“The financial markets are close to panic.”
—Treasury Secretary William Simon, 1974
“I will have to meet and talk with the Shah.”
—President Richard Nixon, 1974
Saudi Arabia’s oil alliance with the United States was sealed in the first week of June 1974 when Prince Fahd Ibn Abdul Aziz al-Saud, the most influential of King Faisal’s brothers, led a contingent of officials to Washington to sign a series of economic and military accords. The official events culminated in a lavish banquet at which more than 1,400 guests wandered through the Saudi embassy grounds, mingling and straining to catch a glimpse of newlyweds Nancy Maginnes, a former aide to Nelson Rockefeller, and her husband, Secretary of State Henry Kissinger, the “queen bee at the center of the hive.” According to one observer, the tables groaned beneath trays piled high with pastries, cakes, and creme-filled confections. “If you have money you can buy anything, probably. These strawberries—fertilized with oil, I imagine. High carbon.”
Two joint commissions were established to handle economic and military relations arising from the new arrangement. The Economic Cooperation Commission was chaired by Bill Simon, sworn in almost a month earlier as the nation’s sixty-third secretary of the treasury. The Security Cooperation Commission was chaired by Robert Ellsworth, director of International Security Affairs at the Pentagon and a former U.S. ambassador to NATO. Together Simon and Ellsworth used their formidable clout at Treasury and Defense to strengthen and deepen ties to Saudi Arabia, a country as big in size as the United States east of the Mississippi, but with only 5.7 million people living atop 132 billion barrels of crude oil reserves. Prince Fahd emphasized that improved relations were contingent on the United States making progress toward the establishment of a Palestinian state. American officials felt they had little choice in the matter. “America runs on oil, and you don’t talk about oil very long before you mean Saudi Arabia,” remarked The Washington Post. The Shah was much less enthusiastic about the idea of institutionalizing economic and military relations with Washington. Back channels to the White House, his preferred way of doing business, ensured privacy and a high level of manipulation. The joint commission would create a bureaucracy run by outsiders and require input from his ministers and the U.S. secretaries of treasury and defense. He smelled trouble. The Shah decided to keep Washington happy by signing the pact. But he made sure it became little more than a talk shop. Distrustful as ever, the Shah suspected the joint commission was an excuse for the Americans to gain influence over Iran’s oil-based economy.
The Shah’s worst fears would have been realized had he been witness to the raucous scenes played out at Bill and Carol Simon’s sprawling seven-acre estate in McLean, Virginia. On Friday afternoon, June 7, the portly Prince Fahd “had been first in the swimming pool,” followed by a tumble of male and female dignitaries, the women frolicking in specially made Arab dresses. Lunch was served to His Highness on the terrace and everyone ate from full plates. This was diplomacy, Treasury-style. Bill Simon telephoned Henry Kissinger at the State Department to say how sorry he was the secretary of state couldn’t be there with them. The Saudis were having an “absolutely super” time, chortled Simon, “and they are going back with great enthusiasm.” Simon’s boyish enthusiasm for the art of the deal came through in comments that left Kissinger cold: “So everything is just perfect. They got so excited this morning at one point in the meeting that they are sending their chief petroleum economist over here this next week and he is going to stay as long as possible.”
Simon’s appointment to head up Treasury had been a typically messy affair. Nixon had already been turned down by David Rockefeller, Nelson’s youngest brother, who ran Chase Manhattan Bank. According to Arthur Burns, whom White House chief of staff Alexander Haig confided in, Nixon believed Simon had “grave shortcomings—a publicity hound, not reflective enough,” but that the job had already been “virtually promised to him.” The president intended to keep Simon confined to Treasury, deny him a White House office, and strip him of any real responsibility. “What a mess!” Burns lamented. “Simon is clever but he shoots from the hip and may be (I don’t really know) a political opportunist.”
Kissinger was struggling to match Simon’s enthusiasm for the Saudis. Things were moving too quickly on the oil pricing front for his liking. He still viewed the geopolitical relationship with the Shah as the essential building block of America’s strategic architecture in the Middle East and West Asia. While he had developed something of a grudging respect for King Faisal, Kissinger loathed Zaki Yamani, Faisal’s charming oil minister and a man who also enjoyed a high media profile. Kissinger shared the view of Iranian officials that the Saudis were cunning parvenus bent on increasing U.S. dependency on Saudi oil reserves while displacing the Shah as America’s senior ally in the Persian Gulf. “Dependent on the West for military and diplomatic support yet fearful of the radical Arab regimes’ capacity to threatened Saudi domestic stability, the Saudi royal family maneuvered with consummate prudence,” Kissinger later wrote. “Carefully modulating conservative foreign and domestic policies with occasional radical rhetoric, it professed sympathy for America’s concern with the price of oil. Yet whenever American importuning on the subject turned practical, we were shunted off, in the politest way possible, to some other address, usually Tehran.” Kissinger dismissed Yamani as a showboat and a lightweight, telling him to his face that “one minister of his training and capacities would greatly buttress the existing Saudi institutions, but ten thousand like him would probably destroy them.” When Yamani came back to Washington in late June, Kissinger stood him up, prompting Bill Simon to tell him that the minister “was, I think, a little hurt, as Arabs get.” Kissinger shrugged off the incident.
Henry Kissinger was faced with the unhappy irony that one of the biggest foreign policy challenges Americans faced on his watch had important economic and financial components that were outside his realms of expertise. Developing a coordinated response to the oil shock would require help from the Treasury and its freewheeling cadre of ex–Wall Street executives, men like Bill Simon and Frank Zarb, the new energy czar and head of the renamed Federal Energy Administration, whose personal energy, ambition, and confidence frequently left Kissinger perplexed, frustrated—and enraged. Instead of engaging them, Kissinger resented their contributions and blocked their initiatives at every turn, usually behind their backs. What followed was a knock-down, drag-out fight that split the Nixon and, later, Ford administrations at the highest levels with Kissinger on one side defending the Shah, and Simon on the other arguing that the Shah was the real obstacle to resolving the energy crisis.
“[Bill Simon] and Henry had a complicated relationship,” recalled Brent Scowcroft, Kissinger’s deputy at the NSC. “And I think at least Bill Simon, and it probably went both ways, saw them as competing for power inside the White House.” Kissinger worried that the treasury secretary, with no prior experience in diplomacy and geopolitics, was being manipulated by the Saudis. According to Scowcroft, Bill Simon was “mesmerized” by Yamani and had lost all sense of perspective. “And whatever Yamani was, and he was very skillful and clever, he was not a policy maker,” said Scowcroft. “The two of them were always at loggerheads,” concurred Frank Zarb of the Simon-Kissinger feud. “I think it was more of a competition between who interfaced with [OPEC] governments on the [oil] issue—between Treasury in general and State in general. And this may have fed the Simon-Kissinger debates.” Nor was there any doubt that the men from Wall Street brought their own distinctive style of diplomacy to Washington and in the process caused Kissinger much heartburn. It was a clash of styles and temperament as much as one of policy. There was an uproar over a remark Zarb made in response to a question posed during a meeting of business leaders. When asked what he thought was the best way to deal with OPEC, Zarb answered with what he thought was a joke: “With a two-by-four!” Unfortunately for him a newspaper reporter was in the room to record the comment.
