No. 197
The British Embassy to the Department of State


Following is message from Mr. Eden to Mr. Acheson:

[Page 434]

I was glad to receive through Her Majesty’s Ambassador your views on the situation in Persia and your proposals for a joint offer to the Persian Government.1

In considering the situation in Persia and in particular your proposals for a joint offer, my colleagues and I have directed our attention especially to:
The dangers of allowing chaos to spread in Persia which might result in communism and involve a serious threat to the whole strategic position in the Middle East;
The extent to which it is possible to regard the present Persian Government as a barrier against communism;
The effect on our interests in other parts of the world. As you know, we feel that this might prove disastrous to a country like ours which is so dependent on these interests for its existence.
I recognise that it is unlikely that Musaddiq could by constitutional means be replaced as Prime Minister in the immediate future, except perhaps by a Tudeh sympathiser, and that it may look as though he were the best defence available at the moment against communism in Persia. I do not, however, consider that his defence is likely to be strong. Her Majesty’s Chargé d’Affaires in Tehran has expressed serious doubts, which I think your Ambassador shares, about Musaddiq’s value as a barrier against communism. Middleton points out that the Tudeh Party has grown in strength as a result of the policies which Musaddiq has followed since he took office. Now he has been returned to power after public disturbances in which the Tudeh Party cooperated with his followers, and the Tudeh are therefore in a good position to make embarrassing demands upon him which he could probably not refuse. Even his supporter Kashani, according to our information, is worried about his weakness to the Tudeh. Whereas it was at first suggested that it was the Kashani elements which arranged collaboration with the Tudeh, it now appears that this was the work of the Iran Party. As a result of dissensions within the National Front, Musaddiq now finds himself at loggerheads with Kashani and virtually forced into co-operation with the Iran Party. In any case he has never shown any willingness to take action against crypto-communist organisations nor against communist newspapers. All this suggests that Musaddiq should be helped only if and for so long as he shows himself ready to check the drift towards chaos and communism.
But there is another consideration. When your proposals were framed, we were all feeling the impact of Qavam’s failure to exploit his position thanks to the lack of support from the Shah and of all that this must have meant to the Army. It seemed incredible that morale should not have fallen to such a point that the army would be eliminated as a significant factor in the political situation. Our latest information, however, suggests that this is not necessarily the case. While criticism of Musaddiq seems to be growing among the National Front leaders, there are signs among the generals of a feeling that Musaddiq cannot be allowed any longer to ruin Persia and that the Army, whose morale is reported to be improving and which remains loyal to the Throne, may have to intervene. If that were to happen, the Parliamentary opposition to Musaddiq would certainly rally to the Army. So long, therefore, as there is any reasonable hope that Persia can be saved by her own people, I believe we should not be hasty in coming to Musaddiq’s aid because we think that we shall never have a better government to deal with.
The Note which has just been received from Musaddiq alters the situation again,2 but before dealing with it I address myself to your proposals for a joint approach to him.
When Musaddiq made his offer of arbitration on July 25th he doubtless meant no more than arbitration on the question of compensation only, though he himself proposed that the formula should be as general as possible so that the terms of reference should not exclude the discussion of any useful points. However, he did contemplate that there would be a neutral umpire and that both parties would undertake to abide by the decisions reached. For our part, we could agree to arbitration only if the terms of reference were sufficiently wide to permit introduction during arbitration of the question of the validity of the Persian Nationalisation law and its compatability with the Anglo-Iranian Oil Company’s concession. We would not, however, insist on either of these points being specifically mentioned in the terms of reference. Our aim would be to request the arbitrators to decide the extent of the wrong the company had suffered and the means of providing redress, including arrangements for the future conduct of the industry. [Page 436] I am sending details of my ideas on this point to Her Majesty’s Ambassador so that your officials may discuss them with his staff.3
Once satisfactory arrangements for arbitration on these lines have been agreed with the Persian Government, I would be prepared to ask Anglo-Iranian Oil Company to make arrangements with the Persians to get Persian oil moving, though for a number of technical reasons this could not be arranged quickly and two or three months might elapse before movement could start. I could not however ask the Company to consider moving oil from Persia until there was good reason to hope that some progress could be made towards a settlement, for example, until the conclusion of a satisfactory agreement for arbitration. In any case I could not ask the company to abandon their right to take legal action against other purchasers of Persian oil before a final settlement of the oil dispute had been reached. To do so would involve abandoning much of the Anglo-Iranian Oil Company’s case, with serious and direct consequences on our interests elsewhere.
I was interested to see that your proposed joint offer to the Persian Government includes arbitration on the question of compensation, and that in this respect your proposals coincided with our thoughts. I and my colleagues have carefully examined the offer as a whole, and have reached the conclusion that, if you were able to consider modifications to your proposals, the offer might be framed in such a way that Her Majesty’s Government could join in making it. The modifications which we would suggest are:
United States financial aid would be conditional upon the agreement of the Persian Government to arbitration on acceptable terms to the conclusion with the Anglo-Iranian Oil Company of suitable arrangements for the lifting of stocks of oil;
Purchases of oil by the Anglo-Iranian Oil Company would not be made until satisfactory terms of reference of the arbitration had been agreed upon;
The Anglo-Iranian Oil Company would not be asked, before conclusion of a final settlement, to abandon the right to take legal action against other purchasers of Persian oil. We regard these modifications as essential. For our part, in return for some progress towards arbitration, we could offer to relax progressively some of the restrictions which we have had in self defence to place on exports to Persia and on the use of Persian sterling.
I must add that though the Anglo-Iranian Oil Company are aware of our views as given in the preceding paragraph, it would be necessary for the matter to be considered by the Board of the Company before any binding agreement, affecting as it would the [Page 437] interests of the Company, could be entered into between our two Governments.
Since the Cabinet agreed upon the policy which I have outlined, we have received a direct approach from Musaddiq, and have also been in contact at The Hague with new Persian Foreign Minister. Unsatisfactory as the terms of Musaddiq’s Note are, it does at least offer an opening for the resumption of direct talks with the Company, and I am therefore now considering whether, while reserving all our rights and continuing to work on proposals for arbitration, we could not turn this opening to advantage. The reply will need very careful drafting but I am now engaged on it and I will give you my thoughts as early as I can next week.




