After exchanging the usual amenities, the Prime Minister indicated to Mr. McGhee that he was somewhat disquieted over the results of the British elections. He felt that the Conservatives would prove more intransigent than had the Laborites.¹ Mr. McGhee replied that the Conservatives had obtained a working majority and their hands were much more free than had been the Laborites who had been living in the shadow of an election. Dr. Mossadegh said that he had only wished that he had bet with Mr. Nitze concerning the election results. He would have won some money. [Paul Nitze, Director of the Policy Planning Staff, State Department]

The Prime Minister expressed his worry over the deteriorating internal situation in Iran. He felt that he must return soon. In the meantime he would like to obtain an advance from the World Bank to provide him with funds to meet his current expenditures as the piling up of arrears in government salaries presented an ever increasing danger. Mr. McGhee said that he understood the need for speed. His thinking had been that if a price could be agreed upon, something might be initialed the following day. He could not see what advantage there would be to the Prime Minister’s hurrying off. If he could not obtain the advance, what could he do in Iran? The Prime Minister replied that he felt he could control the situation in Iran if he were there personally and that if he could not obtain the advance, he would float an internal loan. He felt, nevertheless, that it would be easier to obtain the advance. He would pay any rate of interest and would pledge the very first revenue from oil to repay this loan if the World Bank would grant it. Mr. McGhee said unfortunately the World Bank did not handle this type of loan but that it was a commercial proposition and perhaps some private bank would handle it; but there was always the problem of the title to the oil until an agreement was reached. Either way, it could not be arranged in ten days. The procedure that the request must go through would take longer. Therefore, he felt that if an agreement could be reached quickly, the advance might be secured from the purchasing organization. Dr. Mossadegh said that he could, if necessary, post the Iranian gold in South Africa as collateral. Mr. McGhee asked what this gold was and Dr. Mossadegh said that it was 50 tons of gold turned over by Great Britain to compensate for British issuance of currency in Iran during the war. The Russians likewise were holding some Iranian gold and the Soviet Ambassador had indicated that he would not turn over this gold until the British turned over the British-held gold to the Iranians. The Prime Minister said that, on second thought, he did not think he could borrow on this since this gold was part of the currency coverage. He wondered if the United States Government could advise some bank to lend him the money. Mr. McGhee said that the Government could not interfere with private banking and that Congress was not in session. He pointed out that there was the $25,000,000 Export-Import loan and the $25,000,000 grant to Iran. Dr. Mossadegh inquired whether he could not obtain the grant to defray his current expenditures. He was told this was not possible as it was only to be used for developmental purposes. Mr. McGhee again emphasized that by far the most desirable way of solving this was to reach a speedy agreement. Dr. Mossadegh said there were four points he would like to make and have them inserted in any agreement that was reached. First of all he felt the agreement should state what court would be competent to handle any questions between the company running the refinery and the Iranian Government. He felt that the competent court should be the Iranian “Cour de Cassation.” [Court of Cassation in France] Mr. McGhee indicated that in a matter involving two nationalities, they might like some neutral body. He inquired whether Dr. Mossadegh would consider the World Court. Dr. Mossadegh said that this was quite impossible. The Iranians had had quite enough of the World Court. It must be an Iranian court or it would be tantamount to the Iranians disowning their own courts. Mr. McGhee said that if the agreement was carefully worked out, he would not see where there would be any difficulty. The Prime Minister said that there could be difficulties under any agreement and the court with jurisdiction should be defined.

He then said that he would also like to have something inserted in the agreement concerning the question of housing at Abadan. He himself had not been to Abadan but he knew of the bad conditions prevailing there. He felt that the company owning and operating the refinery should be under the obligation of undertaking a housing program during the first three years of its operation at Abadan.

He felt that there should be a program for training Iranian technicians which would work in the following manner: During the first five (5) years the company could operate the refinery with foreign technicians only. During the second five-year period, they should be required to have one-third Iranians, and during the third five-year period, they should be required to have two-thirds Iranians. This would insure the training of Iranian technicians. He said that at the end of fifteen (15) years, the refinery—as is the case with all concessions—should revert to the Iranian Government. Mr. McGhee said that this matter would complicate the whole question. The refinery would not be a concession but would merely be a factory operating on Iranian soil. He pointed out to Dr. Mossadegh that he did not feel it would be advisable for the Iranian Government to attempt to run this as a factory, saying that the factories presently being run by the Iranian Government were losing money. The Prime Minister said that this was so. Mr. McGhee said this would greatly jeopardize the possibility of reaching an agreement on the question and the Prime Minister, after some argument, finally indicated he would bow to Mr. McGhee on this matter and would withdraw his insistence on it. But he would like provisions to be made concerning the training of specialists and the requirements of one-third Iranians for the second five years and two-thirds for the third five-year period.

