Foreign Relations of the United States, 1955–1957, Near East Region; Iran; Iraq, Volume XII

302. Telegram From the Embassy in Iran to the Department of State¹

Tehran, March 23, 1955—6 p.m.

1948. This is joint Embassy, USOM/I, MAAG message. Following condensed text revised narrative program justification for Iran pouched March 22 as enclosure 3 of Tousfo A–1733² (pouch No. 2352) copy to GTI (pouch No. 2353). This narrative is part of material requested Usfoto 1262.³ Aid levels used correspond tentatively to country team recommendations contained Embtel 1905,⁴ adjustments as result further FOA/W guidance to be supplied by telegram.

Introductory.

Iran key country ME. Long vulnerable border Soviet Union. Independent Iran stands between Soviet Union and Persian Gulf area, which long object Soviet ambitions. Iran economic social progress limited. Political structure brittle and vulnerable.

Serious crises recent years both economic and political. Degree political stability now achieved. Attainment 1957 of level income from petroleum when petroleum production and refinement reach maximum output will give Iran position considerably greater financial strength than previously. However, economic strength Iran strictly limited even with revenues from petroleum. Real economic strength will depend on effective application financial resources including external aid to economic development virtually all areas economic activity appropriate Iran, which essential to establish and maintain minimum basis economic viability, political stability and defense posture adequate to circumstances country. Iran still in transitional stage, with recent gains financial strength and political stability yet to be fully consolidated, Iran foreign policy yet to be fully formulated, and Iran future still in delicate balance.

View existing international tensions, evolution domestic situation and foreign policy of Shah and Government will in this transitional stage be influenced by evidences depth and continuity US interest in security and welfare Iran. This interest expressed partly through specific policies and aid measures designed support efforts Iran Government lay foundations enduring internal security and political stability, develop limited defense capability and establish technical and other bases prolong economic progress in response aroused aspirations people.

Order magnitude US aid Iran not large relative to risks to US and West from any failure Shah and Government obtain minimum external aid necessary to cope with political, security and financing problems with which they now confronted. Future might exact high price for small economy in allocation aid from [for] Iran if required margin safety underestimated.

US aid programs have contributed to atmosphere Iran conducive understanding of constructive aims and objectives US and West. Tendency now exists for Iran associate self more fully and openly these aims and objectives despite Soviet pressures. Tendency however could be checked by severe disappointment in amounts aid received if they below minimum required by Government Iran to manage problems giving rise need external aid. Such disappointment could arouse doubts Iran leaders as to nature, extent, or stability US interest in Iran, and give rise serious economic and political problems.

Scope US aid.

Aid Iran has taken these forms:

(1) Technical cooperation and economic development combined in one technical cooperation program.

(2) Emergency budgetary support.

(3) Military end–item and training aid to Iran Forces including gendarmérie. This form aid outside purview this presentation, but bears important relation to proposed defense support.

Proposed extend in FY 1956 defense support aid including direct forces support, budgetary support, and economic aid for improvement port and highway facilities, no further creation of better defense posture taking account political, economic and military interrelationships.

Economic programs past FYs.

Introductory.

Serious obstacle to attainment US economic objectives Iran lay in fact that Iran Government after oil nationalization 1951 was obliged liquidate foreign exchange reserves and resort deficit financing and printing press.

Obstacle to attainment economic stability Iran has been dearth foreign exchange and balance payments difficulties since 1952, causing shortage essential imported commodities. These shortages contributed inflation and increasing stagnation country’s economic life. Also compelled government postpone economic development projects and retarded increases agricultural and industrial production.

Although Iran cost living index has reached highest point since 1936 and is higher than during World War II government has had to put off pay raises government employees, minimize expenditures needed to improve lot of poorly fed and housed and extremely low paid troops and gendarmes, and postpone essential development projects that would also give work to some of millions unemployed and under–employed throughout country. Government income from oil not expected reach level FY 1956 permitting government meet these added costs.

Budgetary support.

Budgetary financial support begun FY 1954 gave Iran economy badly needed imports and generated local currency to help meet Zahedi government operating expenses. US economic aid made contribution to strengthen Zahedi regime at time when its margin strength narrow, made it easier for Iran Government to resume relations with UK and helped oil settlement. Budgetary support has helped retard inflation, restored confidence in rial, effected reduction number unemployed by enabling resumption work on unfinished public works type projects and initiation under joint US–Iran emergency aid program of number urgent construction and demonstration projects, and made possible Iran Government grant small badly needed additional temporary compensation to low paid members Armed Forces including gendarmerie. US aid has strengthened economic base which should make it easier for Iran intensify defense effort and reactivate economic development plan when oil revenue again substantial.

Technical cooperation.

