Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

S/S–NSC files, lot 63 D 351, “NSC 5402–Memoranda (175)”

No. 403
Statement of Policy by the National Security Council¹

top secret
[NSC 5402]

[Washington, January 2, 1954.]

United States Policy Toward Iran

general considerations

1. It is of critical importance to the United States that Iran remain an independent nation, not dominated by the USSR. Because of its key strategic position, oil resources, vulnerability to intervention or armed attack by the USSR, and vulnerability to political subversion, Iran must be regarded as a continuing objective of Soviet expansion. The loss of Iran, particularly by subversion, would:

a. Be a major threat to the security of the entire Middle East, as well as Pakistan and India.

b. Increase the Soviet Union’s oil resources for war and its capability to threaten important free world lines of communication.

c. Damage United States prestige in nearby countries and with the exception of Turkey and possibly Pakistan, seriously weaken, if not destroy, their will to resist communist pressures.

d. Permit the communists to deny Iranian oil to the free world, or alternatively to use Iranian oil as a weapon of economic warfare.

e. Have serious psychological impact elsewhere in the free world.

2. Due to the events of mid-August, 1953, there is now a better opportunity to achieve U.S. objectives with respect to Iran. The Shah’s position is stronger and he and his new Prime Minister look to the United States for counsel and aid. Some Iranian leaders now seem to realize that Iranian oil is not vital to the world and that it must be sold in substantial quantities if Iran is to achieve stability. There is accordingly a possibility for the United States to help bring Iran into active cooperation with the free world and thus strengthen a weak position in the line from Europe to South Asia. An essential step in this direction is the receipt by Iran of substantial revenues from its oil resources. In the absence of such revenues, Iran will be dependent on external assistance which, if doled out only in minimum quantities to meet emergencies, will do little to create real stability, permit development or avoid future emergencies.

3. If the Shah cooperates, the Zahedi Government should be able to stay in power for some time. However, the Government is confronted with many serious problems, springing primarily from the basic changes taking place in Iranian society. Zahedi must cope with the Majlis, composed of heterogeneous groups, motivated by self-interest, upon whose support the enactment of essential economic and social legislation will depend. The communist and other opposition groups will continue to pose a threat. The problem of Mossadegh must be solved. Zahedi’s position is also threatened by the Shah’s inherent suspicions of any strong Prime Minister. Any non-communist successor government would encounter similar difficulties.

4. The United States now has an opportunity to further its national objectives with respect to Iran by: (a) facilitating an early oil settlement leading to substantial oil income from [for] Iran at the earliest possible date; (b) technical assistance and economic aid; (c) U.S. military aid.

Importance of an Oil Settlement

5. The Iranian economy is basically dependent upon agriculture. Despite revenues from the oil industry, the great majority of the Iranian people have lived in poverty. However, if it receives substantial revenues from the renewed operation of its oil industry on a sound basis, Iran should be in a position to establish a self-supporting, stable government, and carry out much-needed economic and social welfare programs. Without such revenues from the renewed operation of its oil industry, the Iranian Government will proceed from crisis to crisis, thereby greatly increasing both Tudeh Party opportunities to cause disorder or to infiltrate the government, and pressures on the United States for substantial aid. Even if Iran again receives oil revenues, there will be the continuing problem of insuring their application to programs of permanent value, and minimizing corruption.

6. In recent months some progress has been made in clarifying the positions of Iran and the UK toward a settlement. The resumption of UK–Iran diplomatic relations removes one obstacle to a settlement. However, the Iranian Government will continue to fear public reaction to any apparent concessions, and the British may be reluctant to accept necessary terms.

Economic Aid

7. In September 1953, the United States granted emergency assistance of $45 million to permit the Zahedi Government to meet the operating deficit inherited from the Mossadegh regime and to initiate essential monetary reforms. This aid is believed sufficient to carry the regime until May or June of 1954.

8. Until the oil revenues become substantial, emergency aid in some form will have to be continued and may have to be increased. In considering the timing and extent of such aid, the following factors must be kept in mind:

a. Too long a delay in the institution of economic and social reforms in Iran may make it impossible to seize the opportunity presented by present circumstances to increase Iran’s political stability and economic health.

b. Granting of other than emergency aid prior to an oil settlement may make Iran less interested in coming to an early settlement and at the same time harm our relations with the UK.

c. The timing and extent of U.S. aid to Iran should not be such as to encourage other nations to emulate Iran in nationalizing her oil resources.

d. While the present government of Iran has shown itself to be favorably disposed to seek an early settlement of the oil dispute, too great or too obvious pressure from the outside may, because of internal political reasons in Iran, have the opposite effect.

9. In addition to emergency aid, the United States has a limited technical and economic assistance program for Iran of approximately $23 million for FY 1954. Even when substantial oil revenues are realized, it will be desirable to continue limited technical assistance to Iran for a number of years. Insofar as such assistance may effectively be provided through international or private agencies, local fears of U.S. imperialism will be minimized.

Military Aid

10. Iran has thus far received approximately $46 million in military aid from the U.S., and an additional $58 million is currently programmed. Inadequate training, maintenance and supply capabilities, and low caliber personnel restrict Iran’s ability to absorb U.S. military equipment, even at the present rate of delivery. At present, the Iranian armed forces are capable of maintaining internal security against any uprising short of a nation-wide tribal revolt. It is possible that Iran will, in perhaps one or two years, be willing to move in the direction of regional security arrangements, assuming: (a) an early oil settlement; (b) continuation in power of a government friendly toward the West, which has the Shah’s and widespread public support; and (c) a steady increase in the capability of the Iranian army. Iranian forces may be able to improve their capability for guerrilla and limited mountain operations, although it is unlikely that they could in themselves become capable within the foreseeable future of effectively delaying a strong Soviet thrust toward Iraq or the Persian Gulf. A long-range program of improving the Iranian armed forces should be related to the progress made toward effective regional defense plans which will provide Iran, in case of attack, with military assistance from adjacent states.

