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

Under Secretary’s Meeting: Lot 53 D 250; UM Documents, No. 6, 86–113¹

Paper Prepared in the Department of State²

secret
UM D–97

[Washington, undated.]

The Present Crisis in Iran

a. the political situation

Since the failure of the abortive Azerbaijan revolt of 1945, which owed its temporary success to the intervention of the Red Army, the Soviets have played a waiting game in Iran, apparently content to wait for the Iranian regime to collapse from its own inherent weaknesses helped along by sporadic Soviet pressure and threats.

Recent events in Iran have indicated that the time of collapse may not be far away. All traces of effective leadership have virtually disappeared; the Shah, who for a while showed signs of being a force for progress and reform, has exhibited that he has neither the character nor the ability to offer his people guidance; the top Government officials are still unable or unwilling to break away from age old traditions of corruption and inefficiency; the Parliament is composed of obstructionists and opportunists, and the people, thoroughly disgusted with a regime which offers prospects for a still bleaker future, are excellent targets for the clandestine but well-organized and well-financed Communist (Tudeh) Party, whose influence appears to be expanding at an alarming rate.

In part, the present crisis is attributable to basic, organic weaknesses in the body politic, such as the absolute and senseless centralism of the government, the feudal land-holding system with its concentration of wealth and power in the hands of a few selfish persons, and the fact that an undeveloped country such as Iran with a vast, totally illiterate peasant population, and without any sort of democratic tradition, is not suited in times of crisis for parliamentary government on the European model.

On top of these inherent defects in the Iranian system are a number of contemporary factors, part psychological, part economic, and part political, which have joined to bring on a crisis which places Iran under the immediate threat of disappearing behind the iron curtain.

1. Psychological Factors

(a) The Leaders

The Shah and most influential officials of the Iranian Government appear to believe they have taken great risks in opposing the Soviet Union and have not received from the West sufficient compensation for what they believe to have been a significant contribution to the world-wide resistance to the spread of communism. Some of them, bitterly disappointed at the failure of Iran to receive assistance from the United States on a scale comparable to that furnished other countries, particularly Turkey, to which they contend they are entitled as a matter of right, believe Iran is not justified in taking further risks and should endeavor to reach a modus vivendi with the Soviets. There have been reports that conversations have, in fact, taken place between highly placed Iranians and Soviet officials looking to some sort of revamping of the relations between the two countries.

The visit of the Shah to the United States, successful as it was, has boomeranged. Despite repeated explanations by this Government that the visit was purely a normal good will tour, the Shah expected that he could return to Iran with some tangible evidence of United States support for his country in the form of economic or increased military assistance. While he appeared to understand the United States position as outlined for him by the President, the Secretary and other United States officials, he had no sooner returned to his country than he began making remarks such as “American aid stops at Iran’s frontiers.” The Iranian people expected even more, and the popular disappointment has been profound. While “lack of American aid” had to some extent already replaced “British intrigue” as the whipping boy of Iranian politics, the Shah’s return empty-handed accentuated Iran’s lonely position and served to convince many responsible Iranians that they had, in fact, been left alone to face the Soviets.

Should this belief persist, it seems certain that the Iranian Government will seek some sort of arrangement with the Soviet Union since traditionally Iran has never dared resist any great power unless it was confident it enjoyed the support of another. For many years Iran survived by playing one power off against another and it is entirely possible that the present government will revert to the traditional Iranian foreign policy.

(b) The People

Even more alarming than the possibility of the present regime seeking a modus vivendi with the Soviets, is the possibility that Iran may be completely and suddenly taken over by a native revolt led, organized, and financed by the Soviet Union. All reports reaching the Department indicate a feeling of disgust with their rulers on the part of the Iranian people which cannot help but play into the hands of the Tudeh Party. While a feeling of this nature is by no means a new sentiment for the Iranian people, the Tudeh Party is a new tool for converting this disgust into action. Detailed reports on the total membership, organization, and finances of the Tudeh Party are not available but it is entirely clear that it is now making a concerted effort to perfect its organization and greatly increase its propaganda work. The Iranian Chief of Staff, General Razmara, has expressed the opinion that, should matters be allowed to drift, he could not count on the army, conscripted from the poorest classes, to put down a communist-inspired revolt.

