What was the economic significance of the 1956 Suez crisis?

The Suez crisis was not the cause of Britain’s relative economic decline, but it exposed deep-seated weaknesses: the vulnerability of sterling; the constraints imposed by the balance of payments; and the difficulty of sustaining an international reserve currency with inadequate economic strength.

This year marks the 70^th anniversary of the Suez crisis, a sequence of events that is widely thought to have been a turning point for Britain and a national embarrassment. It effectively marked the end of the British Empire and caused commentators to reassess classifying the country as a superpower.

The Suez crisis is intriguing because it has parallels to events in the Middle East today: a fiasco in the region, overreach by an imperial power, relative economic decline and a weakened financial power (McLaughlin, 2026).

But what was the economic impact of the crisis? Not much, according to most sources. For example, in the recent dating of British business cycles, it does not even feature as a turning point (Broadberry et al, 2023). Suez seems so insignificant that the late economic historian Nick Crafts didn’t think it was worth mentioning (Crafts, 2018).

Indeed, when set against the record of post-war governments, the period from 1951 to 1964 appears to be economically impressive as it combined strong economic growth with relatively low inflation and unemployment. This lends support to Conservative prime minister Harold Macmillan’s view that ‘most of our people have never had it so good’.

So is that the end of the story? Not quite. The 1950s period of Conservative rule was referred to by Harold Wilson (Labour prime minister in 1964-70 and 1974-76) as ‘thirteen wasted years’. It was a time when Britain went from having the highest GNP in Western Europe to having one of the lowest (Pollard, 1982, McLaughlin, 2026). The immediate post-war era was bookended by the 1947 downturn with sterling’s first devaluation (Cairncross and Eichengreen, 1983) and the 1975 recession that preceded the 1976 bailout by the International Monetary Fund (IMF) (Smith, 2026).

For Sidney Pollard (1982) and George Peden (2012), Suez was a symptom of Britain’s relative decline rather than a cause of it. In his book The Wasting of the British Economy, Pollard (1982) argued:

The Suez Crisis might appear as an exogenous factor in this story, a disturbance affecting the system from the outside, and it has often been treated as such in the economic literature. But in fact it was symbolic rather than fortuitous. Symbolic, first, of the utter ignorance of politicians and generals of the link between economic power and military or political muscle as they might dispose to strut upon the world stage, as well as of their unawareness of how far Britain had sunk in that respect. But it was symbolic also of the constant drain in that period of vital and costly foreign exchange to sustain colonial and military adventures.

Despite this emphasis on relative decline, contemporary commentary noted that the Suez crisis caused only a ‘minor interruption’ to the home economy (Dow, 1964). The national accounts tell a similar story as GDP was largely unaffected and inflation rose modestly (see Figure 1). Suez triggered a run on sterling, forced the introduction of petrol rationing, reduced imports and accelerated export growth as the government sought to protect the balance of payments.

Macmillan (1971), who was chancellor during the crisis and one of the most hawkish on Egypt in the cabinet, later admitted that the pressure on sterling was ‘greater than I had anticipated’. Dollar reserves fell by $57 million in September and a further $84 million in October, but then pressure increased rapidly and reserves fell by $279 million in the first few days of November.

Macmillan attempted to get support from the IMF and the United States, but was rebuffed on both counts, and realising the gravity of the situation, he advocated that Britain ceasefire and withdraw from Suez. The implications of the event to contemporary observers were that a small-scale conflict, ‘the scale of a minor colonial war’, had effectively ‘rock[ed] the pound sterling to its foundations’ (Shonfield, 1958).

How could an event that barely interrupted British economic growth nevertheless precipitate one of the most serious sterling crises of the post-war period?

Superpower theory meets growth theory

The term superpower was coined by the international relations scholar William Fox in his 1944 book The Super-Powers: The United States, Britain, and the Soviet Union – Their responsibility for peace. In Fox’s original definition of a superpower it was ‘the innocuous consequence of great wealth, great population, and favourable geographic position’. A more recent definition of superpower status comes from Phillips O’Brien (2025), who similarly emphasises economic power, land mass and population, with economic power the most important of the three.