Satisfactory terms of reference for arbitration might be on the following lines:

Arbitration should be on the basis of deciding:—

What sums are due to the Anglo-Iranian Oil Company from the Persian Government in respect of the nationalisation of the Company’s undertaking having regard to:
the date and manner of the nationalisation;
the legal situation existing between the Persian Government and the Company immediately previous to the nationalisation;
the value of the Company’s undertaking, the installations involved, its goodwill and the prospects of future earnings, together with the loss and damage caused to the Company by the Persian action.
The time and method of payment and means of making payment effectual.
The arrangements for the future conduct of the oil industry pending full and final payment to the Company of the compensation and other sums awarded under (a).

This formula would be capable of modification and of being rendered somewhat less precise and comprehensive, but something of the kind seems to represent the least which would enable the Company to raise the issue of the essential validity of the Persian action.

  1. Reference is to Secretary Acheson’s conversation with Sir Oliver Franks on July 31, at which time Ambassador Franks was given the American aide-mémoire contained in Document 194.
  2. On Aug. 7 Mosadeq sent a diplomatic note to the British Embassy in Tehran. In it Mosadeq demanded that the Anglo-Iranian Oil Company immediately pay the Iranian Government all funds belonging to it which the company had been withholding; that all Iranian funds held in British banks be turned over to the Iranian Government; and that the AIOC cease taking measures to prevent the sale of Iranian oil in world markets. If the British took these measures, then the Iranian Government would be willing to enter into discussions with representatives of the AIOC to adjudicate the claims of the AIOC. The verbatim text of this note was transmitted to the Department in despatch 113 from Tehran, Aug. 11. (888.2553/8–1152)
  3. Eden’s ideas on terms of reference for arbitration are printed as an attachment, below.