Foreign Relations of the United States, 1950, The Near East, South Asia, and Africa, Volume V

788.00/3–2350

The Deputy Director (Rountree) to the Director of the Office of Greek, Turkish, and Iranian Affairs (Jernegan)

secret
official—informal

Tehran, March 23, 1950.

Dear Jack: My few days in Tehran¹ have not, needless to say, converted me into a Persian expert, although they have been extremely helpful. I have of course spent long hours with the Ambassador, Richards,² and all other Embassy officer personnel, and I have met with our military officers, OCI representatives, the British, and a substantial number of leading Iranians. The claims and counterclaims, accusations and counter-accusations, undercurrents and overtones—encountered everywhere in the Iranian picture—make exceedingly difficult an objective appraisal of the situation in such a short stay, although I have formulated certain views. Major emphasis in my talks has been in the economic field, the main subject of this interim report which I hope to expand considerably upon my return.

The combination of three primary factors leads virtually everyone with whom I have talked to the conclusion that the immediate situation in Iran is dangerous and explosive. They are (1) increased activities of the Tudeh Party, (2) the current internal economic depression, and (3) the incredible disorganization, confusion and uncertainty among the Government leaders.

There appears to be no question that the reorganized Tudeh Party is considerably more effective than it has been, at least since 1946. Statistical or other precise information as to its activities is lacking, but from the best informed sources of several nationalities with whom I have talked, I conclude that primary activity has been in the publication and dissemination of literature, mainly in the larger urban areas of Tehran, Tabriz, Isfahan and Abadan. Party members come largely from those areas and particularly from AIOC’s 70,000 employees, railway workers, and other large industrial professions, although the Party seems to be concentrating at the moment on the intelligentsia. British studies have led them to estimate Party membership at about 12 to 14 thousand, of which 4 to 5 thousand are in Tehran and 3 to 4 thousand in Azerbaijan, with the bulk of the remainder in Abadan and Isfahan. There are no estimates—or even guesstimates—as to the number of followers. The Party has not infiltrated into the Army to any perceptible extent, and General Razmara’s concern in this connection is related entirely to a situation which might develop rather than having been based upon an existing condition.

Not much is known as to the Tudeh organization itself, although it obviously is well-organized (thanks largely to Komissarov) and is under extremely tight discipline. It is the existence of this effective organization—the only real political party in Iran—that intensifies the concern of practically everyone here, it being felt that the present public psychology would provide an extremely fertile field for rapid expansion and even an attempted coup d’état if an incident occurred which would establish a good opportunity. Whatever its chances of success, the dangers inherent in such an eventuality are evident.

Concerning the current internal economic situation, the British Embassy recently obtained information from all British consulates throughout Iran comparing the present picture with that of September 1949 and a year ago. These reports, which conform to information and impressions which I have gained elsewhere, indicate in general, and relatively, that consumer prices are lower, consumer stocks, particularly food items, are considerably up, and plantings and crop prospects are 20 percent higher than last year; but that business turnover has shown a marked decrease, and unemployment has risen. The economy appears to be in a state of depression which stems largely from last year’s sharp decline in agricultural production. Producers, principally agricultural, were deprived of earnings which normally would have been turned into commodity purchases. While the note issue has remained the same (7.8 billion rials), a larger percentage (1.8 billion rials at present as compared with 1.2 billion rials a year ago) has been held in the Bank Melli reserve, and the velocity of circulation has been reduced to the point where consumption goods in the hands of merchants are not moving, notwithstanding lower prices. Taqi Nasr told me that No-Ruz buying this year is only 60% of last year’s. Large quantities of imports (in Khorramshahr alone more than 200,000 tons) have remained at the docks for several months due to the inability of importers—lacking rials to buy foreign exchange and to cover internal absorption costs, and deprived of credits by tight Bank Melli policies—to take them up.

As indicated, the generally reduced price structure results from plentiful supplies on the market and the low velocity of circulation. Large imports during the past year (170 per cent of 1948) far exceeded the absorptive capacity, but were permitted primarily in order to convert foreign exchange held by the Bank Melli into rials to cover Government and Plan Organization expenditures without an increase in the note circulation. The circumstances have presented a real problem for manufacturers, importers and merchants, and unquestionably a large number have been forced into bankruptcy. “While worthwhile estimates are not available, evidence points to a great increase in bankruptcies in 1949 as compared with 1948. Bankruptcies and reduced business activity have thrown more people out of jobs.

The main unemployment problem centers largely in Tehran, where an estimated 40,000 persons are without work, in Tabriz and in Isfahan. Unfortunately these are the centers of the most effective Tudeh Party activities. Underemployment (reduced number of work days) is as serious as unemployment.