Contributing to fundamental objective strengthening Iran economic base and ensuring social stability, technical cooperation activities have considerably improved living conditions. Malaria, for example is no longer country’s number one health problem. In 3 years it should be virtually wiped out. Serious epidemics contagious diseases now much less frequent owing operations Iran–US Public Health cooperation which, in effect, has become department in structure Ministry Health.

Many farm families today enjoy larger return from labor and bigger food supplies as result of technical cooperation that introduced seed giving higher yields, improved Iran cattle and chickens through crossbreeding, and demonstrated value more economic methods irrigating and growing crops.

Other technical cooperation projects have given thousands Iran teachers first training in methods American specialists such fields education as agriculture, home–making, vocational skills. Modern textbooks based US models being put in most elementary schools. US Government techniques and administrative practices have been introduced Tehran University through creation of Institute Administrative Affairs and into real government ministries, including Ministry Finance and Plan Organization. Ministry Labor has been helped to develop modernized employment service and apprentice system, and introduce safety programs. Factories have been assisted in raising production levels, improving personnel practices, and providing better working conditions.

Iran Government direct contribution to technical cooperation has risen from initial cash 20 million to 180 million rials FY 1955, with additional contributions to projects in cash and kind that in FY 1956 are estimated at 600 million or more.

Proposed technical cooperation FY 1956.

Great importance attached to maintenance of effectiveness existing projects in health, education and agriculture in order foster and develop Iran human and other resources and lay foundation for orderly progress Iran economy and society. Iran Government progressively assuming full administrative responsibility for anti–malaria operations, administration health clinics, agricultural extension work, operation livestock breeding, poultry hatching and plant improvement stations, and all educational programs. In FY 1956 further steps planned institutionalize projects, when Iran Government expected assume greater financial responsibilities.

Increased technical aid will be extended in public administration to create sound base for needed improvement in government performance. Assistance to Plan Organization in fields industrial management and industrial engineering will be expanded to assist that agency in returning many plants to private ownership. Ministry Finance will be further aided in development orderly budgeting and tax collection.

Increased technical aid will be given Ministry Labor in providing country–wide services to mobilize labor resources for economic development. Greater emphasis will be given urban programs, including low cost housing, improvement law and order, and encouragement youth activities to combat Communism.

Important programs now being launched by Iran Government. Proposed to furnish aid in effecting these reforms to provide firm basis for political stability and development. Part of aid would be grant under land distribution program for credit to new peasant proprietors essential to their use of land, and to insure that Iran Government undertakes program on sufficient scale for dramatic impact.

Estimated technical cooperation program FY 1956 provides dollars million 4.7 for US technicians, 2.6 for contract personnel, 0.5 for participants, 1.1 for commodities for project demonstrations, 4.6 for other costs, totalling 13.5, and additional 1.0 rural credit for land distribution, making 14.5 total.

Defense.

Introductory.

Iran occupies important strategic position with key relation to defense ME. If by any means Iran should fall within Communist orbit, consequences would be extremely serious for West.

US defense objectives in relation Iran take account developments along two lines. First, individual [internal?] security in form of capacity deal effectively internal subversion, and limited defense capability against possible Soviet invasion. Second, full association Iran with aims and objectives US and West. Second includes possible adherence Iran to ME regional security pact such as Turkey has with Pakistan and Iraq. However, while US looks with favor on such Iran adherence decision is one Iran Government should make without outside pressure.

Trend Iran opinion is in favor Iran aligning self fully with free world in opposition expansive Communism. Psychological momentum exists that coincides US and Western interest. If no contrary developments, and if situation satisfies minimum conditions Iran Government, Iran may adhere security pact with such countries as Turkey, Pakistan and Iraq.

Iran decision re adherence security pact will be influenced by Iran capacity contribute to collective defense and by Iran strength relative that of other participants. Both these factors in turn influenced by US aid policy for Iran.

Not simple matter for Iran disregard Soviet pressures to dissuade it from alignment Western or ME defense. In order to make bold pro–West decisions, Shah and government must have mutual confidence, solidarity, and adequate degree popular support. This intangible fabric of government depends on strength of Shah, who exerts decisive influence in foreign policy decisions, and on degree confidence Shah and supporters have that they can rely on constant US backing. Strength of Shah himself depends partly on this factor. US backing extends beyond defense realm into economic and technical cooperation which have important bearing on popular contentment and political ability.

Re Iranian individual defense capability, establishment of substantial degree internal security has been attained and basis is being laid for development limited defense capability against possible Soviet aggression. To this end, expanded US military aid and training program has been proposed and certain approved segments are being implemented. Required defense aid falls into two parts: Military end–item and training aid, administered by Department Defense; and defense support aid which subdivides into direct forces support and other defense support. First subdivision covers projects exclusively or primarily of military utility. Second includes budgetary support, civilian road construction, and other aid primarily civilian in character but contributing also to defense posture of country.

