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

888.00R/12–650

Memorandum of Conversation, by the Officer in Charge of Iranian Affairs (Ferguson)¹

secret

Washington, December 11, 1950.

Subject: Economic and Military Aid to Iran

Participants:	Ambassador Grady
	S/MDA—Mr. Ohly
	E—Mr. Dort
	OFD—Mr. Stinebower
	NEA—Mr. McGhee
	Mr. Loftus
	GTI—Mr. Rountree
	Mr. Woodbridge
	Mr. Ferguson

The Problem:

The critical situation in Iran which requires urgent U.S. action to restore its lost prestige and to counteract the current trend there towards neutrality.

Action Required:

To reach Departmental decisions on (1) the amount of grant aid to be recommended for Iran under the new program now under discussion and (2) to decide whether Iran should be considered a “Task Force 1” or “Task Force 2” country in the contemplated new approach to foreign aid programs.

Action Assigned to: NEA, E, S/MDA

Discussion:

Mr. McGhee opened the discussion by saying he had arranged the meeting so that Ambassador Grady could present his views to the persons in the Department concerned with the question of the nature of future economic aid programs to Iran should take and with the question of the inclusion of Iran in the group of nations considered for package aid by “Task Force 1”.

Mr. Rountree outlined the course of the discussions in the Department, citing the difference of opinion between NEA and E on the question of $25,000,000 grant aid for Iran. NEA believed this entire figure should be grant aid, he said, while E was of the opinion $10,000,000 should be grant aid and the balance in the form of loans. Mr. Rountree pointed out that the uncertainty of the NEA grant aid program, particularly as regards South Asia made it desirable to treat Iran in the same manner as Turkey as it was therefore preferable that Iran be included in the “Task Force 1” countries rather than “Task Force 2”.

Ambassador Grady said that he was strongly in favor of the Task Force 1 approach. He said that comparisons between the amounts of U.S. aid accorded various countries frequently arose and while not particularly logical and often annoying they are a very real consideration to the countries concerned. Turkey, for instance, amounted to an obsession with the Iranians. This factor, the Ambassador stated, was of utmost importance and it was essential if the Task Force 1 vs Task Force 2 approach materialized that Iran be included with the ECA nations even if it meant a reduction in the aid figure. A $20,000,000 program in association with Turkey and the rest was preferable, Mr. Grady said, to a $50,000,000, without them.

Turning to the question of loans vs grants, the Ambassador said that grants gave much more elasticity and that the loan approach in Iran had definitely not been successful. Mr. Grady said that he was very disappointed by the exacting requirements and red tape of the loan approach, which admittedly has some advantages, but these are outweighed by the hazards of delay. The Ambassador expressed the belief that the Iranian Majlis might reject the Export-Import Bank loan, especially if it were presented to it for approval after the ratification of the AIOC supplemental agreement. The Iranians, the Ambassador stated, feel very bitterly about the fact that many other countries receive grant aid while they are offered only bank loans on what they consider rigorous conditions. This psychology was most apparent in the sale of military surpluses to Iran at a time when neighboring countries were receiving military aid gratis.

Mr. Grady said that he was not too keen, however, on any irrevocable commitment to furnish Iran grant aid beyond a one year period although he said he realized that because of the need for capital equipment it might still be necessary even after Iran receives the increased royalties due it under the AIOC supplemental agreement. The Ambassador said that he felt obliged to stress the political factors involved since the overall question is to make the Iranians feel that we are their friends. Our prestige, he said, is already low and will go much lower in the wake of the present situation in Korea and the urgency is therefore very great. Even if the United States should lose money, it would be a very small price to pay for Iranian good will. The Ambassador said that this of course means we are “buying” Iran but at the same time we will be raising the wretched standard of living and helping Iran towards economic prosperity thus keeping that country on the side of the democracies. A grant of only $10,000,000 would, Mr. Grady said, be worse than nothing.

Mr. Rountree said that he and Ambassador Grady were in agreement that $10,000,000 for technical assistance would do more harm than good. The main focus of the Iranian attack on the United States aid programs at the moment, he said, is that we have consistently given the Iranians advice but never any real aid.

Mr. Grady said that there would be no difficulty in finding proper ways of expending grant assistance and that he had with him a list of worthy projects he would be willing to discuss.

Mr. McGhee said that the Iranians feel that they were the first to be subjected to Soviet pressure in the post-war period and can see no real reason for our discrimination against them vis-à-vis Turkey.