Most observers believe that what the great mass of the Iranian people require in order to enable them to resist communist blandishments (Communism as a doctrine holds little or no interest) is some tangible sign that forces are at work in the country to assure the people of a future, if not better than the past, at least no worse. The present Iranian regime, which has let its ambitious Seven Year Plan founder in a morass of politics, is incapable of providing this sign without outside assistance and direction.

2. Economic Factors of the Political Crisis

While the current political crisis has sufficient reasons for existence without the addition of economic difficulties, the current business depression in Iran with its increasing unemployment has served to accentuate the inability of the Iranian Government to solve the most ordinary problems and has filled the leaders with a sense of frustration and the people with increased disgust. There are obvious measures, which will be discussed below, which the Iranian Government could take to alleviate the present economic situation but which its weaknesses, political and psychological, prevent. Although there might be contempt for the ruling classes on the part of the people even if times were good, when there is not enough bread and when many workers are idle this contempt can become dangerous.

The economic difficulties now being encountered have definitely alarmed the Iranian Government but not to the point where it will adopt measures to resolve them without pressure from the outside. The economic situation has made the political situation much worse than it ordinarily would have been and has contributed in large measure to the frustration which pervades the Shah and his government.

3. Purely Political Factors

The Shah, an earnest young man full of good intentions, cannot make up his mind whether he should reign or rule, and consequently does neither. While sincerely believing in the aims of the Seven Year Program and the need to reform the Iranian Government, the Shah is fair game for every self-seeking sycophant, of which there are many in the royal palace, who comes near him. His indecision is monumental and his moral courage debatable. He has recently exasperated all reform-minded and progressive Iranians, as well as most foreign observers, by appointing as Prime Minister Ali Mansur, a notoriously corrupt politician with a record of dallying with the Soviets which is rather disturbing. The motives behind this appointment are obscure and, while the Shah by a devious oriental reasoning may have intended it to show the entrenched classes they are incapable of coping with the situation, it could be disastrous for Iran. Reports from Tehran indicate that a general feeling of disgust and despair greeted the appointment, and it seems unlikely that Mansur would be able to govern effectively even if he so desired.

Although it is possible that Mansur may be able to obtain a vote of confidence from the Iranian Parliament (Majlis) it seems unlikely that his Government will long survive. Iran will probably continue its unhappy record of a succession of ineffective governments. This situation linked with the inherent weaknesses in the organic structure of the country described earlier makes the task of the local communists a great deal more simple and prevents effective remedial action on the economic front.

It is also possible that, even if his tenure of office is short, Mansur can by seeking an arrangement with the Soviets create a situation which would prevent succeeding governments from reverting to Iran’s present western political orientation without facing a serious threat of Soviet aggression. Mansur has publicly denied that he is pro-Soviet but his record as Governor General of Khorassan, the northeastern province of Iran, during the war shows that he will play the Soviet game when it serves his own interests. He is no intellectual giant and could be manipulated by clever Soviet agents without too much difficulty.

The Parliament, divided among cliques rather than principles, seems incapable of anything but obstruction. Deputies have never learned the proper functioning of the legislative branch of a representative government and their policy has been selfish and destructive. Some sincere, patriotic men are, of course, found in the Parliament as in the government but they are seldom understood and rarely capable of attracting others to their side or taking vigorous action. Little help may be expected from this quarter in resolving the present crisis.

b. the economic situation

Iran is suffering from an economic depression. While this depression has not yet reached catastrophic proportions, if unchecked it might easily result in the political collapse of the country.

The depression stems from the extremely bad harvest of the year 1328 (1949–50), which so reduced the meager purchasing power of the farm population of the country—about eighty percent of the people—that the peasants could no longer pay for even irreducible necessities.

This destruction of rural buying power on the one hand ruined the business activities of the merchants, whether selling home-manufactured or imported goods, and on the other placed a considerable burden on the government which had to give some aid to the most seriously affected areas, at a time when it could least afford to assume additional financial commitments. Industry was, of course, adversely affected by the inability of the peasants to purchase. This in turn led to urban unemployment and to a still greater reduction in national purchasing power. At the same time the Plan Organization (the government agency for operating the Seven Year Development Plan) had to divert its attention from its long range development operations to immediate relief activities.