11. However, military aid to Iran has great political importance apart from its military impact. Over the long term, the most effective instrument for maintaining Iran’s orientation toward the West is the monarch [monarchy?], which in turn has the Army as its only real source of power. U.S. military aid serves to improve Army morale, cement Army loyalty to the Shah, and thus consolidate the present regime and provide some assurance that Iran’s current orientation toward the West will be perpetuated.

12. Neither the solution of the oil problem nor U.S. moral and financial support for Iran should be viewed as panaceas, but rather as measures which may permit Iran to achieve a condition of stability in which some modest progress may be made by Iran toward the working out of its own underlying problems. However, it should be recognized that physical execution of an economic development program, itself a time-consuming process, will be hampered by (1) lack of qualified Iranian administrative personnel, (2) the opposition of various vested interests, and (3) historically engendered suspicion of the West. Iran’s long frontier with the USSR and the Soviet-Iranian Treaty of 1921 may affect the degree of Iranian cooperation, particularly military cooperation, with the United States.

objectives

13. An independent Iran free from communist control.

14. A strong, stable government in Iran, capable of maintaining internal security, and providing some resistance to external aggression, using Iranian resources effectively, and actively cooperating with the anti-communist nations of the free world.

courses of action

15. a. Assist Iran again to obtain substantial revenues from its oil resources.

b. Assist in every practicable way to effect an early and equitable settlement of the oil controversy between the United Kingdom and Iran.

c. If on June 1, 1954² such a settlement is still unachieved, and it appears likely that the negotiations will fail, review U.S. policy toward the problem in the light of circumstances then existing, including giving consideration to taking independent action with Iran, in order to bring about a resumption of revenues from its oil resources as a stabilizing influence in the Government of Iran tending to obviate the need for U.S. emergency economic assistance.

d. In implementing actions under b or c above, seek to avoid establishing any precedent which would adversely affect United States interests in Middle East resources.

16. Pending the time when Iran shall receive substantial revenues from her natural petroleum resources, provide emergency economic aid, preferably in the form of loans, as necessary to the government of Iran, provided that it remains friendly to the U.S.

17. Continue limited technical and economic aid to Iran. Where appropriate utilize such private institutions and international organizations as may provide technical assistance more effectively.

18. In carrying out the courses of action in paras. 15, 16 and 17 above, the United States should:

a. Maintain full consultation with the United Kingdom.

b. Avoid unduly impairing United States-United Kingdom relations.

c. Not permit the United Kingdom to veto any United States actions which the United States considers essential to the achievement of the objectives set forth above.

d. Continue efforts to have the United Kingdom and Iran agree to a practical and equitable solution of the oil problem at the earliest possible moment and, at the same time, have the United Kingdom give full support to the Zahedi Government.

e. Be prepared to avail itself of the authority of the President to approve voluntary agreements and programs under Section 708 (a) and (b) of the Defense Production Act of 1950, as amended.

19. Provide United States grant military aid for Iran designed to:

a. Improve the ability of the Iranian armed forces to maintain internal security and provide some resistance to external aggression.

b. Enhance the prestige of the monarchy and the morale of the Iranian Government and military services.

20. The amount and rate of such military aid to Iran should take into account:

a. The attitude of Iran with regard to this aid and with regard to political, economic and military cooperation with the free world, including Turkey, Pakistan, and possibly Iraq.

b. Iran’s ability satisfactorily to absorb military equipment and training, and its willingness at an appropriate time to formalize necessary contracts for military aid and training.

21. Encourage Iran to enter into military cooperation with its neighbors as feasible, and to participate in any regional defense arrangement which may be developed for the Middle East.

22. Recognize the strength of Iranian nationalist feeling; try to direct it into constructive channels and be ready to exploit any opportunity to do so, bearing in mind the desirability of strengthening in Iran the ability and desire of the Iranian people to resist communist pressure.

23. Encourage the adoption by the Iranian Government of necessary financial, judicial and administrative and other reforms, including provision for an orderly succession to the crown.

. . . . . .

25. In the event of either an attempted or an actual communist seizure of power in one or more of the provinces of Iran or in Tehran, the United States should support a non-communist Iranian Government, including participation in the military support of such a government if necessary and useful, and should attempt to secure additional support from other free world nations.³ Preparations for such an eventuality should include:

a. Plans for military support.

. . . . . .

c. Plans for UN action.

d. Liaison with United Kingdom, to the degree deemed desirable, concerning each of these plans.

26. In the event that a communist government achieves complete control of Iran so rapidly that no non-communist Iranian Government is available to request assistance, the position of the United States would have to be determined in the light of the situation at the time, although politico-military-economic discussions leading to plans for meeting such a situation should be carried on with the British Government and with such other governments as may be appropriate. In this contingency, the United States should make every feasible effort,… to endeavor to develop or maintain localized centers of resistance and to harass, undermine, and if possible, to bring about the overthrow of the communist government.

. . . . . .

Financial Appendix

expenditures

	(millions of $)
	FY 1951	FY 1952	FY 1953	FY 1951–53	FY 1954 (Est.)	FY 1955 (Est.)	FY 1956 (Est.)
Technical Assistance and Special Economic Aid	0	4.9	19.7	24.6	32.9	29.0	23.0
Emergency Aid	0	0	0	0	45.0	437.0	50
Military Assistance6	—	—	—	45.9	34.5	25.6	12.2
Total	0	4.9	19.7	70.5	112.4	91.6	35.2

NSC Staff Study on Certain Problems Relating to Iran

preface

1. Review of U.S. policy toward Iran has shown a need for detailed study of certain selected problems. NIE 102 “Probable Developments in Iran Through 1954”,⁷ provides a timely study of the present political situation in Iran and the problems which Zahedi or any successor non-communist Premier must face. This staff study is therefore confined to an analysis of six problems as follows:

• Part 1, Survey of the Oil Problem
• Part 2, Report on the Economic Situation in Iran
• Part 3, The Strategic Importance of Iran
• Part 4, Support of the Iranian Armed Forces
• Part 5, Significance of Section 708 (a) and (b) of the Defense
• Production Act of 1950, as Amended Part 6, Significance of the Irano-Soviet Treaty of 1921

part 1

iranian oil problem

1. It is important to settle the Anglo-Iranian oil dispute so that: (a) Iran may become self-supporting through receipt of substantial oil income; (b) an irritant in Iran’s relations with the free world may be removed; (c) the present pattern of international oil business is not damaged; (d) no precedent is set to the detriment of United States investment abroad.

