891.51/7–2443
Memorandum of Conversation, by Mr. Paul F. McGuire of the Office of the Adviser on International Economic Affairs
| Participants: | Messrs. Bernstein, Gunter, Glendinning, Treasury Dept. |
| Col. Luscombe, Persian Gulf Service Command, U.S. Army; | |
| Major Patton, Finance Division, War Department | |
| Mr. Livesey, Financial Division, State Department | |
| Messrs. Jernegan, Parker, Near Eastern Division, State Dept. | |
| Mr. McGuire, Office of Adv. Int’l. Eco. Affairs, State Dept. |
Following the discussion on Near East Financial Policy held at the Treasury on July 15, 1943 (reported in full by Mr. Parker2), this meeting was held to discuss further developments and to instruct Mr. Gunter, who was about to leave on a trip to Iran, Saudi Arabia and Turkey.
Regarding Iran
Mr. Bernstein announced that the Treasury was ready to act on the request of Dr. Millspaugh and the Director of the Banque Mellie for conversion into gold and shipment to Iran by air of $1,000,000 of the [Page 588] Iranian Government deposit in the Guaranty Trust Company on the same terms and conditions as covered a previous shipment of $500,000 worth of gold in May. The Army will provide air transportation for the gold, which will be shipped in the form of bars. The Iranian Government is minting this gold into pahlavis and selling them for rials in the open market. A dollar’s worth of gold coins brings 84 rials in the open market in Iran. Under existing arrangements covering the financing of our military expenditures in Iran, the Iranian Government provides rials in exchange for dollar balances at a fixed rate of only 32 rials to the dollar. To the extent that it is then permitted to convert dollar balances into gold, the Iranian Government can, in effect, get back 84 rials for 32 rials originally issued in exchange for dollars. The extent to which this favorable result can be obtained is, of course, limited by the capacity of the Iranian gold market to absorb gold coins at high prices in terms of rials. The Government’s deficit is running at the rate of 2 billion rials per annum, and the sale of the $1,500,000 worth of gold will contribute only 126,000,000 rials towards the meeting of this deficit, (assuming that the rials received in exchange for gold are treated as current revenues of the government available for respending to cover government expenditures).
The British have undertaken the sale of gold sovereigns in Iran for their own account. According to Mr. Bernstein, they are selling at the rate of 10,000,000 rials daily at 690 rials per sovereign (which would indicate that they are disposing of 14,500 sovereigns daily. This figure may be compared with a figure of 8,000 sovereigns daily and a price of 550 rials per sovereign reported in Tehran’s telegram, no. 727 of July 16). The British have agreed to allow the United States to participate in this program retroactively on a 50–50 basis. The direct effect of this program is a 62% cut in that part of British and United States expenditures which can be covered by the proceeds of the sale of gold. e. g. Instead of getting 32 rials for a dollar through the Bank Mellie, the U.S. Government will get 84 rials for a dollar’s worth of gold sold in the open market. Therefore, the United States will be able to buy 84 rials’ worth of commodities and services in Iran at a cost of $1.00 in the form of gold, whereas if rials were obtained at the official dollar-rial rate through the Bank Mellie, the same quantity of goods and services would require an expenditure of of $2.62 in the form of dollar balances credited to the Iranian Government.
From a long run point of view, this plan is disadvantageous to the Iranian Government, because the pound and dollar balances accruing to the Government for post-war use are reduced. However, the Iranian Government will obtain some immediate benefit. It will no longer be required to issue new rials to cover the full amount of British and U.S. purchases in Iran. While the new currency thus [Page 589] issued has 100% backing in sterling and dollar balances, these balances cannot be converted into imports of commodities due to shipping stringencies. The result has been a large increase in the quantity of money relative to the quantity of goods available for purchase, which has brought about a five-fold increase in prices. This increase in prices has meant a large increase on the expenditure side of the Iranian Government’s own budget, while, as is typical under inflationary conditions, revenues have lagged. It is estimated that the Iranian hudget will show a deficit of 2 billion rials for the fiscal year ending March 20, 1944. Only 500 million rials of this can be financed by issuance of rials through the Bank Mellie under strict Iranian law which requires backing of 100% in either gold or sterling or dollar balances for all issues of currency after November 19, 1942. This crisis will be aggravated by any further price rises resulting from further note issues against sterling and dollar balances to cover British and American rial requirements. It is hoped that, to the extent that the British and Americans obtain rials through sale of gold at the high premiums now prevailing, commodity price inflation will be checked, both through a reduction in the rate of new currency issue, and through substitution of gold for commodities as a hoarding medium. However, the plan is an experiment, and results must be watched closely. It is reported that the gold market is absorbing all sovereigns offered at the price of 690 rials to the sovereign. If enough sovereigns could be made available to maintain the present rate of sale of 14,500 sovereigns daily, yielding 10,000,000 rials daily, about one half of combined British, American, and Russian rial requirements amounting to some 7½ billion rials annually could be covered by gold sales. Obviously, there would remain some 3,600,000 rials to be obtained through new note issue, which would require a doubling of the note issue during the year. Hence, gold sale on the present limited scale is only a partial answer to the problem of financing Allied purchases in Iran. The problem of the 1½ billion rials which the Iranian Government will need to balance its own budget also remains unsolved.
Dr. Millspaugh insists that the Iranian Government faces complete collapse unless provision can be made for issuance of these 1½ billion rials within the limitations of the legal 100% reserve requirements. He has urged most strenuously that a loan of dollar or sterling balances must be made to the Iranian Government to provide backing for the necessary note issue. Otherwise, the Iranian Government will either have to default on some of its obligations, or lower its reserve requirements, which would cause the public to lose faith in the currency and thereby accentuate its depreciation.
At the fixed exchange rate of 32 rials to the dollar, the required loan would amount to about $50,000,000. The Iranian Government [Page 590] would prefer that the United States make the entire loan, but will not refuse British participation. The Russians have refused to recognize the need for a loan, and would probably not participate, though they should be invited to do so.
Mr. Gunter’s chief assignment in Iran will be to discuss the amount of the loan with Dr. Millspaugh and work out certain details with respect to reserve requirements, place where deposits will be held, et cetera. The Treasury believes that so long as the loan is used only as backing for currency issues, it can be handled under existing currency stabilization authority.
The military representatives present at the meeting were chiefly interested in reiterating a request by General Connolly of the Persian Gulf Service Command that gold coins be turned over directly to army procurement officers in Iran to be used directly in the purchase of commodities. They stated frankly that General Connolly would like the 62% cut in expenditures to show up directly on his books, so that his present appropriations would last longer. Mr. Bernstein expressed the view that if there was to be any profit on gold sale, it should go into the general fund of the Treasury, to be reappropriated by Congressional action. He pointed out that considerable confusion would otherwise result, since each agency of the government making any expenditures in Iran (e. g. the State Department) would expect similar treatment in self defense. Furthermore, it would be dangerous to start using gold coins directly in purchasing commodities, since sellers would probably then refuse to accept rials, and would demand gold payment on all transactions. It is believed much safer to have the gold sold in the open market for rials, and to continue to use rials in direct purchases of commodities and services. Colonel Luscombe and Major Patton appeared convinced of the logic of these arguments. They stated, however, that there were indications that British Army procurement officers were getting gold coins to use in purchasing operations. Mr. Bernstein admitted that if this were true, General Connolly would have to be given similar advantages, but said that if the evidence were confirmed the Treasury would try to persuade the British Treasury to stop such operations.
[Here follows section dealing with Saudi Arabia, printed on page 880.]