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Money, Oil, and Empire in the Middle East

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  • Page extent: 346 pages
  • Size: 229 x 152 mm
  • Weight: 0.46 kg

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 (ISBN-13: 9781107657182)

Money, Oil, and Empire in the Middle East
Cambridge University Press
9780521767903 - Money, Oil, and Empire in the Middle East - Sterling and Postwar Imperialism, 1944–1971 - By Steven G. Galpern
Excerpt

Introduction

On October 4, 1951, the last of the Anglo-Iranian Oil Company's senior staff evacuated Iran's Abadan Island. There, the firm had built, owned, and operated the world's largest oil refinery, which Iran had nationalized several months earlier along with the rest of the country's petroleum industry.1 A majority of Anglo-Iranian's British personnel left Abadan the previous day on the HMS Mauritius. Before boarding the small crafts that would shuttle them to the Mauritius, AIOC employees gathered with their bags and other belongings in the hot sun outside the Gymkhana social club, a potent symbol of the kind of informal colonial outpost that Abadan had become.2 Indeed, while British imperialism in the Middle East was mostly informal, the British cultural and economic presence at Abadan demonstrated how, on the ground, the operation of informal influence could approximate formal control. Britain ceded that control when the Mauritius left that October, revealing the empire's vulnerability both within the Middle East and beyond. Possibly in an attempt to deny this fact – or at least to compensate for it – the ship's band gave a rousing, stiff-upper-lip performance of “Colonel Bogey” (the oft-whistled British military song made famous by David Lean's The Bridge on the River Kwai), as it traveled the short distance upriver to Basra, Iraq, which remained an important sphere of British influence.3 The next day, after dominating the Iranian oil industry for half a century, the Anglo-Iranian Oil Company – in which the British government itself had a majority stake – was gone from Iran.

The AIOC's eviction from Iran represented more than a decline in British imperial status, however; it also meant real economic loss for the


United Kingdom. After all, the Abadan refinery was the nation's largest single overseas asset. But of greater significance was the fact that Britain imported much of its oil from Iran, where crude and its derivatives were produced more cheaply than in other countries. Given that the AIOC had exclusive rights to develop and market Iranian petroleum, Britain was able to pay for the oil in its own currency, the pound sterling. This and the company's huge profits greatly benefited the credit side of the country's balance sheet for international trade and payments, and, with a treasury as depleted by war as Britain's, being able to acquire oil with sterling proved vital to the strength of the currency and the larger economy. As one might expect, British officials worked feverishly to find a way to return the AIOC to Iran.

Examining the British experience in Iran uncovers a larger trend in British policy-making after World War II that involved the government's efforts to control the flow of Middle Eastern oil and the money associated with it. Britain's desire to preserve the international prestige of sterling motivated these efforts and, in the process, strained relations with countries and companies involved in the production, sale, and transport of Middle Eastern oil. The rising tide of nationalism in the postwar Middle East and the emergence of the United States as a competing power in the region circumscribed the way British officials were able to defend sterling through their Middle Eastern oil policy and thereby demonstrated the currency's vulnerability, sometimes in stark terms. Indeed, it had become clear to policy-makers that Britain's dependence on foreign oil exposed it to the constant risk of financial crisis – even more so as the nation's precarious balance-of-payments position persisted in the 1950s and 1960s. Thus, British officials viewed the Middle Eastern oil trade as critical not only to preserving sterling's international stature but also to protecting the currency from ruin, reinforcing the already powerful imperative to safeguard the nation's strategic and economic interests in the Middle East after World War II.

British external sterling policy after 1945

In the aftermath of World War II, British officials still considered their country a first-class power, despite the overwhelming physical and economic devastation that the conflict wreaked upon it. After all, London continued to serve as the seat of an empire that stretched into all corners of the globe, and its currency still facilitated half of all international trade. As long as Britain could rely upon financial support from the United States, the world's dominant power after the war, policy-makers across the political spectrum saw no reason why it could not participate in


international affairs as it had done previously. Although Britain reduced its commitments in some parts of the empire soon after the hostilities ended, most notably in India and Palestine in 1947, it reinvigorated its commitments in others, including Africa, Southeast Asia, and the Middle East. Indeed, a combination of perceived economic advantage and a potent sense of pride and prestige would sustain Britain's imperial will well into the 1960s, encompassing the political, military, and economic spheres.4 The last of these three categories frames the issues under consideration in this book, specifically British postwar external sterling policy.