2. Any settlement must take into account a wide and complex range of economic and political factors involving Iranian, British and United States interests.

Political Factors in Iran

3. The political aspects of the oil situation in Iran are inextricably bound up with the nationalization of the oil industry in 1951. The Iranians are convinced that the British used their position in Iran to influence internal affairs. They also believe that Iran did not receive a fair share of oil income. The matter became a political issue and was used by Mohamed Mosadeq and his nationalist followers to achieve power and drive the British oil company and government representatives from Iran. This movement was supported by the majority of articulate Iranians and its success is treasured by most Iranians as a national victory over the powers of foreign imperialism.

4. The fall of Mosadeq and subsequent attempts to discredit him and his close followers have not changed the general Iranian belief that nationalization of the oil industry was an important and necessary step forward for Iran. The Zahedi government, with some foreign assistance, has stressed with some apparent success the importance of turning this “victory” to some constructive use. Government propaganda points out that oil remaining in the ground is of no value to the Iranian people. This propaganda does not attack the concept of nationalization.

5. There remain, therefore, two major political factors on the Iranian side which must be recognized: (a) public opinion holds strongly to the view that “national honor and integrity” require that any settlement of the oil problem be within the framework of the nationalization laws; (b) widespread suspicion of the British is so profound that it is most improbable that any contract providing for the establishment of a British-controlled organization in Iranian oil fields could now even be set up.

Economic Factors Confronting Iran

6. Without oil income or foreign aid, the financial position of the Iranian Government will be precarious. Indeed, maintenance of its oil industry in the absence of sales abroad presents a constant drain on the treasury. Oil revenues represented over half of the government’s foreign exchange income and a third of its total income. There is no other source of revenue or foreign exchange available to the Iranian Government (except foreign aid) which can replace the great amounts available from a resumption of the Iranian oil industry on an efficient full-scale basis.

7. A surplus of oil now exists in the Middle East and will continue to exist for some time whether Iranian production becomes available or not. Proven oil reserves in Saudi Arabia, Kuwait and Iraq are sufficient so that any one of them could probably meet the total demand for Middle East oil entirely by itself, though perhaps with some difficulty. Certainly any two of these countries could do so without undue strain. This fact was totally unappreciated by Mosadeq, who clearly expected the world to beg for Iranian oil on his terms. The Shah and Prime Minister Zahedi have received considerable education in this regard and the government’s propaganda ministry is attempting to explain these facts to the Iranian public.

8. Virtually all Middle East crude production on net balance, flows to Eastern Hemisphere markets. About 75 percent is consumed in Europe, while the rest is divided between Africa, the Far East, South Asia and the South Pacific. There is very little market in the Western Hemisphere, nor will there be for some years to come in view of the potential surpluses that exist in that region. In fact, if there should be any appreciable flow of Middle East oil to the United States within the next few years and especially if it is the result of price cutting in the Persian Gulf area, there unquestionably would be severe economic and political repercussions in the Western Hemisphere.

9. It therefore follows that if appreciable production is to be attempted in Iran it must flow again into Eastern Hemisphere markets, and that no appreciable market will develop in the Western Hemisphere at least for some years.

10. Almost all Middle Eastern crude oil and refined products are produced and marketed by seven large international oil organizations. At least 90 percent of the ultimate retail distribution is handled by these companies, or their subsidiaries and affiliates. There are a few lesser companies who also distribute a minor amount of oil but they are not of appreciable size nor do they have large outlets available. It is necessary for Iran to consummate some form of agreement with an entity which will include the major marketing companies, if an appreciable amount of Iranian oil is to flow to market.

11. The possibility of developing fresh distribution channels of importance outside those afforded by the larger companies does not exist for the following reasons:

a. New private companies entering the international oil distribution business in the Eastern Hemisphere would be at a hopelessly great disadvantage in competing in the present world situation with those companies which are already well established.

b. Those few governments in the world which are endeavoring to operate their own refining and distribution systems offer an extremely limited outlet for Iranian oil.

It is estimated that the sum of these channels could not purchase as much as 100,000 barrels per day of Iranian oil. In many cases, particularly in dealings with foreign governments, income to Iran would have to be received on a barter basis and this would offer obvious disadvantages. Furthermore, a distribution policy based upon sales to a number of small private companies or to foreign governments would not be of a character which would guarantee a steady flow of oil. Under such conditions it would not be possible to operate wells or refineries in an effective, continuous or economic manner.

12. If distribution can be obtained through the major companies, however, a volume of from 400,000 to 800,000 barrels per day could be achieved within approximately a two- or three-year period after resuming operations. This output is comparable to the average offtake of about 650,000 barrels per day which was reached prior to the shut-down in 1951.

13. The refining situation in Iran presents a parallel condition to that which exists in crude oil production. The trend in recent years has been toward refineries located close to points of consumption rather than at sources of production. In many cases governments have forced this relocation of refineries either by direct legislation or by means of tariff differentials. In 1945, 82 percent of all the oil refined in the Eastern Hemisphere was processed in the Middle East. By 1953 this volume had declined to 19 percent of the total. The European refineries in 1945 processed only 6 percent of this total, but by 1953 their proportion had risen to 63 percent. Large additional refining capacity is now under construction in Europe, South Asia, and the South Pacific. In every case these refineries are close to their consuming markets.

