Foreign Relations of the United States, 1948, The Near East, South Asia, and Africa, Volume V, Part 1

890F.5151/5–648

The Minister in Saudi Arabia (Childs) to the Secretary of State

confidential

Jidda, May 6, 1948.

No. 129

Sir: I have the honor to refer to my telegrams No. 206 of April 14 and No. 209 of April 17, 1948,¹ and to report that Mr. Judd Polk, United States Treasury Representative attached to the American Embassy in Cairo, arrived in Jidda on April 20, 1948, and remained in Jidda until May 2, 1948, for an investigation of the particular situation created by the payment of Arabian American Oil Company oil royalties to the Saudi Arabian Government in gold sovereigns,² as well as the general financial situation of the Saudi Arabian Government.

Immediately upon Mr. Polkas arrival Shaikh Abdullah as-Sulaiman, Minister of Finance, was informed of his presence by the Legation and it was stated that Mr. Polk was at the disposition of the Minister of Finance and of his advisers for any discussions which they might care to have with him concerning their particular problems. I have reason to believe that both the Minister of Finance as well as His Majesty, were extremely gratified by the promptness with which Mr. Polk made his services available and, as I had anticipated, the peculiar nature of the problems confronting the Saudi Arabian Government as a result of an influx of gold sovereigns made the Minister of Finance peculiarly receptive to a discussion of Saudi Arabian financial problems with Mr. Polk. Mr. Polk had several initial conversations with: the Minister of Finance and his principal assistant, Shaikh Mohammed Suroor, at which Second Secretary Donald C. Bergus and Third Secretary T. Andrew Galambos were present. Mr. Polk requested certain information of the Government to enable him to pursue his inquiries, and Mr. Polk informed me that he was very much encouraged by the very sincere effort made by the Government to supply him with the information which he desired.

Toward the close of his visit Mr. Polk consulted with me concerning a draft communication to Shaikh Mohammed Suroor embodying certain personal suggestions which he felt it would be desirable to offer the Saudi Arabian Government in meeting its financial problems. It was both my view and Mr. Polk’s that these suggestions should be made in the most informal manner and that every appearance should be avoided of pressing the Saudi Arabian Government to adopt any particular course of action or to employ financial experts or counselors of American nationality. It was felt that the more disinterested our informal advice was framed, the more likely the chances of such advice being given serious consideration. Local considerations regarding the need for presenting currently unpalatable advice in a manner which might leave the Ministry of Finance in a receptive mood for further patient exposition by their own advisors of the need for future implementing measures largely indicated the form in which the memorandum was cast.

I enclose a copy of the suggestions as finally framed by Mr. Polk, which were communicated to Shaikh Mohammed Suroor on April 30, 1948.³ It will be observed from the enclosed memorandum that Mr. Polk has made an analysis of prospective revenues of the Saudi Arabian Government for the ensuing four years, from which it appears that dollar revenues alone may total in 1948 56 million dollars, in 1949 70 million dollars, in 1950 100 million dollars, and in 1951 120 million dollars. Mr. Polk next analyzes the present losses of the Saudi Arabian Government through its currency and exchange operations and he makes certain suggestions for avoiding these losses, including the giving of consideration to the reduction of the silver content of the riyal and the eventual introduction of a paper currency. Mr. Polk also recommends the employment of carefully chosen foreign experts who might prove exceedingly useful in setting up operating and accounting procedures. Finally, Mr. Polk points out the desirability of the employment by the Saudi Arabian Government of one or more foreign consultants who might advise the Saudi Arabian Government concerning its monetary problems.

On May 1, 1948, Mr. Polk, in company of Mr. Donald Bergus and Mr. T. Andrew Galambos, presented his memorandum to Shaikh Mohammed Suroor. At this conference Shaikh Mohammed Suroor indicated his general agreement with the points made by Mr. Polk in his memorandum but expressed disappointment that it did not deal with the specific problem of dollars which Shaikh Abdullah Sulaiman had raised originally with me. I had anticipated that this would be the first point raised by the Saudi financial authorities and Mr. Polk pointed out that the monetary problem arising from a decline in the premium rate on sovereigns was not a genuine dollar problem of the Government. Mr. Polk emphasized that Saudi Arabia’s dollar problem was not really a problem of needing credit, but rather a problem of the effective and wise use of the Saudi Arabian Government’s very rapidly growing dollar revenues.

On May 2, 1948, Mr. Polk in company with Mr. Galambos called on Shaikh Abdullah Sulaiman to discuss the memorandum previously presented by Mr. Polk to Shaikh Mohammed Suroor. At this conference the Minister of Finance expressed a desire for Mr. Polk’s opinion on how the Saudi Arabian Government could best market its sovereigns. Mr. Polk replied that he was incompetent to advise him on this point but expressed willingness to refer his question to the Chase National Bank representative for the Middle East in Cairo.

