703. 1. [The] Shah received me this morning at my request. [Our] Conversation lasted 90 minutes. After [the] usual amenities I asked if he [was] pleased [with the way] way things [are] going. He replied he [is] not altogether happy. [There are a] Growing number [of] complaints coming in re [the] new government. [The] Grievances for [the] most part [are] because of [the] weakness [of] members [of the] Cabinet and of [the] appointment [to] key posts [of] men who in [the] past have proved themselves incapable or dishonest. Even Ulemas (spiritual leaders) who [were] formerly friendly [to] Zahedi [are] now becoming critical. [Fazlollah Zahedi] [The] Latest charges were that incompetent and dishonest people [are] being retained and even introduced into [the] Ministry [of] Justice. Zahedi had also weakened [the] army by trying bring back into active service retired incompetent and corrupt officers. On several occasions he had discussed these matters with Zahedi but Zahedi had apparently paid no attention to his warnings and suggestions.

2. I replied his remarks [were] disheartening. I [am] convinced [that] both he and Zahedi [are] well-intentioned and desired [them to] work together. I [am] concerned lest they [are] not being frank with one another. Zahedi [is the] kind of man with whom [the] Shah should speak openly and not hint. Shah should also encourage Zahedi [to] express his views without reservation since because of his deep respect Zahedi [is] almost sure [to] hesitate [to] disagree with [the] Shah. Since both had common objectives there should be no divergence [of] views if there should be [a] frank exchange.

3. I told [the] Shah rumors [are] circulating in Tehran that he and Zahedi [are] in disagreement re [the] army. On [the] one hand it [is] being said [that] Zahedi [is] taking actions re army without consulting [the] Shah and on other [the] Shah [is] ignoring Zahedi in issuing instructions to [the] army direct to [the] Chief [of] Staff. Tudeh and other enemies of both [the] Shah and Zahedi [are] undoubtedly delighted at stories [of] this kind and [are] taking pains [to] give them wide currency. Shah said there need be no differences or even rumors of differences if Zahedi would realize he had nothing [to] do with [the] army. It [is] difficult for Zahedi to forget that as Prime Minister he [is] now [a] civilian not in [the] capacity [of an] army officer. He [is] quite willing [to] hear anything Zahedi might say to him personally and confidentially re [the] army but [he is] not prepared [to] set precedent by permitting [the] Prime Minister [to] openly give advice re army matters.

4. I pointed out [that the] army [is a] highly political institution. In [the] present delicate situation changes in its high ranking personnel or organization might affect political stability [in the] country. Therefore, [the] Shah should make no such changes without at least informing [the] Prime Minister in advance [of] his intentions. Shah said he [is] willing [to] inform [the] Prime Minister in advance but [he is] not prepared [to] promise [to] refrain from any action re [the] military to which [the] Prime Minister might object. As Commander-in-Chief he could give orders direct to [the] Chief [of] Staff without going to [the] Prime Minister. [The] Prime Minister on [the] other hand should not give orders to [the] Chief [of] Staff except through [the] Minister [of] Defense who would have [the] opportunity [of] consulting [the] Shah before conveying them. I said that in general [the] Shah should channel orders of importance through [the] route [of] Prime Minister and [the] Minister [of] Defense to [the] Chief Staff. Otherwise, both [the] Prime Minister and [the] Minister [of] Defense might be unaware of certain developments for which they should be prepared. Shah repeated he intended [to] give no important instructions to [the] Chief [of] Staff without informing [the] Prime Minister in advance. He did not, however, indicate [any] willingness [to] channel his instructions through [the] Prime Minister.

5. Shah said nothing so far [has been done to] reduce unemployment and take measures for [the] economic development of [the] country. I said such criticism [is] extremely unfair and explained some of financial difficulties of [the] government including those connected with obtaining rials. [The] Government not only inherited bankruptcy but [an] archaic, inflexible fiscal system which shackled its activities. Shah replied he [is] aware [the] criticism [is] unfair but, nevertheless, it bothered him. He thought [the] government [is] partly to blame in that its information apparatus was extremely poor. [The] Government had been ineffective in explaining its difficulties to [the] public.