The immediate situation could be improved by putting more money into circulation and liberalizing credit policies, and if the expenditures by which this were done were of a productive nature the dangers of undue inflation would be minimized. A few work relief projects are under way and some expenditures are being made by way of implementing the Seven Year Program. However, a limiting factor is the existing currency regulations which (a) restrict rial circulation to its present level, and (b) provide that the note issue (in effect) must be covered by 77 per cent gold and foreign exchange. Enactment of Ebtehaj’s bill, which soon will be presented to the Majlis, would authorize increased note circulation and reduce the coverage requirement to 50 per cent. This would mean that up to $60,000,000 additional currency could be issued without further backing. The prospect of this bill soon passing the Majlis seem dim, however, notwithstanding optimism which Mr. Ebtehaj expressed to me. More about this later.

The third primary factor which I mentioned in connection with the current crisis is the almost unbelievable dissension among the Government leaders, who provide no program or direction for meeting the situation. Elaboration upon this point is, I think, unnecessary. You are aware of the Taqizadeh–Ebtehaj conflict, Abdorreza versus Ebtehaj, Ebtehaj versus Sa’ed, almost everybody versus Mansur, Razmara versus Yazdanpanah, etc. ad nauseum. As an example of the problem, the currency reform bill which I have mentioned (the enactment of at least part of which—liberalization of issue—all economists seem to agree is essential before anything really effective can be done with or without American aid) appears at the moment to have little chance simply because it is Ebtehaj’s bill. Substantive arguments against it have, of course, been advanced. The Seven Year Plan is being disrupted because of dissension among the members of the Supreme Council, which recently, without even the knowledge of OCI, committed substantial sums of money for projects not included in the program. OCI is, I believe, doing a good job under the circumstances, but insofar as real progress is concerned it will be butting its head against a stone wall until some order comes out of the present chaotic Government structure, or at least until some of the obstructionists on the Iranian side, such as Mansur, are removed.

Everyone in Iran would, I am sure, agree that things are bad. Perhaps that is a principal reason why they are bad. The pessimism reflected by the Shah, the Government, the Majlis, manufacturers, merchants, landowners, and the bourgeoisie in general, has intensified the discouragement and disillusionment of the small people throughout the country who are the very objects of communist propaganda. Nevertheless, for whatever reason, the situation appears to be serious and dangerous and something should be done about it. The problem is, what can be done.

As Ebtehaj put it to me, if his currency bill is enacted; if a reasonable AIOC agreement is concluded, and if military expenditures are not increased above their present level, Iran would not need American economic aid except of the Point IV type. Other informed sources here generally agree with this conclusion, adding the further qualification that if a brace and bit could be placed upon Ebtehaj. Materialization of all “ifs” in time to meet the present crisis within a reasonable period, however, is quite unlikely.

On the basis of the present AIOC agreement, foreign exchange resources for the year 1329 (beginning March 21, 1950) are tentatively estimated by OCI at 84,506,875 pounds, including 28,000,000 pounds presently fully available for expenditure purposes (this excludes the note cover, but obviously is considerably less than we had thought to be the case. Recent Embassy despatches have explained the situation in this regard); 17,000,000 pounds in estimated trade returns; 24,000,000 pounds in AIOC rial purchases; 14,500,000 pounds in royalties; and 1,006,875 pounds in the AIOC dividend for the 1328 account.

Total charges upon the foreign exchange account would, in the absence of a new AIOC agreement, indicate a deficit of 9,300,000 pounds. The liability side of the ledger consists of 60,000,000 pounds for imports on current account, assuming (as I think for planning purposes we must) the same level as 1328; outstanding obligations of 15,500,000 pounds; fixed foreign exchange deposits of 5,000,000 pounds; and a blocked asset of 6,300,000 pounds representing the British payment for wartime use of the Iranian railway system.

As you know, the AIOC royalties (under present circumstances 14,500,000 pounds) are allotted to the Plan Organization for use in both foreign exchange and rial expenditures. To the extent that this fund is used for foreign exchange expenditures, the 9,300,000 pound deficit would be increased. (The portion converted into rials is, of course, available to the Bank Melli for sale to importers under the import program).