At the conclusion of the Friday afternoon pool party Yamani accepted an invitation from Simon to move into his house for the weekend. This may have been the occasion for Yamani to mention a curious incident that had occurred six months earlier during the Tehran OPEC meeting. In Yamani’s telling of the story the Shah and the oil ministers were seated around a table when he asked them what they thought of his idea of charging $12 for a barrel of oil. Yamani worried that an increase to that amount would hurt the economies of Saudi Arabia’s trading partners. He said he couldn’t offer an opinion on the matter without first phoning King Faisal for instructions. Three times the minister dialed the number to the palace and three times the call would not go through. “It was at a very critical moment,” remembered Yamani, who suspected that the phone lines had been sabotaged. Faced with the choice of opposing the Shah and splitting OPEC, or accepting the Shah’s proposal and then trying “to bring prices down eventually,” Yamani opted for the latter. But he returned home to find King Faisal deeply unhappy with his decision to follow the Shah’s lead.
Yamani and Simon decided to play Kissinger and the Shah at their own game. They opened their own separate lines of communication. “We used to correspond quite regularly as far as confidential messages were concerned,” Simon reminisced. “We used what we call ‘back channel’ messages. They didn’t go through the State Department. It was more private that way.”
In the summer of 1974, with the Watergate investigation in high gear, Richard Nixon announced a grand tour of Middle East capitals in what turned out to be his final attempt at self-preservation. The Egyptians and the Israelis, the Syrians and the Saudis, were happy to receive the president. Only the Shah said no. On at least one occasion he had considered making a public show of support for the beleaguered president. His ambassador in Washington wisely talked him out of it. By the spring of 1974 Nixon had become a liability to the Shah, their association an embarrassment. The time had come to cut Richard Nixon loose. “By no means,” the Shah told Alam when he was asked whether or not he wanted Nixon’s itinerary to include a stopover in Tehran. “His present trip has nothing to do with us, though of course I’ll be happy to receive him if he particularly wishes it. All in all the Americans have been behaving with admirable tact towards us and there really is little for us to discuss.” Alam’s personal opinion was that the Shah felt the need to distance himself from his ally: “HIM’s reluctance to issue an invitation stems from Nixon’s deteriorating position at home.”
The Shah’s singular act of disloyalty backfired when Nixon decided instead to spend three full days with King Faisal. Alam assumed Nixon was trying to divert attention from Watergate and that he was intent on rolling back oil prices. The Shah was first perplexed, then anxious at news of Nixon’s stop in the Saudi capital. Nixon’s political collapse shook the Iranian leader’s confidence in his American ally. What would happen to the secret agreements worked out between them concerning oil prices and arms sales, the Kurds of Iraq, contingency planning in the Gulf, and ferrying military equipment around West Asia? The feverish whiff of conspiracy permeated the corridors of Niavaran Palace. Mohammad Reza Shah thought he knew who and what was behind Richard Nixon’s losing fight to stay in office. “There’s more than meets the eye to his present predicament,” he lectured Alam, who asked whether his master was referring to sabotage by “the Jewish lobby.” “Not the Jews,” replied the Shah. “No, the whole thing is a conspiracy put together by the CIA, big business and a handful of influential men whose identities remain a closely guarded secret. It was they that arranged Kennedy’s assassination. Now they have a score to settle with Nixon, though I don’t know why.” After a moment’s pause he continued: “Maybe I’m just imagining things. But I sincerely hope I’m right about the conspirators. If all this is the result of mere chance it doesn’t bode well for the future of the free world.”
Nixon’s presidency crumbled as the global economic crisis triggered by high oil prices entered a dangerous new phase, with the aftershocks now threatening to overwhelm financial systems and the banks. Officials at Treasury were growing more worried by the day. At 10:00 A.M. on July 9, Treasury Secretary Simon sat down with the president in the Oval Office to discuss his own forthcoming visit to Middle Eastern and European capitals. Nixon seemed overwhelmed by the scale and impact of the financial dislocations set in motion by the oil shock. His core constituents in small-town Middle America were hurting. “He is getting a lot of mail about little guys being hurt,” Alexander Haig confided to Arthur Burns. Two weeks before Simon’s meeting Burns had been privy to a bizarre scene in which Nixon “began by expressing his skepticism about economics and economists. He wanted, so he said, to explore ways of dealing with inflation; but he felt, he added, that old ways do not seem to work, and that something radical—like dictatorship—might be the answer. This, of course, he added is also no answer.” It said something about Nixon’s state of mind that he looked to Simon for reassurance. Simon told him that Treasury estimated that Arab oil revenues for the year would total $60 billion, two thirds of which would be spent or reinvested in the Arab world. King Faisal would hold $10 billion or half of the outstanding sum and Simon hoped to persuade the king to invest that money in U.S. government notes “that would pay the same as Treasury bills.” Washington was anxious to recycle OPEC oil money to improve its own balance sheet and stabilize financial systems buckling under the strain of the massive fluctuations taking place in the markets and banking sector.
Nixon told Simon that during his own recent visit to Saudi Arabia he too had discussed the vexing issue of oil prices with the Saudis. Nixon agreed with Simon that the Iranians and not the Saudis were responsible for blocking efforts to reduce oil prices and that the current posted price was set for political reasons and not because of demand and supply. He did not tell Simon that he had personally triggered the crisis four years earlier when he gave the Shah the green light to increase oil prices as he saw fit. “With Faisal, I have raised it privately, and you can, that the oil prices can’t go on,” he said. “This, of course, will have to be done privately. I doubt that you can do very much as long as the Shah holds up prices, but we want to explore whatever might be possible.”
“Yamani recently spent the weekend with me,” said Simon. “I told him that the high prices were strengthening their potential opposition—that the current high prices help others, but not the Saudis.” Simon was referring to the Shah’s military buildup, which was causing great concern to Saudi leaders.
“Sure. It gives us an incentive as well to develop alternatives,” added Nixon. High oil prices would help wean the United States off its dependency on cheap Middle East oil. But for now prices had to be reined in. “Tell them our efforts for self-sufficiency do not mean we do not care about them. The important thing now is to get prices under some control.”
“Is it possible to put pressure on the Shah?”
“You are not going there,” said Nixon.
“No,” said Simon, who had been all but declared persona non grata in Tehran. He wanted the Shah to think he was cutting a separate deal with the Saudis to reduce prices. He saw the trip as a way of exerting psychological pressure on the Iranian leader. “We thought we would let them sweat a bit while we were discussing goodies with the Arabs.”
“He is our best friend,” answered Nixon warily. “Any pressure would probably have to come from me.”
Simon was dubious: “I wonder. He is the ringleader on oil prices, along with Venezuela. Without them, oil prices would be down.” Within OPEC, Iran had formed a tacit alliance with Venezuela to make sure oil prices did not retreat to their original levels. Like the Shah, President Carlos Andrés Pérez of Venezuela had embarked on a multibillion-dollar drive to modernize his country and had already spent oil revenues that were anticipated but had not yet been generated.
Treasury was worried about the stability of financial networks and the banking system. The economies of the Arab states were too small and primitive to absorb or recycle the billions of petrodollars pouring in from industrialized and developing nations. “With all the states with money and nowhere to spend it, the banks and financial markets are in trouble. Oil prices have caused great instability in the international financial markets.”
“How about the stock market?” asked Nixon.
“There is fear borrowing going on.”
“Why?”
“They are afraid of future inconvertibility moves and interest hikes,” said Simon. “The financial markets are close to panic. There are major corporations which are unable to borrow.”
