“I will tell the Shah. He is an admirer of mine.”
—Henry Kissinger, 1974
“Pride comes before a fall, although in [Kissinger’s] case it’s more conceit than pride.”
—The Shah, 1974
Gerald Ford’s first months in the White House were tumultuous. Richard Nixon’s resignation was followed in short order by Ford’s controversial decision to pardon him, First Lady Betty Ford’s bout with breast cancer, Turkey’s invasion of Cyprus, and the continuing economic fallout from the oil shock. Within hours of being sworn in to office the new president was advised that he had three months to bring inflation under control “or face possible social unrest” at home amid mounting job losses and soaring inflation. Ford’s first address to a joint session of Congress echoed the urgency of those August days—and his predecessor’s parting words—when he declared, “My first priority is to work with you to bring inflation under control. Inflation is our domestic public enemy No. 1.”
Ford reappointed Henry Kissinger to his dual roles as secretary of state and national security adviser. Nixon had cautioned Ford about Kissinger’s arrogance. “Henry is a genius, but you don’t have to accept everything he recommends,” he told his successor. “He can be invaluable, and he’ll be loyal, but you can’t let him have a totally free hand.” In private, Nixon got straight to the point: “Ford has just got to realize that there are times when Henry has to be kicked in the nuts. Because Henry starts to think he’s president. But at other times you pet Henry and treat him like a child.” Unlike Nixon, Ford tolerated Kissinger’s churlish behavior and petulant threats to quit in the face of criticism. “I would take however long it required, which was sometimes minutes and often a whole hour, to reassure him and tell him how important he was to the country and ask him please to stay,” Ford told Kissinger biographer Walter Isaacson. The new president lacked the confidence and sure touch in foreign policy that he displayed in domestic politics. Whereas Nixon had enjoyed a long-term working relationship with the Shah and relished their exchanges and deal making, in his first months in office Ford lacked the requisite knowledge to ask Kissinger and his other advisers the right questions about geopolitics, strategy, and foreign economic policy. Ford kept Bill Simon on at Treasury because he appreciated his fiscal conservatism. These two reappointments ensured the carryover into his own administration of the disagreement over whether the key to America’s energy security and future oil needs ran through Iran or Saudi Arabia.
President Ford’s first briefing on oil, OPEC, and the Shah came on Saturday morning, August 17. A transcript of their conversation shows Kissinger anxious to deflect blame for the oil shock away from the Shah and onto the Saudis and the rest of the OPEC cartel. He did not explain to the new president that he and Nixon had approved previous oil price increases to pay for the Shah’s military buildup. Nor did Kissinger brief Ford on the spider’s web of secret pacts reached between Nixon and the Shah that were among the new president’s most troublesome inheritances. Kissinger wanted to make sure that Ford, a foreign policy novice, saw things his way. “On the energy situation, we have to find a way to break the cartel,” explained Kissinger.
We can’t do it without cooperation with the other countries. It is intolerable that countries of 40 million can blackmail 800 million people in the industrialized world. Simon wants a confrontation with the Shah. He thinks the Saudis would reduce prices if the Shah would go along. I doubt the Saudis want to get out in front. Also the Saudis belong to the most feckless and gutless of the Arabs. They have maneuvered skillfully. I think they are trying to tell us—they said they would have an auction—it will never come off. They won’t tell us they can live with lower prices but they won’t fight for them. They would be jumped on by the radicals if they got in front. The Shah is a tough, mean guy. But he is our real friend. He is the only one who would stand up to the Soviet Union. We need him for balance against India. We can’t tackle him without breaking him. We can get to him by cutting military supplies, and the French would be delighted to replace them.
Kissinger did not mention that Iran’s air force was by now so dependent on American training and spare parts that it would be grounded without them. French military equipment was no substitute for the U.S. hardware favored by the Shah.
“He didn’t join the embargo,” offered Ford.
“Right,” said Kissinger. “Simon agrees now, though. The strategy of tackling the Shah won’t work. We are now thinking of other ways.” They discussed efforts to improve cooperation with other consumer nations: “We are organizing the consumers. Then we are organizing bilateral commissions to tie their economies as closely to ours as possible. So we have leverage and the Europeans can’t just move in in a crisis. We want to tie up their capital. When the Shah sees us organizing the consumers—he will see, if we don’t do it in a way appearing threatening to him. I should perhaps visit him in October, in connection with the Soviet trip, and talk about bilateral arrangements.”
“Does he want higher prices?”
“Yes,” said Kissinger. “He has limited supplies. He knows the profit is higher on petrochemicals and that the Saudis get more from the companies in everything. We won’t be in a position to confront the producers before the middle of 1975. We have got to get rolling.”
Kissinger had just made five extraordinary assertions. He accepted that the Shah was the key to lowering oil prices. He knew the Shah was planning additional price increases. He dismissed offers of help from the Saudis as not to be taken seriously. He conceded that the United States had surrendered its strategic leverage over its ally in Tehran. Most intriguing was Kissinger’s oblique admission that the Pahlavi regime was brittle. Tackling the Shah over oil prices might “break him.” This last remark of Kissinger’s hinted at deeper concerns about the potential for instability inside Iran. Had U.S. officials already concluded that the Shah’s regime was not as strong as it appeared to be? “Yes, and I think we all thought that,” conceded Brent Scowcroft in an interview conducted thirty-six years later. In 1974 Scowcroft was Kissinger’s deputy at the National Security Council. “That [the Shah] had destroyed some of his greatest enemies—that is, the power of the church and the power of some of the great landowners—but that he hadn’t built a replacement support for his policies, so that in the end he was bereft when the revolution came. So we were very cautious in how much pressure we put on him.”
Scowcroft, who admired the Shah, nonetheless “tended to be ambivalent” about the American-Iranian special relationship because “we had a number of goals with respect to Iran and some of them were conflictive.” Iran was the pillar of America’s Middle East policy, protector of the oil fields and shipping lanes, and guarantor of Israel’s oil supply. Yet Iran was also responsible for propping up the high oil prices that threatened American prosperity and the stability of the Western alliance. Further complicating matters, the Shah made it clear to the White House that high oil prices were the price of political stability in Iran. “I think [the Shah] was a true and sincere ally,” said Scowcroft. “He also had his domestic interests and, as you can see, pressures were growing on him too. And it’s quite possible he thought he had to relieve those pressures economically to [save] his own regime.” What leverage did White House officials think they still had to influence the Shah? As it turned out, not much. “Well, the leverage we had was that in the end the Shah was dependent on us, on U.S. support, and the difficulty was we didn’t know exactly how he viewed that and whether he saw it the same way,” conceded Scowcroft. “That explains part of the ambivalence. Some people like Bill Simon, for example, were very impatient with him and thought he was the cause of the oil price rise . . . . He tended to blame the Shah and we, basically Henry and I, and I think [President] Ford agreed with us, were not prepared to put the kind of pressure on the Shah that Simon wanted.”
The administration was pursuing a self-paralyzing policy. Kissinger’s close aide Winston Lord privately reminded his boss of the fix they now found themselves in: “To some extent, arguments over oil prices can be compartmentalized in our dealings with Iran. Yet unless we press some of the levers we have, thereby incurring political costs on both sides, [the Shah] is unlikely to move on the oil price issue.”
Iran’s ambassador Ardeshir Zahedi was ushered into the Oval Office at 12:35 P.M. on Wednesday, August 21, for an introductory meeting with the new president. Kissinger’s behavior during the meeting was revealing. It was as though he and not Zahedi was the Pahlavi envoy to Washington. Zahedi’s meeting with the president followed by a day Ford’s nomination of the Shah’s friend Nelson Rockefeller, a brother of David, the Shah’s banker, to the vacant post of vice president. Tehran could not have been more satisfied with this turn of events. The Shah interpreted the appointment as a vindication of his prestige and power in Washington and as a decisive blow against Bill Simon and the Saudi lobby. Zahedi said he was “very pleased with the Rockefeller appointment. We have very close contacts with the Rockefellers. David is setting up a branch in Tehran. Our Minister of Finance and Minister of Economics—he wears two hats—is coming here to set up a joint commission. I am glad Secretary Kissinger is heading your side rather than Simon.”