There are several possible sources for meeting this deficit. The Plan Organization is soon submitting to the International Bank an application for loans for four projects totalling $15,400,000, a small portion of the rial expenditures of which is included in the Plan Organization’s own program. It is understood that a Bank mission is due to arrive in Tehran the middle of April to study this matter, and the prospects appear to be good that at least half of this sum will be granted. OCI hopes to increase the amount of loans to be discussed by suggesting additional projects, engineering for which has not been undertaken by the Plan. These would be principally agricultural settlement schemes. Secondly, ratification of the new AIOC agreement, soon to be submitted to the Majlis, would make immediately available to Iran an additional 31,458,550 pounds, representing reserve payments and royalty increments from 1947 through 1950. If the agreement is ratified (which is unlikely in its present form) the only financial limitation upon implementation of the Seven Year Development Program of the magnitude now anticipated would be the internal rial problem which can be solved only by the Iranians themselves, and the solution of which should be relatively simple if it were not for the enormous problem of politics and personalities. A third possibility lies in the enactment of the currency bill. As I said, reduction of the cover requirement to 50% would, on the basis of present circulation, release the equivalent of $60,000,000 which could be used in part to cover new currency issues and in part—perhaps $30,000,000—for imports and foreign expenses.

Turning more particularly to the question of the Plan Organization budget, the program with estimated costs for 1329 is in the process of preparation but is not yet available. Preliminary figures obtained from OCI, however, indicate that 2,790 million rials (the equivalent of 31 million pounds) will be needed for justifiable Plan Organization projects. This includes, in millions of rials, 550 for railways, 490 for water projects, 250 for Industrial Bank factories, 350 for other factories, 300 for commitments for new industries, 300 for agriculture, 100 for public health and miscellaneous programs, 100 for Plan Organization administration, and 350 for “flash plan” projects chosen to demonstrate immediate and impressive progress. As against this total estimated program, funds available include the estimated 1.3 billion rials (14,500,000 pounds) in oil royalties and 203 million rials representing the book balance at the end of the year 1328. Under these calculations the Plan Organization program would run a deficit of about 1.3 billion rials.

In addition, about 1.1 billion rials would be needed to meet applications for loans to private industries under the aegis of the Plan, but the portion of these applications which are approved (perhaps half) would be financed by the Bank Melli; and some 250,000 tons of imports now being held up at the docks need to be financed by Bank Melli credits. The present tight credit policies of the Bank, however, indicate that neither the deficit of the Plan Organization nor the credits for other necessary industrial expenditures would be extended unless the currency legislation is enacted. I necessarily must exclude consideration of credit arrangements to meet normal government expenditures since no estimates of the regular government budget are available. It is generally assumed, however, that the budget will add considerably to this general problem. The government budget for 1328 was out of balance at least 420 million rials, and it is believed (but not confirmed) to have been even more. The deficit was financed by Bank Melli advances. Present estimates place the 1329 deficit at an even higher figure.

An analysis of the foregoing would demonstrate in theory at least that it is within the Iranian capability not only to meet the current economic crisis, but to carry out the Seven Year Development program without American financial aid, and, if the new AIOC agreement is signed and other effective measures taken, with relatively small International Bank loans. In terms of the Secretary’s recent policy statement,³ American aid is not the principal missing component in the situation, speaking from a purely economic point of view. Nevertheless, I have concluded that some form of American financial assistance on an emergency basis should be granted. This can and should be justified on political grounds. It can only be rationalized on economic grounds.

There are three main reasons why American financial aid should be extended to Iran immediately:

1. For psychological purposes. Rightly or wrongly, the Iranians have been led to expect American assistance, and they attribute the present deplorable state of the economy to the fact that the United States has done nothing. The Iranian people do not know the intricacies of their economy and are not aware of the capabilities which they have of meeting their own problems. They only know that the economy has deteriorated and that the United States’ help has consisted of nothing more than promises of some “specialists” in due time. Rightly or wrongly, they compare American treatment of Iran with our programs in Greece, Turkey and Western Europe, and recent announcements in regard to other Asian countries, and almost universally conclude that we are less interested in Iran. I am impressed with the effectiveness of Russian and Tudeh propaganda in this regard in light of the visibly deteriorating economy. I am also impressed with reports of the loss of prestige of the United States in recent weeks. I believe that an announcement of some form of American financial aid to tide Iran over this particular critical period would provide the best means of arresting this unfortunate trend.

2. To assist in the immediate short-term economic situation. As I have said, it is highly unlikely under existing circumstances that necessary measures will be taken by the Government itself to remove the causes for the present economic depression. I believe that things soon can be worked out so that American financial aid will not be needed. However, a great contribution to the present situation could be made by immediately authorizing the financing of projects within the general framework of the Plan Organization program, but over and above those which can be undertaken with that organization’s financial resources at the present time. Unemployed could be put to work on projects chosen to show results immediately; increased purchasing power could be created to inject new life into the business commmunity. (This obviously is not as simple as I am putting it. Certain problems involved will be referred to later.)

