“I genuinely fear that this may be the first vague rumbling of impending revolution.”
—Asadollah Alam, 1976
“The dilemma we are in is that rumors are spreading that we are in collusion.”
—Prince Abdullah, 1976
At the dawn of the American Bicentennial year U.S.-Iran relations were at their lowest ebb since the early 1960s. The obvious tensions over oil pricing remained unresolved. Arms sales were mired in scandals involving cost overruns, price fixing, and kickbacks. The collapse of the Kurdish resistance tarnished the Shah’s standing among conservatives and liberals. There were questions too about Iran’s commitment to the security of Israel. Kissinger’s inability to deliver on the bilateral oil deal only added to the growing sense of mutual distrust in both capitals. The latest flare-up was over nuclear cooperation. The White House learned that during a recent trip to India Dr. Ahmad Etemad, the chairman of Iran’s Atomic Energy Organization, had told his hosts that Iran was committed to developing nuclear power for economic reasons that included the detonation of “peaceful nuclear explosions” to dig canals and move mountains. Etemad also insisted that Iran would not allow foreign governments to dictate the terms of its handling of nuclear fuel. His stance appeared to rule out the American preference for a multinational enrichment facility.
Three months earlier Iran had entered into a secret pact with South Africa to buy enough uranium to power up to a hundred nuclear power plants at an estimated cost of between $700 million and $1 billion. Under the terms of the deal Iran would help to finance the construction in South Africa of a big new uranium enrichment facility. The South Africans would supply Iran with ore from its occupied territory of Namibia. The Ford administration had agreed to sell Iran eight nuclear power plants but opposed granting Iran the right to reprocess uranium in Iranian-built and managed facilities. The Shah’s South Africa deal directly challenged U.S. domination of the international uranium trade. This was his way of evading his ally’s restrictions. “This story has been denied publicly, but in confidence an [Iranian] official has confirmed that there is a secret agreement to purchase uranium from South Africa,” Embassy Tehran alerted Washington. “It is evidently being kept under wraps at the insistence of South Africa.” In a separate communication, Ambassador Helms informed Secretary of State Kissinger that Iran was “seeking foreign—including American—expertise to help prospect for uranium within Iran, and is reportedly entering into joint ventures for uranium exploration in central Africa.”
On January 12, a tetchy Henry Kissinger faced a revolt from his senior staff on the two key issues of nuclear cooperation and unrestricted arms sales. Deputy Secretary of State Robert Ingersoll asked if Kissinger had had a chance to “look at this nuclear position with Iran.”
“No one has given it to me yet,” Kissinger groused. “What if they gave it to me? In a way, it is not comprehensible.”
“Well, we need to give them some guidance—”
“Well, we better get it into our heads that Iran is on the verge of moving away from us. And since we always apply our morality to our friends—”
“This isn’t morality,” Ingersoll calmly replied. “This is a suggestion that we go to see the Shah by top-level State Department—”
“Tell him what he has already known,” said Kissinger. “He will not accept it, I’m sure. I haven’t read it. Am I wrong?”
“No. It’s really to find out—”
“It’s a lecture on nuclear proliferation and its contribution to it,” interrupted Kissinger. He ridiculed Ingersoll’s suggestion that Washington send an envoy to Tehran to clarify whether Dr. Etemad’s views were shared by the Shah. “Well, Helms can find that out,” he retorted. “That’s easily found out. To send a top-level guy to Iran to ask him where he stands in relation to his bureaucracy is an insult.”
“It isn’t just that. It’s to point out the problem of proliferation and—”
“Oh, come on!” snapped Kissinger. “He knows the problems of proliferation. This is one of these—we’re going to wind up with a combination of things—pushing the Shah in a direction where five years from now we’ll be on our knees begging him to do a tenth of the things he now does voluntarily at a heavy price. That’s going to be the end result of all this brilliant, profound, moral—”
Remarkably, Ingersoll and his colleagues kept at it. Under Secretary of State Joseph Sisco joined the fray. The exchange was polite, the message clear: it was time for a course correction in relations with Iran.