“They don’t care about me—just so long as it is not Simon,” joked Kissinger.
“I have been talking to our Ambassadors in Paris and London, and also His Majesty’s feeling was excellent,” said Zahedi. “[Nelson] knows Iran and [he has a] close relationship with Iran.”
When Ford said he looked forward to meeting the Shah, Zahedi effused that, “The U.S. holds the highest place in his heart,” and subtly referenced the 1953 coup. “It has always been so. The U.S. has helped when we needed it most, without strings. We remember those days . . . . So many forget all that the U.S. has done.”
“The Shah has always been our best friend,” Kissinger effused and cited the Shah’s refusal to allow Soviet overflights during the October Arab-Israeli war.
It was Zahedi who raised the touchy subject of oil: “The oil problem—there is one. I want to do what I can.” But he explained that Ken Jamieson, the chairman of Exxon, had recently been to Tehran and met with the Shah. The Shah was now arguing that the renegotiated terms of Saudi Arabia’s participation deal with Aramco meant that “Saudi Arabia and others get $10” in profit for each barrel of oil that they produce, whereas Iran was only getting $7: “Some countries want to do away with the posted price.” Kissinger added that Iranian complaints about the Saudis were justified: “The basic point is that these prices are complicated. The Shah’s view is he gets 15 percent less on buy-back oil than the Saudis. Iran is tied to the price of oil, but Saudi Arabia can maneuver around and vary the participation.”
“I will work on it and we want to help and we understand the problems,” Zahedi assured the president.
“Please express to the Shah my deep appreciation for this attitude.”
It was Saudi Arabia’s turn next. Umar al-Saqqaf, Saudi Arabia’s minister of state for foreign affairs, stopped by the Oval Office eight days later. After discussing the prospects for peace in the Middle East, Ford steered the conversation toward the oil supply and pricing: “We hope we don’t have an embargo again. We understand the circumstances last time, but we hope there is no repeat. It would be very serious. And then about prices.”
“I have said that oil is not a toy to play with,” Saqqaf austerely replied. He insisted that another embargo was out of the question and was equally forthright on the question of pricing, explaining to Ford that, “On price, we were the last to accept it.” Without naming the Shah, the ambassador reminded them of Yamani’s scuttled auction, but his oblique reference to Iran was unmistakable when he warned: “There is an empire of oil. We must be very careful. The auction was stopped to avoid playing with oil.”
“An auction could have counter-results,” added Kissinger. He did not explain that the Shah had threatened to cut Iranian oil production to drive prices even higher if the auction went ahead: “If there is not a surplus, an auction would drive prices up.”
Ford reminded the ambassador that the health of the American economy was inextricably linked to U.S. leadership in world affairs and the Middle East.
“I know and I see people taking advantage of it,” replied the Saudi. “I know if it hurts you it hurts us. It is not a matter of billions; it is a matter of balances.”
Economic imbalance lay at the heart of the challenges facing President Gerald Ford in the autumn of 1974. The Dow Jones Industrial Average had slumped 35 percent and shed $300 billion in national wealth since reaching its high-water mark of 1,051 points on January 11, 1973. Economists were already raising the specter of a second Great Depression. In the first three years after the 1929 stock market crash share prices collapsed a staggering 86 percent. Analysts noted that during the six-year period from 1968 to 1974 shares had fallen an almost equally impressive 79 percent. “Investors have seemed frightened of an economy that seems out of control,” reported Time magazine in the autumn of 1974. Housing starts fell 38 percent in the same period. Pan American airlines, battered by high fuel costs, appealed to the federal government for a taxpayer-funded bailout of $10 million a month. Cost cutting became a national pastime. Massachusetts General Hospital stopped changing bed linen every day.
The federal government estimated that in only eighteen months the number of Americans living below the poverty line rose by 5.6 percent, the number of children living in poverty increased by 8 percent to 10.2 million, and real income declined 4 percent over a twelve-month period. The American middle class was under real pressure. Here was the true cost of the Shah’s oil shock. It came as no surprise that 46 percent of Americans told Gallup they “feared a depression similar to the classic one of the 1930s.” In a year of constitutional crisis, financial meltdowns, and hard-luck stories, Americans flocked to the big screen to watch their favorite Hollywood stars be incinerated, suffocated, crushed, drowned, and maimed in celluloid disaster epics like The Towering Inferno, Earthquake, and Airport 1975. Gerald Ford’s America wallowed in its impotency.
The picture overseas was, if anything, even worse. High oil prices exacerbated a global food crisis. Famines caused by drought conditions and “the soaring cost of oil and fertilizer” stalked sub-Saharan Africa and India. Unable to pay its fuel bills, India shut off irrigation pumps and “lost enough wheat to feed 50 million people for a year.” Hunger led to an increase in child mortality in Tanzania. In Latin America, inflation roared out of control and at one point topped 207 percent annually in Chile. Falling consumer demand in the West for textiles led to factory closures in Singapore. In Western Europe, where the price of heating oil jumped 60 to 100 percent, thermostats were turned down. French president Válery Giscard d’Estaing switched off the heat altogether and worked beside an open fire. Electrical light displays were banned in Britain in the daytime and in France after 10 P.M. In Greece the floodlights around the Acropolis were turned off and at nightfall darkness enveloped democracy’s birthplace like a mourning shroud. Few omens have been so loaded with significance.
South Vietnam was especially hard hit. Doing business in Saigon during the oil shock was likened by one American entrepreneur to “making love to a corpse,” and President Thieu’s government admitted its finances had been “overwhelmed” by surging fuel costs. Oil prices of $1.50 a gallon threatened to achieve what the Communists had so far failed to do: drive South Vietnam to collapse. There was a sour irony in the fact that oil was also seen, at least by President Thieu and the increasingly desperate U.S. embassy, as a panacea for South Vietnam’s worsening economic fortunes. For years there had been rumors of vast oil deposits in the coastal waters off the Mekong Delta. In the spring of 1974 a consortium of four Western oil companies purchased exploration rights to the area and announced plans to start drilling by the end of the year. American officials crossed their fingers in the hope that oil would magically transform South Vietnam into the Kuwait of Southeast Asia. “Please God, just let them bring in one well,” was the impolitic reaction of one American diplomat to the treasure hunt.
A new globalized economy was emerging, one that carried with it great promise but also enormous risk. “What happens in the economic realm in one part of the globe often induces quick repercussions in other places,” wrote Thomas Mullaney in The New York Times in September 1974. “So it has often been with respect to the major current problems—rampaging inflation, soaring interest rates and the explosive rise in international oil prices . . . . Serious as they are, the world’s economic ills might have been addressed effectively over a period of time without too much difficulty had there not occurred the dramatic change in Middle East oil policy almost one year ago.” The world’s oil bill for 1974 would be $100 billion. The United States alone faced an increase of $16 billion over the previous year.
“The quadrupling of the price of this key resource in such a short time has created widespread distortions and financial problems that are intensifying week by week,” wrote Mullaney. “And the Western world has been almost powerless to deal with a most perilous situation. The public has not fully grasped the potential implications of the sudden change in petroleum economics, though certainly political leaders have sensed it. But coping with these dire new circumstances is another matter.” Oil producers, wrote New York Times financial affairs columnist Leonard Silk, would not be so foolish as to doubt American resolve to bring them to heel. The United States in the aftermath of the oil shock was like “a screaming eagle . . . . But the crucial question is not where some of the oil producers, such as Saudi Arabia, will be frightened into making some modest appeasement gesture, but where there is enough force behind the new United States line to bring down the price of oil significantly—such as by one-third or more.” OPEC members had crossed a line when they decided to prop up the market price by reducing their collective output, rather than allow prices to settle as Western consumption slackened. “It looks as though the battle in what could be a long energy war—the first in history—has now been joined,” wrote Silk. “Its outcome, failing a quick backdown by OPEC, could be years in coming.”