While Fox originally saw three great powers, in a retrospective, he recanted and said he had made ‘an elementary mistake’ by including Britain as a superpower (Fox, 1980). The country ultimately lost all three attributes of superpower status, most notably the first, which was foremost (see Figure 2).

By 1950, Britain was still Europe’s leading industrial nation as its competitors had been severely damaged by the war. But in the subsequent 25 years, the so-called Golden Age, Britain grew slower than other countries in Western Europe, and they eventually converged and overtook Britain (Pollard, 1982, Crafts, 1995).

Continental Europe’s Golden Age had coincided with the creation of the European Coal and Steel Community in 1952 and the European Economic Community (EEC) in 1957, which effectively created a larger market for the economies of Europe. Britain’s performance in the Golden Age was better than anything historically experienced by the country, but in comparison with its peers, it was weak. This led to a strand of research emphasising a ‘British disease’ (Allen, 1979; Pollard, 1982; Robbins, 1983; McLaughlin, 2026).

Most of this growth from Britain’s competitors would have been expected: it was effectively ‘catch-up’ growth where countries could adopt the latest productive technology from the ‘leader’. In some respects, it was also a return to trend growth that was disrupted by the interwar period (Crafts and Mills, 1996; Temin, 2001).

The year 1956 is significant in the history of economic thought as it was when the neoclassical growth model was published (Solow, 1956; Swan, 1956). This theoretical analysis showed the importance of technological progress in driving economic growth and swept away the older models that emphasised capital accumulation. The neoclassical framework, as subsequently applied by Robert Solow (1957), became widely used to analyse economic growth, particularly among economic historians (Crafts, 2009).

The neoclassical model provided a framework for understanding economic convergence. But it offered only limited insight into why the technological frontier shifted or why the frontier economy (Britain) itself might subsequently be overtaken (that is, by the United States).

Explaining Britain’s relative decline therefore encouraged economic historians to draw increasingly on the insights of new (endogenous) growth theory (Crafts, 1998, 2012, 2018). The main insight drawn by Crafts (2018) was that innovation depends on incentives, particularly the expected returns to innovation and the influence of institutions and policies on investment and innovative effort.

In the post-war period, the United States was the technological leader, while West European countries benefited from adopting US technologies and management practices. But the ability to adopt new technologies depended on what Moses Abramovitz (1986) termed ‘social capability’, including human capital and institutions. Britain was less successful in this respect (Eichengreen, 1996). Crafts (2018) also emphasised how the legacy of interwar unemployment shaped post-war economic policy, with governments prioritising full employment over competition and productivity, contributing to Britain’s relative economic decline (Crafts, 2012).

Within Craft’s work, the Suez crisis has received comparatively little attention and there is no mention of it in his 2018 book, Forging Ahead, Falling Behind and Fighting Back. Yet Britain’s inability to sustain its foreign policy in Egypt in 1956 reflected not only diplomatic isolation, but also the constraints imposed by relative economic decline and particularly the weakness of sterling. The Suez crisis therefore provides a useful link between long-run economic performance and the exercise of geopolitical power.

Figure 1: Quarterly GDP growth first quarter of 1955 to fourth quarter of 1964

Source: Office for National Statistics (2024).

Figure 2: Relative GDP

Source: Maddison Project database, 2011 international dollars

Stop-go policies and sterling in crisis

The period from the 1950s to the 1970s was characterised by what were known as stop-go economic policies, as Britain had to contend with periodic balance of payments crises. During the go phase, there was a boom with some export growth, but this led to an increase in imports. This in turn put pressure on the balance of payments and was followed by a sudden stop. As such, the stop-go years were characterised by periods of economic expansion followed by contractions, as restrictive policies were introduced to restore external balance.

