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

342. Memorandum From the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Allen) to the Under Secretary of State (Hoover)¹

Washington, December 2, 1955.

SUBJECT

• Démarche to Shah on Iranian Budgetary Aid Requests

Discussion:

Ambassador Chapin recently strongly urged (Embtel 682—Tab C)² that additional budgetary aid be provided to Iran for FY 1956 to avoid the political crisis that may well result from approaching imbalance, and to strengthen the Shah’s hand following Iranian adherence to the Baghdad pact.

Iranian revenue would be adequate to meet this deficit only if it were politically possible to take legislative action to revise substantially the formulae for dividing it. (The bulk of oil revenue is allocated to the Plan Organization for development, and none is presently available for the ordinary budget, although sporadic consideration is being given to proposed legislation, now before the Majlis, calling for the diversion of a small portion of this revenue to the budget.) The Ambassador believes that it is a psychologically hopeless moment, Iran having just reversed its traditional policy of neutrality, for us to urge the Shah to force a showdown on this revision, which is an explosive issue, unless we are prepared to give substantial help.

We concur with the Ambassador’s estimate of the political situation and believe that in view of developments in the Arab states and the establishment of the Baghdad Pact Council, this is a dangerous time to risk political upheaval in a Northern Tier State. Moreover, we believe there would be great advantage to assisting a nation which has given up its traditional policy of neutrality and declared itself openly allied with the West.

However, before recommending further budgetary aid, we believe it is necessary that the U.S. make a démarche to the Shah on the economic issues implicit in the recent decision to build the Karaj Dam out of Plan Organization oil revenues rather than utilize available Export-Import Bank credits (Embtel 803—Tab D).³

The attached telegram⁴ instructs Ambassador Chapin to make the following points to the Shah:

a) It is difficult to justify budgetary aid as long as Iran fails to use the available development credit.

b) Iran’s budgetary deficit is closely related to the lack of balance between development program and ordinary budgetary requirements.

c) We are concerned that this decision not to use the Ex-Im Bank credit for the Karaj Dam is related to apparent discrimination by the Plan Organization against American business.

d) In order to consider further budgetary aid we need detailed information on Iran’s financial operations and on its plans for reducing the deficit by using its own resources.

We believe this approach will cause the Shah to consider seriously practical fiscal reforms and a temporary diversion of some oil revenues to the budget. We hope that it will also serve to protect the interests of the Morrison-Knudsen Co. in the Karaj Dam project.

We do not expect this to result in the immediate solution of the budgetary deficit problem. Given the present political conditions this would be virtually impossible. Therefore, we anticipate there will still be a need for additional budgetary aid. If the Iranians make some reasonable efforts to deal with the issues raised in this telegram and if they take some measures designed to reduce the deficit, it will be necessary to provide additional budgetary aid during FY 1956. Aid funds now available will be exhausted by February 1, 1956. Ambassador Chapin has recommended, and we agree, that $20 million will be required to cover the budgetary deficit from February to the end of FY 1956.

Because the Shah will probably find the substance of this démarche difficult to understand and, in some respects, unpalatable, we are instructing Ambassador Chapin by separate telegram (Tab B)⁵ to be prepared to give the Shah an encouraging reaffirmation of U.S. overall policy of support to Iran, an expression of awareness of the importance of Iranian accession to the Baghdad Pact and a reminder of previous statements regarding the continuation of military aid.

Recommendation:

1. That, if you approve this line of action, you sign the attached telegram to Tehran (Tab A),⁶ bearing in mind that if the Iranians give a favorable performance on the points raised it will be necessary to allocate $20 million from FY 1956 funds to be available for budgetary aid by February 1, 1956.

1. Source: Department of State, Central Files, 788.5–MSP/12–255. Secret. Drafted by Hannah and cleared by Baxter, E, the Export-Import Bank, Department of the Treasury, and ICA.
2. Dated October 26, not attached. (Ibid., 780.5/10–2655)
3. Dated November 18, not attached. (Ibid., 888.2614/11–1855)
4. Telegram 933 to Tehran, December 2, not attached. (Ibid., 780.5/10–2655)
5. Telegram 932 to Tehran, December 2, not attached. (Ibid., 780.5/10–2655)
6. The following note, apparently initialed by Baxter, appears at the top of the first page of the source text: “Showed to Mr. Hoover 12/2, who signed the telegrams attached.”