“There’s a concrete proposal in the paper,” said Sisco. “I think you ought to look at it.” Sisco wasn’t done. The Shah was threatening to cut back on his defense expenditures unless the U.S. members of the oil consortium agreed to buy more oil from the National Iranian Oil Company to sell on the world market. Under the terms of the 1973 accord they signed with the Shah the companies yielded their operational role to the Iranian company in exchange for a twenty-year preferred access contract to sell Iranian crude oil on the world market. But they weren’t required to buy the oil and now, with market demand in a slump, they had no incentive to do so. As usual, the Shah wanted it both ways. He would not allow the National Iranian Oil Company to cut back any further on production. Yet he refused to haggle with the companies over price. The result was a standoff that left the Shah with still more millions of barrels of unsold oil on his hands. He threatened another big price increase when OPEC met in Bali in May unless the companies fell into line. Kissinger’s aides thought the time had come to call the Shah on his bluff. They accepted that U.S. arms sales were gnawing at the foundations of the Iranian economy and saw in the Shah’s threat to reduce defense spending an opportunity to force fiscal restraint on Tehran.
“Mr. Secretary,” said Joseph Sisco, “on the related question that you mentioned, how concerned are you on this move of his to cut back? I don’t personally believe that it’s all bad.”
“I’m sure that Senator Kennedy will love it.”
“But the Shah was basically, in my judgment, overcommitted in terms of what he’s trying to do—particularly on the military side—over the last year or two,” said Sisco. “I think he’s terribly overcommitted. And if he comes to his own judgment to cut back, I’m wondering if that’s so bad.”
“The great specialty—first of all—of this Department is to tell other people how to run their affairs, not having solved our own,” Kissinger rebuked Sisco. “I have proceeded on the premise that we should let other countries determine their own priorities. Secondly, why is he cutting back? If he came to the conclusion that he should cut back on general grounds, we would certainly not urge him to over-defense himself. Thirdly, he generally feels that our role in the world is declining, and he has to reassess. Those are his principal reasons, and because some other deals he wanted to make with us are falling through. So for a combination of a number of reasons, he’s cutting back; and that’s not at all helpful. It can’t be helpful to American foreign policy. Of many American friends in the world, there’s no one who can point to something forthcoming we’ve done for them.”
“Well, that’s a general problem,” Sisco concurred.
Two days later, Kissinger and his senior deputies reconvened.
Sisco suggested to Roy Atherton that they prepare a briefing memo for Kissinger that would examine not only the vexing question of oil liftings but also the array of problems taking a toll on American-Iranian relations.
Still the problems kept piling up. On January 19, Defense Secretary Rumsfeld hosted General Toufanian, the Shah’s head of weapons procurement, in a private dining room at the Pentagon. They quickly got into a dispute over who was responsible for the swirling military contract scandals that included the sale of Grumman F-14 fighter jets. Rumsfeld took umbrage at Toufanian’s tone of voice. It was the Iranians, he insisted, who were at fault and not the Americans. Toufanian gave Rumsfeld a tongue-lashing, calling him “uninformed . . . not his own man.” The general wanted to know: “How can Iran be responsible for Grumman and Litton cost overruns as reported by your own U.S. press?” They were stealing from Iran.
“Yeah, but the price of your oil has tripled,” Air Force General Howard Fish tartly replied.
The lunch broke up in rancor.
Back in Tehran, Toufanian wrote a scathing assessment of Rumsfeld for the Shah. He described the forty-two-year-old secretary of defense as “political, forceful, shallow, immature, inexperienced in the defense matters of his job.” The Shah severed relations with Eric von Marbod, the Pentagon representative in Iran, and ordered no further contact with his staff.
Relations between the Department of Defense and Iran descended into a deep chill. “It’s raw, it’s awfully raw, more than anyone dares show,” said one American official. “From the way we’ve behaved, they’ve lost all trust in us.” Washington insiders speculated that Treasury Secretary Simon might have a new ally in his crusade against the Shah. “Attempting to bully Rumsfeld, one of Washington’s most cold-blooded infighters, was a colossal tactical error,” wrote Evans and Novak. “What remains to be seen is whether Rumsfeld might join Treasury Secretary William Simon in renewing an old policy dispute inside the Ford administration. Simon still wants confrontation against the international oil cartel (OPEC) in general and Iran in particular to break world oil prices. Until now, President Ford has rejected Simon’s advice and accepted Secretary of State Henry Kissinger’s policy of aiding OPEC members—including heavy arms aid for Iran.”
The furor left Ambassador Richard Helms despondent. “Nothing good would happen in the U.S. government until the end of the election,” he reportedly told one colleague who kept a note of their meeting. “He had never seen such a weak government and so many people out of control in the Pentagon.”