Dr. Mossadegh said that he would also like to have inserted in the agreement a clause which would require the refinery to refine a million tons of oil a year for the Iranian Government as this was the internal consumption of Iran. Mr. McGhee did not feel that there would be any serious difficulties but he hoped that the Prime Minister would [not?] go into too much detail in the agreement. The Prime Minister said that he agreed. He wished to make the agreement simple. He said the Anglo-Iranian Oil Company’s 1933 agreement was so voluminous that no one could understand it. He wished to make this agreement simple so that anyone could understand it.

The Prime Minister indicated that he could not sign any agreement until he had first submitted it to the Parliament and the Parliamentary commissions for approval. This was required by Article 23 of the Iranian constitution. He indicated that he would forward the agreement to the Parliament without publicly endorsing it. Mr. McGhee asked why he could not endorse it, as it would be more effective if he did. He was not only the leader of the nationalist front, but also the leader of the whole movement which had culminated in the nationalization of the oil industry; and if he felt it was a just agreement, the chances of its approval were much greater. The Prime Minister replied that if he endorsed it publicly, the agreement would have a more difficult time in the Parliament than if he said nothing. He will handle the matter according to his judgment of the best way to do it. He indicated that he would work behind the scenes to obtain its approval; and if asked point blank what his opinion was, he would say he thought it was the best deal that could be made. Mr. McGhee pointed out that he would have a difficult time selling this to the British as they would have to make a number of concessions. He asked the Prime Minister how long he thought it would take to obtain the approval of the Majlis. The Prime Minister indicated that to obtain an opinion from the Parliamentary commissions would take about ten days and formal approval by the Parliament would take a good deal longer. Both he and Mr. McGhee were concerned about the length of time that would elapse before the agreement was approved. Mr. McGhee indicated that if the agreement were approved speedily, advances could be obtained from the purchasing company.

The Prime Minister said he would like to handle the matter in the following manner: There would be a bilateral agreement with the U.K. Government acting on behalf of the AIOC concerning compensation and declaring that the claims of both sides were canceled. Mr. McGhee said that there should be something inserted concerning turning over the refinery to the Dutch company which would then pay compensation to the AIOC. If this were not included, it would make it much more difficult for the British to accept. The Prime Minister was reluctant to include this in the agreement with the British but did not object flatly. The Prime Minister said that there would also be a bilateral agreement between the Iranian Government and the Dutch company operating the refinery, and in this there would be given the assurance against nationalization for a certain period as well as the conditions on price, taxes, etc. The Prime Minister indicated that he had withdrawn his idea that the refining company might be exempt from taxes if they paid a higher price for the crude petroleum. Finally the Prime Minister said he would make a unilateral statement concerning the Board of Directors of the NIOC and other purely internal matters.

Mr. McGhee said that the United States wants to help in this question. They will try to meet Dr. Mossadegh’s requirements. They may not be able to meet all of them, but they will nevertheless try to work out something acceptable to him. Mr. McGhee then inquired whether we should talk with Mr. Hassibi or not. [Kazem Hassibi, Oil Adviser] The Prime Minister said he would talk with Mr. Hassibi and would then talk with us. He would also like to go into the question of procedure as to how the matter would be handled. In reply to the question, he indicated he would be willing to talk further in this matter on the following day at 4:00 o’clock.²

Mr. McGhee said that the Prime Minister had two alternatives before him. If he reached the agreement, he would have been successful in achieving his objectives; the British and American Governments would be satisfied that the matter had been handled legally; he would obtain the cooperation of the world petroleum industry which would feel that everything had been done in a satisfactory manner; and he would have provided for Iran a revenue many times larger than anything that had ever been available before. He would have guaranteed his country against foreign interference and insured its independence. The United States would also sign the agreement and this would be an additional guaranty for Dr. Mossadegh that we would see that it was satisfactorily carried out. Dr. Mossadegh said this was indeed so. He desired to have the friendliest relations with the British Government because this was in the interest of Iran. Mr. McGhee then pointed out that if no agreement was reached, Dr. Mossadegh would find himself in a situation where he would have no revenue from the petroleum industry which he would have great difficulty in operating; no one would want to come and buy his petroleum with threats of suits by the AIOC hanging over them; the world petroleum industry would be hostile to him, feeling he had treated them badly; and he would not be able to apply the immense revenue that could be supplied by the oil business to improve the condition of his country. The Prime Minister said he understood that and for this reason he was desirous of solving the whole question as quickly as possible.