888.10/10–1250: Telegram
The Ambassador in Iran (Grady) to the Secretary of State
851. 1. In view of completion of Exim application and continued reports that Department considering aid program for Asia, I wish to offer some thoughts on future aid for Iran.
2. US military aid to Iran comprises material delivered under $25,000,000 surplus arms loan and material planned under $65,000,000 MDAP grant. This aid is necessary to lift Iranian army from half-armed outfit to a reasonable well-equipped army which the Russians must be prepared to fight if they wish to take Iran. It has, furthermore, given Iranians confidence as our allies. However, we have reached the point of diminishing returns. We must continue to show interest in the country by giving some aid each year, but it is futile in the next few years to attempt to mold by increased equipment the Iranian army into a force which can stop or even slow for long time Russian invasion.
[Page 606]3. Economic aid consists of a proposed Exim Bank loan of $25,000,000 for road construction equipment, agricultural equipment and an electric power survey, and a proposed International Bank loan of $10,000,000 for port equipment and cement mills. In addition, a $0.5 million Point Four program for agriculture—health, education centers in the provinces is under way.
4. We are now faced with the question whether there should be more aid for Iran and, if so, what type of aid this should be. Future military aid has been disposed of above.
5. If the criterion of aid is the balance of payments deficit or the effectiveness of the country’s use of its present exchange revenues, the answer is the same we have been giving Iran for some years, namely no aid is necessary. But application of the tests we applied to the more advanced European countries misses the point. Iran’s international payments are in balance if one counts as an account receivable the increased oil revenues which the oil company has offered in the pending negotiations. However, while achieving this balance in her international payments her people live in animal-like poverty without many commodities which cost foreign exchange. Even so, Iran is living beyond her means since she is using her wasting resource, oil, for the purchase of items of current consumption rather than for capital investment. Though her poverty makes her obvious prey for Russia, she does not have competence, energy and moral stamina to push ahead with a program of capital investment and exchange training. It is of vital interest to US to prevent Iran from falling into Russian hands as a result of its sins of mismanagement. Part of the case for American aid is that it is a means of supplying Iran with the direction and discipline required for its survival and the financial value of the aid must be great enough to induce Iranians to accept such discipline and direction.
6. Assuming that there is to be aid, the next question is whether it should be loan or grant. As I have said before, loans have advantages. Demands tend to be more moderate, and we can more easily channel the funds into sound capital investments and away from current consumption. However, acceptance of loans which cannot or will not be serviced is an unhealthy business. Iran’s failure to service the surplus arms loan and her difficulty in obtaining dollars to service the arms and Exim loans raise questions about Iran’s further borrowing capacity. For these reasons and because grants will give us leverage, the conclusion is that further aid to Iran should be in the form of grants.
7. If grant aid is to be given, it can be used for continuation of either of the types of programs we are now inaugurating, namely, capital investments (power and irrigation dams, transportation, and [Page 607] city water systems) or technical training along Point Four lines. Iran needs both. Under Reza Shah and under the present government, the emphasis has been placed upon capital investments, and particularly upon those which have been thought by Iranians to be indications of an advanced state of civilization. Unfortunately, Iranian minds and hands have not kept pace with these material improvements. The splendid railroad completed over a decade ago is operated in a grossly inefficient manner. The magnificent new government buildings house civil servants untrained to perform their duties.
8. It is assumed that any aid program will be largely for capital investment, but emphasis must also be placed on training of people in mechanics, modern agriculture, preventive medicine, and other fields which must be developed if this country is to move out of its semi-feudal state. Much can be done here to increase productivity merely through technical assistance; in fact the great lack of technical knowledge, training and personnel in Iran constitutes at present a limitation on the extent to which Iran can beneficially avail itself of aid to be used for capital investments. Therefore, every effort should be made to include as much technical training as possible in whatever aid is granted.
9. In the long-term we must assist this country to improve its productive facilities and standard of living so that the blandishments of Communism and the country’s inner weaknesses will not cause it to fall into the Russian orbit. In the short-term, however, we must give the country a psychological lift. Through our aid we must give it assurance that we have faith in it and that we consider it an ally. While the long-term aim is basic, the psychological aim is of tremendous importance now while Iran is in a precarious position. Consequently, we should tailor our programs to get the maximum psychological benefit for Iranians and maximum credit for ourselves.
10. In summary, there must be grant aid. None should be used for current consumption. It should be used for capital investment and, to the maximum extent possible, for technical training.