14. The Abadan refinery, largest in the world, formerly had a through-put in excess of 500,000 barrels per day. Since the shutdown it has fallen into considerable disrepair, and an expenditure variously estimated from $30,000,000 to $60,000,000 will be required to place it back into partial operation. Even with a reduced through-put of 300,000 barrels per day a severe marketing and distribution problem will be encountered. This will be especially true in view of the trend, already noted, of processing at points close to consumption rather than at the sources of production. The only outlet for such a large volume of refined products is through the combined marketing systems of the major oil companies operating in the Eastern Hemisphere. Furthermore, this refinery can be operated and managed most efficiently if it becomes an integral part of these distributing organizations.

15. Since Iran does not have the marketing facilities or the resources to acquire them, it can only be considered as a supplier. As a supplier, Iran must compete with other Middle East sources of petroleum in order that marketing companies, with which Iran must deal as shown above, will not be penalized in shifting their requirements from their own sources in the Middle East to Iran.

16. Before any sales agreement could be entered into, assurances would undoubtedly be required by any marketing company that there would be performance by the supplier in accordance with the strict standards of the industry. This requirement is generally interpreted by the industry to mean that there must be effective foreign management of Iranian oil production. Techniques to accomplish this, within the framework of the nationalization law, range from suggestions that the IBRD be an intermediate agent to consideration of the restoration of a foreign oil concession in Iran under some terms of contract with the National Iranian Oil Company.

17. The existing net income, in the form of royalties and taxes received by various Middle Eastern countries, is at present approximately from 70 to 80 cents per barrel. Saudi Arabia will receive a net income in excess of $200 million for the year 1953. Kuwait and Iraq are receiving proportional amounts dependent upon their actual production. Since Iranian oil must compete commercially with other Middle Eastern oil and no distributing company, capable of handling substantial quantities of Iranian oil, could afford to pay Iran more for its oil than the cost to it of oil received from other Middle Eastern countries, Iran can expect, with a volume of sales of 400,000 to 800,000 barrels daily, distributed through the large companies, to receive $100 million to $200 million each year. As the markets increase from year to year the income should grow proportionately. If, on the other hand, Iran chooses to sell direct through some of the smaller outlets, with a production of approximately 100,000 barrels per day, the annual net income would be only about $20,000,000. It is estimated that an annual net income of not less than $100,000,000 is required to maintain a stable economy in the country.

18. The oil problem in Iran is not one of slowly building up the producing and refining facilities, with a correspondingly gradual entrance into the world’s market. On the contrary, in this instance one of the world’s largest producers and refiners of oil, with its facilities already fully developed, must be put back into full operation within the shortest possible period of time. There is not time to develop new marketing outlets or alternate systems of distribution. The maximum possible quantity of oil and refined products must be injected immediately into the existing channels of distribution, with corresponding cut-backs in other Middle Eastern producing countries.

19. The Government of Iran is therefore on sound economic grounds when it insists that any solution of the oil problem shall include all, or at least a majority, of the large international oil companies now operating in the Middle East. The Government also has excellent political reasons for adopting this policy.

20. There are still further economic reasons for reaching such a decision. Without going into detailed figures, it is estimated that between $10,000,000 and $20,000,000 will be required to put the producing, pipeline, storage and loading facilities in Iran back into operation again. When added to the amount required to put the refinery on stream, the total new investment will be probably between $40,000,000 and $80,000,000.

21. The financial situation of Iran is so critical, as noted above, that in the event an agreement can be worked out it will be necessary for the companies to make substantial advances to the Government before oil shipments can reach appreciable levels. Such advances, to be repaid out of subsequent revenues, would have to be on the order of $7,500,000 to $10,000,000 per month, or at the approximate rate of $100,000,000 per year, and a guaranteed minimum revenue of at least the same amount annually would have to be included in any such agreement. It is estimated that the funds so advanced would reach a maximum of from $50,000,000 to $75,000,000 and that a period of from two to five years would be required for their repayment. The total investment required by the oil industry, therefore, will probably be from $100,000,000 to $150,000,000. Only a combination of the largest units in the industry would have such capital available, and at the same time be able to furnish the additional working funds to carry forward the operations.

22. A summary of the economic considerations listed above shows that any settlement must take into account the following:

a. Large-scale operations are a necessity, involving the maximum possible production and the largest possible income to Iran.

b. All major companies now operating in the Middle East should participate in order to achieve maximum off-take, facilitate the cut-back problem in other countries, minimize the future domination by any one organization, and provide maximum diversification of market.

c. Iran’s income must be not less than the highest received by other countries in the Middle East on a per barrel basis.

d. Settlement must not establish a precedent adversely affecting the presently established international oil industry in a way inimical to U.S. interests.

Political Factors in Great Britain

23. British officials have asserted that they would face a serious domestic problem if any settlement of the Anglo-Iranian oil dispute reflected adversely upon British prestige. They have stated that their maximum concessions were stated in the February 20 proposals, which Mosadeq rejected.

24. Also for political reasons, the British insist that they cannot open negotiations with the Zahedi Government on the oil problem until after receipt of a report which they hope to have by January from their own diplomatic representatives in Iran.

25. The British have given assurances on a high level that they will not undermine the Zahedi Government while seeking an oil settlement and will move as rapidly as possible to achieve such a settlement on terms which will not be indefensible by Zahedi before the Iranian people.

Economic Factors Affecting British Interests

26. The British have only reluctantly entertained the idea that an international consortium would replace the AIOC as producer and marketer of Iranian oil. However, Sir William Fraser, Chairman of the AIOC, has invited representatives of five major American oil companies and of Shell to conversations in London regarding the establishment of such a consortium.

27. The British have insisted that settlement of the oil dispute should not result in damage upon Britain’s dollar position. They also insist upon payment of compensation either directly by the Iranian Government or through some contract arrangement with the international consortium, for “the loss of their enterprise in Iran.”