This depression has been fed and intensified by political uncertainty and unrest, and by fears and doubts concerning Iran’s position in the world and its future. Knowledge that the situation is bad has in turn contributed to discouragement bordering on hopelessness, which has magnified the seriousness of the problem. The economy of the country now needs what might be called “shock treatment” to break the deepening deflationary spiral which if unchecked could lead to national disaster.

The elements of the depression are:

1) increasing unemployment;

2) reduced purchasing power;

3) falling prices (but not falling as fast as purchasing power);

4) increasing bankruptcies;

5) accumulation of excessive stocks of merchandise (for example, nearly one year’s supply of imported textiles in the Tehran region and about 250,000 tons of miscellaneous goods unremoved from the ports of the country);

6) declining industrial activity and an almost complete cessation of investment in new enterprises; and

7) a growing tendency for capital to flee the country.

This situation could be substantially improved by:

1) a satisfactory to good harvest in 1329 (1950–51);

2) renewed investment programs; and

3) restored confidence.

There is some evidence that the forthcoming harvest will be good, thus establishing a base from which to start an investment program and to restore confidence. Some outside assistance—a stimulus to the economic system—is, however, almost certainly needed.

The investment program could be stimulated—and confidence restored—if certain economic reforms were introduced and if the Seven Year Plan were pushed vigorously ahead. To do the latter, some assistance in the way of foreign exchange (or loan tied to a reform program) is necessary.

Based on the best available estimates the foreign exchange prospects for 1329 (1950–1951) are as follows:

Foreign Exchange Receipts

Exports	$35,000,000
AIOC expenditures	60,000,000*
Oil royalties	36,400,000
Sundry	3,000,000
Total		$134,400,000

Foreign Exchange Expenditures

Government requirements	12,200,000
Imports	115,000,0005
Sundry	7,200,000
Subtotal	134,400,000
Plan requirements	35,000,0006
Total		169,400,000
Foreign Exchange Deficit		$35,000,000

At the commencement of 1329 (March 1950) the nation had free foreign exchange reserves of about $45,000,000 (not including gold and foreign exchange held as part of the legal coverage of the outstanding notes). While some of this reserve could be drawn upon to meet current requirements, it is probably already at a dangerously low level and additional excessive reductions (this reserve was very substantially reduced in the year 1328) might well further reduce or destroy confidence. Furthermore, one of the requirements for an active successful investment program is more rials, the lack of sufficient quantities of which explains to a large extent the accumulation at ports of large stocks of goods, which act as a serious deterrent to local production. The present gold and foreign exchange coverage of notes outstanding is 78 percent. A reduction of this degree of coverage in an unsophisticated economic system and in the present state of uncertainty would very likely add considerably to the existing atmosphere of pessimism. Some of the free foreign exchange reserves may therefore be needed as additional coverage for an additional note issue.

A United States loan to support and stimulate the investment program (from which arises the potential foreign exchange deficit) would, if accompanied by certain reforms, be of immediate economic benefit and would restore confidence by indicating that Iran had the sympathy and support of the United States. The reforms should include:

1) More effective import and foreign exchange controls to prevent the waste of foreign exchange resources on luxuries and to check the tendency of capital to flee the country;

2) A somewhat more flexible monetary system;

3) More effective and realistic government budgetary practices;

4) More effective tax practices (beginning with improved collection of taxes falling on the rich and a start towards substituting a more effective income tax for heavy import, excise, and turn-over taxes which hamper business activities, raise prices, and reduce purchasing power).

The International Bank is contemplating relatively small loans to Iran at the present time. While this should be encouraged, the loans, even if made, would not take care of the present emergency situation. They are expected to be made for such long-term projects as the development of the port of Khorramshahr, construction of a cement plant, and water well drilling. They would be made by an international organization and could not, therefore, have the same psychological impact as assistance given directly by the United States. The factor of psychological impact indicating interest and support by the United States is undoubtedly one of the most important elements in any program to prevent the possible collapse of Iran.

c. conclusion and recommendations

It is clear that a crisis of a very real nature exists in Iran at the moment, a crisis which if continued might well lead to the complete disintegration of the country and its absorption immediately or eventually into the Soviet bloc. The crisis is of Iran’s own making and the remedies inherently are in Iran’s own hands; however it is also clear that the Iranian regime as it is presently constituted is incapable of resolving the situation.

