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

888.2553/10–1451

No. 115
Memorandum of Conversation, by Colonel Vernon Walters¹

secret

New York, October 15, 1951.

Participants:

• Prime Minister Mossadegh, Iran
• Mr. George C. McGhee, Assistant Secretary of State
• Colonel V. Walters

After exchanging pleasantries, Mr. McGhee stated that he had just flown up from Washington to see Dr. Mossadegh as he fully understood the urgency of the situation and Dr. Mossadegh’s need for speed in this matter. He had previously explored Dr. Mossadegh’s thinking and since he had last seen the Prime Minister we had been exploring the British thinking, and in the light of this we felt justified in going ahead. He said that we were doing everything we could to help Dr. Mossadegh achieve a satisfactory solution of the problem. He said that there were a number of points on which agreement would have to be reached. “Agreement with whom?” asked Dr. Mossadegh. He then went on to say that the Iranians were absolutely unwilling to come to any agreement with either the British government or the AIOC. They could not do this. No one in Iran would accept it. If they reached any agreement with the British they would have to reach a similar agreement with the Russians, this on the principle of reciprocity and equal treatment. The Iranians could not give the British any sort of most-favorednation treatment or they would be compelled to extend the same treatment to the Soviet Union. Mr. McGhee said this was not quite the case as they had now nationalized the oil fields and there could be no question of giving any concession or other arrangement of a similar nature to the Soviets.

Dr. Mossadegh then spoke at some length about the seriousness of the situation in Iran and the grave consequences that might ensue if a speedy solution were not achieved. He had come here filled with a desire to reach a speedy solution and now a week had passed and the British had done nothing.

Mr. McGhee assured him that we have been working day and night as honest brokers sounding out both sides. Dr. Mossadegh did understand that we were not negotiating because we did not have any authority to do so. Nothing he said could be construed in any way as a commitment. Dr. Mossadegh said he understood this and likewise anything he said was of a tentative nature and not to be regarded as a commitment. The word “agreement” was explained at some length to Dr. Mossadegh as it seemed to have for him some connotation of a concession type arrangement.

He said that the Stokes proposal² was nothing more than a concession in disguise and that it was therefore unacceptable to the Iranians. The question of compensation was then touched upon. Dr. Mossadegh said that Iranians would be prepared to pay compensation on the basis of the stated value of the company’s installations in Iran as set forth in the AIOC’s annual statement, which amounts to some £27,000,000. Mr. McGhee explained that there was considerable difference between the book value and the sales value or real value of assets. Dr. Mossadegh then asked whether the AIOC would be willing to say by how much they had committed a fraud in their statement. Mr. McGhee said it was not a question of fraud but that normally the book value did not always represent the true sales value of assets. If a company was making money, the true value was usually higher than the book value, and if a company was losing money the true value was usually lower than the book value. In the case of the AIOC, which had been making a substantial profit, it was therefore probably higher than the given figure. Dr. Mossadegh asked Mr. McGhee whether he had any idea what the real value was. Mr. McGhee said he did not. It was not easy to arrive at the valuation of property of this type. However, if the property were located in the U.S. it would be worth a great deal more than £27,000,000, perhaps over a billion dollars. Dr. Mossadegh replied that the property, however, was in Iran and should be valued on that basis. Mr. McGhee said this was true but nevertheless certain values were absolute, regardless of where property was located.

Mr. McGhee asked Dr. Mossadegh whether he himself had any idea as to a final figure. Dr. Mossadegh said he did not and asked whether Mr. McGhee could not get the thinking of the British on this. Mr. McGhee explained the difficulties and time required to obtain a fixed valuation for property such as this. Dr. Mossadegh thought it could be done more quickly. Mr. McGhee then suggested that this might perhaps be taken care of by setting aside a percentage of the profits for compensation and then establishing a procedure for fixing the value of the property. The organization of a Commission or small group to decide the value of the property was discussed. Dr. Mossadegh was fearful of an international group, fearing that it would be influenced by the AIOC and suggested that the President of the U.S. arbitrate this matter. Mr. McGhee said that this was too great a responsibility for us to take on as a government and emphasized the value of an international organization or a small group of neutral experts, pointing out that such a group would consist only of personnel satisfactory to Dr. Mossadegh in whom he had confidence. Dr. Mossadegh, while not accepting this idea outright, nevertheless seemed less hostile to it than previously.

Other aspects of the question were then discussed. Mr. McGhee pointed out that considerable agreement which encouraged him had become evident. Dr. Mossadegh said this was so and suggested that they both write down these matters on which they agreed so that they would be fully aware of them. Mr. McGhee agreed to this and the following items were then written down by Col. Walters in French and English, with Dr. Mossadegh keeping the French copy and Mr. McGhee retaining the copy in English. The paper, on completion, was carefully read over to Dr. Mossadegh paragraph by paragraph, and then in its entirety, and he expressed his approval thereof.

The following were the points set forth:

1. Iran agreed to sell the oil to consumers on the basis of what they have taken over the last three years, through any intermediary the consumers may designate in writing.

2. The Board of Directors of the National Iranian Company will consist of three Iranians and four neutrals.

3. In order to obtain the technicians required, and the access to technology, the National Iranian Oil Company will enter into a contractual arrangement with an outside company on a fee basis. A Dutch company would be acceptable for this purpose. Technicians will have individual contracts with the NIOC.