President Ford did not fire the first shot in the great oil war. But he did issue what amounted to a formal declaration of hostilities against oil producers in a landmark address to an international energy conference in Detroit on September 23, 1974. It turned out to be the most important foreign policy speech of his presidency. “The danger is clear,” said the president. “It is severe.” Ford explained that sovereign nations “cannot allow their policies to be dictated, or their fate decided, by artificial rigging and distortion of world commodity markets.” Oil prices should move freely with the laws of the market and not because producers wanted to lock prices in at a particular level. Financial systems and political structures were under enormous strain. “Exorbitant prices can only distort the world economy, run the risk of world-wide depression, and threaten the breakdown of order and safety.” He admitted it was not easy to avoid discussing the issue of oil without resorting to “doomsday language . . . . The whole structure of our society rests upon the expectation of abundant fuel at reasonable prices,” an expectation that “has now been challenged.” The president refused to rule out the use of force to stop the escalation in oil prices. “Throughout history, nations have gone to war over natural advantages such as water, or food or convenient passages on land and sea,” he said, while conceding that “war brings unacceptable risks for all mankind.” Ford’s speech was described by The Wall Street Journal as “harsh and even threatening” with “a thinly veiled—and unspecific—threat of possible retaliation against any nation that seriously disrupts the U.S. economy by using oil as a political weapon.”
Henry Kissinger and Bill Simon delivered equally hard-hitting speeches on the same day to drive home to producers the message that the president and his inner circle were speaking with one voice. “What has gone up by political decision can be reduced by political decision,” Kissinger told the United Nations General Assembly. “Oil prices cannot go up indefinitely. Strains on the fabric and institutions of the world economy threaten to engulf us all in a general depression . . . . The world’s financial institutions are staggering under the most massive and rapid movements of reserves in history. And profound questions have arisen about meeting man’s most fundamental needs for energy and food.” A senior U.S. official told reporters: “Yesterday’s actions were a signal . . . that an important battle will be fought on this issue. Up to now we, and they, thought the problem would go away or that supply and demand would come into play.”
While Kissinger kept a close eye on events in Lisbon and Rome, Bill Simon was anxiously monitoring the health of America’s banks. Treasury’s worst-case scenario was not a Communist takeover of Southern Europe but a banking collapse at home. Another big increase in oil prices might lead to “economic catastrophe” over the winter. Treasury warned of “a drastic business decline with depression-level unemployment—thanks to the traumatic impact on the West of wildly rising oil prices.” Ten months earlier the Bank of England had been forced to step in and bail out two British banks drained by panicked investors rushing to reclaim their deposits. The crisis had left the City of London, The Economist reported at the time, “on the brink of a terrifying collapse of confidence in the banking system.” More recently, the failure of banks in West Germany had startled financial analysts. In September 1974, the same month that Franklin National, the forty-seventh-largest U.S. bank, ran into trouble, representatives from ten Western governments met to agree on the terms under which they would bail out big international banks “in danger of succumbing to financial pressures.” What if these were not isolated events but the first in a coming wave of bank failures? Simon, like Kissinger, worried about falling dominoes, specifically “skyrocketing escalation of energy costs [that] will generate critical bank failures in Western Europe, which will spread to American banks and American businesses bringing a flash-fire business decline with unemployment exceeding 10 percent.”
The Ford administration’s energy offensive provoked outrage in the Middle East. “America Warns the Arabs, Threatens Nuclear War over Petroleum,” blared the headline in the Lebanese newspaper Al Sharq. “Ford Threatens to Seize Arab Oil by Force of Arms,” declared a second paper. But Saudi Arabia’s Sheikh Yamani didn’t see it that way at all. “It is calling for cooperation rather than confrontation, and emphasized the danger of confrontation,” he told reporters in Chicago. “I was amazed to see the media interpret it in a different way. I think the President’s statement is a well-balanced statement because it pinpoints the problem. He was talking about a period of inter-cooperation.”
Iran’s emperor thought he smelled a bluff. Mohammad Reza Shah was in the Australian capital, Canberra, when a reporter at the National Press Club asked him to comment on President Ford’s remarks from Detroit. The Shah’s haughty reply was all too quickly flashed around the world by the wire services. “No one can dictate to us,” he famously declared. “No one can wave a finger because we will wave a finger back.” He again demanded parity between oil prices and a basket of twenty to thirty other commodity items: “If the world prices go down, we will go down with oil prices. But if they go up, why should we pay the bill?” He should have stopped there. He announced that Ford’s speech was unacceptable to the Iranian people: “We will be ready to provide our energy resources against the Westinghouses and General Motors and General Electrics and all the other generals they have.”
When he returned to Tehran the Shah and Court Minister Alam talked about his decision to publicly slap down an American president. It was something he never would have dared do while Nixon was in power. The Shah had respected and feared Nixon. “Ford is an utter booby,” he declared. “He does nothing but repeat whatever cretinous nonsense he’s fed by Simon.” Alam replied that “Kissinger was the real power behind the throne,” a remark that the Shah found agreeable. As Kissinger was the Shah’s great admirer they felt they had nothing to worry about. Still, they should remain on their guard. “Pride comes before a fall,” the Shah contemptuously said of Kissinger, “although in his case it’s more conceit than pride.” Just a few years earlier the Shah had bitterly complained to Ambassador Douglas MacArthur that President Nixon still had not taken him up on his offer to visit Tehran. Now he feigned indifference when he was told that Ardeshir Zahedi had approached the White House to suggest that Gerald Ford stop off in Tehran on his way to a summit meeting of Western leaders in Tokyo. He was much more preoccupied with planning the forthcoming visit of Britain’s Queen Elizabeth the Queen Mother.
The Pahlavi tour of the Far East was a smashing success. A stopover in New Delhi was required. India was now a member of the atomic club and the Shah was eager to patch up relations with Indira Gandhi and enter into trade deals. He wanted to court Australia, a country he identified as a potential partner and emerging power in the Indian and Pacific oceans. The Persian caravan traveled through Singapore and Indonesia, and as far southeast as New Zealand, whose lamb and dairy products were expected to feed the growing ranks of the empire’s burgeoning middle class. In the cities of Australasia the imperial couple were treated like rock stars. There was a concert at the Sydney Opera House, banquets, a day at the races, and in Melbourne a horse-drawn carriage ride through streets lined with cheering crowds. Farah was a particular draw. Her good works had earned her the informal title of Iran’s “Working Empress,” and her renowned beauty and effortlessly stylish wardrobe garnered a great deal of attention.
Behind the glamour of the state visits was a push by the Shah to project Iranian imperial power from Tehran to Wellington. Hemmed in to the north and west, Iran should pivot south and east in search of allies, influence, and markets, as the Shah saw it. He envisioned a new regional order comprised of Iran, Israel, Ethiopia, South Africa, India, Indonesia, Australia, and New Zealand. Buoyed by the crowds and headlines, the Shah correctly sensed a power vacuum in the Far East in the wake of the American drawdown in Southeast Asia. If it was leadership these people wanted, the heir to Cyrus the Great was happy to step in and give it to them. He had already called for a common market binding regional economies. In Canberra he proposed a “military understanding,” a collective security pact that would keep the Indian Ocean free from U.S. and Soviet naval rivalry, enabling it to be jointly patrolled by the Iranian and Australian navies. The Shah spent time courting Prime Minister Gough Whitlam because the Australian had two commodities the Shah wanted: uranium and bauxite.
The Shah owed Iran’s rise to regional power status to Richard Nixon, who provided him with the guns and money to pursue his ambitions. The Iranian also owed his atomic dreams to the Americans, who had helped save his throne. After the 1953 coup the Eisenhower administration provided Iran with a small nuclear reactor under the terms of its Atoms for Peace program. “It was primarily used for university research,” said Dr. Akbar Etemad, the president of the Atomic Energy Organization of Iran from 1974 to 1978 and the man widely regarded as the father of Iran’s nuclear program. “Then, in the early 1970s, the Shah came to the conclusion that Iran should develop its nuclear technology. We needed more power plants to generate electricity: the population was increasing and people were using more electricity than before.” President Nixon had responded to these concerns in 1972 when he secretly agreed to sell the Shah nuclear power plants and fuels. When Iran’s oil income quadrupled a year later, the Shah was finally free to pursue his ambition of acquiring the atom. The next year Iran and the United States entered into formal talks “with the precondition that [Washington] should have complete control over our nuclear fuel cycle,” recalled Dr. Etemad. In 1974 the Shah announced his intention to buy eight nuclear power plants from the United States and five from France.