Ambassador Grady warned that great caution should be exercised in making statements regarding our intentions which the Iranians could interpret as promises. He said the Iranians had no inkling that we were even thinking of a grant aid program and that if it materializes it will come as a most pleasant surprise to them. Not only will it give us political advantages, he said, but it will also give the United States the leverage it now lacks to get the Iranian economy moving. Loans, he said, cannot give us this but grant aid in Iran might very well give us the opportunity to make more progress in Iran than had been possible in Greece. Nothing, of course, he added, can be done in this direction until the goods start arriving.

Mr. Stinebower inquired concerning the present source of the Soviet appeal to the Iranians since they are not promising the Iranians anything.

Ambassador Grady said this was hard to explain. In the case of Iran the Soviet bullying tactics of last spring suddenly were replaced by a policy of friendship and it is usually true that when the bully shows signs of moderation, his victim is unduly impressed. Mr. Grady said that the recent Irano-Soviet trade agreement had definite Economic advantages for the Iranians but that these were less of a factor in the present Iranian attitude than the sudden switch to a policy of ostensible friendship. The Soviets, he said, always make an enormous fuss over their gestures towards other countries even though in many cases they are only giving those countries their just due. The Ambassador cited in this connection the return of the seven kidnapped Iranian soldiers.

Mr. McGhee said that in Iran we are confronted by a power relationship and that the Iranians are only justified in standing up against the pressures and threats of the Soviets if fully backed by the West. If Soviet power were suddenly removed, the Iranians would naturally choose us as their friends.

Ambassador Grady expressed the opinion that the propaganda the Soviets will let loose over any minor concessions they may make in connection with the present Irano-Soviet frontier Commission will more than outweigh the value of the small amount of land the Iranians will recover. The odds in this propaganda war, Mr. Grady stated, are against us and our propaganda is frequently minimized by Soviet gestures such as the border rectification.

Turning to strategic considerations, the Ambassador said that Iran is undoubtedly high on the list of Soviet priorities and that the Soviets are probably hoping they can build up the present situation to the point where Iran will fall into their laps.

Mr. McGhee explained to Ambassador Grady that there was always resistance in Washington to foreign aid programs justified solely by political and psychological factors. He said there had been a widespread impression here that Iran’s oil royalties were or would be such that dollar aid would not be required and that, while the Department now realizes that this is not the case, the fact remains that an Iranian program must be justified on economic grounds.

Ambassador Grady said that he was aware of this and stressed the political need since it points up the urgent need for American assistance. The standard of living in Iran, he said, is deplorable and there is no difficulty in justifying an Iranian program on economic grounds.

Mr. McGhee stated that even if the Iranian balance of payments were satisfactory, which it is not, there would be a real need for economic development through foreign aid.

He said that we have the ability to buy staying power to help drain off Soviet strength. 100,000 properly equipped troops in Iran could, he said, be much more helpful to us than a similar number in, say, Denmark. We are, Mr. McGhee stated, aiming at building our position throughout the entire Soviet periphery not merely in Iran which we do not claim can withstand the Soviets by itself.

Mr. Dort said there is no sharp distinction between the programs considered by Task Forces #1 and #2 regarding ECA type aid. The Task Force #1 program is designed for countries already organized together in OEEC and it would be difficult to fit an outsider into a going organization at this time. The legislative distinction, he said, is not very sharp.

Mr. Ohly said there were three distinct titles under discussion in Task Force #1:

(a) Military aid for NATO coupled with economic assistance under ERP;

(b) Military aid for Greece, Turkey, and Iran;

(c) Military assistance for the Far East.

Mr. Ohly said he foresaw strong Congressional objections to any attempt to include economic aid to Iran in this program.

Mr. McGhee doubted that there would be any undue Congressional objections to the inclusion of Iran and cited the example of the MDAP appropriation of last spring where Congress insisted that Iran be included in Title II instead of III where it had been placed because of anticipated Congressional objections to its inclusion in Title II. Mr. McGhee expressed the fear that Congress would look on the Task Force #1 vs. Task Force #2 distinction as a question of priorities with the possibility that with the world situation being what it is, the Task Force #2 program would have rough sledding.

Mr. Ohly admitted that there was such a danger and said that in presenting the program, Iran will have to be considered as a separate entity, not merely included in a general grouping.

