Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 1

Conference files, lot 59 D 95, CF 100

No. 349
Memorandum by the Director of the Office of Greek, Turkish, and Iranian Affairs (Rountree) of a Meeting of Secretary of State Acheson and Foreign Secretary Eden at the Department of State, January 9, 1952, 4:30 p.m.¹

top secret
TCT CONV–10

January 9, 1952, 4:30 p.m. to 4:30 p.m.

Present:

• U.S.

  • Secretary Acheson
  • Mr. Matthews
  • Ambassador Gifford
  • Mr. Perkins
  • Mr. Nitze
  • Mr. Berry
  • Mr. Rountree

• U.K.

  • Secretary Eden
  • Ambassador Franks
  • Sir Roger Makins
  • Sir Leslie Rowan
  • Mr. Burrows
  • Mr. Leishman

Iran

The Secretary began by saying that he would like to point out certain current problems which the United States has in Iran. Two American programs are in operation in that country: military aid and technical and economic assistance under the expanded Point IV program. While we are having difficulties regarding both programs, the one involving military aid is most disturbing. Under the military program, we are supplying Iran with equipment which its forces require, and are maintaining in that country Army and Gendarmerie Missions engaged in training Iranians. Both aspects of the military program work together. The flow of military equipment makes the Iranians more willing to have our military missions in that country, which are very important from the points of view of maintaining the efficiency of the forces and of their morale. Prime Minister Mosadeq has refused to give assurances which are required by the Mutual Security Act in order to permit continuation of military shipments. The requirements of this legislation, as they apply to Iran, are not wise and increase our difficulties; nevertheless, the assurances are required and because of Dr. Mosadeq’s refusal to give them it has been necessary to suspend further military shipments, effective January 8. With the suspension of military assistance, the status of the military missions becomes precarious. Dr. Mosadeq has indicated that he does not want to extend the agreement under which they remain in Iran, and in the absence of such extension they would stay after March 20 only on a day-to-day basis, which is not good from our point of view.

Regarding the economic development program, the Secretary said that we are financing the salaries and expenses of a number of technicians in Iran, and are supplying end items in order to carry out various development projects. Dr. Mosadeq has been persuaded to give the assurances required under the Mutual Security legislation for continuation of the present program, which involves approximately $23,000,000, and it is going ahead. In addition, there has been under discussion with the Iranian Government for some time the extension of a $25,000,000 Export-Import Bank loan, which would not be in free funds but which would be for the purpose of financing materials from the United States for specific development projects. The technical discussions regarding this loan have vitually been completed. We will soon be in a position where we cannot continue to delay conclusion of the contract on technical grounds alone, and any further delay would obviously be upon political grounds. This obviously would create problems. We are now in the process of deciding what action should be taken in connection with this matter. We fully realize the implications of our proceeding, even though the loan would not relieve the immediate financial problems of the Iranian Government and indeed the utilization of the loan would require additional expenditures on the part of the Iranian Government for the internal costs of the projects. Our minds have not been made up on this matter but it may be necessary to render a decision in the near future. Before going ahead, the Secretary said, we will discuss the matter with the British.

Responding to the Secretary’s query, Mr. Rountree said that it is expected that only a small portion of the Export-Import Bank loan could in any event be utilized during the next twelve months; perhaps no more than $5 million.

Mr. Eden said that the decision in this and other matters should rest to a considerable extent upon an appreciation of the situation in Iran. He commented that he had received information that Dr. Mosadeq intends going to the Hague Court for the purpose of stating the Iranian position upon the question of the Court’s adjudication of the oil issue. This move would prevent the opposition from attacking him until he gets back to Tehran, and he must feel that if he should be successful in the Hague, it would work well for him as did his appearances before the Security Council. The British Embassy in Tehran had suggested that the British might request postponement of action by the Hague Court in order to prevent this move by Dr. Mosadeq at a time when his opposition in Iran is making itself felt. Mr. Eden continued by saying that the situation in Iran generally does not look as though an early solution can be evolved.