From the outset, Secretary of Defense James Schlesinger, whom Ford had also kept on, forcefully registered his concerns about Iran’s nuclear program. Before taking over at Defense, and before his even briefer stint as CIA chief, Schlesinger had served as chairman of the Atomic Energy Commission. “I was resisting the efforts of American firms to sell reactors to Third World countries,” he recalled, noting that it “irritated some of my fellow commissioners on the Atomic Energy Commission who thought it was our job to go out and sell.” Schlesinger’s view was simple: “Any sales that we make should be in the American interest and not in order to buttress the balance of payments.” Pentagon analysts suspected that the Shah’s motives were not entirely peaceful. They questioned what would happen to Iran’s nuclear program if he died or was removed from power. The Shah did nothing to ease their fears when in June 1974 he gave a provocative interview to a French journalist. Asked whether Iran would one day possess a nuclear weapon, the Shah boasted, “Certainly, and sooner than is believed.”
“I always suspected that part of the Shah’s plan was to build bombs,” Dr. Etemad later admitted. A flurry of cables from Embassy Tehran sought to assure the White House and the Pentagon that the Shah had been misquoted. Ambassador Helms even peddled the Shah’s disingenuous line that he had been unfairly quoted because his remarks were “off the cuff.” It was a preposterous attempt by Helms to cover up a gaffe that revealed too much about the Shah’s ultimate strategic ambitions.
The Pentagon stiffened its resolve to oppose sharing nuclear technology with Tehran. The Shah wanted to build a nuclear reprocessing plant in Iran. “At that time, reprocessing did not have significant commercial potential,” reported the Bulletin of the Atomic Scientists, “but it did enable scientists to recover plutonium from nuclear fuel once it had been used in a power reactor, and that plutonium could be used to manufacture nuclear weapons.”
“If Iran were to seek a weapons capability, it is noted that the annual plutonium production from the planned . . . Iranian nuclear power program will be equivalent to 600–700 warheads,” warned an internal report prepared for the assistant secretary of defense. “Although Iran is currently stable, that stability is heavily dependent on the Shah’s remaining in power. In a situation of instability, domestic dissidents or foreign terrorists might easily be able to seize any special nuclear materials stored in Iran for use in bombs . . . . An aggressive successor to the Shah might consider nuclear weapons the final item needed to establish Iran’s complete military dominance of the region.”
American intelligence and military officials watched with great interest the Shah’s triumphs overseas. In the minds of some the Shah was becoming too powerful too quickly, while the Persian Gulf was descending into an unchecked arms bazaar. The Defense Department had been quiet for two years on the subject of unrestricted arms sales to Iran. That changed on September 25, 1974, when Schlesinger publicly disassociated himself and his department from arms sales to Iran and Saudi Arabia. “I should make it meticulously clear that the Department of Defense does not have its own policies with regard to the sale of arms,” he told reporters at a press conference. “In general, military assistance rests under the purview of the Secretary of State. We are the administrators of the programs.” Schlesinger was also taking a very hard look at the Shah. “By mid-1974, the shape and scope of the Shah’s arms purchases were arousing concern in the Department of Defense,” concluded a secret history of U.S.-Iran relations prepared six years later for President Jimmy Carter’s National Security Council. “This concern was reflected in an internal memorandum of October 3, 1974, which stated, ‘There are sufficient negative indicators in relations to the Shah’s prospects to prompt the USG [United States Government] toward a somewhat more cautious and guarded relationship with the Shah.’ ”
The Shah’s ambitions caused concern at the CIA. As one perplexed U.S. intelligence official remarked at about this time of the proud fifty-five-year-old King of Kings, whose throne the agency had helped to restore, “He was our baby, but now he has grown up.” The spy agency conducted an analysis of Iran’s economy in October 1974 that in hindsight reads like a distress flare. The CIA had always been skeptical of the Shah’s financial acumen. Intelligence analysts now concluded that the world’s fastest growing economy was having trouble digesting its billions of dollars in oil revenues. Iran’s economy had taken off like a booster rocket but no one knew where it would land or how hard it would fall. “The latest surge in oil revenues has contributed to an acceleration in the rate of growth,” reported the CIA. “The economy grew by 33% in 1973 and is expected to grow another 40% in 1974.” These were astounding figures. “Oil revenues will continue to exceed the economy’s absorptive capacity over the next few years.” So much money was pouring into the domestic economy that the Iranian government couldn’t spend it fast enough: “The Shah’s ambitious development program and arms build-up are creating domestic economic problems.” Inflation, skilled labor shortages, and urban unemployment were occurring.
Inflation was eroding the earnings of Iranians who were poorer and more religious-minded. “The cost of living in Iran—where more than 60 percent of the families have a subsistence level income under $15 a week—is jumping almost daily and is expected to rise soon to 20 percent above what it was last year,” reported The New York Times in October 1974. “Prices for staple foods, textile goods and home appliances have been soaring, in some cases to 100 percent above last year’s levels. A black market has developed to circumvent the Government’s price controls.” The government was trying to keep a lid on inflation with the help of expensive subsidies of basic household items. Despite its best efforts, “inflation still dissipates the income of many Iranians, leaving them little if anything to spare and far below the consumption levels of Western nations whose money is pouring into this country in petroleum.”
The CIA did not take the logical next step, which should have been to study the impact an inflationary economy would have on political stability in Iran. CIA director William Colby might have paid closer attention to Iran had he any inklings about the Shah’s health. Just before his departure for Australia, on September 9, 1974, the Shah had complained to Court Minister Alam about a rash on his face. His spleen was also enlarged again. The Shah had so far not responded to the French doctors’ diagnosis of Waldenström’s disease from last May. The Shah and Shahbanou opened the second Tehran International Exhibition on the evening of September 17. The next morning they were due to depart for New Delhi en route to the Far East. While the queen busied herself with some last-minute packing, the Shah’s French doctors, Flandrin and Bernard, with a third colleague in tow, Professor Paul Milliez, were smuggled into the palace through a back entrance. “Medically, the patient was still in excellent shape, but his spleen had grown larger,” noted Flandrin. The doctors aspirated samples from his bone marrow. Alam described it as “a very painful exercise but necessary if they’re to make a proper laboratory analysis. [His Imperial Majesty] chatted with them while they went about their business, recommending that they take a look round our new heart hospital.” Alam thought this unwise, pointing out that if they were seen in a local hospital it might give rise to rumors about the king’s health. The doctors decided to begin treatment with small doses of chlorambucil, a drug prescribed to combat the Shah’s lymphoma. They disguised the medication by placing the capsules in plastic containers that usually held vitamin pills.
The number of individuals who now knew that the Shah was being treated for blood cancer had likely risen to seven: the Shah; the three French doctors, Flandrin, Bernard, and Milliez; General Ayadi, the Shah’s physician; presumably the high-powered and unnamed Iranian who was close to the Shah and whose home the French doctors stayed at during their visits; and Professor Abbas Safavian, primary physician to Asadollah Alam. If Alam suspected the truth he never let on.