6. Shah said he understood I had been pressing for early elections. I said, “no.” I had, however, pointed out to [the] Prime Minister [the] difficulties which Iran might face if [there is] no Majlis at least by March 1. I asked if [the] Shah opposed elections. Shah said he thought it dangerous [to] have elections until [the] government had instituted broad impact economic development programs which would show [the] people it intended by acts, not by promises, to help them. I pointed out [the] government did not have funds for instituting such impact programs and probably would not have [them] until [an] oil settlement could be achieved and [the] Majlis could meet ratify it and approve loans.

7. Shah said if US [is] more interested in saving Iran from Communism than in achieving [an] oil settlement he saw no reason why [the] US Congress could not grant additional credits in January so that public works could be undertaken prior to elections. Did [the] US want [an] oil settlement at [the] expense of Iran’s loss of independence? I replied if no oil settlement [were] made, I thought Iran would lose its independence anyway. It seemed to me quite impossible for [the] US Congress to grant more credits to Iran if [an] oil settlement [were] not achieved or at least in sight. American public opinion would oppose such action by Congress. Furthermore, British public would be outraged and would bring pressure on [the] British Government. Shah knew as well as I that if [the] US and UK would work at cross purposes in Iran they would thwart each other and Russians would have [a] clear field. Shah agreed. He said he [is] afraid, however, that free elections without prior impact programs would result in returning many rabble rousers and irresponsibles to Majlis who would paralyze [the] government.

8. I said if through free elections Iran [was] not able [to] return patriotic men able and willing to pass legislation necessary for maintaining Iranian independence and promoting its prosperity it would seem to me that [a] democratic independent Iran [is] not possible in [the] present conditions and [a] decision must be faced as to whether (a) for [a] period there be an undemocratic independent Iran, or (b) permanently an undemocratic Iran behind [the] iron curtain. [Soviet Union]

9. Shah said perhaps it would be safer in [the] circumstances for elections to be “supervised”. I said [the] Shah and [his] government [are a] better judge in this respect than I. I would venture [to] remark, however, that if elections were supervised [the] aim should be to fill [the] Majlis with intelligent broadminded loyal patriotic Iranians possessing leadership qualities rather than second rate and perhaps even dishonest Iranians whose only merit might be [their] willingness to vote yes. Shah said he heartily agreed but before elections could be held on this basis it [was] necessary for Zahedi [to] extirpate incompetent and doubtful people from his Cabinet, from his advisers [and from] several Ministries. [The] Greatest necessity of course would be that [the] army be strengthened immediately regarding morale and equipment.

10. Shah then stressed with great earnestness army needs. [The] Financial situation [of] army personnel, particularly non-commissioned officers and commissioned officers up to rank captain, [is] unbearable. He had been compelled [to] promise them increases in salary and better housing conditions. Unless this [is] done immediately he could not vouch for [the] morale [of the] army. Even without impact programs [the] government could ride through [a] storm if [the] army morale [were] intact. Without good morale in [the] army and without impact programs to satisfy [the] unemployed and poverty-stricken masses [an] election campaign might prove disastrous. With [a] loyal army he would not even hesitate in case [the] supervision [of] elections should fail [to] produce [a] “good Majlis” to dissolve it and exercise dictatorship until impact programs would prepare [the] atmosphere for a second round of elections. He hoped [the] US Government would understand what [a] loyal army would mean to Iran in [the] present difficult situation.

11. I asked what precisely he had in mind. He said he [is] not yet sure [of the] exact amounts but thought it would cost approximately $300,000 monthly to raise salaries and approximately $200,000 monthly to carry out [a] housing program in [the] outlying districts where commissioned and non-commissioned officers [are] living in abject misery. I asked if he desired that funds which we had hoped to lay aside for impact programs be diverted to this purpose. He replied “no”. Rumors would inevitably become current that workers [were] being sacrificed for [the] army. That would be disastrous. This extra half million dollars monthly should not be taken from such meager funds as might be available for impact programs.