After spending most of the nineteenth century as the world's preeminent trading and reserve currency, the pound entered a period of decline triggered by World War I. Because of its global reach, the First World War disrupted and permanently realigned international trade patterns and, in the process, diminished both sterling and the City of London (the capital's financial district, usually referred to as “the City”), the world's leading financial center. By the 1930s, worldwide economic depression had forced Britain and sterling into retreat into a neo-mercantilist, imperial trading system that during World War II evolved into the currency bloc known as the sterling area. Nothing did more damage to the status of both sterling and the City of London than the Second World War. Six years of conflict precipitated a financial hemorrhage so great that the British government could not sustain the pound as an international currency without putting intense pressure on the domestic economy and keeping the sterling area and its rigid exchange controls intact.

Nonetheless, until its devaluation in 1967, both Labour and Conservative governments struggled to strengthen sterling in an effort to preserve


the currency's international standing.5 Clement Attlee's Labour government of 1946–1951 believed that a strong pound was the lifeblood of the sterling area, economically binding together the British empire and Commonwealth, the very existence of which demonstrated Britain's continuing importance in the world. Although Labour officials figured that sterling's strength also promoted London's position as one of the world's foremost financial centers, they considered this benefit ancillary to the currency's vital role within the empire.6 In contrast, the Conservative governments that ruled Britain from 1951 to 1964 under Winston Churchill, Anthony Eden, and Harold Macmillan, respectively, were convinced that Britain's influence in world affairs depended on London's status as a financial center – which they thought depended on sterling convertibility – and, therefore, sought to bolster the pound before removing it from its safe haven of exchange controls.7 They also believed that the future of sterling and the British economy lay outside the empire, a destiny that depended on the currency's strength and convertibility.8 The Labour government that took power under Harold Wilson in 1964 fought to defend the pound's value for yet another reason: Wilson believed that the currency represented one of the two major pillars – along with the dollar – of the postwar international financial system. That sterling was considered the first line of defense for the dollar, the monetary foundation on
which the Bretton Woods system rested, contributed to Wilson's view that the system would not survive if Britain devalued the pound.9

Within the British government, officials at the Treasury and the Bank of England10 represented a sustained, one-note chorus of voices on the question of postwar international sterling policy that found a receptive audience in the Conservative Party. Advocating for sterling convertibility immediately after the war – and doing so until Churchill's government lifted exchange restrictions in 1954–1955 – they, like the Conservatives, believed that the City profited greatly from the pound's widespread use.11 As the City went, they thought, so did Britain. Only in 1967 did these officials undertake a rigorous examination of whether or not the City's success depended on sterling's international role, eventually reaching the conclusion that it did not.12


Treasury and Bank officials also noted other benefits to sterling's international presence. British merchants could use their own currency “over a large part of the world” and be saved the “expense and inconvenience” of operating in foreign currency, they explained in a 1956 working party report. They also pointed out that Britain could keep smaller working balances of other currencies if it tended to buy and sell goods in such currencies. Ultimately, though, they felt that the British government had no choice other than to maintain the pound's international role. Even if it wanted to reduce the pound to a purely domestic vehicle of exchange, Britain did not have the financial resources necessary to buy back the sterling held in the reserves of countries all over the world.13

To strengthen and stabilize sterling, postwar British governments had to rebuild the gold and international monetary reserves depleted by the conflict. In a gold standard or gold-exchange standard international monetary regime – both of which will be discussed in chapter 1 – the reserves of a country's central bank help to determine its currency's value.14 A country adds to its reserves by absorbing more gold and foreign exchange from the rest of the world than it releases, which is known as running a balance-of-payments, or current account, surplus.15 Consistent surpluses will result in upward pressure on a currency's value, while consistent deficits will do the opposite. A country will generally run a current account surplus if it exports more goods than it imports, that is, if it develops a surplus on its visible trade – physical products – with the rest of the world. A country's invisible trade, which includes the interest and dividends earned on foreign investments, as well as the earnings from services such as banking, shipping, and insurance, also constitutes part of the current account. Because the City developed such superior financial services across the nineteenth century, Britain's invisible income became an increasingly important element in the nation's balance of payments.


And as the decline of Britain's industrial sector relative to its competitors led to progressively smaller visible earnings – a trend accelerated by the destruction World War II wreaked on the British mainland – the country's invisible earnings became even more valuable.