In early 1974, flush with oil revenues, the Shah decided to build a new Iranian-controlled complex of radar installations that would allow him to listen in on all civilian and military communications in the Persian Gulf. It is unclear whether the Shah proposed the concept himself or if it was presented to him by Ambassador Helms. Either way, Helms took it upon himself to personally shepherd the $500 million project—code-named Ibex after the horned alpine goat—through the planning and construction stages. According to one of the few published reports ever to mention the project, Ibex envisioned the construction of eleven ground monitoring posts connected to six airborne units and mobile ground units. In the initial stages fifteen CIA employees were sent to Iran undercover to act as an advisory team to the Iranian government. Four U.S. corporations, among them Rockwell International, entered into the bidding war to win the first-phase $50 million contract to design the project’s specifications. In November 1974 the bidders were cautioned by the CIA not to pay Iranian middlemen to help their chances of winning the contract. At the time it was common practice for well-connected Iranian businessmen to help foreign defense contractors win business at court in return for lucrative sales commissions. It was their job to grease the wheels by greasing palms. Executives at Rockwell ignored the directive, which had been forwarded to the CIA by General Hassan Toufanian, the Shah’s highly trusted chief weapons procurement officer. In January 1975 Rockwell hired Universal Aero Services Co. Ltd. to help state its case to the Shah. UASCO’s mail address was a post office box registered in Bermuda and its agent was Abolfath Mahvi, a well-connected Iranian businessman. In return for Mahvi promising to provide “the necessary marketing services,” Rockwell agreed to pay him a fee “ranging from 5 to 10 percent of sales.” Mahvi stood to make millions of dollars if Rockwell won the contract to build Ibex.
On February 17, 1975, the Shah decided to award the contract to Rockwell. He was acting on the recommendation of the CIA advisory team that had screened the four contenders. The Shah was insistent that Ibex and the Rockwell contract remain top secret. He did not want to alert Iran’s neighbors, particularly the Soviet Union, to the project. Nor did the Shah want the Iranian people to be reminded of his long-standing ties to the CIA. When he visited Andrews Air Force Base in May 1975 he inspected specially outfitted planes carrying radars, airborne warning and control systems that were referred to as AWACS. These aircraft, the airborne component of the Ibex project, had been built to pick up and send signals to the ground-based receiving stations.
Ibex ran into trouble when General Toufanian learned of Rockwell’s decision to hire Mahvi as its middleman. Toufanian, no stranger to intrigue, insisted that the U.S. Defense Department place Mahvi on a blacklist, essentially banning him from future involvement with defense contractors operating in Iran. To quell the uproar, Rockwell notified Mahvi that his services were no longer required. There was just one problem: Rockwell had signed its contract with UASCO for five years. That left Rockwell liable for the grand sum of $4,526,758. A check in this amount was duly sent off to the Bermuda mail drop. Documents later surfaced confirming that payments to the mail drop were then forwarded to a Chase Manhattan bank account in Geneva. A Washington Post investigation later showed that the Ibex money trail led all over Washington, D.C., involving the CIA and various U.S. companies.
Quite apart from financial irregularities, the Ibex contract was remarkable for several other reasons. First, the Department of Defense was shut out of Ibex. The contract was quietly rushed through the State Department’s Office of Munitions, an obscure office that Kissinger used to handle special projects he deemed essential and wanted to keep tabs on. Ibex was very much a Kissinger-Helms project. Second, the Ibex contract allowed for Rockwell to hire away former and current National Security Agency and Air Force Security staff. This unprecedented breach in security protocol sent shock waves through the American intelligence community. One former NSA employee declared himself “amazed” that the Ford administration would allow its own intelligence specialists to put their skills to work for a foreign government. “We can’t say who the Shah’s targets would be,” one unidentified official told New York Times reporter Seymour Hersh. “We have to assume that among the people intercepted would be Americans—those working for the Mil [military advisory] Groups in Iran and elsewhere in the Persian Gulf.” He pointed out that Ibex might one day be used to spy on Israel “and even used by the Iranian secret police, SAVAK, to help locate dissidents inside the country and for other internal security functions.”
The Shah was distressed when The New York Times published a lengthy front-page exposé of the Ibex project on June 1, 1975. The article included enough unnamed sources, anonymous leaks, and inside information to suggest that it could have come only from top officials in either the CIA or at the Defense Department. Ibex was now public knowledge and not only to the thousands of Iranian students studying in the United States. Almost immediately, the official newspaper of the Soviet Communist Party, Pravda, swung into action. Pravda retaliated with its own front-page article reminding the Shah of the 1962 treaty forbidding construction of foreign rocket bases on Iranian soil. Pravda pointed out that in 1960 the Soviet Union had shot down a U-2 spy plane that flew out of an American spy base located in Peshawar, Pakistan, an action that led to the collapse of a summit between President Eisenhower and Nikita Khrushchev and chilled superpower relations through the Kennedy years. Ibex was not technically a foreign or a missile base but the Russians were deeply concerned that “it will be built by Americans and will require the long-term presence of American personnel.” Ibex created a rift between Iran and its northern neighbor and provided extremist groups in Iran with one more charge of puppetry to level against the Shah.
The American public was unaware of the policy disputes and spy intrigues that lay at the heart of American-Iranian relations. Its concern was holding on to jobs and homes as the recession caused by high oil prices worsened. Over the winter of 1974–75, America’s unemployment rate climbed to 7.1 percent and there were more Americans out of work than at any time since 1940.
Two faces among the 6.5 million unemployed were Ron and Jill Stuber, young newlyweds from Brentwood, Long Island. Ron was a heavy-machine technician and Jill a dental assistant. The Stubers had planned to travel to Iran for their honeymoon. But when they read that the Iranian embassy in Washington was accepting job applications from Americans to help the government fill a shortage of skilled labor the Stubers decided to pack up and move to Iran for good. They weren’t alone. By the spring of 1975 Ardeshir Zahedi’s embassy on Massachusetts Avenue was taking more than one hundred applications each week from teachers, engineers, technicians, academics, lawyers, and accountants looking for work. “We are being flooded,” chortled an Iranian consular official.
The Stubers joined the growing exodus of Americans moving to Iran, a country they believed offered them their best chance to live out the American Dream. An internal survey conducted by the Department of Defense in January 1975 revealed that seventeen thousand Americans were already living in Iran, triple the number from just four years earlier and predicted to increase 20 percent a year for at least the rest of the decade. Sixty-eight percent of the incoming arrivals were attached to the military mission. A further 5,200 were doctors, Peace Corps volunteers, teachers, lawyers, accountants, construction workers, contractors, and husbands and wives joining their Iranian spouses. Defense traced the upsurge to Nixon’s 1972 visit and his decision “to provide advanced weapons systems and uniformed technical assistance personnel to Iran.” American trainers and technicians—the blue suiters promised to the Shah—usually arrived in-country some eighteen to thirty months after an arms deal was concluded. Based on current trends, and with almost $6 billion in expenditure for U.S. armaments already signed for 1973 and 1974, a massive influx of American nationals eventually numbering fifty thousand was expected to be residing in Iran during the peak years of 1979–80.
Tehran was also the major hub for Pan Am flights connecting European capitals with major destinations in the Far East. Pan Am’s vast operation extended to training Iranian pilots, and air and ground crews. Its presence exposed Iran to Western tourism on a mass scale for the first time. Then there was the chance to make some fast cash. “Our ambition is to make as much of America out here as we can,” said the wife of a Bell helicopter pilot. “We owe it to our children.”
If the thousands of Americans who descended on Iran in the mid-1970s knew nothing about Iranian history, culture, language, religion, or politics, that was all right too. Once they settled into the American colony in north Tehran these Americans entered a rarefied world of cocooned privilege unlike any they had ever known. For the first time in their lives they had servants, pools, tennis courts, and country club memberships. They worshipped at a Presbyterian church dating back to the nineteenth century. They sent their children to one of three exclusively American elementary and secondary schools, where parents had over the years successfully resisted the introduction of Farsi and Persian culture studies. The children were transported to school in sixty school buses. The American School fielded three football teams, and a cheerleading and drill team. Football games were played under lights on Friday night against the dramatic backdrop of the Elburz Mountains. American housewives shopped at the commissary attached to the embassy grounds, the largest of its kind anywhere in the world, and where the only Iranians admitted were members of the royal family. Everything Americans ate and consumed was airlifted or shipped in from home. They preferred to buy their Coca-Cola from the commissary even though it was sold on the streets outside at half the price.