Also out of control was Iran’s economy. On Thursday, January 22, Court Minister Alam received a briefing from Abdul Majid Majidi, the head of the Plan and Budget Organization, which left him shocked and depressed at the dire state of the government’s finances. “I genuinely fear that this may be the first vague rumbling of impending revolution.” Alam had always understood the causal link between economic prosperity and the survival of the Pahlavi dynasty. The regime’s “oily legs” were trembling. “He told me that we’re in deficit on this year’s budget by as much as $4 billion and that the government is conniving at the most senseless extravagance . . . . The losses we’ve incurred in buying wheat, sugar and other foodstuffs are beyond belief.”
The Shah suspected the White House “was stalling” on the secret oil deal being negotiated between Hushang Ansary and Frank Zarb. He knew that the refusal of Western oil companies to increase their Iranian liftings left his economy doubly exposed to the vagaries of the market. “The bastards have thrown down a serious challenge to us,” he said of the oil companies. “So much for their protestations of goodwill.” Alam was shocked to learn that Iran’s oil production had plunged by 1.7 million barrels per day, a decline equal to a $6 billion shortfall in government income for the coming year. Alam suspected Kissinger was playing a double game behind their backs.
In early January, Kissinger and Helms flew to London for a private meeting with Finance Minister Ansary. Iran’s fiscal crisis threatened to have profound flow-on effects for American national security objectives and the array of covert military actions being undertaken in the developing world with the help of Washington’s Persian gladiator. The Shah had recently declined the U.S. request to funnel aid to anti-Communist guerrilla fighters in Angola. A flurry of meetings ensued between American and Iranian envoys in London. On Saturday, January 24, Kissinger’s aide Joseph Sisco held follow-up talks with Ansary and cabled a summary back to the State Department. He reported to Kissinger that the Iranian had expressed frustration that the terms of the bilateral oil deal had still not been concluded in Washington. He told Sisco that he believed he had reached an “understanding” with Kissinger and Helms at their meeting in London earlier in the month “although one key element (i.e., discount) remained to be worked out.” Ansary offered to meet with Kissinger again, this time in New York or the Bahamas, where he would be recuperating from a hospital stay, so they could complete a draft agreement for the Shah’s approval. On the same day in Tehran, Alam met with Ambassador Helms to talk about oil production and pricing. Helms said he understood the difficulties facing Iran’s economy and “promised to do what he can on our behalf.”
A week later, on January 30, Ansary telephoned Kissinger to remind him of the sense of urgency on the Iranian side. Kissinger recorded the conversation. “You know our last meeting in London—we got over so many problems,” said Ansary. “I am sorry things have not moved as fast as anticipated because I don’t know what the problems are on your side but I have the strong feeling that you and I should get together.” Kissinger said they would meet again soon: “I understand you are going to see [Charles] Robinson next week. After you talk to him, you and I should get together.”
Kissinger was caught in a bind. He had a habit of telling his interlocutors what he thought they needed to hear so that he could get what he wanted from them. At one time Kissinger would have had no trouble delivering on his end of the oil deal for the Shah. But this was 1976, not 1972, and the political landscape in Washington had changed since Nixon’s departure. Kissinger, however, had not changed with the times. Nixon had given him carte blanche to manage U.S. foreign policy. Gerald Ford was much more focused on teamwork, the economy, and managing the fallout from the oil shock. Foreign economic policy was the strong suit of men like Simon, Zarb, and Greenspan. By January 1976 Kissinger knew that he could not deliver everything he had promised the Shah. Yet he worried that if the Shah knew this, he might find other uses for Iran’s oil wealth and its 436,000-strong armed forces. This was not an irrational fear on Kissinger’s part. The Shah was determined to hold American feet to the fire. He wanted no more excuses. “If you try to take an unfriendly attitude toward my country, we can hurt you as badly if not more so than you can hurt us,” he told U.S. News & World Report in early 1976. “Not just through oil—we can create trouble for you in the region. If you force us to change our friendly attitude, the repercussions will be immeasurable . . . . A false sense of security will destroy you.”
A turning point came on February 11 when Kissinger signed a presidential memo that reflected the views of his aides Sisco and Atherton. “The Shah of Iran has, during the last six to eight months, come to realize that, in spite of a dramatic increase in Iran’s income from oil since 1973, his expected revenues will not meet the costs of his ambitious civilian and military development programs,” Kissinger told Ford. In the fourth quarter of 1975 Iran’s exports of heavy crude oil had plummeted by 1.5 million barrels per day. The Shah had approached the administration to help him plug the gaping hole in his finances. “In the last few weeks the Shah has made a series of direct and indirect approaches to us seeking assistance of this Government in putting pressure on American oil companies to increase their purchases of Iranian oil,” read the memo. “He has suggested that, if Iran’s oil income does not rise to meet his development spending plans, he will have to revise his foreign policy to fit the country’s more modest financial capabilities.” Kissinger explained that Western consumer demand for Iran’s heavy crude oil had collapsed. That made it “impossible for us to be of any substantial assistance in increasing Iran’s oil income.” Further, Kissinger made it clear that the United States could offer no relief in the sensitive matter of cost overruns for the Shah’s imports of American military equipment.