(Note: This problem is at present under active consideration by the British and Iranian Governments, while U.S. influence is being exerted primarily through persons of Mr. Herbert Hoover, Jr., Special Consultant to the Secretary of State on oil affairs, and of Loy Henderson, U.S. Ambassador to Iran. Although general lines of a settlement have been blocked out, no firm position has been taken on either side.)

part 2

the economic situation

1. Iran’s economy is basically agricultural. Some 80 percent of the people depend upon agriculture for their existence. The average Iranian peasant is used to an extremely meager existence and has little to do with anything outside his village. The only imported commodity which is consumed in any quantity by the bulk of the Iranian people is sugar. During good agricultural seasons, the Iranian peasant eats a little more and eats a little better. During poor seasons he “pulls in his belt.”

2. The loss of oil revenue (since nationalization of the oil industry in the spring of 1951) has not greatly affected the existence of the peasants. The urban sector of the population, however, is more heavily dependent on imports and has been more seriously affected since, in the period immediately prior to the nationalization of the industry, Iran was receiving about two-thirds of its total foreign exchange revenue through the operations of the oil industry.

3. The loss of revenue from the oil operations created a serious crisis for the Iranian Government since, directly or indirectly, it was obtaining very close to one-half of its total revenue from these operations. The bulk of Government expenditures represents salary payments which could not be readily reduced. In addition, it was politically necessary for the Government to assume the salaries of the former AIOC employees. As a result, reductions in Government expenditures since oil nationalization have not been substantial. For the most part, they have consisted of such “gestures” as the selling of office rugs and official automobiles. Laws were passed designed to increase tax revenues and make the tax burden more equitable, but tax revenues have not been significantly affected.

4. For the first year after the nationalization of the oil, the Iranian Government made up for the loss of revenues from oil operations primarily by selling foreign exchange, using $62 million of reserves and obtaining $8.75 million from the International Monetary Fund.

5. By mid-1952, however, this source of funds was exhausted since, under the prevailing laws, the remaining gold and foreign exchange reserves of approximately $180 million had to be retained as cover for the currency. In this situation, Mossadeq compelled the Central Bank to issue additional rial notes, exceeding the limit set by statute. With this additional note issue, the Iranian Government paid its bills.

6. During the period when the Government was meeting its deficit by selling foreign exchange, imports were maintained at something approaching the normal level and no serious inflationary pressures developed. However, when the Government turned to the issuance of additional rial notes to meet its deficit, imports had to be cut 40 to 50 percent. With the amount of currency in circulation increasing and the goods available for use in economy decreasing, inflationary pressures developed rapidly and grew to serious proportions, although they were felt more slowly in the rural areas.

7. Thus, when the Zahedi Government came to power, it was faced with rapidly developing inflation, no means of fully financing minimum Government expenditures except by further inflationary measures, and inadequate supplies of foreign exchange to pay for necessary imports.

8. In this situation the United States made available emergency aid in the amount of $45 million. The funds are being used: (a) to purchase sugar and other commodities for sale to the Iranian people for rials, (b) for direct sale of dollars to Iranian importers, again to produce rials for the Government, and (c) to serve as note cover for an additional issue of rial notes. The first two of these methods produce rials for the Government only to the extent that they can be absorbed by the foreign exchange market without interfering with sales of ordinary exchange receipts. It is anticipated that this $45 million will permit the Iranian Government to meet its major budgetary needs, at least through the current Iranian year which ends in March 1954, and perhaps until May or June.

9. The latest data regarding Iran’s current financial operations indicate that the Government is incurring a budgetary deficit of about 400 million rials per month. Allowing for customary year-end bonus payments, this amounts to a deficit of about 5 billion rials per year. At the recently established rate of 90 rials to the dollar, this is the equivalent of about $55 million. In the absence of any change in the currency laws, the Iranian Government has no legal means of obtaining the rials to meet this deficit. By revising the legal basis for the currency issue, additional rials could be printed. This would, however, add to the inflationary pressure and would not provide the means for financing increased imports.

10. Iranian foreign exchange requirements and sources of foreign exchange are shown in the following table:

Millions of dollars

Requirements	Year Ending March 20, 1950	Year Ending March 20, 1951	“Emergency Basis” annual rate
Imports	192	147	120
Government expenses and noncommercial items	11	30	25
Total requirements	203	177	145
Sources
Exports	37	62	70
Oil Operations	110	115	0
Special British railway settlement	23	0	0
Miscellaneous	3	4	0
US technical and economic assistance program	0	0	23
Foreign exchange reserves	30	–4	0
Total sources	203	177	93
Residual Requirement for Emergency Aid	—	—	52

11. On the basis of the above presentation, U.S. emergency aid at a rate of $50 to $55 million a year along with the continuation of the current technical and economic aid program ($23 million) would meet the minimum budgetary and foreign exchange requirements.

12. This type of program would not provide the Government with financing for any economic development program other than that included in the present U.S. technical and economic aid program. The Zahedi Government has committed itself to a development program designed to raise the standard of living and reduce unemployment. This program calls for an annual expenditure of 3.9 billion rials ($43 million) and there is a risk that any Iranian Government which does not begin to make good on these commitments cannot maintain itself in power. Insofar as the Government begins to carry out these commitments, it adds directly to the budget deficit which it must meet.

13. Furthermore, the Iranian Government may well be faced with the political necessity of extending wage increases and making other costly concessions which would further increase its rial requirements. This would of course also add to the budget problem and, if undertaken, to present inflationary pressures which are already serious.

14. It thus appears that if the technical and economic assistance program is continued at approximately the present $23 million annual rate, emergency economic assistance at a rate of at least $50 to $55 million a year will be required until the country again begins to receive substantial revenues from oil operations. As noted in paragraphs 12 and 13 this would not provide any margin to meet expenditures which might have to be undertaken as a result of political pressures. An additional $10 to $15 million may have to be made available in the current U.S. fiscal year.