American universities suffering the effects of the recession joined the money chase and rushed to enter into joint ventures with their Iranian counterparts. Georgetown University signed an $11 million contract with Ferdowsi University in Mashhad. George Washington University trained fifty-four Iranian army officers in computer science. Harvard accepted a $400,000 grant from the Iranian government to begin preliminary planning for a campus on the south shore of the Caspian Sea. New York’s Columbia University accepted $361,000 to conduct a three-month study for a huge new $500 million international medical complex in Tehran. Columbia was also helping Iran plan a new school of social welfare. “There are tons of dollars there—it’s like a gold mine,” exulted one East Coast college administrator.
Washington encouraged the recycling of petrodollars and established joint ventures of its own. Kissinger believed that the best way, perhaps the only way, to retain some form of influence over the Shah and Iran now that the Twitchell firewall had been breached, was to integrate the Iranian and American economies to such an extent that one could not function without the other. Kissinger’s “super economy” would swap petrodollars for weapons. But that was not how the Shah saw it. “We’re spending so much money on U.S. military supplies that no U.S. government, let alone the arms manufacturers, could afford to deny us,” said Alam. Economic ties led to misunderstandings on both sides about the ability of each to influence the policy of its partner.
Many of the government-to-government deals had obvious dual civilian-military purposes that held little immediate benefit to the Iranian people. The Federal Highway Administration sent out teams to survey Iranian highways. The Federal Communications Commission negotiated for a study of frequency allocation. The Federal Aviation Administration sent three hundred personnel to support a $270 million Iranian procurement package to coordinate Iran’s civil aviation authority, navigation aids, and communications. In October 1974, Iran signed a $4.5 million agreement with NASA to build a satellite receiving station to monitor the NASA Earth Resources Technology Satellite. U.S. defense contractors rushed to enter into co-production projects and opened factories in Iran. There was a $1.5 billion contract with Bell Helicopter for two hundred of its 215s. Emerson Electric would build one thousand TOW missile launchers in Iran at a cost of $60 million. Contracts to make these items and many more, including rockets and lightweight fighters, inevitably meant that hundreds more Americans and their families would have to relocate to Iran. Co-production fitted into Kissinger’s grand plan to turn Iran into a giant regional arms depot from which he could insert or extract men and machinery at will to impose regional order.
Iranian defense plants and military facilities were dispersed around the country as a precaution against invasion. That meant American defense contractors and their families were also required to move out of Tehran, often to remote parts of the country deeply imbued in conservative Shi’a Islam. “The major distributional change is occurring in [Isfahan] and Shiraz where two large American civilian defense contractor communities are growing,” reported the Pentagon. “Bell Helicopter and Grumman Aircraft will locate about 4,000 American families there, probably by 1980. Thus, while the appearance of Americans outside Tehran was not unusual in the early 1970s, by the latter part of this decade U.S. citizens will be a significant part of the Iranian ‘frontier areas.’ ” From the Shah’s perspective, this was ideal—American men, women, and children based near the frontier areas were there to act as a trip wire or human shield to deter Soviet aggression and invite an automatic American response in the event of invasion. They were his insurance policy until Iran was strong enough to stand on its own around 1980. But neither the incoming Americans nor their Iranian hosts were ready for the cultural disorientation and confrontations that followed. “Many American families are poorly prepared for life in an alien culture,” reported the United States Information Service even as it noted that Iranian universities were “producing a highly nationalistic and self-assertive younger generation, skeptical of the American cultural model.”
Embassy Tehran’s economics counselor was William Lehfeldt. He liked to take his family on road trips into the Iranian countryside. One time they made a trip outside Kashan, up into the mountains, “where they harvest the rose petals to make attara roses.” The villages up in the hills had been converted from Zoroastrianism to Shi’a Islam by Reza Shah in the 1930s. The Lehfeldts were wandering through one of the rose villages when they were approached by some local children. The children “came up to us and started talking to us and reflected their teachings from the mullahs, which were that ‘you Christian, you no good; me Muslim, me good,’ in their medieval English. A medieval modicum of English.” It was a jarring, if slight, incident on an otherwise peaceful spring day. “But the attitudes that they displayed were symptomatic, I think, of what came later,” he reflected. Even here among children living in the remote hills of the roses above Kashan the Americans were unwelcome.
In the autumn of 1974 Secretary of State Henry Kissinger traveled to capitals in West Asia and the Middle East. Egypt, Syria, and Israel had still not concluded a deal to disengage their forces and enter into formal peace talks. The shattering events of late 1973—the October War, the oil embargo, and the oil shock—remained a constant source of open-ended conflict and grievance. During his talks with the leaders of Saudi Arabia, Pakistan, and Israel, Kissinger was also made aware of growing unease in the region with Iran. Nixon had delegated to the Shah the powers of a gladiator and stabilizing presence. But transcripts of Kissinger’s meetings with foreign leaders confirm that the Shah’s neighbors were concerned with their neighbor’s sudden wealth and vaulting ambitions, and increasingly saw him as a source of mischief and even instability in a tinderbox region.
Saudi Arabia. On October 13 Kissinger was in Riyadh, where the inscrutable King Faisal proved resistant to Kissinger’s flattery and charm. The secretary of state assured the king that President Ford’s Detroit speech had not been directed at the Arab people but at “all oil producers,” an obvious reference to Iran. He asked the king for help on oil prices and phrased his appeal in ways that he hoped would resonate with Faisal’s reflexive anti-Communism. “There is a big problem which, if it continues, will contribute to the spread of Communism everywhere in the world, and not only in the under-developed countries,” Kissinger explained. “In Europe, if Italy goes Communist, France will follow and the political map of the world will change. This will be to the detriment of the Middle East . . . . We can solve our problems in the U.S. without a catastrophe but if Western Europe, India and Japan go Communist, or are taken over by other radicals, there will be no peace for anyone. Our concern is not profit or money but the entire world structure. This would bring Communism into power and the producers would end up with clients who are worthless and whose money had no value.”
Faisal was not about to accept blame for the parlous state of Western Europe or the world economy. “Our policies are consistent with what you have said but other countries including some of your friends such as Iran and also Kuwait and Algeria are not cooperating,” he lectured the secretary. “They can wield great influence. You should intensify your contacts with them and try to get them to understand the situation as you and we do.”
“I will see the Shah in two weeks for this purpose,” he assured Faisal. “Your Majesty is doing all he can and we realize that other leaders must support him if he is to be able to lower the prices.”
Faisal insisted that Kissinger must make the Shah see reason. “While you are trying to convince others, we are trying our best,” he said. “I sent my son to explain about policy to the Shah. I am also working with Algeria. But, I cannot do it alone.” He then administered the final sting: “It takes two hands to clap. The U.S. must also do its best.”
Pakistan. At the end of the month Kissinger was in Islamabad where Prime Minister Zulifikar Ali Bhutto was clinging to power. As Bhutto sadly explained to his American guests, he was also the foreign minister and defense minister these days “since one has to maintain tight control in order to avoid a coup.” The Shah’s recent rapprochement with India’s Indira Gandhi had caught the State Department by surprise. Nixon’s decision to arm the Shah in 1972 had been at least partly influenced by his conviction that Iran could shield Pakistan from its neighbor. Now the Shah’s commitment to Pakistan’s survival seemed less assured. Pakistan’s economy was also reeling from high fuel prices. “Our balance of payments is terrible and we need fertilizer which has become extremely expensive,” explained Bhutto. “The increased oil prices are having a disastrous effect.”
Bhutto’s complaint prompted Kissinger instead to launch into a vicious appraisal of King Faisal and Saudi Arabia. Away from Washington he could speak freely. “Faisal is trying to speed up the end of his own monarchy by bringing in foreign resources and exports and techniques, which will speed up radicalization at home, and at the same time weakening the countries abroad on whom he must depend for support,” said Kissinger. “He is also making Saudi Arabia more attractive for its covetous neighbors. I am saying this to you, a friend of Faisal, just as I am. But when he tells me of the modernization he is encouraging, I think ‘Oh you fool.’ ”
“I agree,” Bhutto exclaimed. “The monarchy cannot last with $29 billion floating around!”
