235. Telegram From the Embassy in Iran to the Department of State0

2200. Paris pass CINCEUR. (Dept may wish rpt additional posts.) On eve my departure from this post believe Dept will wish to have my personal assessment of Iranian situation and my [?] for forthcoming talks in Washington with Shah.

Central factor in domestic political situation is development of personal rule by Shah. Shah has increasingly taken over decision making on all important and many minor questions. Shah himself believes, as he has told me, that after twelve years of post-war effort he has finally achieved position of commanding power. In spite of fact Shah’s assumption of direct rule has made him personal target for increasing criticism his assessment of his position may well be correct. Shah has recovered from whatever political worries he may have believed were potentially involved in Qarani affair.1 If any psychological difficulties were involved in recent divorce they seem to have left no scars and there are some prominent Iranians close to Court who profess believe that Shah is relieved to be rid of Queen and that his first despondency was more feigned than real. Recent oil agreement with Standard of Indiana2 appears to Shah and is accepted by many Iranians as triumphant vindication of Shah’s policies on exploitation of Iranian oil resources. Although future hazards for regime may exist in restlessness of intellectual elite, including rapidly increasing numbers of jobless graduates of university and secondary schools dissatisfaction of urban middle class, and failure to inspire emotional loyalty of city proletariat, Shah is now in firm control.
On economic side Shah places great faith in benefits Iran will derive from increasing oil revenues which he estimates will reach one half billion dollars annually in five years’ time and one billion dollars in ten years’ time. Again Shah may not be far wrong. Over long term Iran’s oil revenues should increase perhaps even to estimated figure, and should allow for latitude of trial and error in field of economic development which is possessed by very few underdeveloped countries. There is to my mind some real danger that intoxicated by the unusually generous terms of the Indiana oil contracts, future contracts in petroleum and other economic fields will be increasingly difficult to negotiate (at least [Page 550]for the next year or so). We have already seen this in the case of the Chase Manhattan–Lazard Freres proposal for an industrial bank3 when P.M. compared offer with some contempt to Indiana bid. Moreover it is already apparent that some pressure is beginning to build up for revision of oil consortium agreement. Short term economic problems are real. There is danger that combination of heavy military expenditures, continued high level of investment in economic development, necessary social expenditures and slow rate of short term increase in government revenues will lead to inflationary situation. Prudent management should be capable of forestalling this danger but there is obviously no guarantee that a prudent course will be followed.
Shah’s military ambitions, and his preoccupation with large modern military establishment pose a major problem for not only economic but also political health of country. They are also a major irritant to our relations with Iran. Shah admits present forces are more than ample for internal security. Major increases in the current military force objectives and costs this would entail might heighten domestic political and economic tensions and increase possibilities of disorder. Yet Shah’s personal interest in enlarging and modernizing armed forces lead him constantly to make demands upon us for increased military assistance. The problem of how to handle these frequently unreasonable demands is, as I can testify from sad experience, the one most difficult problem in our relations with Iran.
In field of foreign affairs I am certain Shah recognizes dangers to his regime inherent in Russian ambitions and policies and value of Iran’s association with West in Baghdad Pact. Soviet soft line, intensively pursued in Iran with increased propaganda effort, has not deceived Shah although it has complicated his problems of maintaining popular alertness to communist threat. But Shah undoubtedly has inflated idea of his cleverness and skill in handling Soviets and may from time to time make unwise arrangements with them. There is also always some risk of headstrong action by Shah with relation to Baghdad Pact arising from some moment of personal pique and frustration. But on balance believe Shah’s general international posture will remain satisfactory. He does have increasing concern with developments in Arab world and particularly potential threat of influence by Nasser in other countries of Near East. Shah may believe such influence would not only threaten Iran, particularly southwest provinces with considerable Arab population, but would also conflict with his aspirations to succeed [Page 551]British, who in his eyes are on their way out of this area within the next decade or so, in a position commanding the Western littoral of the Persian Gulf. It is in part because of this threat, and of his lack of confidence in long term independence Iraq or its continued adherence to BP, as well as his personal drive for prestige, that he has recently been promoting idea of federation of some sort with Pakistan and possibly Afghanistan, as well as continuing to insist on strengthening his armed forces.
