Foreign Relations of the United States, 1950, The Near East, South Asia, and Africa, Volume V

780.00/9–1850

Record of Informal United States–United Kingdom Discussions, London, Thursday Morning, September 21¹

London, September 21, 1950

secret

Topic for Discussion: Greece, Turkey and Iran—Items 4, 5 and 6 on agreed agenda. Also remainder of Item 1 (Iran).²

Participants:
Foreign Office:	Mr. Michael Wright, Assistant Under-Secretary of State
	Mr. G. W. Furlonge, Head, Eastern Department
	Mr. L. Barnett, Eastern Department
	Hon. P. Ramsbotham, Economic Relations Department
	Mr. H. G. Gee, Labor Adviser
Treasury:	Sir Ernest Rowe-Dutton, Third Secretary
	Sir Herbert Brittain, Third Secretary
	Mr. Norman Young, Assistant Secretary
	Ministry of Fuel and Power:
	Mr. Victor S. Butler, Under-Secretary, Petroleum Division
U.S.A.	Mr. McGhee } Department of State Mr. Kopper3 Mr. Woodbridge4 Mr. Parker, Financial Attaché, Cairo Mr. Palmer5 } American Embassy, London Mr. Willoughby Mr. Root6

AIOC and IPC Problems (Item 4 on agenda)

The British representatives opened the meeting by stating their understanding that the general objectives of our two countries in the Near East were identical: that, in carrying out these aims, we were agreed on the importance of avoiding unnecessary rivalry or friction between ourselves or between our respective oil companies, whose impact on the Near East we recognized to be of primary importance; and that each country should play its full part in helping developments in the Near East. Specifically, they believed we were agreed that:

(1) The Near East countries should not be permitted to play one of us against the other;

(2) The Near East countries should not be permitted to play our respective oil companies against each other;

(3) Our oil companies should work in line with, not against, the policies of the US and UK Governments.

We indicated our full agreement with these statements but added, that when the particular activities or policies of any of the oil companies, of whichever side, threatened to affect adversely the common objectives of our two governments, we thought each of us should feel free to criticize to the other these company activities or policies.

There was then discussion of the serious situation now threatening Iran. There was complete agreement on both sides that Iran was the danger point in the Near East and that the problem there was one of the utmost urgency.

Mr. McGhee reviewed the background of our own program for Iran, which we had already discussed with the British, and emphasized that financial assistance from us and ratification of the AIOC agreement were essential elements in strengthening the country and in maintaining the Razmara government, which both of us looked to as the one best suited to lead Iran out of the present crisis. Razmara must soon show tangible results or fail in his efforts altogether and time is running out. The need for funds is urgent and there is reason to feel that Iran should obtain new benefits which it will eventually receive under the supplemental agreement. It seemed to us of the greatest importance that this agreement be ratified without delay. Admittedly its financial provisions are fair ones. But the best political judgment in Iran felt there was no chance of ratification in the Majlis without the concession of something in the nature of the four points specified by Razmara.

Mr. Butler then explained the company’s preliminary reaction on these points. The first was greater Iranianization. On this point Iran should be more explicit. Already the company was 97% Iranianized. What Iran probably had in mind were the more important executive jobs but the difficulty here was to find suitable persons to fill them.

The second point was an audit of AIOC’s books. This the company found quite impossible to concede, nor did it feel it owed any obligation in this respect beyond that to any other normal stockholder. It must be remembered that the company had interests outside of Iran which were impossible to separate from activities in Iran. The company could not divulge the nature of its worldwide operations to Iran. He assumed, in this connection, that the Iranian Government would have no desire to give up its participation in outside profits.

The third point was the local price of oil, which Iran wanted to obtain at the cheapest figure paid to AIOC. The country already had a very favorable position in this regard but nevertheless he did not think the company would refuse altogether to budge on this demand.

Mr. Butler had not previously been familiar with Razmara’s fourth point, which Mr. McGhee explained Was the right to check exports, but said he would take it up with the company and he did not believe it would pose an insurmountable difficulty. The trouble on all these demands was that the Iranians had never been very clear about them. The company was now trying to learn from them just what it is they want, and the Iranian Finance Minister, who is due in London for talks on the AIOC problem, would probably have something further to say about them.

Mr. McGhee then returned to the reasons why we felt it was so important that something be done immediately. He said we were disappointed that the company had not shown the same sense of urgency about the matter that we attached to it. It seemed to us essential that the agreement be put through the Majlis at this session. Before leaving the US he had talked with representatives of the principal American oil companies with operations in the Near East about Razmara’s demands. They felt these demands were not unreasonable ones and that there were none they themselves could not have met. Mr. McGhee observed that the question of accounting, for example, seemed elementary enough. Creole was obliged to present its accounts to the Venezuelan Government for examination.