15. A special contingency fund of $45 million for the whole area of the Near East and Africa has been included in the FY 1955 budget, some of which might be available for Iran in the event that substantial oil revenues are not flowing by that time. These funds would be additional to the technical and economic program which would be continued at approximately the current level of $23 million.

part 3

strategic significance of iran

Importance to Defense of Middle East

1. The strategic importance of the Middle East to the United States and its allies has been described in NSC 155/1.⁸…

2. Iran constitutes a blocking position from which to oppose any Soviet operation launched across the Caucasus for the purpose of encircling Turkey, attacking the Suez Canal or seizing the Persian Gulf area. Because of its geographical location on the periphery of the USSR and its key position in relation to the other countries of the Middle East, Iran can offer valuable base sites, with logistic support provided from the Persian Gulf, for any allied attack which may be mounted against the USSR from the Middle East.

3. Iran also constitutes a blocking position from which to oppose any Soviet operation aimed at depriving the free world of Middle Eastern oil resources. At the present time our allies in Western Europe are dependent upon Middle East oil resources. Unless adequate petroleum products are available for its essential requirements, Western Europe is not defensible, our investment in its rehabilitation will be dissipated, and it will be lost and become a liability to the free world. It has been estimated that by 1975 Europe will be dependent upon the Middle East for at least 90% of its peacetime crude oil—requiring imports of 3.7 million B/D. Likewise the United States, by 1975 will require peacetime imports of 1.2 million B/D of Middle East crude oil (8.8% of total peacetime requirement). Therefore, unless the essential and greater allied wartime requirements, including those of the United States, can be met from other sources, provision must be made to insure the continued wartime availability of the petroleum resources of the Southwest Persian Gulf area. It has been estimated that these requirements can be met by continued operations in the Kuwait and Saudi Arabian fields. The Allies must therefore deny to the Soviets those areas of Iran from which the USSR can launch air or ground attacks designed to prevent Allied oil production in Kuwait and Saudi Arabia.

4. For these reasons Iran is of great strategic importance in the forward defense of the western Mediterranean and Persian Gulf areas.

5. It should be noted here that at the present time the U.S. has no commitment to employ U.S. forces in Iran. If it is found necessary for the U.S. to provide military forces in this area, implementation will require either an augmentation of U.S. forces or a reduction of present military commitments elsewhere.

6. The line which would have to be defended in order to protect Turkey and Pakistan against Soviet invasion through Iran, although mountainous, is much too extensive to permit any effective defense by Iranian forces alone in the foreseeable future.

7. The rugged terrain and lack of communications in this part of the Middle East make effective support of Iran extremely difficult.

Importance to Russian Expansion

8. There is a long historical record of Russian interest in gaining control of the Iranian plateau and its warm-water ports on the Persian Gulf. Peter the Great’s strategy for Russian expansion foresaw a need for Russian occupation of the Iranian plateau. Nazi-Soviet diplomatic conversations resulted in 1940 in a draft agreement “that the area south of Batum and Baku in the general direction of the Persian Gulf is recognized as the center of aspirations of the Soviet Union.”⁹ The USSR is extremely sensitive to developments along its borders. It usually has sought to protect its frontiers with a cordon of satellite states. Efforts to retain Soviet troops in Iran after the end of the last World War and to establish a puppet communist government in Azerbaijan in 1946 proved Soviet interest in obtaining control of at least the northern area of Iran. Further evidence of Soviet concern over the vulnerable Iranian frontier has been a series of truculent Soviet notes to recent Iranian governments protesting the presence of American military missions and oil drillers in Iran. Each note referred, as a basis for the protest, to Article VI of the 1921 treaty between the USSR and Iran (see Part 6).

9. If air bases were to become available to the USSR in Iran, light bombers of the Soviet Air Force would be able to operate throughout the region of the Persian Gulf. Iranian bases could also support Soviet ground and air attacks against the upper Tigris–Euphrates valley and thence westward toward the Mediterranean. East-West lines of communication would be threatened. Communist control of Iran would also provide an excellent base for political penetration of Pakistan on the East and the Arab states on the West. Communist theoreticians have described the conquest of Iran as the key to the success of communist designs on Asia, and particularly India.¹⁰

10. While the USSR does not require the oil reserves and facilities of Iran for further development of her peacetime economy or to insure her ability to wage war, the acquisition or control by the Soviets of these reserves and facilities would have the following estimated effects:

a. In time of peace

(1) Serve to augment existing Soviet oil and gasoline stocks thereby boosting Communist economy and preparations for war.

(2) Provide additional power to wage economic warfare through “dumping” methods designed to disrupt the oil markets of the West.

b. In time of war

(1) Provide oil and gasoline stocks for local military operations in the Middle East and for Soviet submarine refueling in the Persian Gulf.

(2) Deny the use of the Iranian fields to the allied coalition as a wartime petroleum source.

Significance to Neighboring States

11. The significance of the fall of Iran into communist hands has to be measured in more than military terms. Friends of the West in the Arab nations would undoubtedly be grievously discouraged by the inability of Iran to maintain its independence within the community of free nations. Friends of international communism would be greatly encouraged; while those who have sought to maintain a so-called neutral attitude would undoubtedly have their fears of choosing sides emphasized. Of course, it is possible that Arab governments might draw a lesson from the fall of Iran and take more active measures to resist communist pressure. Even this however would not counterbalance the advantage to the Soviets of gaining additional territory from the free world and of having a better base for propaganda and special political action in the Middle East.

12. As to the effect upon Turkey and Pakistan, it is obvious that these two nations would be prevented by a communist Iran from maintaining effective military cooperation. Both nations would find themselves with newly exposed frontiers open to communist military action or political subversion. It is probable that Turkey’s determination to resist Russian aggression would not be lessened by this event, but the question of Pakistan’s reaction is not so clear.

13. It would also be a shock to the whole community of free nations should Iran become a satellite of the USSR. U.S. prestige throughout the world would suffer and the concept of communal security would be weakened.

part 4

support of iranian armed forces

Current United States Military Assistance

1. There are two United States military advisory missions in Iran (the U.S. Mission to the Iranian Army and the U.S. Mission to the Iranian Gendarmérie) in addition to the Military Assistance Advisory Group (MAAG) which supervises the handling of U.S. military aid to Iran. Since the program began in 1950, a total of 101.4 million in military aid has been programmed for Iran, of which only 45.9 million has been delivered (including the value of end-items shipped plus expenditures for packaging, handling, crating, transportation, and training).