The Secretary said that it appeared as though things in Iran were coming to an early crisis and expressed the opinion that our respective appreciations of the general situation are not far apart. We believe that Mosadeq’s opposition is becoming weaker rather than stronger, and potential alternative Prime Ministers have lost considerable prestige. As a result, the Shah himself has become weaker. The main difference in the estimates of the British Embassy in Tehran and of ours is as to the length of time the present situation can continue without internal difficulties of a very serious nature. Ambassador Henderson thinks the time will be sooner than does Middleton, but this is a question of whether it will be sixty days or 120 days, for they both agree that trouble is coming and that is the important thing. Moreover, even if the differences regarding oil should be solved tomorrow, six months or more would be required before Iranian financial problems could be met. The representatives of the IBRD now in Tehran are returning to Washington on January 15 and it is most important that the Bank’s precise plan be formulated as soon as possible. The heart of the problem of evolving a solution is the question of price. In general the Bank’s proposal is that it would operate the oil industry; oil would be sold by the Bank at a price to be agreed upon, which they are thinking of in terms of $1.75 per barrel; and proceeds from oil sales would be divided with 25 percent going to the Iranian Government, 25 percent to the purchasing organization and 50 percent to the Bank. The latter would use its share to pay operating expenses and would set aside the remainder for subsequent distribution when the questions of compensation and discounts have been settled. The 25 percent to the purchasing organization would in fact be a discount, the balance being divided one-third and two-thirds. The main problem here is that Mosadeq wants to know what happens to that portion retained by the Bank. The Bank can say that it is for final settlement, but Mosadeq would think this is too vague and there would be serious difficulty upon the point. The Secretary then outlined in general terms an alternative solution based in part upon Mosadeq’s own suggestion which was made to the British Chargé through an emissary, and in part upon certain statements which Mosadeq made while he was in the United States. The plan would involve an agreement upon compensation, the amount to be determined by representatives of the two parties. Dr. Mosadeq does not want a Board including a third member. Indications are that Mosadeq would accept for compensation a figure of 100,000,000 pounds, plus the 42,000,000 pounds now held by AIOC as royalties due the Iranian Government under the unratified supplementary agreement. He would waive counter claims under such a plan, and thus total compensation might be established in the neighborhood of the equivalent of $400,000,000. Mosadeq has suggested that he would agree to pay full compensation in oil before sales are made for the account of the Iranian Government. This would involve the International Bank not only bearing the cost of production in the period during which compensation shipments were made, but the Bank would also be asked to support the Iranian economy during that period. This would impose a very heavy burden upon the Bank, and it is not likely that they could agree. The scheme, however, might be used as a basis for working out something better. For example, sales of oil at an agreed discount price might take place simultaneously with deliveries of free oil as compensation. In this way the revenues could support the cost of operating the industry and provide some funds to the Iranian Government to meet its needs.

Mr. Eden said that he had not seen the plan suggested by Dr. Mosadeq’s emissary to the British Embassy and was shown, by Mr. Burrows, a copy of a pertinent telegram. Other British representatives present likewise appeared unfamiliar with the communication.

The Secretary commented that our concern is that if the Bank continues upon the basis of its present proposal, and that is rejected, then we are in bad shape. It would be desirable if the Bank could have more flexibility. The present position of the Bank is based primarily upon an interim solution and not a long-range solution, the idea being that if it could get the industry going for a period of two years, the situation might meanwhile change for the better and the chances for future settlement would be enhanced. Mosadeq, however, might not be willing to accept any arrangement under which disposition of a portion of the proceeds from oil sales remains in question. We should, therefore, be thinking about an alternative solution which would establish an amount of compensation and arrangements for running the industry until compensation is paid. It would be necessary, at the same time, to have an agreement upon the discount at which additional quantities of oil are to be sold. An important question is what happens at the end when the compensation has been paid. The Iranian Government would then own the properties and the British would have received the equivalent of $400,000,000. However, with the compensation payments the British could develop additional refining capacity somewhere else where there is a more reliable source of crude oil. Under those circumstances, the question which must be carefully considered is whether Mosadeq would be in a position where he would be able to sell oil at prices which would endanger the established oil industry or whether his position would be weaker by virtue of the increased productive capacity which will have been created. There is a danger that he might seriously prejudice the international oil business. On the other hand, substantial competition would have been built up against him. The alternatives to such a course might likewise present very real dangers, perhaps greater and certainly more imminent ones. The oil concessions throughout the world are in trouble in any event as a result of the situation that has been created in Iran. This whole matter requires very careful study.