It is worthy of note that Iran is the only free country on the periphery of the Soviet world not receiving or about to receive direct United States economic assistance designed to keep it outside of the iron curtain. The situation in Iran has reached the point where, whatever its causes and whatever the Iranians technically could do themselves to correct it, the United States cannot take the chance of seeing Iran surrender to communism and must take every reasonable step within its power to make sure that another country directly exposed to the threat of Soviet aggression, internal or external, does not fall into the Soviet orbit.

Aid to Iran is not recommended primarily because Iran needs economic aid, but because it offers the most effective means of forcing the Iranians in spite of themselves to put their house in order. It is believed that the following program would offer the best possibilities of meeting the present crisis:

1. A survey mission headed by a prominent and experienced American should be sent to Iran at once to investigate the most practicable means of extending financial and/or other assistance. This mission should include representatives of the Eximbank and Treasury. The mission should be empowered in advance to announce, should it find it advisable to do so, that the United States Export-Import Bank is prepared to extend a line of credit not exceeding the amount of $50,000,000 for carefully selected projects to be implemented within the general framework of the Seven Year Development Program. The projects selected would be those which the mission considers practicable and most likely to reassure the Iranian people that they have not been left alone, and which would provide the best leverage for prodding the Iranian Government into immediate action to put its house in order.

2. To obtain the desired effect it will be necessary to impose certain rather rigid conditions upon any economic assistance the United States extends. While the exact nature of these conditions can be left to the survey mission, they might include some or all of those listed on page 7 [9?]³ above, and must include an agreement as to the method of financing internal costs in rials. The aid should be administered and controlled by a United States official sent to Iran for that particular purpose.

3. The Department should take immediate steps to strengthen its representation in Iran. These should include the opening of a consulate at Isfahan under a Foreign Service Officer not lower than Class 4; the appointment as consuls at Tabriz and Meshed of Foreign Service Officers with political experience at least of Class 4 and preferably Class 3; and the augmentation of the staff of the Embassy at Tehran to include at least three officers in the economic section and four officers in the political section exclusive of the Counselor.

4. The Department should immediately expand its informational program in Iran to make sure that the American position in the “cold war” is made clear not only to the Iranian ruling class but also to wide segments of the population. To this end information offices should be established in the consulates at Tabriz, Meshed, and Isfahan and the USIE staff in Tehran should be strengthened. The Voice of America programs should be redesigned to meet more effectively and dramatically the needs imposed by the present unfortunate psychological trends.

5. Since the success of the aid program will depend to a large extent on the character of the Iranian cabinet in power, the United States should express to the Shah its concern over events in Iran, should describe to him the reforms the Iranians could put into effect themselves, and should indicate United States assistance will be forthcoming only if a government comes to power willing to and capable of using this assistance to strengthen Iran’s internal defenses against communism. If necessary, the United States should be prepared to name the Iranian official who it believes most effectively could meet these requirements.

6. If at all possible, the Iranian MDAP program authorized for FY 1951 should be not less than $20,000,000. The actual sum to be released, however, should be used as an added lever for persuading the Iranians to accept American advice.

7. Once the status of Point Four is clarified, the United States should proceed at once with the recruitment of a technical aid mission concentrated in one or two fields, such as public health and roadbuilding, which should proceed to Iran, accompanied by suitable publicity, at the earliest possible moment. A decision should be reached in the Department at once on the field of activity desired.

1. Lot 53 D 250 is a master file of records of meetings, documents, summaries, and agenda of the Under Secretary’s meetings for the years 1949–1952, as maintained by the Executive Secretariat of the Department of State.
2. This paper and a covering memorandum on the subject, “The Iranian Crisis,” April 19, by Mr. McGhee to the Secretary of State, not printed, constituted document UM D–97, April 21, which was considered at the Under Secretary’s meeting, April 26; see infra and the memorandum, April 25 [26], by Mr. McGhee to the Secretary of State, p. 521.
3. Likely to be lower, since expenditures during the last few months of year 1949–50 showed a marked decline. [Footnote in the source text.]
5. In 1949–50, about $165,000,000. [Footnote in the source text.]
6. Based on 1/6 of total requirements as estimated by OCI. [Footnote in the source text.]
3. Reference presumably is to the four numbered reforms listed above, beginning with “1) More effective import and foreign exchange controls …”