The Shah’s Request

2. The Shah has stressed the necessity for an early decision as to whether his armed forces are to be treated merely as a police force to maintain internal security or both as a police force and defense force, capable of delaying the progress of an enemy if Iran should be invaded.

Ambassador Henderson’s Recommendations

3. The Ambassador has recommended that the United States should accede to the request of Iran to assist in reorganizing, rearming and retraining the armed forces of Iran so that:

a. These forces will be capable of strong withdrawal-delaying action if Iran should be invaded by the armed forces of international communism;

b. These forces may eventually be employed in cooperation with the armed forces of other free Middle Eastern countries in a common defense of the Middle East against international communist aggression in accordance with any regional defense arrangements which may later be developed.

4. The Ambassador amplified upon his recommendation in the following terms:

“I make this recommendation partly for psychological reasons. It is my belief that unless the Shah, the Iranian Government, the members of the Iranian armed forces and the Iranian public are convinced that western powers expect Iran to defend itself if invaded by the armed forces of international communism, and unless the U.S. indicates this expectation by assisting the Iranian armed forces to prepare to maintain a strong withdrawal-delaying action, the determination of Iran to suppress internal communist activities and to resist external communist pressure will be seriously affected. It is also my belief that until Iran is convinced that its armed forces are capable of contributing to the common defense of the Middle East, there is little likelihood that effective arrangements can be worked out for such defense.”

Iranian Attitudes

5. The Shah has stated that until Iran has an army capable of putting up some kind of defense, it would be useless to discuss multilateral security arrangements. Ambassador Henderson believes that the Shah and Zahedi would probably be willing to undertake such arrangements if (1) Iran is more on a basis of equality with its neighbors in military capabilities, and (2) if the combined strength of the countries participating in a defense arrangement is sufficient to discourage Russian aggression. The Ambassador also believes that in perhaps one or two years Iran might be willing to move in the direction of an area security arrangement, assuming

a. An early oil settlement.

b. A steady although not necessarily spectacular increase in the capability of the Iranian Army.

c. Continuation in power of a government friendly toward the West which cooperates fully with the Shah and which has widespread public support.

The Ambassador points to the dilemma which would arise if an increase in U.S. military aid to Iran is predicated upon Iranian participation in regional defense arrangements. The Shah has stated that he cannot consider cooperative arrangements until his army has improved. The U.S. would forestall any progress if it refused to build up Iranian armed forces until after defense arrangements had been concluded. The Ambassador has quoted the Shah as urging the U.S. to act with optimism in order to inspire optimism.

6. Although the Zahedi Government, on balance, seems to be holding its own, it is confronted with a number of immediate problems, the decision upon any one of which could cause grave complications. Public reaction to the government’s disposition of these matters, the ability of the government to continue to maintain security and effectively quell opposition, and the degree of continued cooperation between government and Shah, are points which will have a heavy bearing upon the very future of Iran. The Iranian Government will thus be too pressed in the immediate period ahead for it to consider at this time injection of another issue, i.e., mutual defense arrangements, which it can avoid and which at best would incur widespread internal opposition and new external pressures. Probably no real progress can be made in obtaining Iranian decision in this matter until other problems more pressing to them are solved and resultant public attitudes determined. Even then, any concrete action should be preceded by a substantial period of public orientation to the need for collective defense measures and the desirability of “getting off the fence” in the cold war, which would be another entirely new departure for most Iranians.

Soviet Threat

7. It must also be recognized that the Soviet Union constitutes a constant, overwhelming, armed threat to Iran. The Iranians do not see any equally potent force on their frontiers willing and able to oppose the Soviet Union successfully. They are not encouraged by the Korean precedent. They will undoubtedly be very cautious toward any policy which may appear provocative to the USSR. This attitude must be taken into account in any planning toward including Iran in regional arrangements with anti-Soviet implications.

Regional Aspects

8. Turkey, Iraq and Pakistan have the capability of contributing significant forces to the defense of the area provided that proper equipment is furnished from outside sources. The situations in Pakistan and Turkey are substantially different than Iran. Ambassador Henderson believes that it would be useful at the proper time for the Turks and Pakistanis either to take the lead in discussions with Iran and Iraq or at least to closely associate themselves with any proposals which might be put forward. He speculates that favorable action by Iran and Iraq would probably be predicated upon firm commitments from the U.S. in the matter of military aid and would probably exclude the U.S. staying in the background even if it should otherwise be desirable to do so.

9. Indian policies under Nehru undoubtedly will be unalterably opposed to participation by Asian countries in measures of this kind. India opposes military aid to Pakistan. It is unlikely, of course, that the Indian attitude would have much bearing on Pakistan’s decision. However the U.S. should not overlook the importance which Iran attaches to India. A strong adverse Indian reaction could have heavy influence in Iran. There is evidence that the Indian Ambassador to Iran already has been endeavoring to discourage Iranians from any idea of participating in a security pact. Also, the extent to which the Indian attitude will influence the British is a consideration having an important bearing on practicability of proposals.

10. Because of British interest in the area and close British relationship with Iraq and Pakistan, it seems necessary that the British be brought into the picture at an early stage and certainly before any definitive discussions with Iran, Iraq or Pakistan, in all of which they have particular interest. In fact it is unlikely that arrangements of this type could be undertaken without British cooperation.

British Attitudes

11. The British have already indicated that the Shah should be told that the U.S. and U.K. would encourage the building up of Iranian military forces into two components:

a. A static garrison force primarily designed for the maintenance of internal security.

b. A highly trained, active, mobile force, probably to be stationed in the northwest, to be not too heavily armed, which could act as a harassing force in the event of invasion and which would be useful in keeping up morale and in the training of an officer cadre. Discussion with British representatives has also revealed that the U.K. is less inclined than the U.S. to accept the thesis that Iran can develop a useful military force and they are also more inclined to discount the possibility of an eventual defense of at least some portions of Iran. There is agreement, however, that it would be difficult, if not impossible, to decide on major plans for the Iranian Army in the absence of a plan for the defense of the area as a whole.