Sir Leslie Rowan expressed the view that the essential feature of any deal must be arrangements for the sale of oil. The United Kingdom views the current problem from a much wider point of view than in relation to Iran alone. The 50–50 principle is extremely important and must emerge quite clearly from any settlement; otherwise the entire oil industry is in trouble. There are various ways of evolving a settlement which would meet this principle and he does not know what plan the IBRD has in mind, since it has only established general principles. He felt that the acceptance of the principles is an essential condition to working out a detailed plan; otherwise the plan could do substantial damage on a much broader scale than Iran alone.

The Secretary said that it is very important to keep the discussions with Iran going and not to reach a dead end. The 50–50 principle is important, but in order to say whether the 50–50 principle is valid, one must know within what context it arises. If, for example, Iran had funds in England with which to pay in cash for the oil installations which it had nationalized, the 50–50 principle would have no validity. Since it cannot pay in cash but must pay out of oil resources, an essential point is that there must be effective management under which compensation payments can be assured. Moreover, if the IBRD put substantial sums of money in Iran they must insist upon effective management in order to secure their investment. The question is of what things you talk about at what points. Mosadeq says that he wants to know what happens to that portion of the revenues from oil sales which is held by the Bank. One way of clarifying this position is to inject the element of compensation.

Mr. Nitze commented that there are two ways of approaching the Iranian problem. We could start out with a set of principles and then come down to a specific proposition, which might be quite unsaleable, and would cause grave consequences. Another approach would be to lay aside general principles and to decide what might constitute a practical solution to the difficult problem. That is the approach that we think wise at the moment. The suggestion outlined by the Secretary would involve the payment of $400,000,000 in compensation, plus a continuing discount of, say 25 percent, on oil. This would result in approximately a 40–60 percent division of profits. If the discount must be something less than one representing a 50–50 split of profits, it would certainly not be good; but on the other hand present arrangements in other countries do not uniformly provide for an equal sharing of profits. Indonesia and Venezuela were cited as examples. Even if no arrangement is made with Mosadeq, we are headed for deep trouble elsewhere. It is worth exploring something within the realm of possibility and moving forward upon that, rather than insisting upon general principles which could never be sold to Mosadeq in the absence of a specific proposition.

Mr. Eden stated that, regarding price, he felt the Bank should be permitted to make their proposal and the British could then say whether it would be acceptable.

The Secretary said that the Bank’s present plan would make the actual price relatively unimportant. The Bank is endeavoring to find a way to get some portion of the sales price back to the people who buy the oil, and in doing so they are maintaining the 50–50 principle in several ways. First, 50 percent is held for expenses and final settlement and, second, the remaining 50 percent is again split in half. Under their suggestion of withholding a substantial portion of the proceeds they would confuse the ultimate question of price. The Secretary commented that he entirely endorsed the idea of giving the Bank an adequate chance to develop a plan and to try to sell it, but that we should be considering now what next moves might be made.

Sir Roger Makins commented that if it should become known that we were considering new steps to be taken following any rejection of the Bank’s plan, the chances of its rejection would be greatly increased. He said that if a scheme could be developed which would be found satisfactory to the British, that in itself would be compensation and we would not need to be concerned with payments by the Iranian government.

The Secretary disagreed with this approach and said that what we have been trying to do is to translate compensation into a new scheme for the production and sale of oil, but Mosadeq has made it fairly clear that this will not work. What Mosadeq wants is for the British to be paid off so that at some point he will have completed his obligation in the matter of compensation.