4. If suitable conditions can be obtained, Iran would be willing to borrow the working capital required from the World Bank.

5. The length of the contract for the procurement of crude oil will be fixed by agreement and will be for at least ten years duration. The price will also be fixed initially by negotiations, and change each year in accordance with variations in world petroleum prices.

6. Under the Board of Directors of the NIOC, there will be a Technical Director of neutral nationality with executive authority over the operations of the company. He will be chosen by the Board of Directors from a nationality to be indicated by the Iranian government.

7. Payment for the crude petroleum will be made in sterling.

In connection with point 4, Mr. McGhee explained that the World Bank, if it were to lend the money as working capital, would probably wish to be able to discuss administrative arrangements with the NIOC, as is normal in banking practices in order to be sure that efficient management was ensured. Dr. Mossadegh expressed assent to this and did not believe it would cause any difficulty.

In connection with point 5, Dr. Mossadegh was anxious to have the price fixed every year. Mr. McGhee explained the difficulty of this to him in that it provided no stability. After some discussion of this point, Dr. Mossadegh finally agreed to the wording whereby the price would be fixed initially, with the flexibility to provide for variations in world petroleum prices.

With regard to point 6, Dr. Mossadegh was anxious for the inclusion of the words “neutral nationality” and also for the sentence indicating that the Iranian government would control the nationality of the Technical Director. He leaned strongly towards the selection of a Swiss, but finally indicated he would be willing to accept a Netherlander. He said that the Dutch were very honest. Mr. McGhee indicated that next to the Americans and the British, the Dutch had the widest experience in this field.

In regard to point 7, Dr. Mossadegh was anxious to include some provision governing the acquisition by the Iranian government of the foreign exchange necessary to carry out their import program. Mr. McGhee explained that the Iranian market was presently a sterling market, which was to the advantage of the Iranians because many of the present customers could not purchase the oil if it were a dollar market. As a matter of fact, some American oil companies were at the present time seeking British authorization to sell for sterling as this would substantially increase their sales. Dr. Mossadegh agreed to receive payment in sterling and to the wording of item 7.

Dr. Mossadegh stated that he was going before the Security Council the following day to present the defense of his country. He laughingly said that they were going to put him in prison and asked if Mr. McGhee would help get him out of jail. Mr. McGhee jokingly said we would be waiting for him at the door. Dr. Mossadegh feared that any resolution of the Security Council recommending negotiations would tie the hands of the Iranians by simultaneously preventing the return of British technicians and the hiring of other technicians such as Germans (from whom he had had many offers). He would much prefer it if the Security Council would adopt no resolution or merely take a non-commital position. (This was the first conversation in which Dr. Mossadegh did not ask that the Security Council declare itself without jurisdiction over this question.) Mr. McGhee said that we were well aware of his feeling on this matter and that any action we or the Security Council took would be in an endeavor to help him solve his problem.

Mr. McGhee said that this whole petroleum question was an extremely complex one with widespread ramifications. Dr. Mossadegh should have confidence in us. We had had wide experience in this matter and he could be sure that we would not be a party to any solution which was unfair to him. Dr. Mossadegh said he had full confidence in us. Mr. McGhee, in pointing out that any solution which was reached must appear reasonable to both sides, [said] it should likewise appear reasonable to us and to world petroleum. Dr. Mossadegh needed the cooperation of world petroleum to operate his business. He could not operate it alone in isolation. Therefore it was essential that whatever arrangement was finally reached, it must appear equitable to world petroleum. It was our policy to recognize nationalization but we feel that prompt, adequate and effective compensation should be paid. If anything were done to violate this policy it would jeopardize the interest of the whole petroleum industry and it would thus be impossible to secure their cooperation to help Iran derive the maximum revenue from her petroleum sources. Dr. Mossadegh indicated agreement with all the foregoing.

Mr. McGhee then said that on the basis of what Dr. Mossadegh had given him he would sound out the British. He inquired whether Dr. Mossadegh would be willing to wait until after the British elections providing satisfactory progress were made in talks prior to that time. He pointed out how difficult it would be for the British politically to make a final decision prior to the elections. Dr. Mossadegh said he understood and would be willing to wait until after the election.

Mr. McGhee then inquired of Dr. Mossadegh when he would like to come to Washington. Dr. Mossadegh said he would like to as soon as he got out of jail (the Security Council). Mr. McGhee said that the President and Secretary were anxious to see him and talk to him. He also said that Dr. Mossadegh might visit the TV hydroelectric installations and perhaps one of our spas, like White Sulphur Springs. Dr. Mossadegh said he would like to but of course his health would govern this.

Mr. McGhee invited Dr. Mossadegh down to his farm near Washington and Dr. Mossadegh said he would like very much to come. He also is a farmer and would like nothing better than to give up political life and return to his farm. Mr. McGhee said that he would return to Washington immediately and go to work on what Dr. Mossadegh had given him. He would get in touch with Dr. Mossadegh immediately after the Security Council had met. He excused himself for keeping Dr. Mossadegh up so late, and the talk then concluded.

1. The meeting took place at Mosadeq’s Ritz Tower apartment on Oct. 14.
2. Regarding the Stokes proposal, see Document 67.