Kissinger’s memo was his first acknowledgment of the damage to Iran’s economy and society wrought by arms sales. “We note, incidentally, that a decision by the Shah to slow the pace of his defense development program would have the positive aspect of permitting Iran’s strained manpower and infrastructure to catch up with equipment procurements,” he wrote. Kissinger had in effect thrown in his lot with those who argued that the Shah’s profligate spending had gone too far and that it was now in the American interest to see that the Shah had fewer resources (that is, less income from oil) to devote to the military purchases overloading Iran’s economy. Kissinger urged that “a damage-limiting effort is in order to reassure the Shah that our inability to be of assistance has not diminished our interest in maintaining and expanding our special relationship with Iran.” He proposed that the president send the Shah a letter providing the necessary assurances. Kissinger’s memo was sent first to the desk of National Security Adviser Brent Scowcroft.
What Kissinger did next defied the laws of logic. He flew back to London for a breakfast meeting with Hushang Ansary at the Ritz-Carlton. Kissinger might have been expected to brief Ansary on the change in U.S. policy and the administration’s belief that Iran’s economy warranted a cooling-off period and fewer weapons purchases. This he did not do. Like the Shah’s doctors, aides, and family members, Kissinger did not believe the Shah capable of hearing the truth, let alone dealing with its consequences. So he engaged in a deception, one that would have far-reaching consequences for both the United States and Iran. Kissinger’s private meeting with Ansary was kept low-key to avoid alerting the press. That we know their tête-à-tête happened at all is due to a remarkable cable summary of the talks prepared by Charles Robinson, who accompanied his boss to the Ritz-Carlton.
According to Robinson’s memo, Iran’s finance minister explained to Kissinger the scale of the financial crisis unfolding in Iran. The country’s income from oil had flatlined. Western oil companies were buying only 3.3 million barrels of Iranian oil per day. Ansary admitted that this was “to some extent” the fault of the Shah, who stubbornly refused to reduce the price of Iran’s crude exports to adapt purchases of Persian crude oil to the new market reality. The Iranian government hoped to “push” the oil companies’ liftings back up to 4.9 million barrels per day. Together, Ansary and Kissinger agreed that the bilateral oil deal, now dragging into its second year of negotiations, offered the Shah a financial lifeline and a way out of the trap he had set for himself and now could not get out of. Robinson’s document suggests that Kissinger was playing for time. He explained to an apparently surprised Ansary that the deal had not in fact been approved by President Ford. And he lied when he claimed he had just learned that the deal required congressional authorization before it could proceed. The Iranians, he added, should lower their asking price for the oil they sought to offload.
Kissinger informed Ansary, also apparently for the first time, that the deal was violently opposed within the White House by Simon, Rumsfeld, Zarb, and Bob Ellsworth. Ansary agreed with Kissinger that “we would not push this program for the moment, recognizing the need to get Rumsfeld, Ellsworth and Zarb on board before proceeding with an aggressive effort to conclude this arrangement.” In the meantime, to help the Shah meet his defense needs and pay his suppliers, Kissinger agreed that officials from the State Department would quietly meet with representatives of leading U.S. defense contractors to encourage them to pursue arms-for-oil swaps with Iran. Kissinger and Ansary also decided that confidence-building measures were required to get U.S.-Iran relations back on track. Kissinger promised to set up a meeting between Ansary and President Ford to discuss “the importance of continued U.S. support for Iran’s expanding military capability.” Ansary’s meeting with the president would be followed up with “a small dinner affair with Rumsfeld, Ellsworth and Zarb in an effort to [increase their] sense of participation in our relationships with Iran.”
Incredibly, Kissinger then assured Ansary that he still supported Iran’s current high levels of spending on defense. It was a stance totally at odds with what he had just recommended to President Ford four days earlier in his memo of February 11. “You supported Ansary’s view that Iranian oil exports should be maintained at a high level to provide funds necessary for purchase of U.S. military equipment,” Robinson reminded Kissinger. Nor was that all. At the conclusion of the meeting the note takers left the two men alone at Ansary’s request so they could discuss “personal matters.”