3. As an instrument of American policy. The Ambassador has said to me that we are playing in a big game without a single white chip. We are currently trying to influence the Iranian Government in matters of absolutely vital importance to the interests of the United States; yet the principal tool of persuasion that we now have is the tone of our voices. He feels, and I am inclined to agree, that the instrument of American aid to Iran under the control of an American authority would greatly strengthen our hand. That aid, properly used, not only could help to relieve the general problems of the moment, but could be used to influence the Government in taking other steps which we consider necessary under the circumstances.

The precise form in which American aid should be given presents a problem. Time is an essential factor, and any assistance should be extended through a mechanism immediately available. I assume that Congressional action, even if recommended by the Administration, would take months, and we could not announce an aid program to the Iranians before Congressional approval is assured. It seems, therefore, that the Export-Import Bank provides the best, and perhaps only, opportunity of meeting this particular situation. (Even this must be worked out with the International Bank to preserve its potential position here.) Moreover, it would be difficult to justify a grant to Iran, since all factors, assuming continued convertibility, point to the ability to repay. And, also, loans are considerably easier to end than the extension of grants while the latter are being authorized for other countries.

The mere extension of an Export-Import Bank loan, however, would not in itself solve the problem since the principal dilemma of the moment is concerned with the internal rial difficulty. Foreign exchange expenditures for emergency projects would be useless in the absence of some agreement by which internal expenditures could be provided for.

This means, of course, that we would have to work out carefully with the Iranians an arrangement by which any such Export-Import Bank loan could be made effective. I feel that long distance negotiations on this point would be hopeless. It occurs to me that, if the Department and the Administration agree that aid must be extended to Iran, a high level official of the Export-Import Bank and a Departmental officer of suitable caliber might head a small mission to proceed immediately to Tehran to work out the details. Even before they depart, however, the agreement in principle to extend aid to Iran should be sufficiently definite to enable the Ambassador to announce to the Iranians that such assistance will be forthcoming. Even this is a delicate matter and should be handled carefully to avoid the impression that any undesirable element (i.e. Mansur) is responsible for our decision.

As to the amount of any such loan, I personally think it extremely doubtful that more than $20,000,000 could be used effectively over the course of the next twelve months; indeed, the figure is likely to be very substantially less than that sum. However, to be really useful politically the amount announced to the Iranians should be higher though, as in the case of several other countries, it may not be used. It could be in the form of a line of credit for expenditure if and when justified by individual projects, and, moreover, the expenditure upon justified projects should be authorized piecemeal by an American authority to provide maximum control.

Let me recognize parenthetically at this point that my assumption that immediate direct aid other than an Export-Import Bank loan would be impossible may be invalid. If there are means (unknown to me) by which we could do so on an urgent basis, a partial answer may be to send certain types of consumer goods not in plentiful supply here, for example cotton seed and seed wheat, for directed distribution in problem areas such as Azerbaijan. Another possibility would be agricultural tools which could be distributed at low cost in connection with a comprehensive welldrilling program. The field for this type of aid is, however, limited unless we were to find American financed goods in competition with indigenous production or already overstocked markets, thus adding to the problems of local producers and sellers. For example, the prospects are that wheat production this year will approach normal, and any influx of foreign wheat would have a depressing effect upon the already low return to the farmers, who even now are threatened by the effects of the business depression in the urban areas. Such a program would therefore require considerable administrative flexibility, and would not substitute fully for the major capital expenditures needed to be undertaken under the plan.

The foregoing obviously is not an attempt at an exhaustive study of the Iranian situation, but merely outlines such ideas as I have developed during my stay here, which may be of use to you in your own consideration of the problem. Many angles, of course, have not been considered in this brief résumé, and I know from recent telegrams that concentrated thought is being focused upon the matter by you in Washington. I will not undertake, for example, to suggest how we should get around the complication of reversing the position that we have so strongly taken with the Iranians, in the absence of any further justification for American aid presented by the Iranians themselves. That is a detail that should be handled carefully, especially since I do not believe that we can expect the Iranians to come up with an adequate justification before a decision on our part is required, although OCI could develop a case for a good many projects on relatively short notice.

All the best to GTI.

Sincerely,

Bill

1. Mr. Rountree arrived in Tehran on March 15 and departed to Istanbul on April 1. This letter was received in the Office of Greek, Turkish, and Iranian Affairs on April 4.
2. Arthur L. Richards, Counselor of Embassy in Iran.
3. Possible reference to an address by Secretary Acheson at San Francisco on March 15 (Department of State Bulletin, March 27, 1950, p. 467).