Kissinger let the Shah increase oil prices because he believed oil revenues would cushion the pro-American monarchies of the Persian Gulf from internal revolt and external invasion. But his cynical comment to Bhutto gave every appearance of being a tacit admission that he knew his policy had resulted in blowback and that Saudi Arabia’s oil wealth now might actually incite domestic revolution and provoke foreign aggression—most likely from Iran. Nixon’s two pillars of stability in the Gulf might in fact attack each other. But rather than take responsibility for a failed policy Kissinger instead blamed the victim when he assumed the pose of a finger-wagging bystander who has watched someone he plied with alcohol run a red light. He was anxious to sound out Bhutto on the Shah’s push for regional hegemony and his future prospects: “What are your relations with Iran?”
“Very good,” replied Bhutto. He had recently upset the Shah by referring to the Persian Gulf as the “Arabian Gulf” in deference to King Faisal, whose financial assistance helped keep the prime minister in power: “We have no problem with the name of the Indian Ocean. But if it comes to a crunch we will call it the Persian Gulf. Iran is our neighbor. Saudi Arabia is far away.”
Kissinger praised the Shah as “a man with big conceptions,” then made the following jarring statement: “The Shah must understand that his security will be in jeopardy if the high price of oil keeps up.”
“I wish we had his money to buy some.”
“You have 75 million persons,” Kissinger said, trying to make Bhutto feel better. “You have a skilled people so do not despair. You are a martial people, but there is no evidence of the Persians fighting anyone for the past 1,000 years! Pakistan has great opportunities.” It was typical of Kissinger to make one foreign chief feel better at another’s expense, though his suggestion that the Iranians were the first to back away from a fight raised the question as to why he had approved the Shah’s military buildup in the first place.
What did Kissinger mean when he told Bhutto that the Shah’s security would be jeopardized “if the high price of oil keeps up”? Was he referring to a possible reduction in military cooperation? Perhaps the withdrawal of Nixon’s blank check on oil prices and arms sales? Was the United States planning some sort of covert or military action to overthrow the Shah if he refused to cooperate on oil prices? While it was the case that some officials at the Pentagon and the CIA were raising questions about the Shah’s judgment and loyalty, no evidence has emerged to suggest that replacing him or cutting off military aid was ever considered. The Shah was still seen in Washington as a strong and essential—if increasingly uncooperative and belligerent—ally by most of the political and military establishment. The security threat that Kissinger envisioned to the Shah was not external but internal, most likely in the form of a leftist coup or uprising ignited by economic hardship. Kissinger was not concerned about a threat to the Pahlavis from the Ayatollah Khomeini, who languished in exile in Iraq. He agreed with the Shah that Iran’s Shi’a clergy was finished as a dynamic force in Iranian life. What most worried Kissinger was the threat from the left, the emergence of a second Mohammad Mossadegh who might take Iran out of the Western orbit. Kissinger’s remarks to Bhutto suggest that he feared a repeat of the anti-Shah disturbances of 1953 and 1963, that he now accepted that high oil prices posed as much a threat to the stability of Iran as they did to, say, Italy—to oil producers as well as oil consumers—and that friendly authoritarian dictatorships as well as Western democracies were in equal peril from the ructions of the oil shock.
To Bhutto, Kissinger complained that the oil shock could have been avoided had the Nixon administration accepted the Shah’s offer in 1969 to buy millions of barrels of Iranian oil at a special discount. The deal promoted by Herbert Brownell had been judged illegal under U.S. law because it violated the quota laws that applied to petroleum imports. Kissinger knew that the quotas no longer existed. “If we had made that deal we would not have trouble today,” he told Bhutto. He was ready to deal again.
Iran: Kissinger was in Tehran on November 1 to preside over the first meeting of the U.S.-Iran Joint Commission to coordinate trade and industrial development, military and security, nuclear energy, agriculture, and science and technology. The Iranian side was led by Hushang Ansary, Iran’s minister of economic affairs and finance and Kissinger’s friend. Kissinger’s relief at being back in Tehran, among people who saw the world the way he did, was obvious. He admitted to Ansary that there was an undercurrent of tension in U.S.-Iran relations:
I come here when it isn’t clear from the American press and even some American officials whether I’m here to negotiate a disengagement of our forces [laughter] or an armistice [laughter], or whether we’re dealing with friends. But the press isn’t making foreign policy. If we could control them, we could keep them from writing about me [laughter]. So the people who make foreign policy consider Iran a traditional friend, and our relationship has a significance far beyond our bilateral relationship. Therefore, I am not here to discuss this or that technical issue.
The “technical issue” Kissinger was referring to was the touchy subject of oil prices. He wasn’t about to let Bill Simon or Treasury ruin his chess game in West Asia. To Ansary, Kissinger harked back to the golden days of their relationship when deals could be struck without having to go through the “experts” at Treasury, Justice, or Defense. Referring to the Shah’s 1969 oil deal, the one he had earlier mentioned in his discussion with Bhutto, Kissinger announced he was ready to do business the old way: “I owe it to our Iranian friends to point out that I submitted this proposal to our experts [at the time] who said this was a sly Iranian trick to capture a bigger share of the limited oil market and squeeze the Arabs out. This sounds ridiculous today. Our Iranian friends were 100% right, and we were 100% wrong. So we should look ahead into the real future, and not just project a little bit forward like bureaucrats.”
“Kissinger flew in this afternoon accompanied by his wife,” observed Court Minister Alam. “He was received by HIM between six and eight thirty. At dinner he was placed to the right of HMQ with me on her left. He was full of praise for HIM, saying how much he wished President Ford could emulate his example . . . . Afterwards he and HIM resumed their private discussions, breaking off at midnight.” Nancy Kissinger and Empress Farah watched a film while their husbands, joined by Ambassador Helms, held their discussions.
Kissinger’s behavior at the imperial table—belittling his own president in a foreign capital and in front of foreign heads of state—was not out of character. More unfortunate was the false impression his comments may have left with the Shah about Ford’s qualities as a man and as a leader. Kissinger’s remarks had the unfortunate effect of undercutting Ford’s authority with an autocrat who only responded to and appreciated power. It also left the Shah with the false—and erroneous—impression that Ford was not a man of his word. As Alam’s diary makes clear, it was about this time that the Shah, following Kissinger’s lead, began denigrating Gerald Ford as a “hopeless old donkey” and ridiculing him as “that idiot Ford.” He even repeated Lyndon Johnson’s sour one-liner “that Ford was so thick he couldn’t chew gum and walk straight at one and the same time.”
In their talks, the Shah explained to the Americans that a fall in demand for Persian crudes meant that Iran had millions of barrels of unsold oil on its hands. As he had tried to do unsuccessfully in 1969, the Shah offered to secretly sell surplus petroleum to the United States at a discounted price. If Iran could be assured of an intact, albeit slightly diminished stream of oil income, the Shah could keep buying military equipment and pay for existing orders. Kissinger liked the idea. He wanted to break OPEC without harming Iran’s economy. The Shah and Kissinger also saw the deal as a way to increase their strategic leverage over each other. “And one of the notions we had was that we could both break the cartel and help the Shah by buying excess oil from him at a lower price than OPEC charged but still help him with his economic policy,” recalled Brent Scowcroft. The Ford administration had also decided to build an emergency strategic petroleum reserve as insurance against a second oil embargo. Officials hoped the Shah’s stockpile of surplus oil could be used to build the reserve. Kissinger believed he could relieve the pressure on the American and Iranian economies and at the same time block the effort by Simon and Yamani to strengthen Saudi Arabia’s toehold in the American domestic fuel market.
The Shah and Kissinger were in agreement. The deal they struck was that the Shah would support a price freeze at the next OPEC ministers meeting in Bali in May 1975. Kissinger had until the end of the summer to work out the details of their plan and get the president and the administration on board. The Shah made it clear that if a deal was not forthcoming by the end of next August, he would have no choice but to increase prices still further to cover his budget deficit. Iran’s economy could not wait.