Treasury’s forty-strong delegation stopped off in Nice before flying on to Egypt, where President Sadat was anxious to secure U.S. financial aid. While in the French Riviera Simon agreed to be interviewed by Willard Rappleye Jr., the editor of the trade publication American Banker. Rappleye’s article, published after Simon’s plane touched down in Cairo, kicked off a furor. Simon was quoted as explaining that Tehran was not included in his itinerary because “The Shah is a nut,” and, “maximization of the oil price is in his best interest as he sees it.” The Shah “wants to be a superpower,” explained the treasury secretary. “He is putting all his oil profits into domestic investment, mostly military hardware.” This was harmful to the long-term interests of America’s friends in Saudi Arabia: “It is crazy from their point of view. The Saudis helping keep oil prices high is making Iran, their natural rival, strong.” Headline writers back home had a field day. “Simon to Skirt ‘Nut’ Meeting,” headlined the Chicago Tribune.
En route to his next stop, Riyadh, Simon received a cable from Kissinger: “I am besieged by queries about you calling the Shah ‘a nut.’ ” Simon wired back that his comments had been “taken out of context.” “Just exactly how do you call the ‘King of Kings’ a ‘nut’ out of context?” asked Kissinger. Simon subsequently explained that he “was using the vernacular in the same way anyone would describe himself as a nut about tennis or golf. I was using a slang expression to show that the Shah had very firm ideas about oil.”
Niavaran Palace wasn’t buying it. Regardless of his poor choice of words, Simon’s willingness to stoke Saudi fears about Iran’s military buildup gave the Shah a troubling insight into American tactics to roll back oil prices. In Tehran, a U.S. diplomat drove to the palace to hand-deliver a note from the treasury secretary explaining that his comments had been taken out of context.
Kissinger telephoned Ambassador Ardeshir Zahedi at 4:23 P.M. on July 15 to personally apologize for his colleague’s behavior. With Zahedi, who had already written Nixon a letter of protest, Kissinger was not above resorting to groveling and flattery to smooth over the tensions aroused by Simon’s impertinence. The fact that a transcript of their conversation required redaction shows the level of outrage at the palace: “Mr. Ambassador, I call you about once every three months about our errant Secretary of the Treasury. Will you convey to His Imperial Majesty our affection, regard, mortification and needless to say [redacted]. He denies having said it.”
“Yes,” said Zahedi. “Fortunately, I got it a few hours ago.”
“Well, you convey to His Imperial Majesty that every member of the cabinet, with the exception of the Secretary of the Treasury, and particularly the Secretary of State and the President, hold him in the highest esteem and we will put a stop to this,” he replied. Kissinger announced that he was personally taking over chairmanship of the joint U.S.-Iran bilateral commission. He reiterated that “we consider [His Imperial Majesty] one of the great leaders and we will convince our Secretary of the Treasury that this sort of [redacted] is out of the question. I am not sure he said it. He denies saying it but whatever he did say I apologize for.”
The conversation must have been particularly galling for Kissinger, who relished every opportunity to denigrate Zahedi behind his back, even as he accepted the Iranian’s lavish hospitality. A royal blue Persian rug was a wedding gift from Iran. “I can remember it being rolled out one day so people immediately around the ambassador could view it,” remembered Delphine Blachowicz, Ambassador Zahedi’s secretary. By law U.S. government officials were required to turn over gifts from foreign governments; the blue rug never appeared on the list of items turned over to the State Department by Kissinger. “He’s certain they turned everything in,” was how William Hyland, a Kissinger aide, later sheepishly put it. “Mrs. Kissinger wasn’t wildly happy about [the State Department] ruling requiring the handing in of gifts.”
One man who was not on Zahedi’s gift card list after July was Secretary Simon. Relations between the two men chilled to the point where Washington hostesses knew not to have them in the same house, let alone at the same table. There had been a scene at one of David Brinkley’s famous dinners where insults were hurled in the presence of various society doyens. Thereafter the two men never appeared at the same event, formal or otherwise. It said something about Zahedi’s popularity that his stock continued to rise while Simon, perhaps uniquely for a sitting cabinet officer, found himself dropped from formal events involving Iranian dignitaries.
The treasury secretary’s attack on the Shah had been calculated. Simon was sending a message to the Saudi leadership that he understood their concerns and was ready to do business. He was in Riyadh on July 21 when his friend Yamani announced that an auction would be held in August of one million barrels of government-owned oil set for delivery during the last quarter of 1974 and the first quarter of the next year. This was the breakthrough Simon had been hoping for. Yamani hoped to break the Shah’s lock on pricing and put pressure on the world oil market to drive prices down. It was a strategy that amounted to a countercoup in the oil market. But it didn’t quite work out that way. The governments of Iran and Venezuela informed Faisal that if the Saudi auction went ahead they would slash their own oil production to further tighten the market and squeeze prices even higher. Venezuela, Libya, and Kuwait had already reduced their production to bolster the $11.65 per barrel posted price. They sent emissaries to inform the king that they were prepared to drive prices up still higher. Faisal lost his nerve and retreated; the auction was canceled.
The collapse of the auction was a blow to Yamani personally and it marked a setback for Treasury’s efforts to stabilize global financial institutions. Yamani told U.S. ambassador to Saudi Arabia James Akins, whom he knew to be a staunch supporter of closer U.S.-Saudi ties, that Kissinger was to blame because he “is speaking about lower oil prices but in secret doing everything possible to jack them up.” Akins shared Yamani’s assessment of how things stood: “The Saudis had urged us on numerous occasions to put pressure on the shah to cooperate with Saudi Arabia and reduce the oil prices. Yet we had refused to do this.” Kissinger dismissed the auction as a ruse. “My belief was that the Saudis did not want to get prices down but wanted to place the onus for the price rise on the Shah,” he confided to Jack Anderson five years later.
Bill Simon now had what he considered irrefutable proof that the Shah was blocking sincere efforts to reduce oil prices. Simon’s 10:30 A.M. meeting with Nixon on Tuesday, July 30, to go over the results of his trip was pushed back to three o’clock because the president was still asleep. It had been a dramatic day of developments in the Watergate case. The House Judiciary Committee had drawn up articles of impeachment against the president and would shortly present them to the full House of Representatives for a vote. When Simon arrived at the White House he was told the president was in the Lincoln Sitting Room. Nixon had sequestered himself, listening to tape recordings of his Oval Office conversations. One of the tapes included the infamous June 23, 1972, “smoking gun” conversation in which he and Bob Haldeman had discussed having Richard Helms and the CIA block the FBI investigation into the Watergate break-in. Aware that the tapes implicated him in a criminal cover-up, Nixon nonetheless went ahead with his meeting with the treasury secretary. A transcript of their conversation betrays no sign of the enormous pressure Nixon was under. As usual with foreign policy, Nixon stayed focused and engaged. “It was as if he could pull down a screen and utterly separate his professional duties from his political problems,” Simon later remarked.
The treasury secretary began by telling the president that the situation on oil prices was out of control. “The Arabs are acting like nouveaux riches,” he said. During his trip to the West German capital of Bonn, Chancellor Helmut Schmidt had expressed concern that high oil prices were destabilizing the continent’s political structures. “The oil prices are a problem everywhere. Faisal says he has gone as far as he can without our help. The Shah is threatening to cut production.”
“He is our good friend, but he is playing a hard game on oil,” Nixon conceded.
“Faisal asks our help with the Shah,” said Simon. “There is an internal fight in Saudi Arabia between those who want price cuts and those who wish to keep production up. Faisal really wants our help with the Shah. In discussions with other Ministers I said Saudi Arabia has probably 150 years of production left, whereas Iran has only 15 years. Maybe Iran will build its industry and when the oil runs out, they can take you and get the oil back.” In other words the treasury secretary had told Saudi leaders that the Shah might invade Saudi Arabia to seize its oil fields.