There were two issues at play. The first was what became known as the monetary policy trilemma, as identified by Robert Mundell (1960, 1961a, 1961b) and Marcus Fleming (1962). This idea holds that a country cannot simultaneously maintain a fixed exchange rate, free capital mobility and an independent monetary policy. In the post-war period, Britain sought to maintain a fixed exchange rate while retaining monetary policy autonomy, with capital controls intended to restrict capital mobility.

The second issue concerned the tensions arising when a national currency also operated as an international reserve currency. These tensions had been recognised earlier by Feliks Młynarski (1929). Robert Triffin (1960) subsequently formalised the problem in what became known as the Triffin dilemma. Sterling’s continued international role meant that Britain faced substantial external sterling liabilities at the same time as it sought to maintain sterling’s exchange rate against the dollar.

Britain’s vulnerability was most apparent in the foreign exchange market. During the Bretton Woods system, the Bank of England relied on the US Federal Reserve to intervene on behalf of the Bank in New York. But the Bank of England was ‘reluctant to share information’ in the 1950s, mainly because it did not want to make markets aware of the conditions of sterling (Naef, 2020). This differed significantly from the classical gold standard, which was characterised by central bank cooperation (Bordo and McCauley, 2017). The Suez crisis saw the greatest Bank of England intervention in support of sterling during this period, resulting in a substantial depletion of reserves (Naef, 2020, Figure 4.1).

In the Bretton Woods system, dollar shortages pushed European countries into crisis and difficulties with the balance of payments put pressure on the pound, which was forced into a 30% devaluation in September 1949 (Newton, 1984) – see Figure 3.

The fact that Britain devalued in 1949 led to continued speculation that it may devalue again: for example, there was recurring speculation that there would be a devaluation of sterling in 1955 following a dock strike that affected British exports (Dow, 1964, McLaughlin et al, 2025). There was also speculation about the convertibility of sterling and the feasibility of maintaining the sterling peg against the dollar (Shonfield, 1958). This was reflected in the daily pound to dollar exchange rate (see Figure 4).

Market speculation against the pound in 1955 was distinct from the subsequent sterling crisis in November 1956. The latter had its roots in the Suez crisis, when the landing of British and French forces precipitated a loss of foreign reserves. Britain was only able to support the exchange rate with the help of the US administration, which was ardently opposed to the Suez operation (Klug and Smith, 1999).

Figure 3: Monthly pound to dollar exchange rate, 1945 to 1960

Source: McLaughlin et al (2025).

Figure 4: Daily pound to dollar exchange rate, 1953 to 1958

Note: The horizontal black line indicates the official exchange rate.
Source: McLaughlin et al (2025).

Sterling was the economic chokepoint of the Suez crisis. In the 19^th century, sterling’s role as the world’s principal reserve currency had given Britain what is now termed an ‘exorbitant privilege’, allowing it to borrow cheaply and sustain its international financial position (van Hombeeck, 2020; Chen et al, 2025). By 1956, the dollar had displaced sterling as the principal source of international financial power, although sterling remained an important reserve currency.

At the beginning of the Bretton Woods period, sterling was the dominant reserve currency, but it was replaced by the dollar by the 1960s (Bordo, 1992). Suez accelerated doubts about sterling’s international role (Schenk, 2010).

Maylis Avaro (2024) describes the post-war experience of sterling increasingly surviving as a ‘zombie international currency’, maintained within the sterling area through exchange controls and political pressure rather than market confidence. Yet sterling’s loss of reserve currency status was a gradual process and countries abandoned sterling at different times as trade patterns and exchange rate arrangements evolved (de Bromhead et al, 2023), illustrating how Britain’s monetary influence eroded long after its geopolitical decline had become apparent.

Pollard (1982) argued that the balance of payments crises were the result of the British state continuing to act as an imperial power without the (colonial) resource base to support it, resulting in negative foreign balances. These deteriorated over the period and placed additional strain on the domestic economy.