12. Any statement of policy should, therefore, be sufficiently broad to allow U.S. officials to plan for and support a gradual increase in Iran’s military capabilities and to answer the Shah’s request without discouraging him or, on the other hand, making commitments beyond Iran’s absorptive abilities.

part 5

significance of section 708 (a) and (b) of public law 774—81st congress

1. It appears at present that an essential element of settlement of the Anglo-Iranian oil dispute will be the establishment of a cooperative group of major oil companies to produce and market Iranian oil. If American oil companies are to join such a group, they run the risk of violating United States anti-trust legislation. The statement of policy on Iran foresees this problem and makes specific reference to the authority possessed by the President to grant exceptions to anti-trust laws if he finds such voluntary agreements or programs “to be in the public interest as contributing to the national defense”.

2. Pertinent sections of the Defense Production Act of 1950, as amended, are quoted below:

“Sec. 708. (a) The President is authorized to consult with representatives of industry, business, financing, agriculture, labor, and other interests, with a view to encouraging the making by such persons with the approval by the President of voluntary agreements and programs to further the objectives of this Act.

“(b) No act or omission to act pursuant to this Act which occurs while this Act is in effect, if requested by the President pursuant to a voluntary agreement or program approved under subsection (a) and found by the President to be in the public interest as contributing to the national defense shall be construed to be within the prohibitions of the anti-trust laws or the Federal Trade Commission Act of the United States. A copy of each such request intended to be within the coverage of this section, and any modification or withdrawal thereof, shall be furnished to the Attorney General and the Chairman of the Federal Trade Commission when made, and it shall be published in the Federal Register unless publication thereof would, in the opinion of the President, endanger the national security.”

3. It is of interest to note that on November 26, 1952, President Truman requested the Secretary of State “to engage in exploratory discussion with representatives of United States oil companies and with the Anglo-Iranian Oil Company for the purpose of determining what type of action by (the President) would produce the result desired.” The President, giving this instruction, referred to the authority granted him by Congress in Section 708 (a) and (b) of the Defense Production Act of 1950, as amended.¹¹

4. On December 4, 1952 representatives of the major American oil companies assembled at the Department of State for exploratory discussions, under the following terms of reference as stated by the Acting Secretary of State:

“In the light of the national defense considerations implicit in finding a solution to the Iranian oil problem, I have been requested by the President to engage in exploratory discussions with you (or your authorized representative) and other officers of United States oil companies for the purpose of determining what type of action by them might contribute to producing the result desired. In his memorandum to me requesting that I take this action, the President has stated that he is prepared to utilize the authority granted to him by the Congress under Section 708 (a) and (b) of the Defense Production Act of 1950 as amended.”¹²

5. On the basis of these conversations the U.S. and U.K. offered Iran, as part of a “package” proposal for settlement of the Anglo–Iranian oil dispute, an assurance that an international oil company, in which several major U.S. oil companies would participate, would purchase unspecified amounts of Iranian oil. When Mosadeq rejected these proposals in February 1953, the entire question of the formation of an international purchasing organization was dropped until its recent reconsideration.

part 6

significance of irano-soviet treaty of 1921

1. It is probable, if the Soviets invade Iran, that they will attempt to invoke Article 6 of the Irano-Soviet Treaty of Friendship, 1921, as a justification for their action. The pertinent portions of Article 6 are quoted below:

“If a third party should attempt to carry out a policy of occupation by means of armed intervention in the territory of Persia or to use the territory of Persia as a base for military operation against the USSR, and if thereby danger should threaten the frontiers of the USSR or those of Powers allied to it, and if the Persian Government, after warning on the part of the Government of the USSR, should prove to be itself not strong enough to prevent this danger, the Government of the USSR shall have the right to advance its troops onto Persian territory in order to take necessary military measures in the interests of self-defense.”

. . . . . . .

1. NSC Executive Secretary Lay circulated this statement and the NSC Staff Study, along with a cover sheet and a background note dated Jan. 2, to members of the NSC, the Secretary of the Treasury, the Attorney General, the Director of the Bureau of the Budget, the Chairman of the Joint Chiefs of Staff, and the Director of Central Intelligence notifying them that President Eisenhower on Jan. 2, 1954, had approved the statement of policy contained in NSC 175 and its Annex as amended and adopted by the NSC, and that NSC 5402, “United States Policy Toward Iran”, superseded NSC 136/1.
2. No documentation has been found in Department of State files to explain the change of date in paragraph 15-c from Apr. 1, 1954 (see footnote 4, Document 401), to June 1, 1954.
3. At the present time the United States has no commitment to employ U.S. forces in Iran. If it is found necessary for the United States to provide military forces in this area, implementation will require either an augmentation of United States forces or a reduction of present United States military commitments elsewhere. [Footnote in the source text.]
4. On assumption that no net oil revenues will be realized. [Footnote in the source text.]
5. On assumption net oil revenues are realized. In the absence of such revenue, emergency aid in some form will have to be continued. As a tentative estimatge this might amount to $50–55 million in FY 1956. [Footnote in the source text.]
6. Represents the value of end-items shipped plus expenditures for packaging, handling, crating, transportation, and training. [Footnote in the source text.]
7. Document 387.
8. For text of NSC 155/1, “United States Objectives and Policies With Respect to the Near East”, July 14, 1953, see vol. ix, Part 1, p. 399.
9. Nazi-Soviet Relations 1939–1941, Documents from the Archives of the German Foreign Office. [Footnote in the source text.]
10. G. Lenczowski, Russia and the West in Iran. [Footnote in the source text.]
11. See Document 243.
12. Regarding this meeting at the Department of State, see Document 245.