“We have to see what we can do,” said Nixon. “I will have to meet and talk with the Shah.” The president clenched his fountain pen between his teeth, yanked off the cap, and scribbled a note to himself on a scrap of paper. Simon understood this to mean that the president would contact the Shah. Nixon had finally come around.
“The Shah has us,” Simon pressed on. “No one will confront him. The producer nations are locking in the consumers and keeping them away from us. Schmidt said, ‘If the prices don’t move down, I have to move against the companies and deal with the producers myself.’ This issue will require strong action by the United States.”
Nixon perked up: “Like what? This should be developed. We need discussion with you, Ken [Rush], Henry and Brent. Keep it small.”
“It is a terrible problem. I was not thinking so much of energy as of balance of payments. I am worried about production cuts . . . ”
“[Schmidt] is worried about the banks,” Nixon mused.
Perhaps not understanding German sensitivity on the issue, Simon thought the chancellor was “overboard on that.” But the West German leader had been badly shaken by the recent collapse of a West German bank, the first of four German banks to fail in the summer of 1974 and a further worrying sign of the extent to which European financial institutions were being battered by the aftershocks of the spike in oil prices. Bank collapses, rising levels of unemployment and inflation, plunging consumer demand, and a slump in the nation’s export sector revived memories among older Germans of the financial distress that preceded the fall of the Weimar Republic and the rise of Nazi extremism in the early 1930s. Lengthening shadows were falling over Europe. The Portuguese empire had imploded and Lisbon was in the hands of leftist colonels. Britain, France, and Italy were in the grip of deepening recessions. Economists in Brussels predicted inflation of 20 percent in Britain and the number of unemployed to clear the one million hurdle by year’s end. In Italy too, inflation was forecast to breach 20 percent a year. Italians had been panicked by a rash of mysterious terrorist bombings carried out by neofascist groups with loose affiliations to state institutions and the military. Nixon and Kissinger were convinced it was just the beginning of a repeat of the instability of the early 1930s. “In France there’ll be a popular front within five years,” Kissinger grimly told the president. “That will drag Italy the same way or there’ll be a right-wing coup.”
Nixon then shared his Manichaean anxieties with Simon, giving him a quick tour d’horizon of the world scene as he saw it. Simon was an eager listener. Relations with Britain’s new Labour government were surprisingly good and Britain’s [Chancellor Denis] “Healey is a strong good friend.” The Italians were hopeless. “Italy has no government,” Nixon sighed, adding that “the Latins are unstructured without a dictator. Right now the great nations of the West must be united politically—the lack of stability in the world sets everything loose.” Nixon was keeping an eye on Europe’s disintegrating southern tier nations of Greece, Italy, Spain and Portugal. He smelled trouble ahead. Churchill was right, he told Simon. He launched into a discourse on Gallipoli, Verdun, the 1918 Spring offensive against the Germans. The only organized force in Portugal today were the Communists. Spanish dictator Franco was dying and who knew what would succeed him? “If Spain goes, Italy goes. In Yugoslavia—when Tito goes, the Soviets will make their move. Greece and Turkey are so important because they are the rest of the southern tier.”
Simon shared Nixon’s concern with Italy in particular. The Italian economy was leaning at a dangerous tilt: “We will have to aid Italy before too long. I talked to [Federal Reserve Bank chairman] Arthur Burns about a [credit] swap line. He is opposed, but I’ll get it. Even if the new fiscal measures take, they will have problems.”
As he approached the depths of his second Watergate summer Richard Nixon’s world was falling apart. His presidency was collapsing. Impeachment was not a question of “if” but “when.” Henry Kissinger, his own secretary of state, now referred to Nixon behind his back as “the felon.” As network television crews mounted a death watch at the gates of the White House, the president was consumed with paranoia. Everyone was lying to him. Old friends had turned their backs on him. He was drinking every other night now. Despite his daily agonies, Richard Nixon stayed focused on foreign policy and strategy. What happened next suggests that he was having second thoughts about his old friend the Shah. Bill Simon had indeed gotten through to him. To Kissinger’s great consternation, a meeting of White House senior advisers was scheduled for the first week of August to thrash out the whole issue of oil pricing, the Saudi-Iran debate, and why the Shah was refusing to cooperate with the Saudis to seek a reduction in oil prices. Kissinger heard the news in a late afternoon phone call on August 1, from Deputy Secretary of State Robert Ingersoll. “[Treasury] would like to have a meeting with you and Simon next week,” Ingersoll advised him. “We’re checking your schedule to see if it’s possible.”
“I just don’t trust his assessment of the situation,” said Kissinger.
Ingersoll said that Treasury officials wanted to clear up the conflicting versions of stories about the Shah’s role in torpedoing Yamani’s oil auction.
“I don’t see that the Saudis should run a risk to get oil prices down,” protested Kissinger.
“We’ll try to get a meeting on Tuesday with all of them. We’re checking your schedule.”
“Just because there’s a vacancy on my schedule doesn’t mean you can put something on it,” snapped Kissinger. “You better check with me first.”
“Okay.”
The first three days of August 1974 would prove to be a turning point for American-Iranian relations and for the future of the Peacock Throne. By a quirk of fate, at the same time Kissinger and Simon were having their showdown over oil policy the Shah was making a crucial decision on what to do with Iran’s new petrodollar fortune. Should the money be spent? Should it be invested? The previous autumn the Shah had instructed the government’s Plan and Budget Organization to adjust its budget forecast in anticipation of a new windfall in oil profits. Since then Iran’s income from petroleum had climbed from $2.8 billion for the year 1972–73 to $4.6 billion for the year 1973–74, a total revenue increase of 65 percent over a period of twelve months. The full impact of the boom would be felt in 1975 when revenues rocketed to $17.8 billion, a stunning leap of 287 percent in twelve months. The Shah had dreamed of the day when he could buy what he wanted when he wanted it. That day had finally arrived. “We have no real limit on money,” boasted his chief economist. “None.”
The danger was always from inflation. By the summer of 1974 the Iranian government was collecting $1 billion in oil receipts each month. “For at least a dozen years, the Shah has had the plans to rebuild his country,” observed The New York Times. “Now, apparently, he has the money, and the problem of pumping it into the economy without causing disastrous inflation.” The Shah was aware of the potential danger. If handled incorrectly the deluge of petrodollars could blow the economy out from under his feet. The Saudis faced a similar problem. For now they decided to park much of their oil wealth offshore to reduce the risk of inflation and dislocation at home, investing in real estate, foreign industry, and bank deposits that allowed for rapid withdrawal.
Iran’s inflation rate was already in double digits in marked contrast to the previous year. The economy was heating up even without the infusion of most of the new petro-stimulus. Eyewitness accounts and hard statistics from the spring and early summer of 1974 indicate that a form of financial hysteria had taken hold in Iran where oil money was being ingested like so much cheap cocaine. “Inflation is running wild, anywhere from 15 to 22 percent,” reported one observer. “Anyone who can is moonlighting. Tehran now has an extra set of traffic jams each day as workers rush from one job to another. Although duty on imported cars runs between 200 and 500 percent, dealers have a hard time supplying customers with enough Mercedes Benzes, Jaguars and Citroëns. Glittering boutiques and department stores along broad, tree-shaded Pahlavi Avenue are jammed with women anxious to have the latest Charles Jourdan and Yves St. Laurent creations.” There were remarkable scenes of excess. In the city of Mashhad a blond woman drove through town in an open car handing out fistfuls of dollar bills estimated to be in the thousands to passersby she assumed were poor. While women in north Tehran mobbed furriers, the Shah’s own palace guardsmen were unable to feed their families because of a bread shortage.