Mr. Dort expressed the opinion that the inclusion of Iran in Task Force #1 would present many complications since it would in fact add Iran to the European community of nations involving such organizations as OEEC, EPU, etc. He said that the problem for the Task Force #1 countries was now primarily one of military rather than economic assistance.

Mr. McGhee said that it may be that events will move beyond the Department’s present thinking and that our entire foreign aid program will have to be based entirely on the security considerations.

Mr. Loftus said that he feared the Task Force #2 approach would not have the flexibility necessary to accomplish our aims in Iran.

Mr. Stinebower disagreed with Mr. Loftus on the question of flexibility and said it was impossible to allot ERP money to Iran. If Iran were included in Task Force #1, he said the illusion would be created it was to be included in ERP.

Mr. Ohly said there would be difficulty for Congress to understand the inclusion of Iran in Task Force #1 since it was intended for the ERP and NATO countries, aid to whom was justified on the grounds of unfavorable balances of payments.

Mr. Woodbridge pointed out that Iran does, in fact, have a balance of payments problem, the present deficit being more than $20,000,000.

Mr. McGhee expressed the fear that the Task Force #2 program would not be considered essential for U.S. security and if the funds requested are attacked in Congress, Iran will suffer.

Mr. Rountree said the Task Force #2 approach for Iran was bad since it discriminated against Iran vis-à-vis Greece and Turkey. He said that he doubted that Congress would be at all receptive to the Task Force #2 approach.

Mr. Dort said that in presenting both programs to Congress the security angle would be stressed. He added that E had not looked on the $10,000,000 grant aid it had proposed for Iran as technical assistance and had proposed the ten million-fifteen million division since Iran had plenty of bankable projects making it difficult to justify any greater amount of grant aid.

Mr. Woodbridge said that recent experience had shown the Department that it was much more difficult to obtain loans from the Export-Import Bank than Mr. Dort seemed to think.

Mr. McGhee said that there were any number of projects in Iran that could meet the objectives of a grant aid program. Mr. McGhee said that he felt that the fear of Congressional reaction to grant aids to Iran was unjustified since under prevailing world conditions, it is not easy for banks to make loans. Mr. McGhee said he believed it essential the Department reach an early decision on the amount of grant aid we are to propose for Iran.

Ambassador Grady reemphasized the need for elasticity which could be found in the Task Force #1 but not the Task Force #2 approach.

Turning to the general problem of aid to Iran, Mr. Grady said that the time had passed when we could get by with token programs and that we must now make a real effort.

Mr. Dort said that the Task Force #1 concept is that of a group of European countries sitting down and jointly planning what they are to do. Iran would not fit into this concept.

Mr. Stinebower, turning to the amount of grant aid to be rendered Iran, asked if there would not be unfavorable reactions in the countries stretching from Libya to Iraq if Iran alone were to be accorded the same amount of grant aid as all of them combined.

Ambassador Grady doubted that there would be any significant reactions since the countries in question realized that Greece, Turkey, and Iran stood as buffers between them and Soviet aggression. He mentioned that this had been discussed last year at the Istanbul Meeting of the Chiefs of Mission² from the area and they had agreed that there would not be any really significant resentment.

Mr. Rountree pointed out that this issue had been faced before in connection with military assistance and that there had been no reaction in the Arab states when Iran had been given aid. The whole policy of the United States, he added, in Greece, Turkey and Iran is to strengthen those three countries in order that the entire area may be protected.

Ambassador Grady said that it was difficult to understand the attitude towards Iran that he encountered in some quarters. He said that the Iranians look on our policy as one of treating Iran as a stepchild; writing it off. He said he personally deplored defeatism of this sort and felt that Iran constituted a dangerous weakness in the security belt we have attempted to build. Thwarted in Greece and Turkey, the Soviets could run through Iran without difficulty. The Iranians, he said, do not expect anything extraordinary from us, merely the knowledge that we are doing everything we can.

Mr. Loftus expressed the opinion that the 50–50 balance between Iran and the NE area was justifiable.

Ambassador Grady said that he did not believe that Congress would be hostile and that when he had testified recently before the Foreign Affairs Committee of the House, he had found the members most sympathetic to Iran’s problems. He said that the courage with which Iran resisted Soviet aggression in 1946 should appeal to Congress and they would think it logical that Iran should be included in ERP.

1. The conversation took place on December 6.
2. For documentation on the Conference of American Chiefs of Middle Eastern Missions at Istanbul, November 26–29, 1949, see Foreign Relations, 1949, vol. vi, pp. 165 ff.