Mr. McGhee then contrasted the numerous advantages AIOC enjoys in its operations with the position of oil companies elsewhere in the world. The cost of oil to AIOC was by comparison extremely low and good profits were made. As for the argument that AIOC’s operations in Iran were tied up with interests elsewhere, Mr. McGhee indicated that Creole in Venezuela had somewhat analogous problems. The American representatives he had spoken with felt that so long as the company did not lose control of its board of directors there was little it could not afford to agree to. The advantage in negotiations today lay with the country where the oil properties were located and about the best the companies could do was fight a graceful rearguard action.

Mr. McGhee mentioned the new demands that the Saudi Arabian Government was making on Aramco⁷ and warned of the repercussions these would have when they became known to other Near Eastern Governments. He could assure the group that these demands were astounding and extremely sweeping, covering both financial and other concessions. Once known to the Iranian Government, he doubted whether there would be any longer the slightest chance of getting the present supplemental oil agreement ratified. He was not at liberty to disclose the details of the Saudi Arabian demands, but he could not emphasize too strongly the impact they would have when they become generally known, as inevitably they must. This new factor threw an alarming new note of urgency into the need for getting immediate ratification of the supplemental agreement.

[Here follows a discussion of the labor problems of the Iraq Petroleum Company.]

Convertibility of sterling (Item 5 on agenda)

There was a lengthy discussion on the question of converting sterling to dollars to service US loans to Iran. The British position, which was propounded mainly by the Treasury representatives, was that it was not fair to place this additional burden on the UK and that loan servicing should be made a first charge on Iran’s own dollar earnings. Sir Ernest Rowe-Dutton, explaining the memorandum of understanding with Iran on the convertibility question, said that the agreement did not cover loan servicing. It was, he said, much easier for the UK to defend the conversion of sterling for essential imports than to open a sort of checking account on dollars for the Iranians. Further, he was concerned by the precedent which this would set not only in Iran but elsewhere throughout the world. The UK simply could not be drawn into such a dangerous commitment.

He suggested as an alternative that, as the IBRD had done with the recent loan to Iraq, we include as part of our loan the sum which will be required for the first few years of servicing. In the meantime the UK and the US should do everything possible to get rid of the present Iranian decree covering foreign exchange which leaves the disposition of practically all of Iran’s export dollar earnings in the bazaar where they can be withheld as long as 16 months. The UK Government, he said, brings under its control the country’s dollar earnings and the Iranian Government should do the same.

Mr. McGhee reviewed the factors in the Iranian picture which, for psychological reasons, made an immediate Export-Import Bank loan imperative. He said that Ambassador Grady was most emphatic on this point. However, the whole transaction was now being held up by the convertibility question, for the Export-Import Bank could agree to advance the loan only if the UK gave us an assurance to provide the dollar conversion necessary for servicing the loan. The simple fact was that British earnings in Iran represented the sole substantial collateral.

Moreover, it might be argued that British agreement to conversion is in fact an obligation the UK could not avoid. AIOC was the UK’s biggest overseas asset and had been a tremendous dollar earner for the British; by contrast, Iran obtained very little. The UK, as we saw it, simply had no alternative to provide the Iranians with their dollar requirements. Conversion for loan servicing was itself, in effect, no more than an allocation of dollars for essential goods. Furthermore, it appeared that conversion requirements under the present understanding with Iran were diminishing appreciably and the inclusion of loan servicing should not extend the amount of the UK’s commitment. As for dollars available directly to Iran through exports, many of these were already being used for essential purposes.

Sir Ernest Rowe-Dutton feared that British agreement to convert would be an “open-end” affair and would lead to similar demands in the future. Mr. McGhee replied that the assurances we were now asking were limited to the $25 million which the Eximbank was prepared to lend and for which the Iran Government had now made application. In answer to a question, he added that servicing of the arms credit was also part of the same problem. This, the Eximbank loan and the proposed IBRD loan would mean servicing requirements of perhaps $6–$7 million yearly. Sir Ernest again expressed his feeling that we should accomplish our objectives by pressing the Iranians to tighten their financial controls and make use of the dollars now available in the open market. Mr. Woodbridge explained that while US statistics indicated imports of some $10 to $15 millon were coming from Iran, actually much of this represented re-exports through third countries from which it was virtually impossible for Iran to obtain the dollar proceeds. In addition, many of the free dollars in Iran were already being used for essential imports and were furthermore a necessary factor in the import surplus which Iran required to finance its rial expenditures. In actuality, the amount of free dollars that might be available to Iran for loan servicing was much less than at first glance might seem likely.

Sir Ernest Rowe-Dutton again urged that some strong action be taken by the US and UK to get the withdrawal of the present Iranian decree covering the distribution of dollar earnings from imports. Mr. Parker said the International Monetary Fund, which was now studying the problem, seemed to him to be the appropriate forum for taking up the question of modifications. It was impossible simply to revert to the original situation in Iran. What was now necessary was for the International Monetary Fund to sit down with the Iranians and discuss useful changes in the present controls to achieve the objectives the Iran Government had had in mind. Eventually, as the next step, it might be appropriate for the US and UK to make a unilateral approach, as in fact we had already done in a sense with respect to the retention of export proceeds. We intended to press as we could for a revision of the exchange regulations. The point now was that we did not have the time to await these developments before making a loan.