The nature of those “personal matters” was hinted at several weeks later during one of Kissinger’s recorded telephone conversations. “Are things moving satisfactorily on the personal front?” Ansary asked.
“I think so,” replied Kissinger.
“Are you getting the businessmen together?”
“Yes,” said Kissinger. He left it at that and moved on to other matters. We still don’t know what Ansary’s private business proposition involved, why the American secretary of state’s help was needed in “getting the businessmen together,” or how such dealings may have affected U.S. foreign policy toward Iran.
It is never an easy matter to interpret the motives of a master tactician like Henry Kissinger. What we do know is that over the winter of 1975–76 President’s Ford’s foreign policy team had been alerted to Iran’s deteriorating fiscal situation. The Shah had quietly reached out to them for help. The U.S. foreign policy team knew that U.S. arms sales were draining Iran’s civilian economy of precious capital and skilled manpower. Nixon’s 1972 blank check on arms sales to Iran had created its own inevitable, destructive dynamic. But how to stop it? How to break the cycle? The Shah made it clear that any decision to reimpose restrictions on arms sales would be seen in Tehran as a loss of confidence by the Americans in their ally.
“Now the question was what did [Iran] need, what did it want, and that was kind of complicated to figure out,” remembered Brent Scowcroft. “I think we were concerned because weapon prices were going up and that was taking more money out of the Iranian budget which the Shah didn’t have, and that was a concern to us. But how to deal with that?” The problem the administration faced on arms sales was that “if you tell the Shah we’re not going to give [him] enough arms that looks to him like we’re decreasing our support for him to try and put pressure on him.”
Iran’s military buildup had gone far beyond what Kissinger or Nixon ever intended. Worse, the Shah did not know when to stop. “He was trying to do too much, too soon, always,” said Scowcroft. Kissinger’s memo to Ford proposed a course of action that ensured Iran would generate lower oil revenues so that the Shah had less money to spend on arms. Yet to Ansary, Kissinger pledged his commitment to help the Shah generate higher oil revenues to maintain high spending on arms. As a result of Kissinger’s assurance, the Shah apparently felt no need to adjust spending patterns or rein in fiscal profligacy at home. He kept placing orders for more military equipment because he expected another bailout in the form of a future hike in oil prices. Why did Kissinger tell Ford one thing and Ansary something completely different? “Well, these [things] aren’t always carefully coordinated, as you can see, because we’re playing against ourselves,” Scowcroft ruefully observed.
Henry Kissinger took to handling the tiresome Shah in the same way he had handled Nixon on his worst days, responding to any unpleasantness by ladling out dollops of flattery with the regularity and enthusiasm of Mr. Bumble feeding the workhouse boys. It was a task made infinitely more difficult and unpleasant for him by Jack Anderson, the journalist who continued to hound the Shah at every turn. Ambassador Ardeshir Zahedi phoned Kissinger to warn him that the Shah was threatening to sue Anderson over remarks he had made on a morning television news show. Anderson had repeated his earlier claim that the CIA had produced a psychological profile of the Shah that concluded the Iranian leader was “mentally ill.” Kissinger claimed not to know anything about the profile but promised to follow the matter up with CIA director George Bush. Kissinger and Zahedi were eventually successful in persuading the Shah not to proceed with a lawsuit that would result in public embarrassment for both governments.
Kissinger was convinced he knew who was behind the sabotage. “What was it Simon said last year?” he asked Zahedi. “What was the word he used?”
“I don’t dare repeat it,” said Zahedi.
“You have to give the Shah my affectionate greetings. He is one of the few world leaders for whom I have substantive regard. If he had a country of 200 million we would all be better off. Come to think of it, if he had a country of 200 million he might conquer the world.”
“You don’t want me to tell him that?”
“You can tell him that. You don’t think he would mind?”
“No, I think he would like it.”
“Tell him I said it with affection.”