12. I asked [the] Shah if it [were] his idea that [the] US Government find immediately another $3.5 million for carrying out [an] “army morale” program up to April 1. He said “yes”. He [was] sorry [to] make such [a] request. He realized US fiscal difficulties. Nevertheless he hoped [the] US would realize [Iran’s] urgent needs and find some way [to] provide these funds. I asked if it might not be possible that [a] housing program be carried out as [a] technical assistance program like [the] present limited program for improving housing conditions [in the] gendarmérie. He said “no”. [The] Housing program for [the] army should be carried out as [a] purely Iranian program under some kind [of] additional Iranian army budget. It would make army personnel vulnerable to propaganda charging that [the] army had been taken over by [the] US and that [the] military forces were in effect US forces if [the] housing program was under US auspices. Army personnel would be informed by Tudeh and other groups hostile to [the] West that [the] army had been sold out; it [is] supposed [to] fight for [the] US not for Iran. I said I would bring his views [to the] attention [of the] US Government which I know would be sympathetic but that I could not see where any additional funds could be found for this purpose. Furthermore, there were technical problems involved, in view [of] Iran’s inflexible fiscal system in exchanging $3.5 million additional dollars into rials. Shah said he [is] confident [that] US and Iranian experts could find [the] means [to] accomplish this if they would exert all their ingenuity. He intimated that if necessary some extraordinary way might be found to effect such [a] conversion.¹

13. I told [the] Shah I thought that at [the] present juncture [the] best Iranian financial brains should be brought to bear on Iran’s fiscal problem. I asked why it was that man like Ebtehaj [were] not being used. [Abolhassan Ebtehaj, who developed Iran’s banking system] He said he had pressed Zahedi to bring Ebtehaj back. He thought [the] latter much more capable and trustworthy than Amini, [the] present Minister [of] Finance. [Ali Amini] Zahedi, however, had thus far apparently not taken any steps to effect [the] return [of] Ebtehaj.

14. I again returned to [the] problem [of the] Majlis. It seemed to me necessary that in [the] near future there be passage of legislation re [an] oil settlement, re possible foreign loans, re reformed fiscal and taxation systems, etc. Shah said perhaps loans [were] not necessary. Several European countries had already expressed willingness [to] advance enormous grants of credit to Iran. German bankers and industrialists [were] even discussing [the] possibility [of] credits to Iran in [the] amount [of] $200 million. Japan [is] also showing interest [in] furnishing credits in return for future oil deliveries or in connection with barter deals.

15. I said I [am] confident any credits which European countries or Japan might offer Iran were based on [the] assumption that [an] oil settlement would be achieved. Shah said nothing had been said to that effect. I replied Iran should not build up false hopes. [It is] Inconceivable that any responsible group [of] foreign businessmen would wish to risk extending credits or making investments to Iran so long as [the] latter [were] in its present abnormal international and internal political and economic situation. [The ] Risk would be too great. Iran’s international credit [is] worthless in absence [of an] oil settlement. It would be [a] great tragedy if Iran should obtain [the] false idea that it could play off one group of businessmen in [the] free world against another at least in absence [of an] oil settlement. He should use all his influence to bring about settlement [of the] oil problem in [the] earliest possible future. If then Iran could receive large credits from other free countries so much the better.

16. Shah asked if I had as yet any ideas as to what might be necessary in order [to] effect settlement [of the] oil problem. I replied negative. I [was] sure he would find UK full [of] good will and anxious to effect [a] settlement on [a] fair basis. Iran could not expect, however, that [the] UK would abandon principles on which international intercourse among free nations must be based in order [to] achieve settlement. Shah asked whether it would be preferable to establish relations with [the] UK prior to [an] oil settlement. In his personal opinion [the] oil settlement should come first. I said I had no views on this matter. I did not know what [the] British attitude was. However I thought diplomatic relations should be resumed and [an] oil settlement effected without delay. Until that [were] done [the] international position and internal political and economic situation of Iran would continue to be delicate and dangerous.