The Secretary continued by saying that if it is not possible for the Bank to sell its plan, we must consider the next step. Garner will undoubtedly ask the British and ourselves what he should do. He will want to know if he should take to Iran with him only the plan which he has developed, and if it fails whether he should come home. If there were unlimited time available in which to work out a solution, he might be advised to do that. However, there is not enough time. The situation in Iran cannot go on indefinitely without incurring the very real danger that a solution will come too late. It is best to have alternates. Garner will certainly want to know whether or not there are other moves which might be made.

Ambassador Franks expressed concern that there is enough difference in the British and American political assessments to make it difficult or impossible for us to come to an agreement upon the precise steps which should be taken. The British believe that whether or not a settlement is made, the result would probably not be a catastrophe. They say, however, that conditions would continue to deteriorate and that some danger would be involved. They know that there are United States interests in Iran as well as British, and that those interests would incur the same risk. The Ambassador commented that in Persia they often encounter serious threats, but they seem never to go over the cliff. They continue on in one way or another. The United States has been more alarmist. The difference between our respective views is largely responsible for our different approaches upon the oil issue. The basic British thinking upon the oil question is that they must keep their hands on all or most of Persia’s oil. This is a question of a hard physical asset, and the position is based upon the principle that those who have oil to dispose of have a very great facility, particularly under world conditions as they are today.

The primary condition of any solution is therefore a condition relating to the sale of oil, the Ambassador continued. The outcome must be that the United Kingdom has its hands upon all or most of the oil produced by the Iranian industry. Beyond that the British want to pay for the oil in a manner which is satisfactory to them which means they want to pay for it in sterling since dollar payment would impose an unbearable hardship upon the British economy. Further, the British insist upon paying a price for oil which gives to them as big a profit as is reasonable. In these circumstances, the question of compensation is relatively unimportant. Under any arrangement, the British must be satisfied, however, upon these three essential elements.

Ambassador Franks, continuing, said that the United States is worried over the situation in Iran and in their alarm would shade any possible solution in favor of Iran. They think that the future of Iran is very black indeed and that a sacrifice is worth while in the common cause. The United Kingdom feels more inclined to insist upon the 50–50 principle and upon arrangements which otherwise would do minimum danger to its position. We have been talking about various devices for possible agreement, the Ambassador said. If we could reach substantial agreement upon the situation in Iran, the details of an arrangement upon the oil question could, he was confident, be worked out. He was, however, troubled by the thought that British and American talks upon a solution to the oil question per se would immediately raise the problem of political assessment and this would make it unlikely that we could agree on what kind of settlement should be accepted. He emphasized that the British hold on the oil is something that they are prepared to go a long way to secure. It should be possible, even granting our respective pre-judgments upon the situation in Iran, to agree upon an assessment of whether or not the fall of Dr. Mosadeq would present a catastrophe. If it would not, the United States should back the British position to a much greater extent. If, on the other hand, the United States representatives were to persuade the British that the American views more accurately represent the situation, the British should be prepared to yield to the United States position.

The Secretary said that he agreed in large part with what Ambassador Franks had said, but not all. He agreed that the difference is in the political estimate but he was impressed by the fact that the differences between our two embassies in Tehran are not so great. If Iran did not occupy its peculiar geographic location, the problem would be much easier. It is not as though we were dealing with a country remote from the Soviet Union. It is in a bad spot. We could not agree with the latter part of what Ambassador Franks had said. The Secretary emphasized that it is the refining capacity which is of such great importance at the moment since the British have access elsewhere to plenty of oil in its raw stage. By increasing their refining output somewhere else, the British would make it considerably more difficult for Iran to sell its oil, and the question arises as to what would happen to the Iranian industry under those circumstances; whether it would be a maverick which would upset the entire oil business, or would act sensibly in its own interest.