This interpretation has led some scholars to argue that the interests of British manufacturing were subordinated to the defence of sterling and the priorities of the City of London (Mishan, 1967; Dintenfass, 1992). Repeated sterling crises, and the accompanying cycle of stop-go macroeconomic policies designed to defend the balance of payments, became central to what was later termed the ‘British Disease’ (Allen, 1979; Crafts, 1993).

The political economy of Suez

The cold war provides the context for the Suez crisis. In retrospect, both the prime minister Anthony Eden (1960) and the chancellor (and Eden’s successor as prime minister) Harold Macmillan (1971) saw the crisis as the result of a decision by the United States abruptly to cease funding for the Aswan dam. But US support waned after Nasser publicly announced an arms deal with Czechoslovakia in September 1955, followed by Egypt officially recognising Communist China in May 1956.

After this, US support for the Aswan dam project cooled and the Soviet arms deal is now seen as ‘the main cause of the crisis’ because it upset the balance of power in the region and led Israel to launch a preventive war (Hewedy, 1991). For Israel, the canal itself was never the central issue: the deeper concern was Egyptian power and access through the Straits of Tiran after Nasser’s growing military strength (Hennessey, 1996).

The United States had been prepared to accept a fait accompli if Britain and France had quickly secured their objectives (Lucas, 1991). But as the then chief whip Edward Heath (1998) later recounted, Britain was ‘hopelessly ill prepared’. While various proposals had been discussed in cabinet (Lucas, 1991), delay in decision-making led to a diluted military operation that was limited.

In addition, there were no longer bases in Suez and intervention would have required much greater mobilisation. There had been a divergence in objectives with some seeking to take Alexandria while others wanted a reduced objective of securing the canal. Ultimately, there was no ground invasion of Alexandria and the attacks were limited to aerial bombardment and the landing of paratroopers near Port Said. Britain had therefore lost both the economic power and key geographical advantages that had led Fox to classify it as a superpower.

The British government assumed that the United States would either support or at least tolerate military action. Instead, the Eisenhower administration exploited the weakness of the pound and used financial pressure to force Britain’s cessation of hostilities in Suez. As Diane Kunz (1991) concludes, Britain’s financial dependence on the United States first constrained and then destroyed its ability to pursue an independent policy in Egypt.

France was less vulnerable to similar pressures because the franc did not possess the international reserve currency role of sterling and it was also not convertible. Although the French drew down their IMF reserves before the crisis, these two features meant that they were far less susceptible to external financial pressure than Britain (Klug and Smith, 1999).

When Britain sought IMF assistance during the crisis, US support was withheld until Britain agreed to abandon military operations (Boughton, 2000). Faced with the choice between defending sterling and continuing the intervention, British policy-makers chose monetary stability over their geopolitical objectives.

Summary

The Suez crisis barely registers in Britain’s macroeconomic record, yet it left an indelible mark on the nation’s psyche. Suez was not the cause of Britain’s relative economic decline, but it exposed weaknesses that had developed over several decades. The crisis revealed the vulnerability of sterling, the constraints imposed by Britain’s balance of payments and the growing difficulty of maintaining an international reserve currency without the economic strength to support it.

The major consequence was a reorientation of Britain from Empire to Europe, which saw policy-makers embrace the European project. It also saw Britain develop the North Sea as a means to enhancing the country’s energy security. Both aspects are relevant to how Britain is adapting to the current crises in the Middle East.

Where can I find out more?

The 1956 Suez crisis: Britain’s relative decline and the geoeconomics of British power: 2026 study by Eoin McLaughlin, published in the journal Contemporary Social Science.
70 years ago the Suez crisis exposed British relative decline; Today, the Iran conflict could be doing the same for the US: October 2026 piece by Eoin McLaughlin at The Conversation.
The Inclusive Wealth of Nations: Prosperity, sustainability and the future of economic progress: Book by Eoin McLaughlin, published by Bloomsbury.
Suez and Britain’s decline as a world power: 2012 study by George Peden, published in The Historical Journal.
1956: End of illusion: A BBC radio programme on the Suez crisis presented by historian David Runciman.