888.2553/2–1053: Telegram

No. 296
The Secretary of State to the Embassy in the United Kingdom1


5294. Eyes only Henderson and Holmes. Delay in Washington in reaching decision on future course of action in Iran negotiations has resulted from reluctance to proceed on course which seems have remote chance of success, yet on other hand we have been unable devise any new formula likely be agreed by both Mosadeq and British. We have also been disturbed by factor which has become more apparent to us in last few weeks and that was vividly brought to mind by Mosadeq’s threat sell oil to all comers at 50 [Page 663] percent discount.2 We have long felt that deterrent to dumping of Iranian oil was not primarily threat of British legal action but more the result of factors attributable to commercial situation, of which availability of tankers was perhaps greatest. It is rapidly becoming apparent that future tanker situation, including charter rates, will be such in very near future that Mosadeq may be able to carry out his threat. This seems to us an inescapable fact.

Daily charter situation has weakened substantially with single voyage rates quoted as low as 40 percent below US Maritime Commission rates for foreign flag vessels. This compares with 100 percent to 200 percent premiums 12 or 18 months ago. Charters over 1 or 2 years are about 15 percent below USMC which compares with the 50 percent premium fixed few months ago. Construction proceeding at level which gives little indication of anything other than easy supply situation for future.

British of course know that we consider a number of solutions vastly preferable to no solution at all. These would include reasonable lump-sum settlement or provision for compensation through a long term contract with AIOC at excessive discount. Either of those solutions seem to us to hold less danger from viewpoint of effect on other oil producing areas than does no solution at all. Since British have often stated their primary concern to be effect of an Iranian solution on other areas, we think they should take good hard look at possible effect of no solution at all. On our part, we cannot fail to be concerned at what we consider may be effects of no solution on other areas of the world in which both of us have an interest.

Also, and again because of commercial factors outlined above, we believe British bargaining position will become worse in future, as regards Iran, than it is at present. It seems to us that this factor as well should be carefully analyzed by British before present negotiations are allowed to fail.

British have come a long way, and proposals upon which we could agree for next approach to Mosadeq, presumably along lines of the first alternative text contained in Deptel 5148 (rptd Tehran 1953)3 are not unreasonable. Neither do we consider unreasonable however, in political situation in Iran, Mosadeq’s concern over accepting a solution which can be politically termed “bondage forever” to British. There is in fact a practical limitation upon Iran’s ability to pay and upon the worth of the property taking into account [Page 664] its earning power. We believe, therefore, that British should at least attempt meet this concern of Mosadeq in manner somewhat along lines of alternative method of payments provisions contained in above reftel. We feel same way about question of payment of interest.

From our point of view there are two possible alternative approaches. Henderson could return to Mosadeq with texts contained in above reftel, substituting the alternative section on method of payments presented latter part that message in his initial presentation, so that we will at east have some, although admittedly small, chance of success.

Second alternative would be for US to withdraw from negotiations without reference to further documents. We could inform Mosadeq that since proposals presented him on Jan 15th were unacceptable to him, and since his suggestions of Jan 17th as later supplemented were unacceptable to British, and since US has been unable find way of bridging these differences, US Government had reluctantly come to opinion that there is nothing further Henderson can do at present time to promote settlement of dispute.

We would clearly prefer first alternative. If negotiations fail, under this alternative they would fail over Mosadeq’s refusal to agree to a specific offer placed before him which meets his “economic bondage” point. There would be real public relations advantage in having the negotiations fail in that manner rather than in present somewhat confused state as to where the parties really stand. We also feel that if negotiations fail without return offer of this type Mosadeq would be able to assert effectively that British have refused any type of settlement which did not imply that Iran might be called upon to pay indefinitely and in amounts which would be beyond her capacity to pay.

We feel that whatever we do should be done quickly as all evidence indicates Mosadeq will not refrain much longer from breaking negotiations by explanations to Majlis and press.

British Ambassador is being given oral presentation of our views on commercial aspects this problem. British Embassy here being furnished texts in Deptel 5148 and contents this message.

Request Embassy London undertake preliminary task obtaining British reaction this message.4

  1. Transmitted in two sections; also sent to Tehran. Drafted by Byroade, cleared in substance with Secretary Dulles and Under Secretary Smith, cleared in draft with Nitze and Linder, and signed by Byroade.
  2. On Feb. 3 Henderson reported on a conversation he had that day with Mosadeq, in which the Iranian Prime Minister said that if the British continued to insist on a formula which would involve the payment of future profits, he would contemplate asking the Majlis to agree to his announcing that Iran would be willing to sell its oil at a 50 percent discount to all customers. (Telegram 3016; 888.2553/2–353)
  3. Not printed. (888.2553/2–353)
  4. The Embassy in London reported on Feb. 11 that the contents of telegram 5294 and the texts contained in telegram 5148 to London, Feb. 3 (888.2553/2–353), were conveyed to the Foreign Office that day. The Foreign Office desired to reserve comment pending study. (Telegram 4457; 888.2553/2–1153)