Sir Roger Makins states that the British are prepared to “play” much longer than we are. The British estimate is that Mosadeq will be compelled to accept a satisfactory arrangement sooner or later. They are perfectly prepared to have the Bank proceed with its efforts, but they do not want to confuse the Bank by considering now some other scheme before the Bank is given the “full run”. After two or three months, if the Bank is not successful, something else might be tried.

Mr. Eden inquired concerning our views as to what will happen in Iran in the absence of an oil settlement.

The Secretary said that we do not say that Iran would collapse immediately, but the result would be a gradual weakening of the economy. A series of changes of Government might be expected, which would result in increased influence of the Tudeh party. The Secretary asked Mr. Rountree to comment upon this point.

Mr. Rountree said that our concern does not relate to the future of the Mosadeq Government, as it is quite possible that increased economic pressure might eventually cause its fall. Whether Mosadeq or any other Prime Minister is in power, however, Iran soon will be faced with four alternatives: either they must come to an agreement upon the oil issue, which would permit a resumption of oil revenues through sales to normal customers; obtain financial assistance from the United States in order to prevent the collapse of the economy; sell oil to new customers, which would certainly mean sales to the Iron Curtain countries; or look to the Soviet bloc for economic assistance and a modus vivendi. In the absence of an oil settlement or of American economic aid, the Communists in Iran would have powerful arguments of persuasion for turning Iran to the Soviets. This pressure, accompanied by an extremely difficult economic situation, which would soon result in civil servants and the Army going unpaid, could not fail to result in very substantial Tudeh gains and the Tudeh might soon take over one way or another. An immediate problem which arises from the failure of Iran to sell its oil to normal customers or to receive financial aid from the United States is that Iran is considering the sale of oil to Czechoslovakia and Poland. While such sales could be only in small quantities, any would raise the immediate problem of the Battle Act.² The necessity of withdrawing American aid as a result of this situation would eliminate any influence that we have in Iran and would make the job of the Tudeh much easier.

Sir Roger Makins commented that the British estimate of this situation would be different, particularly regarding the ability of Iran to sell and have delivered any quantities of oil to the Satellites. He said the main problem here seemed to be our own legislation.

Mr. Rountree said that we did not estimate that there was the capability of delivering large quantities, but delivery of any quantity not only would raise the question of the Battle Act but would establish a trend which might be difficult to stem.

The Secretary said that we of course have no way of knowing that these things will happen, but we feel that there is a real chance that they will happen.

Sir Leslie Rowan commented that while the Americans are uncertain as to what might happen if no arrangement is made, from the British point of view they feel certain what will happen if a bad arrangement is made. The effect on other British arrangements would be catastrophic.

Sir Roger Makins said that the consequences of submitting to blackmail would be grave. Mosadeq has deliberately broken an agreement and the British are determined not to get back at the expense of other external British positions.

The Secretary stated that there is no question that if we have a bad settlement, we will have trouble. The point is that we must find a settlement with which we can live. He then suggested that Mr. Eden might wish to have Sir Roger Makins and other British representatives meet with Messrs. Nitze, Berry, Rountree and other appropriate American officials to discuss this matter in more detail.

Mr. Eden agreed to this and suggested that arrangements be made for such a meeting.

Since Sir Roger will not be available until Tuesday, January 15 tentative plans were made for a meeting on that day.³

1. Drafted on Jan. 11. Apparently this memorandum of conversation and the two that follow (TCT CONV–4—Parts I and II) record the several topics that were discussed at a single meeting starting at 4:30 p.m. The records of the Department of State do not indicate the order in which the topics were discussed. A five-point briefing memorandum, prepared by Berry for the use of Secretary Acheson in the discussion on Iran and dated Jan. 9, is in file 888.2553/1–952.
2. Under the terms of the Battle Act the United States was obliged to discontinue economic and military assistance to countries which shipped strategic goods to the Soviet Union or its satellites.
3. No record of a meeting with Makins on Jan. 15 has been found in Department of State files. However, on Jan. 17 Makins, Christelow, Rickett, and Burrows met with Nitze, Thorp, Berry, Raynor, Rountree, and Ferguson to discuss Iran.