Before Kissinger left Tehran he held a press conference to announce that “the United States is now attempting to halt new increases in oil prices, rather than trying to negotiate lower prices.” Kissinger prized stability above all else. Knowing that the Shah was immune to persuasion and to pressure, the best the secretary could do was to try to extract a commitment from the Iranian not to increase oil prices until the world economy had stabilized. Although no notes remain of what was said in their meeting—most likely none was made—Kissinger undoubtedly made it clear to the Shah that a deal on oil prices was in their mutual best interests. The Shah would have been equally insistent that he could not allow prices to retreat. Kissinger accepted that if the Shah would not or could not roll back oil prices he might at least agree to a price freeze on condition that the United States accept a level below which prices would not fall. This became known as the “floor price” and it dominated policy discussions in the White House over the winter of 1974–75. A floor price for oil would protect Iran’s economy from a sudden loss in revenue if consumer demand in the West continued to decline. Not everyone in the Ford administration was happy with this new policy. They regarded it as one more triumph of convenience over morality and yet another victory for the Shah. The pricing structure that kept oil prices artificially propped up—that everyone knew resisted market forces and the laws of consumer demand and supply—was now to all intents and purposes a fait accompli. The Shah’s own self-satisfactory comments at the end of Kissinger’s trip were cabled to U.S. embassies and back to Washington where one analyst scrawled “B-S,” “F. Bull!” in double underline and “Not any more!” in the margins.
Israel: Kissinger was in the prime minister’s residence on November 7, 1974, for consultations with Prime Minister Yitzhak Rabin. Rabin and his ministers were anxious to hear more about the details of Kissinger’s meeting with the Shah. “How do we stand on oil?” asked Defense Minister Shimon Peres. Israel’s rate of inflation was running well over 30 percent. Kissinger explained that his strategy was to stabilize prices, then seek reductions while increasing the insecurity of the producers so they would not threaten an embargo.
Kissinger was convinced that the administration’s top strategic priority must be to prevent a second oil embargo during the Middle East peace talks. The Shah, supplier of half of Israel’s oil, must be kept on the United States’ side. Kissinger revealed details of his just concluded talks with the Shah in Tehran. He told Rabin and Peres that the Shah assured him that “he would refuel us in an Arab-Israeli war if we could keep it quiet.” The Shah said “he would like us to improve our airlift capability in the Middle East, not only for Israel but for him. Because he doesn’t think we have reliable bases anywhere. On which he is right. I will look into this.” Then there was the Shah’s cooperation with the Kurdish insurgency in Iraq. During his meeting with the prime minister, Kissinger pulled out an Israeli list of weapons they wanted the Shah to send to the Kurds. Rabin was embarrassed when Kissinger explained that when he pulled out a similar list with $24 million in military hardware, the Shah had pulled out the same Israeli list estimated at $108 million. Were the Israelis trying to pull a fast one over on the Shah?
“No, it was not given,” Rabin said. “Why would we do that?”
“It cost us ten minutes in that conversation comparing the lists,” Kissinger replied. “There was one item on his list that wasn’t on mine, I agree. Let’s not worry about it.”
Rabin told Kissinger that the Kurdish leadership was disappointed in the Ford administration. It had expected more military aid for its fight against Saddam Hussein. Kissinger didn’t disagree. “Everyone around the world is disappointed in the U.S. attitude,” he admitted. He referred to Watergate and the resignations of Nixon and Agnew and the perception it had created of an America weakened by its own internal divisions and unable to project its will in international affairs.
I am not talking about Israel. With all these pressure groups. The general impression of knocking off a President, then a Vice President, and almost knocking off the Vice President–designate. I am not blaming this on Israel or the Jews. This is becoming a security problem for the world . . . . The biggest security problem in the world is the domestic weakness of the United States. I can keep it going in the Middle East for a few more months because of the romantic cult of personality and the belief I can somehow do it.
From Kissinger’s perspective a deal with Iran on oil prices was inseparable from the Shah’s support for Israel and the Kurds, contingency planning in the Gulf, and preventing Iran from joining a future oil embargo against the West. A freeze on oil prices was the best deal he could get if he was to keep his other balls in the air. But the Shah continued to spring surprises on him. In early December the Lebanese weekly magazine Hawadess published an interview with the Shah in which he hinted “at a possible shift of Iranian policy toward closer alignment with moderate Arab governments on the Arab-Israeli conflict.” According to Washington Post columnists Evans and Novak, a transcript of the interview “rushed to high officials [in Washington] via official cable from Beirut” indicated the Shah had delivered a threat to the Israelis: “Either Israel accepts the implementation of the United Nations resolutions or there is no alternative to war. Of course, it will be our war. We support the Arab view because the Arabs became a victim of foreign occupation.”
Our war? The Shah had lately become enamored of President Anwar Sadat and had agreed to pay a state visit to Egypt in the new year. The Sadats and the Pahlavis subsequently became good friends and the Shah began to entertain the notion of an Iran-Egypt axis in the Middle East. The Shah made other comments in the interview that raised eyebrows back in Washington. He stressed that American military intervention in the Middle East to smash OPEC was “unthinkable as long as oil-producing countries maintained their cohesion.” He criticized the Ford administration for failing to provide Egypt with more aid. Perhaps most intriguing was his prediction that “Iran needs only six or seven years to become a military power capable of defending the region.” By 1980, implied the Shah, Iran would be off the leash for good and could stand up to any great power or aggressive neighbor.
The Shah’s interview “is causing high-level consternation inside President Ford’s national security apparatus,” reported Evans and Novak.
Until now the leader of the Middle East’s most populous and powerful country had dealt with Israel on special, almost intimate terms. But the Shah’s latest pronouncement last weekend warned that the special relationship was coming to an end . . . . While devoid of overtly nasty anti-Israel rhetoric, it raises serious alarms considering the multi-billion-dollar American arms sales to Tehran and Washington’s policy of depending on Iran for western defense of oil-rich Persian Gulf and northern approaches to the Soviet Union.
The Israelis were puzzled and then concerned by the Shah’s wooing of the Arab world’s most powerful leader, with whom they were still technically at war. On Monday evening, December 23, Kissinger met with Israeli ambassador Simcha Dinitz and Mordechai Shalev, a minister attached to the embassy. It was Dinitz who turned the discussion around to the Shah: “But there is another visit to Egypt—the Shah’s. Do you know anything?”
“The Christian Science Monitor says he will offer arms,” prompted Shalev.
“It is inconceivable that he would do it without consulting us,” Kissinger confidently assured them. Dinitz agreed but sought direction on how to respond.
“No, let me handle it,” Kissinger assured him. “I will tell the Shah. He is an admirer of mine.”
The Kissinger-Dinitz conversation was troubling for several reasons. Neither the United States nor the Israeli governments, both of which enjoyed close ties with Tehran, knew the Shah’s long-term strategic objectives nor had specific intelligence about Iran sending guns to Egypt. Over the past couple of months Henry Kissinger’s excuses for justifying the Shah’s oil and arms policies had been undermined by the Shah’s own words and deeds. By now it should have been abundantly clear that the Shah was pulling away from Washington to pursue a foreign policy based on independent nationalism, as Ardeshir Zahedi had been advocating since the late 1960s. Years earlier the CIA had warned that as the Shah became more assertive the chances would increase that Iranian foreign policy goals would diverge from those of the United States. Whereas Saudi Arabia was making inroads in Washington, Iran was increasingly identified as a source of tension and instability. Kissinger’s boast that the Shah was his admirer only added to the surreal nature of his exchange with Rabin.
Anxious to restore momentum to U.S.-Iran relations, in December Kissinger and Zahedi agreed that His Imperial Majesty should make a state visit to Washington in May 1975 as part of his tour of the Americas. Much would be riding on the success of the visit and the secret deal on oil prices that Kissinger and the Shah had worked out in Tehran the previous month. The Shah had agreed to a price freeze for one year. Kissinger had not yet told the president what he had agreed to do for the Shah in return.