The invisible side of a country's current account also includes the profits generated by its multinational corporations, and no two firms contributed more to Britain's balance of payments in the postwar era than the Anglo-Iranian Oil Company (AIOC)16 and Royal Dutch-Shell,17 the two major multinational oil firms residing in the United Kingdom. They both produced enormous invisible income flows for Britain, particularly the AIOC, whose production facilities were located almost entirely in the Middle East, where oil was the cheapest in the world to produce. Not only did the profits of the companies help increase Britain's invisible earnings, but by virtue of the fact that they were treated as British residents, their operations also protected and bolstered the visible side of the nation's current account, simultaneously saving and earning foreign exchange for Britain's reserves. For a country so dependent on imported oil, it is impossible to exaggerate the advantages that Anglo-Iranian and Shell afforded Britain – and never more so than after the war when domestic petroleum consumption almost doubled and British imports of crude grew more than six-fold between 1946 and 1955.18 As countless files at the Bank of England and the records of the Foreign Office, the Treasury Office, the Ministry of Fuel and Power, the Cabinet Office, and the Prime Minister's Office illustrate, British officials fixated on the connection between the state of the nation's balance of


payments, the strength of sterling, and the operations of the AIOC and Shell.

Given how much the British government's sterling policy seemed to undermine the nation's manufacturing sector – by making exports more expensive and imports cheaper – and benefit the nation's service sector – by attracting foreign investment – it is worth asking whether there was an official bias in favor of finance. After all, the City did not generate enough national income to justify such favoritism in material terms.19 P.J. Cain and A.G. Hopkins address the issue of financial influence on British imperial and foreign policy by describing a common worldview among policy-makers within Whitehall and City elites based on their similar socioeconomic backgrounds and experiences, something they call “gentlemanly capitalism.”20 From the Cain and Hopkins perspective, gentlemanly capitalists in government were, in effect, socialized to pursue an imperial or foreign policy agenda that would inherently benefit financial interests. Thus, it was not simply the physical proximity of the City to the machinery of government that enabled this sector to have more political influence than northern-based manufacturing interests, but the sociocultural proximity as well.21

Without dismissing the merits of the Cain and Hopkins argument, a more compelling explanation for official bias in favor of finance in British policy is that the Treasury Office had enormous influence over policy-making after World War II. According to one historian, the department had attained a “zenith of responsibility and power” not seen since the late seventeenth century as a result of the nationalization of British industries, as well as the dire financial straits in which Britain found itself after


the war.22 Because Treasury officials regularly sought advice from their colleagues at the Bank of England, who in turn had a great deal of contact with their like-minded associates in the City, conditions were ripe for the City to influence policy on behalf of its interests.23 But, as recent studies have demonstrated, scholars should avoid broad generalizations about the historic relationship between the British government and the City: it was complex and changed over time based on the party in power and the domestic and international economic context.24 While a financial bias undoubtedly existed at the Treasury and the Bank, such favoritism did not guarantee that City interests got everything they wanted from the British government, nor was it a prerequisite for Whitehall's support for a strong and stable pound. Ultimately, the desire to maintain Britain's place in world affairs provided enough incentive for both Labour and Conservative governments to pursue policies that promoted sterling's international role.25

That said, the philosophy that seemed to underpin foreign economic policy in the British government in the 1950s and 1960s could not help but reflect the shift in the center of gravity in the British economy from manufacturing to finance that began to occur earlier in the century.26 In


this way, postwar British political economy followed a pattern of development experienced by other leading economic powers. The internationalization of the economies of Spain in the sixteenth century, Holland in the seventeenth century, and the United States in the twentieth century, through the export of goods and capital, led to the development of advanced commercial and banking sectors. As these countries became more willing to pay emerging economic powers to manufacture what they wanted and needed than they were to make such things themselves – because the emerging powers could do so better, more cheaply, or both – their economies became dominated by financial services. And because they had more developed capital markets and financial services than those of their manufacturing competitors, they tended to place increasing value on the financial sector of their economies, an area where they had the greatest comparative advantage.27

In the years after World War II, Britain ceded its advantage in financial services to the United States, which raises the issue of British economic decline, the timing and nature of which has been a subject of vigorous debate among scholars, politicians, and others over the past century.28 First and foremost, any discussion of economic decline must be based on precisely defined terms. To what sector of the economy are we referring? Are we referring to relative decline, meaning a country's performance measured against the performance of others, or absolute decline, meaning a country's performance measured against its own past performance? This book deals specifically with the decline of sterling as a leading international currency and deals with it in both relative and absolute terms. There is no question that the dollar superseded the pound as the world's preferred trading and reserve currency after World War II, a point best exemplified by the decision to underpin the Bretton Woods international monetary system with it. There is also no question that fewer and fewer countries wanted to use sterling as either a trading or reserve currency after World War II: Britain was forced to maintain capital controls in the sterling area until 1958 to prevent member countries from abandoning the pound; and after 1958, those countries began diversifying their reserves out of sterling and into gold and dollars.




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