The Pahlavi cult of personality had reached its zenith. Every front-page of every newspaper published in Iran was required to carry a picture of members of the imperial family accompanied by their latest appearances and achievements. A new portrait of His Imperial Majesty appeared in public buildings and private businesses that showed the Shahanshah “standing on what appears to be the top of the world, waving, with clouds rolling by behind him.” He resembled North Korea’s Great Leader. Another portrait depicted the Shah and Shahbanou resembling movie stars Jeff Chandler and Sophia Loren. The whole country was high from the fumes of oil profits.
The Shah’s personal management skills were abysmal. Distrustful of everyone around him, the Shah was a micromanager who refused to delegate to subordinates, kept his ministers on a tight leash, and made sure anyone who was too smart or too popular was removed from the center of power. Court Minister Alam recorded the bizarre scene on the same day in 1974 that the Shah’s ally Emperor Haile Selassie of Ethiopia was deposed in a left-wing coup. His Imperial Majesty was preoccupied not so much with the geopolitical consequences of the coup and what it meant for Iran’s security, as by the placement of new furniture ordered for one of his palaces. The Shah managed the armed forces the same way, to the point of approving the appointments and promotions of even the most lowly ranked junior officers. It was just this sort of rigid management style that led Henry Kissinger’s good friend Hushang Ansary, Iran’s minister of finance and economics, and a cunning businessman who piled up his own fortune while serving in the Shah’s cabinet, to tell an interviewer with a straight face that Iran’s economic problems were no big deal because, as he put it, “His Imperial Majesty has an extraordinary ability to make the right judgments.”
One early and prominent American skeptic of the Shah’s handling of the Iranian oil boom was David Rockefeller. The Rockefeller-Pahlavi connection was personal and financial. Mohammad Reza Shah’s social ties to the Rockefellers were primarily through his relationship with Nelson. By contrast, the younger David addressed the Shah as “Your Imperial Majesty” and he in turn was addressed as “Mr. Rockefeller.” “The primary topic in all our meetings was business,” David Rockefeller recalled. The Rockefeller bank, Chase, enjoyed strong relations with Bank Melli, Iran’s largest commercial bank, and Chase was the lead bank for the National Iranian Oil Company, which managed Iran’s oil wealth. After oil prices rose fourfold in 1973 Iranian deposits in Chase “increased dramatically” and “our finance business boomed because we continued to finance a significant portion of Iran’s oil exports. By the mid-1970s as much as $50 to $60 million a day passed through Chase, and Iranian deposits at one point in late 1978 exceeded $1 billion.” It was Chase that the Shah turned to when he needed to raise international financing for Iran’s big industrial projects. Rockefeller thought it ironic that “we were never successful in attracting the Shah himself as a customer; he preferred to keep most of his money in Switzerland.”
In January 1974 David Rockefeller flew to St. Moritz to talk to the Shah about expanding Chase’s business opportunities in Iran. Before the trip the Rockefeller family’s still loyal former retainer Henry Kissinger “had told me that the Shah was an exceptionally able man with a strong grasp of international affairs.” But during his two-hour audience with the Shah, Rockefeller developed doubts. He observed
an arrogance that underlay his pronouncements on many of these issues; they lacked plausibility and betrayed an alarming isolation from political and economic reality. The Shah seemed to think that because he believed something, it was automatically a fact. The term hubris occurred to me as I sat listening to him outline his startling vision of an imperial Iran reclaiming the ancient domain of the Medes and the Persians. He seemed unconcerned about the havoc the high oil prices had already caused in the global economy, let alone what his extravagant proposals would generate.
When he traveled to Tehran a few days later, Rockefeller discussed his concerns with Ambassador Richard Helms. He found that Helms too thought the Shah was overreaching, that the Iranians were “really feeling their oats”: “Oil wealth and their predominant military position in the Gulf, largely the result of assistance from the United States, had transformed Iran’s strategic and economic position.” According to Rockefeller’s notes of their meeting, Helms observed that “their biggest problem is that [the Iranians] have the money, the materials, but not the trained manpower necessary to handle them. What is perhaps even more serious, the ministers are not sophisticated or experienced enough to cope with the added governmental complications which their sudden enormous wealth is bringing them.” In retirement Helms conceded that “the embassy was certainly concerned” with the economic effect of the increase in Iran’s oil income. “I think the Shah himself was aware of the implications of those decisions,” he added.
From August 1 to August 3, the Shah, the Iranian government, and leading bureaucrats and experts retreated to the resort town of Ramsar on the Caspian Sea to approve a spending and investment plan to handle Iran’s new oil wealth. Budget planners had laid out several scenarios in which they tried to predict the consequences of a big spending stimulus on inflation, infrastructure, employment, housing, and agriculture. Ramsar became synonymous with the deluge that followed.
The Shah opened the meeting by making it clear that the only opinion that counted was his. This was no joke. “I not only make the decisions, I do the thinking,” he boasted to one foreign visitor at about this time. Two days later, on the 3rd, he brushed aside warnings of disaster if profits from the oil boom were pumped straight back into the economy. The Shah approved a plan to grow the Iranian economy at the stunning rate of 25.9 percent each year for the next five years. It was an exceptionally high figure even by the standards of an economy already growing at an official annual rate of 11.4 percent. Virtually overnight, government expenditures doubled from $35 billion to $69 billion. Government ministers reacted as though a starter’s gun had gone off and raced to assemble spending projects. “My head is spinning with the whole series of incredible statistics,” Alam wrote in his diary. “Two years ago the target outlay was $24 billion. Today it’s more or less trebled to $68 billion.”
The Shah had laid a trap for himself. He had not taken into account the possibility that the recession in the West might lead to a sharp fall in demand for Iran’s oil or that OPEC members might fall out among themselves and try to undercut each other in the marketplace. The government’s Plan and Budget Organization had already cautioned that oil and gas income “was subject to the vagaries of world supply and demand conditions and therefore highly erratic.” Iran could not, “on the most optimistic assumptions, become the world’s fifth industrial power in this century.” Iran would remain an importer of food. There was an urgent need to invest in transport, ports, power, and the water supply to avoid infrastructure bottlenecks that could throttle economic growth. Iran should concentrate on building nuclear power plants to supplement hydroelectric power and develop heavy industries such as steel, petrochemicals, and machine tools. The Fifth Plan was based on estimates that wrongly assumed the oil market would remain tight, oil prices would keep rising, and demand for oil would stay high. Financial Times journalist Robert Graham concluded that the Shah’s decision to go for broke was the natural result of his string of unbroken victories over the oil companies and the Nixon administration. His habit of overspending on arms and big development projects, and then hiking oil prices later to pay for them, had become a dangerous compulsion. “At the end of the Ramsar meeting, few realized they had just agreed to a ‘hyper-boom,’ ” wrote Graham. “Even as the Shah pushed through this doubling of proposed expenditure, all the evidence pointed to dangerous overheating of the economy.”
The Shah believed that he had to move quickly before Iran’s oil fields went into decline. Two former economic planners in the Iranian government, Dr. Hossein Razavi and Dr. Firouz Vakil, have described their monarch’s infatuation with Big Push economics. Advocates of Big Push were in favor of countries like Iran—economically undeveloped yet rich in commodities like oil and copper—plowing revenues back into their economies in the form of big development projects. Instead of investing their money overseas like the Saudis, the Iranians should build steel mills, petrochemical plants, highways, and textile factories—anything and everything that would create the foundations for a modern, diversified industrial economy. But Iran’s Big Push could work only if its economy was big enough to absorb the financial stimulus. The cash infusion had to be ingested in stages, not swallowed at once. If these conditions were not met the results would be comparable to an overdose. Perhaps the Shah felt the need to move quickly on the economic front because of the uncertainty surrounding his health. He was a fatalist and sensed that time was not on his side.