Shaikh Abdullah Sulaiman then outlined his general plans for handling Saudi Arabian finances. He stated that it was the Government’s purpose to establish a central bank in which the Saudi Arabian Government would deposit 214 million paper riyals, an amount equivalent to the recently published budgetary expenditures of the Government. The Government would draw on these riyals against the deposit of gold sovereigns at the rate of 65 riyals per sovereign.

Mr. Polk stated that he was gratified at the direction of Shaikh Abdullah’s thinking, but that he was worried over the notion of stabilizing the riyal in terms of the sovereign, inasmuch as the sovereign itself has a fluctuating value. Shaikh Abdullah stated that he would in any event make no decision without first obtaining the advice of competent experts. The Minister of Finance added that the Government proposed to obtain Egyptian advisers, and Mr. Polk mentioned as a suitable candidate Darwish Bey. Shaikh Abdullah asked Mr. Polk if he would approach Darwish Bey to ascertain whether he would be interested in the post of consultant.

In concluding the interview the Minister of Finance stated he had great respect for American financial opinion and knew our advice was disinterested. He reminded Mr. Polk he had first turned to the “friendly American Government” when he needed advice on financial problems, and he assured Mr. Polk he would again turn to the “friendly American Government” for its comments on such advice as the consultants whom he might employ would have to give him. I enclose for the record memoranda of Mr. Polk’s conversations of May 1 and 2, 1948.⁴

I believe a very useful start has been made in the turning of the thoughts of the Saudi Arabian Government seriously to a consideration of the modernization of its currency and financial problems. I wish to express my great appreciation of the extremely valuable services rendered by Mr. Polk to the Legation in this instance. I have expressed to Mr. Polk the hope that in the event the wish should be expressed at any time by the Saudi Arabian Government for his presence in Jidda for consultation he make every effort to accede to such desire. I feel strongly we have an exceptional opportunity presented to us at the present time and that if we are prompt in taking advantage of it and prudent in our approach to the Saudi Arabian authorities we may accomplish a great deal in the way of assisting the Saudi Arabian Government to the effective solution of its monetary and financial problems.⁵

Respectfully yours,

J. Rives Childs

1. Neither printed.
2. The “gold pound controversy” between Aramco and the Saudi Arabian Government was of some two years’ duration and concerned the computing of royalties due to the Government and offsets based on dollar advances made by the company to the Government against future royalties.

   Final negotiations between Saudi Arabian officials and Aramco representatives began in February 1948 and were brought to a successful conclusion before the end of March. Royalties were fixed at four gold shillings per ton of oil, payable in British gold sovereigns. Should Aramco be unable to obtain gold sovereigns, it was to make payment in dollars at the rate of $12 per sovereign. It was the contention of Aramco, during the negotiations, that dollar payments should be calculated at the selling price of the gold sovereigns in the United States, i.e., $8.24. The Saudi Arabian negotiators insisted on payments at the rate of the sovereigns at Jidda, which fluctuated between 16 and 20 dollars. The company finally presented the controversy to King Ibn Saud, after which agreement was reached at the $12 level (despatch 95, April 3, from Jidda, 890F.51/4–348). Past accounts up to February 29, 1948, were liquidated by payment of 184,549 gold sovereigns by Aramco to the Saudi Arabian Government (despatch 98, April 6, from Jidda, 890F.5151/4–648).

   The “particular situation” as reported by Minister Childs on April 13, flowed from the payment of royalties in gold sovereigns. An acute dollar shortage resulted, together with a fall in the local price of sovereigns to $12 and of the riyal to 20 cents, less than its bullion value. These monetary developments were said to threaten a cessation of Saudi Arabian trade with the United States (telegram 204 from Jidda, 890F.5151/4–1348).

3. Not printed.
4. Neither printed.
5. Mr. Polk made a second report on Saudi Arabia’s financial situation on May 31. A copy was transmitted to the Department by Jidda in despatch 160, June 5 (890F.5151/6–548). The report, as quoted in the despatch, stated in part: “Saudi Arabia’s financial problem is how to convert the revenues from oil into lasting production gains. The problem is dramatic because of the size of prospective aggregate earnings—at least $2½ billion and possibly as much as $15 billion. The problem is sobering because of the very real difficulties in finding promising lines of economic development in so barren a land. The problem is urgent because oil is a depletable resource—its benefits will accrue for perhaps 25 to 50 years. As far as it is now known, there is nothing to take oil’s place once it is gone. So the problem may be more definitely stated as how to translate $2½–$15 billion into as big a gain in production as possible, and to do so within a generation or two.”