Direct forces support.

This closely complements military end–item and training aid. Each depends on other.

To make best use Iran defense capabilities in event Soviet invasion in force, it would be necessary for Iran forces to occupy different positions and have their supplies and equipment in different locations from present ones. [8 lines of source text not declassified] Military roads of limited immediate economic value should be built or repaired to permit lateral communications between units of armed forces in new on–site defense positions. Tactical jet airwing should be stationed with adequate facilities at suitable point some distance to southwest of Tehran, and facilities required to make forces effective in new positions should be constructed.

Direct forces support proposed this purpose includes $9.5 million requested as supplemental allocation fiscal year 1955 funds, and $25.0 million proposed as total direct forces support Iran fiscal year 1956. The $25.0 million includes $9.1 million for barracks.

Other Defense Support.

Economic and financial affairs continue furnish some primary domestic problems. Economic policies and programs adopted or encouraged by government have profound effect on internal financial and fiscal situation, foreign exchange needs and reserves, tendency to inflation of domestic price level, and requirement for commodity imports to offset inflationary tendencies.

Estimated that budgetary deficit approaching $60 million will occur Iran fiscal year ending 22 March 1956. This takes account of increase in budget Iranian Armed Forces to 5.5 billion rials, compared with present annual 3.8 billion; transfer of most development expenses from government to Plan Organization budget; and subsidy by Ministry Finance to offset losses of certain government commodity agencies. It does not, however, take account any significant increases in pay of civilian government employees. Estimated fiscal year 1956 deficit includes some uncovered accrued liabilities from previous year.

Estimated that about $225 million of commodity imports on private conversion by consortium to finance local costs its operations. Requirement indicated for foreign exchange of $55 million from other sources to make total $225 [275] million.

No net increase domestic production likely to reduce significantly country’s need imports. In fact, agricultural crops may suffer seriously as result anticipated water shortage.

Taking account all information now available, including budgetary deficit about $60 million and estimated foreign exchange deficiency about 55 [it is] believed US interests would be well served by allocation defense support funds to meet these requirements. Under loan agreement with US Government 30 made available FOA FY 55 appropriations will be applied against part of the government budgetary and balance of payments deficits. In addition to this amount, it is recommended that $27.6 million (25.0 for budgetary and balance payment support and 2.6 for defense support projects) be made available out of FY 56 defense support funds. Believed that by January 1956 oil revenues will reach level at which possible for some oil revenues to be diverted from politically important program of economic development to support of government budget. This would require Parliamentary approval of amendment to law relating Plan Organization. If Government Iran can show substantial economic progress during first two years following oil settlement, government will probably be strong enough to obtain approval of amendment.

Aside from the $25.0 million for budgetary and balance of payments support, US defense support funds for FY 56 needed is sum 2.6 of which 1.2 for high priority projects in field port improvement, 1.1 in field transportation, and 0.3 for immediate improvements in radio needed to support economic development and service direct forces support program. Transportation project provides for extension highway maintenance stations and services token areas where this activity would help direct forces support program. Improvement port facilities would meet critical need in weak sector Iran economy. Expansion radio facilities has high US priority and political and strategic importance.

Budgetary support funds will be used to support some of technical cooperation projects now conducted in cooperation with interested Ministries. Cost of essential increase in pay and allowances of armed forces, including increase in pay and in certain other costs of gendarmérie, which may total $11.0 million, will also be met this way.

Clear that Government Iran not yet in position to finance budgetary deficit from [garble] sources, and that cut back in government expenditures to reduce deficit would have undesirable high impact on some essential programs Iran Government has undertaken with encouragement US. These programs contribute to attainment US policy objectives [garble].

Loan and grant relationship.

Foregoing sums recommended as aid to Iran for FY 56 amount to sum of $67.1 million and consist of 14.5 technical aid, 27.6 budgetary and project support, and 25.0 direct forces support. Amount of 67.1 for FY 56 compares with 140.3 for FY 55, latter including a recommendation of 9.5 to permit early initiation of direct forces support program.

Proposed division of recommended sum of $67.1 million is 25.0 loans and 42.1 grants. Loan portion is composed of aid for budgetary and balance of payments support. Grant portion consists of 14.5 technical aid, 2.6 for projects related to direct forces support, and 25.0 for direct forces support. Once Iran oil revenues resumed at level planned for 1957, believed Iran capacity repay will be sufficient to ensure servicing interest and principal on its foreign obligations.

Rountree

1. Source: Department of State, Central Files, 788.5–MSP/3–2355. Secret. Passed to FOA, Treasury, and Defense.
2. Not printed. (Washington National Records Center, FOA Files: FRC 56 A 632, Box 137, Tehran)
3. Not printed. (Ibid., Box 112, Tehran)
4. See supra.