As a result Iran, one of the world’s oldest societies, was hurled into the future like a pebble flung from a slingshot. The Shah set out on an ill-conceived Persian-style Great Leap Forward that he hoped would bolster the monarchy, inoculate Iran from outside threats and pressures, and build a legacy for the ages.
For the Shah, thinking big meant that nothing was off-limits. The Shah unveiled a $3 billion plan to bulldoze Tehran’s city center and replace it with a grand plaza bigger than Red Square in Moscow. The 2.5 mile border around the proposed Shah and Nation Square would include six hotels, forty thousand parking spaces, 55 million square feet of office space, housing for fifty thousand residents, and the new Pahlavi National Library. Upon completion, Iran’s national library would comprise one of the great scholarly wonders of the world, boasting a staff of five thousand and more than 5 million books, a hotel for visiting scholars, and the most advanced cataloguing system in the world. Iran’s Persian heritage would also receive a boost from a ten-year, multimillion-dollar project to rebuild the seven fluted columns of Xerxes in Persepolis. Oil money would meld Iran’s past to its glorious future. The Shah had already placed orders for two supersonic Concorde airliners with the option to buy a third. He signed a $6 billion trade deal with France that included construction of a forty-mile subway system, the introduction of color television, construction of 200,000 housing units, and an automobile plant that would initially produce 100,000 Renaults. “I will sell you aspirins, I will sell you proteins,” declared the king as Tehran’s bakeries ran out of bread, “I won’t sell you crude oil.”
At 10:00 A.M. on Saturday, August 3, the same day the Shah wrapped up the budget deliberations at Ramsar, senior Nixon administration officials gathered at the State Department for their long-awaited showdown over high oil prices. This meeting marked the first time in four and a half years that Henry Kissinger had been asked to explain, let alone justify, his unconditional support for Iran’s Shah. It was a discussion that he did not want to have. Kissinger still adhered to the view that the conservative monarchies of the Persian Gulf were entitled to raise oil prices to generate the revenues that kept them in power and allowed them to buy the American firepower that defended Western political and economic interests throughout the Middle East. What Kissinger had failed to anticipate was that too high oil prices might also damage the U.S. economy and the economies of its NATO allies, even to the point of compromising the security of the free world.
Yet Kissinger may have anticipated something that his colleagues over at Treasury did not—the potential catastrophe that awaited the Shah if oil prices retreated. Kissinger knew that the monarchies of the Gulf, and Iran in particular, spent more money than they generated in oil profits and that their finances were as a result overextended and therefore dangerously vulnerable to sudden shifts in demand and supply. “Falling prices would quickly bring the revenues of all of the producing countries below their current levels of expenditure,” wrote one scholar who sympathized with Kissinger’s view. “With the government unable to meet expectations conditioned by past experience, conservative regimes would probably not survive, and more radical governments would also be threatened.” Iran was not like Saudi Arabia, a country whose small population and vast foreign exchange reserves meant that it could safely absorb a big reduction in the price of oil and accommodate a substantial decline in its revenues. The Shah never saved and always spent. There was no financial cushion to act as a shock absorber for the Pahlavi monarchy if oil prices suddenly dipped. A sudden adjustment in income could lead to a fiscal crisis followed by social unrest and political instability. The Shah’s “oily legs” would melt away. Kissinger’s actions in defending the Shah and trying to fend off Treasury and the Saudis must be seen in this light. He was gradually beginning to appreciate that high oil prices were choking economic growth and causing instability in the industrialized world, but he was equally attuned to the fact that high oil prices were the key to propping up the Peacock Throne. He faced an excruciating dilemma: how to ease the oil shock for Western economies without breaking the Shah’s regime?
The small group at the table included Kissinger, Treasury Secretary Bill Simon, chairman of the Federal Reserve Board Arthur Burns, Deputy Secretary of State Robert Ingersoll, and Assistant Deputy Secretary of State for Economic and Business Affairs Thomas Enders. Kissinger was by now thoroughly alarmed at what he perceived to be Simon’s reckless meddling in foreign policy. Addressing his colleague on that August morning, he got straight to the point: “You are saying the oil situation is unmanageable.”
“Yes,” Simon declared authoritatively. “It will force a massive realignment—you can assess whether that is good or bad for us. Europe is becoming dependent on the Arabs for both oil and money.”
“You must also know there is a real chance for another Arab-Israeli war,” said Kissinger. “Are the Saudis really prepared to cooperate in getting lower prices, and how far?”
“If production doesn’t get cut, oil prices would drop by 30 percent,” Simon replied. “We would consider production cuts an unfriendly act, and for Iran, we could cut military supplies.”
Kissinger wanted to know who would do the confronting—the U.S., or the U.S. and Europe and Japan? “The second question is what happens after the opening round?” he asked. “I think Iran would be supported by Algeria and many others. If the U.S. is alone this certainly would be the case.” Kissinger described Algerian president Boumediène as “psycho on oil prices” and warned that if the U.S. challenged the pricing structure “Algeria would mount a campaign. They would carry the Syrians with them. In effect, the Saudis would be isolated and I don’t think they could or would stand up to it.” Kissinger reminded the group that their European allies had buckled under pressure from the Arab states and could not be relied on to stand with them in a showdown with the producers. If the United States cut off arms sales to Iran, “The Europeans could supply the Iranians with hardware.” He turned to the question of the Saudis: “The Saudis may be preparing an ultimatum on Israel. They want to be our sole supplier so they can squeeze us when they want.” Kissinger had just voiced his worst fear. He was looking ahead to a day when Saudi Arabia used its oil power as a choke hold over American foreign policy in the Middle East, specifically toward Israel. “My conclusion is that we have to move with enormous care—we can take on the producers at the right moment—to disassociate Israel from the oil problem. But it must be at a time when we can’t be isolated and it can’t be linked to oil. We first need to get the consumers together. Then we can do some confronting—but it will only work if we are willing to use force.”
The problem, as Kissinger knew all too well, was that the United States in the summer of 1974 lacked the ability to confront OPEC with the use of force. Kissinger said he would once again tell the Saudis “that we will not stand for another oil embargo. If all this is correct, we need to get the Europeans together and share this with them. They first will be shocked, but I see no other way to go. I, though, am prepared to talk privately with the Shah.”
“I think we have to work with the Saudis—telling them hard out what we need,” replied Simon.
At this point Burns reminded the group of what was at stake: “We are heading towards disaster in the industrial world. Withholding arms from Iran won’t help. Getting the consumers together would work. I think the Germans would go with us. We have a firm chance with the British. The French would drag their feet but might go along after all the others do. The Japanese, I don’t know. Conservation should be pushed. The tax on gas has gone up everywhere but in this country. How about hanging a tax on exports to the producing countries by all of us—on the exports?”
The Fed chief was anxiously monitoring the buildup of monetary reserves in countries that had even less absorptive capacity than Iran, which at least had a population of 33 million and a burgeoning industrial base. The World Bank estimated that if current levels persisted five countries with a combined population of only 11.5 million—Saudi Arabia, Libya, Kuwait, Qatar, and Abu Dhabi—would accumulate total monetary reserves of $453 billion of the projected $650 billion of all reserves held by OPEC member countries in 1980. The bank warned that “the world banking system cannot possibly handle the recycling job that such a volume of foreign exchange holdings would require.” Oil consumer nations had in the meantime plunged into the red to pay exorbitant fuel bills, taking out loans and seeking financial assistance through the World Bank, the International Monetary Fund, and private lenders like Wall Street banks to finance ballooning deficits. The lending binge left unresolved the question of whether the debtors would ever have the means to pay back their loans, particularly if oil prices continued to rise, placing greater strain on government budgets. Global financial networks and banking systems had never been subjected to such intense pressures over such a prolonged period of time.