I believe Shah’s Washington visit is major opportunity for making it crystal clear that while US will carry out promptly obligations it has already undertaken to assist Iran economically, and will continue its present programs to improve the quality and modernization of current force objectives, it will not provide assistance for any significant enlargement of the Shah’s military forces and it will not at this time undertake further major commitments for economic assistance. Shah will obviously not be happy to hear such statements, and there is some risk that his reaction might be to weaken connections with BP. But I believe risks to US relations with Iran of firmly and authoritatively telling Shah facts of life at highest level are less than risks involved in making any statements which Shah might misinterpret as implied promises of increased assistance and later feel that we have again let him down as he has alleged in the past. Shah is past master at reading promises of help into generalized statements of friendly intentions. Washington talks should be completely frank and objective and should leave him no such opening.
On the military side it is particularly important that Shah be disabused of idea that US has any obligation or for that matter intention of providing for Iranian forces at levels that may from time to time be discussed in BP Mil Planning Committees. I have consistently attempted to refute Shah’s notion that staff level discussions in Baghdad somehow commit US to support for specific levels of Iranian forces. But his own advisors tell him differently and he always has the feeling that there is a higher court of appeal in Washington. It would be helpful to US position, and particularly to my successor, if this point could be clarified for Shah by the highest US political and military authorities.
On economic side it is likely that Shah will request further economic aid probably in form of development loans beyond $40 million commitment. I believe we should certainly press rapidly ahead with action the $40 million programs. It would in fact be highly desirable that negotiations with Ebtehaj be successfully concluded or at least be well along by the time of Shah’s Washington visit. But I believe it important to maintain firmly the $40 million ceiling on all new US loans to GovIran this year except for BP regional projects. I also believe we should not at this time make any commitments for loans in succeeding years, although we ourselves should not exclude such a possibility if it proved [Page 552]desirable. $40 million commitment has already enabled plan organization to compensate for part of its loss of oil revenues. There is danger Shah will believe US willing to underwrite increasing part of PlanOrg’s program and will feel free to use Iranian foreign exchange earnings for other purposes. Every means should be taken to avoid fostering of psychology of permanent Iranian dependence on US economic assistance. Embassy will later make detailed recommendations on specific items such as Intercontinental Hotel project, additional technical assistance for crown lands distribution, and the Lazard Freres-Chase industrial bank proposal. But in general I feel it of great importance that Shah be given clear statement that US will not go beyond its present commitments for economic assistance. Over long term, and given even reasonably wise economic direction and development, agricultural, mineral and industrial, and reasonably wise social and tax programs, Iran could become solidly prosperous country.
On the positive side it will I think be highly important that officials in Washington, and particularly Secretary and the President for whom Shah has greatest personal respect, stress the deterrent power of US armed forces, the meaning of the Eisenhower Doctrine, continuing US friendship for Iran, and the intention of the US Government to cooperate with Shah and to support him personally in his efforts to improve and modernize his armed forces and to achieve political and economic progress in Iran. The point should be made repeatedly that domestic political and economic health are of highest value to the defense of Iran, whether against communism or against rabid Arab nationalism, and that any significant increase in Iran’s military establishment could undermine Iran’s security by contribution to economic difficulties and political instability.
  1. Source: Department of State, Central Files, 788.11/5–2958. Secret. Transmitted in two sections and pouched to London, Ankara, Karachi, Baghdad, Cairo, Beirut, and Paris.
  2. See footnote 3, Document 229.
  3. See footnote 1, Document 234.
  4. In a memorandum of conversation, May 26, between Eugene Black, President of the IBRD, and Dillon, Black explained the background of the Iranian rejection of the Chase Manhattan Bank/Lazard Freres proposal to organize and manage an Iranian industrial development bank. (Department of State, Central Files, 888.14/5–2658)