Sir Ernest wondered whether the prospect of an International Bank or other loans might be used as an inducement to get the Iranians to withdraw the decree regulations, for he doubted the effectiveness of International Monetary Fund intervention alone. Mr. McGhee and Mr. Parker in answer again stressed the time factor. It was impossible to take the time to work this out. Furthermore, the main purpose of our loan was for the psychological effect it was hoped to have and any pressure prior to its granting would simply undermine the objective for which it was intended. It was certainly part of our thinking that the loan, once made, could be used as leverage to get the Iranians to improve their financial administration. However, it was out of the question to bargain on the granting of the loan itself.

Mr. Parker explained briefly the implications of the present financial picture in Iran. The estimated budget deficit, together with rial requirements for investment and sales to AIOC, left the Iranians with nearly 7 billion rials less than needed for total rial expenditures. There was at the moment no adequate mechanism for credit expansion. By running an import surplus, he said, the Iranians can obtain an additional 4 billion rials for their internal needs, but in any event this still left a gap of 3 billion. Foreign exchange income and outgo about matched each other but this artificial import surplus materially altered the picture,⁸

General Economic Assistance to Persia (Item 6 on agenda)

Continuing the above discussion, Sir Herbert Brittain explained that the UK had hoped for some joint arrangement with the US for financial assistance to Iran, with the UK prepared to help as necessary with respect to sterling needs. By the same token, however, it was part of their hope that the US would take the responsibility for dollar requirements, including the question of loan servicing.

He said the UK was prepared to consider providing Iran with the sterling needed for the financing of immediate development expenditures, but that the form this assistance would be given had not been worked out. He mentioned the £8 million which the AIOC had already advanced against royalties under the old rates but said the company felt it was unwise to make advances at this time on new royalties under the supplemental agreement. Mr. Wright explained that the company had not yet, however, closed the door to a direct loan. Alternatively, the UK Government itself was considering the possibility of sterling aid, either in the form of a loan or as a credit guarantee, perhaps for an AIOC loan. Sir Herbert Brittain said the tentative figure the UK had in mind was about £6 million. This was in addition to the £8 million on royalties which AIOC had already advanced. Also, the UK was considering the possibility of advancing £2 to £3 million under a “half shares” scheme for financing internal rial expenditures needed for Iran’s development program if the US provided dollar assistance for the same purpose on roughly a 50–50 basis.

In closing, Mr. McGhee explained that it seemed to us that the UK already owed Iran something in the nature of £40 million (the amount accruing to Iran under the supplemental agreement, and that conversion for loan servicing was simply a part of this debt and could not be avoided. The Eximbank felt it could not lend money where the only asset available could not be used to retire the debt. Sir Ernest Rowe-Dutton observed that this, in effect, would amount to a “giltedged” loan.

It was agreed that Mr. Woodbridge and Mr. Parker would continue discussions of this subject with Sir Ernest Rowe-Dutton and other UK Treasury representatives and that general discussion of the subject would be renewed Saturday morning, September 23.

Question of Security for Iran (GTI—Item 1)

We pointed out that if Greece and Turkey become in any way associated with the North Atlantic Pact, it might be necessary to make a reassuring statement regarding Iran. The UK representatives said that they would be glad to repeat the statement made last spring but were not prepared to go further.⁹ We agreed with this view.

It was further agreed that there was still some ambiguity regarding the extent of military responsibility in connection with Iran and that this should be settled. It was decided that Foreign Office and State Department representatives should press for an early solution in the proper quarters.

(See also minutes for Saturday morning¹⁰)

1. The authorship of this record is not indicated on the source text. Presumably prepared by an officer of the Embassy in London, it is part of a comprehensive collection of records of the American-British discussions in London, September 18–23 included in a single dossier under file 780.00/9–1850.
2. The agenda for the American-British discussions was agreed in advance of the arrival of the McGhee party in London.
3. Samuel K. C. Kopper, Deputy Director, Office of Near Eastern Affairs, Department of State.
4. George Woodbridge, Officer in Charge of Economic Affairs, Office of Greek, Turkish and Iranian Affairs.
5. Joseph Palmer 2d, First Secretary of the Embassy in London.
6. John F. Root, Second Secretary of the Embassy in London.
7. For documentation on the Aramco discussions with Saudi Arabia on a new oil agreement, see pp. 9 ff.
8. At a meeting in the afternoon of September 21, Woodbridge told the British that their suggestion to withhold sufficient dollars to service any loan for two years was unacceptable. The British repeated their arguments in favor of this proposal and both sides reviewed many facets of the Iranian situation along the lines discussed in the source text. The British concluded the meeting by saying they would take the matter up with their ministers and inform the United States Embassy as soon as possible thereafter. A record of this meeting is in file 780.00/9–1850.
9. Presumably this is a reference to the statement made by Bevin on May 19 following the Foreign Ministers meeting. Secretary Acheson made a similar statement on the following day and it is quoted in part in footnote 2, p. 1264.
10. For a record of the Saturday morning meeting, see infra.