If the United States was to avoid “huge foreign debts,” wrote one scholar who studied the impact of petrodollars on financial networks, oil prices would have to be “substantially lowered by OPEC, or [unless] American oil imports are drastically curtailed, or domestic fuel and industrial production is continually expanded, the United States will have to endure the financial onus of an additional, ever-mounting multibillion dollar outlay each successive year. Such a course of policy would appear, politically, as well as economically, ruinous.”
Simon and Burns were trying to get a handle on the financial crisis. Knowing nothing of Nixon’s and Kissinger’s secret dealings with the Shah, they may as well have been performing surgery blindfolded. The American economy was shedding jobs at the fastest rate since the Great Depression. The deficit was climbing. Inflation had roared to life. Consumers were cutting back on spending. The export sector had slumped because of falling demand for American goods overseas. Factories were closing down. A noxious economic phenomenon known as “stagflation”—high levels of unemployment and inflation—had taken root. If relief did not come soon, feared some economists, then a financial catastrophe on a par with the Great Crash of 1929 could not be ruled out.
Inflation was on Richard Nixon’s mind three days later when he presided over a full meeting of the cabinet. His presidency had finally stoved in on itself. The explosive “smoking gun” tape recording had been released to a shocked public. Cabinet officers assembled in the expectation Nixon would announce his resignation. “I would like to discuss the most important issue confronting the nation, and confronting us internationally, too,” he started. Steeling themselves for the next line, those in the room were bewildered by what he then said: “Inflation. Our economic situation could be the major issue in the world today.” He then talked about the economic challenges facing the nation caused by skyrocketing oil prices. It took Vice President Gerald Ford to steer the meeting to the Watergate issue. He told Nixon that he could no longer publicly defend the president’s handling of the scandal and he predicted impeachment by the House. Ford assured Nixon that come what may, “I expect to continue to support the administration’s foreign policy and the fight against inflation.”
Bill Simon, watching the surreal drama unfold, thought the president “seemed to hear nothing that the vice president had said, save the remark about inflation. ‘I think your analysis is exactly correct,’ said Nixon. Then the president turned to me. He started to question me about an upcoming economic summit. I was virtually speechless but answered the best I could.” When the cabinet meeting wrapped up at 12:30 it was Simon whom Nixon asked to address the waiting throng of reporters outside the White House and who now mobbed him “as the rest of the cabinet scooted out a back exit.” By focusing on Simon and ignoring the rest of his cabinet—including his vice president—the mortally wounded president was finally acknowledging Simon’s loyalty and tacitly accepting that their talks about oil, the Shah, and economics had left an impression. It was Richard Nixon’s final gesture of defiance to a political establishment that he believed had its priorities in the wrong order.
Thick, wet heat clung to Washington like a dead vine on the evening of Thursday, August 8. Simon was still at his desk when the call came through from Haig. “It’s all over, Bill. You’d better get Carol down here right away.” The president had decided to resign. Carol was staying at the family’s summer home in East Hampton on Long Island. A second phone call came in from Ken Rush, Nixon’s economic adviser: “Bill, what are you doing?” he asked. “Come on over and have a Scotch.” Simon walked out into the night and headed for the White House, “where Ken and I proceeded to consume a bottle of Dewars. A half-hour before the President’s address, we walked over to the Oval Office.” As Richard Nixon ended his speech of resignation and the television cameras pulled away he “walked past Ken and me, tears streaming down his cheeks, his mouth set in a quivering frown, and when he was a few feet from us he abruptly turned right and headed into the residence.”
Bill Simon was “frozen in my spot, overcome with grief and disbelief.” He remembered King Faisal’s words from just a few weeks earlier: “The American people are too wise to get rid of a great president because of something as insignificant as Watergate.” Simon’s window of opportunity to confront the Shah over oil prices had just slammed shut.
President Nixon’s resignation speech was broadcast around the world and heard live in Tehran at 4:30 A.M. local time on August 9. Cynthia Helms, wrapped in a dressing gown, walked downstairs and carried a shortwave radio into the garden of the American embassy to get better reception. When the Voice of America signal proved too weak she tuned to a Swedish station to hear Richard Nixon become the first American president in history to resign from office. Her husband was so convinced that Nixon would stonewall that he refused to get out of bed. “It was a warm and starry night, and the lovely garden looked like a fairyland, brightened by the security lights,” she remembered. Iranian armed guards were posted under the trees and around the perimeter of the embassy grounds. Nixon’s voice carried over the lawn and back up to the house. The ambassador, suddenly curious, pushed up a bedroom window and called down asking for news. “For us, it was a dramatic and sobering moment,” his wife said of the moment when Nixon quit. “We were filled with a sense of history, and, I must confess, relief.”
The embassy grounds had been purchased in 1928 for the then princely sum of $60,000 from a local family anxious to settle a gambling debt. The property occupied a twenty-five-acre walled compound at the corner of Roosevelt Avenue and Takht-e Jamshid Avenue. Cynthia Helms likened the compound to a cool oasis of shrubbery, trees, and fountains, a refuge from the dust and noise on the streets outside. Visitors were escorted up a driveway shaded with tall pine and sycamore trees that ended in front of two big blue doors and pots of oleander. The ambassador’s residence was a hybrid of contemporary American and Persian architecture. The upstairs living quarters included four large guest rooms and a private apartment with sitting room, bedroom, and bathroom with a large black marble bath. “We were charged a monthly rent for this apartment, but it was a haven of privacy,” Cynthia later wrote. The small family dining room offered “a glorious view of the mountains.”
By the fall of 1974 Embassy Tehran was one of the busiest and biggest American diplomatic posts in Asia and the hub of the fast-growing U.S. presence in Iran. Few embassy employees learned Farsi or developed a firm grasp of Iranian culture and customs. “In inquiring why this was so, I came to the conclusion that most officers and their families who lived once in Iran had no great compulsion to go back,” recalled one former U.S. ambassador. “It is a rather forbidding country, and its culture is not congenial to foreigners.” The majority of the local hires were not Shi’a Muslims but Armenian Christians, Assyrians, and Jews. Shi’a Muslims cited cultural reasons for avoiding foreign employment. This unfortunate but perhaps inevitable tendency to hire outsiders to work for outsiders only reinforced the isolation of American diplomats. The Iranians they did mix with tended to be members of minority groups with gripes against the majority Shi’a.
Embassy Tehran fulfilled a dual but vital function as a regional base of operations for the Central Intelligence Agency. Other embassies in the capital provided a similar function but none matched the scale of the American enterprise. Tehran during the years of the oil boom was to the world of espionage what Vienna had been in the early years of the Cold War, rife with intrigue. CIA staff worked alongside American diplomats and in some cases used diplomatic credentials as a cover for their work. Armin Meyer had been the ambassador when the decision was made to build a “warehouse” on the embassy grounds in the late 1960s. The warehouse was actually a basement that held nothing but electronic gear and served as an important listening post for the agency. “In the meantime we had all kinds of other monitoring devices on the compound,” Meyer recalled. “We had invaluable devices at the Shah’s game preserve” and “extensive facilities out north of Meshed, monitoring every blast that the Soviets ever emitted, every missile they ever shot, their intercommunications between their military units, and so on. It was fabulous, really. The Shah was working with us on that.” These were the facilities monitoring the Soviet Union that were so prized by Helms and Kissinger and whose importance they argued far outweighed concerns about the Shah’s spending on arms, oil prices, and Iran’s record of torture, extrajudicial executions, and human rights abuses.
When Ambassador Helms arrived on post he took a close interest in making sure the embassy compound was secured. He personally inspected the locks on doors, vaulted areas, and emergency exits. Despite everyone’s best efforts, security at Takht-e Jamshid Avenue remained porous and problematic. One incident in particular stood out. It was an evening when Cynthia Helms came downstairs a few minutes early to greet guests about to arrive for a dinner party. “I walked into the room to find my husband talking to a woman I didn’t know.” She leaned in to her husband and asked, “Who is our guest?”
He whispered back, “I thought she must be a friend of yours. She just walked in through the front door.”
Husband and wife realized they were dealing with an intruder. “With growing horror I focused on her large handbag on the couch next to Dick,” said Mrs. Helms. “Where were our guards? I couldn’t see them anywhere.” She maneuvered the woman, who was becoming visibly distraught, into the library while the ambassador tended to the guests. She lifted the intercom telephone to call for help from one of the sixteen Marines who guarded the compound. No one answered. Then she walked across the grounds to the security office to summon assistance. When someone finally did arrive he had to excuse himself to retrieve his sidearm and radio from downstairs.
The intruder turned out not to be a security threat but the troubled wife of an Iranian judge who had been friendly with the previous ambassador’s wife. But the incident left the Helmses unnerved. Their guards had allowed someone onto the grounds who was not on their guest list. A policeman had even escorted the judge’s wife to the front door, which was open for the party. The servants had not thought to challenge her. The Marine usually on duty inside the residence was not at his post. The Marine guard Mrs. Helms called for assistance was not carrying his sidearm. A potential assassin had casually walked into the ambassador’s residence “and sat down beside my husband, probably the most guarded man in Iran besides the Shah.” This incident and others that followed convinced the couple that “too much was expected of the marine guards at the age of eighteen or nineteen in handling the complexities of protecting our embassy and its occupants.”
Factory closures, rampant inflation, long unemployment lines, food shortages, carless days, and populist revolts became signs of the times. Political structures began to shake loose. The Portuguese empire had disintegrated in the spring; over the summer of 1974 it was the turn of the Italian state to drift toward the abyss of financial ruin and collapse. The oil shock at times resembled a series of seemingly disconnected crises that threatened to converge and form one monstrous upheaval. At the end of the month West Germany’s chancellor Schmidt held crisis talks with Italy’s premier Mariano Rumor at Bellagio on Lake Como. The bottom was about to fall out of an Italian economy staggered by high fuel costs, galloping inflation of 18.7 percent and 800,000 unemployed. The German leader granted Italy a $2 billion loan. The credit was to last six months but could be renewed for three additional six-month periods. Italy agreed to pay interest of 8 percent and put up 515 tons of gold or one fifth of the state bank’s bullion as collateral.
The West German rescue package signaled an ominous new turn in Europe’s worsening financial crisis. With weak governments in Britain, France, and Italy, it was left to Helmut Schmidt to take the lead in shoring up the continent’s banks and currencies. Over the next two and a half years the chancellor played the role of Europe’s fireman-in-chief, rushing from one crisis to the next to douse the flames of each new flare-up with his bucket of deutsche marks and easy credit. His efforts were immensely complicated by a historic political realignment transforming Europe’s sclerotic southern tier. Within eighteen months, dictatorships of the right collapsed in Portugal, Spain, and Greece. These convulsions created opportunities for democracy to flower from Lisbon to Athens. Yet the most immediate and obvious beneficiaries of unrest were the local Communist Party chapters that had led the resistance to dictatorial rule. In the summer of 1974 buildings in the Portuguese capital Lisbon flaunted the hammer and sickle, and Alvaro Cunhal, the Communist Party’s secretary-general, held cabinet rank in a unity government. Inflation was running at between 30 and 40 percent, tourism receipts were down 30 percent, and the breakdown of basic public services coincided with a deadly cholera epidemic.
Greece was in crisis too. In Athens, the collapse of the military junta led to the formation of a United Left coalition of opposition parties dominated by Communists. Deeply angered by the brand-new Ford administration’s handling of the conflict over Cyprus, the new Greek government withdrew its troops from NATO and anti-American protests rocked Greek cities. Financial analysts took note of the country’s $2.8 billion trade deficit and the “perennial deficit in Greece’s international payments account.” Greek tourism revenues had been hard hit, first by a war with Turkey and second by the worldwide slump in the tourism industry as Americans and Europeans chose to save money by staying close to home. On September 6, five days after Italy received its bailout, the government of Greece received a loan of $100 million from a conglomerate of banks headed by Chase Manhattan and Goldman Sachs. Athens also made an appeal for a second cash injection of $800 million from West Germany and the Common Market. Foreign Minister George Mavros, touring European capitals that week, made the case for Greek membership in the Common Market. He got a chilly reception. “They want a new patron because they have always had a patron,” a European diplomat coolly observed of Greece’s decision to break with Washington. “They spit on the hand that used to feed them, so now they’re looking for someone else.” Other analysts fretted that Greece would become a financial albatross about the necks of the Common Market’s parsimonious northern members. “Nobody really wants them,” sniffed a Common Market official. “It would be another debtor country on our hands, and if we take them it would be hard to resist countries like Portugal and Spain.”
The red tide was also running high in France and in Italy, where Communist Party leaders Georges Marchais and Enrico Berlinguer, respectively, were seen as attractive and unsullied leaders-in-waiting. Fueling the rise of Euro-Communism was inflation driven by high oil prices. The Great Inflation of 1974 discredited Europe’s postwar political order and brought back memories of the hyperinflation that led to the collapse of Western democracies in the 1930s. Many European and American analysts frankly suspected the durability of the continent’s postwar democratic institutions. Foremost among them was Henry Kissinger. To Kissinger and other pessimists the countries of Southern Europe were like dominoes ready to fall. Advocates of the domino theory feared that Portugal was on the verge of becoming the first Communist state in Western Europe. Western Europe could be splintered between an anti-Communist north and Socialist and Communist-ruled south. NATO would be paralyzed. Détente would collapse. Faced with the grim prospect of a Communist takeover of Southern Europe, Henry Kissinger, the student of great power politics, finally grasped the damage high oil prices were inflicting on the economies and political structures of the Western democracies. Following the overthrow of the Portuguese government by leftist army officers, Italy’s fate weighed heavily on his mind.
In early September Kissinger expressed grave fears about Italy’s future at a meeting with congressional leaders where he defended ongoing covert activity by the CIA in Italian politics. Kissinger was just as forceful in talks with Israel’s prime minister Yitzhak Rabin. “The increasing cost of oil is prompting a significant number of Americans I met during my visit to consider the price of oil as the main reason for the collapse of the democratic regimes in Western Europe, which would make these countries ripe for Communist domination,” Rabin told the Israeli newspaper Maariv after returning from a trip to Washington. “American personalities pointed out to me in many talks the serious danger of Communist domination in Italy, and perhaps in other European countries.”
“You have to look upon him in this case as a historian,” one of Kissinger’s aides explained of his boss’s concern about Europe. “He grew up in Nazi Germany and knows how economic depressions can lead to acceptance of authoritarian regimes, and he fears that this could happen in the West if something is not done to solve the problem.”