The dangerous games continued. President Ford’s political advisers, apparently knowing nothing of Kissinger’s assurances to Ansary, decided that if the Shah wanted the United States to take Iran’s surplus oil off his hands then he should reciprocate with a freeze on oil prices, at least until the end of the year when the election was out of the way. Oil ministers from OPEC were due to meet in Bali at the end of May to consider another price increase. There had always been the risk that Gerald Ford would repeat Richard Nixon’s mistake of turning to the Shah to cut a deal and help his chances to win election. The White House wanted to strengthen consumer confidence in the run-up to November. The risk to Ford was obvious—if the Shah agreed to the trade, the two leaders would then be indebted to each other. This naturally suited the purposes of the Shah. Cutting deals with the Shah was a temptation for American presidents because their Tehran back channels allowed for speed and flexibility. More than anything, Gerald Ford wanted to win the presidency on his own terms. He detested his Republican rival, former California governor Ronald Reagan, the darling of their party’s conservative wing, a politician who shared Simon’s free market orthodoxy. On March 30, Ford was in the Oval Office with Kissinger when he asked, “How did you make out with Ansary and the oil deal?”
Kissinger described where things stood.
“I think we should ask the Iranians to hold the line on prices this summer,” said Ford. It was not so much a request as an order to his secretary of state. Ford wanted an extension of the OPEC price freeze: “That would mean much more to us than a discount on 200,000 barrels a day.”
“I think we can get them to do that,” said Kissinger, who may have been surprised at Ford’s assertion of authority. Until now Kissinger had enjoyed a free hand in U.S.-Iran relations and running his back channels to Tehran. The president wanted to make one other thing absolutely clear. He had heard that Nixon was planning a trip to Iran to see his old friend the Shah. Under no circumstances, Ford told Kissinger, should that trip proceed. The president couldn’t have been more explicit: “I have heard maybe Nixon is going to Iran. He cannot do that.” Scowcroft recalled the incident this way: “I think it was probably because negotiations here were pretty tense and delicate and God only knows what Nixon might have said or done. Because he felt very close to the Shah.” Nixon maintained their connection through Ardeshir Zahedi, who kept up his friendship with the former president. The ambassador would helicopter to Nixon’s oceanside retreat at San Clemente during weekend getaways to the Palm Springs home of Walter and Lee Annenberg, who were also close friends of the Reagans.
Kissinger said he would take care of the problem. “Let me talk to the Iranians. I think this is the best way to turn it off.” He then telephoned Ansary and told him the bilateral oil deal was back on: “I have talked to the President and we are going to push it now. We have to find out—we don’t want to get into the position Zarb proposed to you, but we want something we can live with.”
Zarb, coincidentally, was required to come up with a plan by December 15, 1976, to buy one billion barrels of petroleum on the world market for the planned U.S. strategic reserve. Of that total, 150 million barrels had to be accumulated within three years of Congress approving the president’s energy plan. “It is important that we move as quickly as possible, to accumulate strategic reserves as a buffer against a potential embargo,” NSC official Robert Hormats reminded Scowcroft on March 12, “and as a deterrent to less wealthy oil exporters who might be reluctant to participate in an embargo knowing that the U.S. can sustain itself for a relatively long period without imports.” This latter point was an obvious reference to Iran. The United States was preparing for a showdown with OPEC.
Kissinger’s transcripts confirm that Zarb was negotiating at cross-purposes to the secretary of state. Zarb’s hard-line terms were a seven-year agreement with Iran to sell 300 million barrels of oil to the United States for its strategic reserve. He stuck to his threshold of a $3 discount per barrel. When Ansary complained that Zarb’s negotiating terms were unacceptable to the Shah (“Zarb’s proposals would put him in a spot”), Kissinger agreed they were “ridiculous” and told him not to worry—he would take care of it. This pleased Ansary, who replied that “it would be a good thing to get Zarb to see the light.”
Nineteen seventy-six marked the fiftieth anniversary of the founding of the Pahlavi dynasty in Iran. A round of royal celebrations and provincial tours was planned at the beginning of the Iranian new year beginning in late March. Alam’s diary shows that Mohammad Reza Shah was also keeping an eye on the American presidential contest. The Shah wanted to learn more about the leading Democrat, former governor of Georgia Jimmy Carter, a supporter of human rights and a vocal critic of the international arms trade. He worried that if Carter were elected he would demand liberal political reforms in Iran as John F. Kennedy had done in the early 1960s. Alam forwarded to the Shah a cartoon from an American publication depicting both Ford and Carter in an unflattering light. Alam said “the artist had grasped Ford’s native stupidity.” The Shah was amused. Nonetheless, Alam warned him, “Carter may turn out to be an even greater ass than Ford.”
The terrorist threat in Iran was intensifying by the month. January began on a low note with the announcement that an Iranian army tribunal had sentenced to death ten terrorists for the murders of Colonel Lewis Hawkins in 1973 and Colonels Paul Shaffer and Jack Turner two years later. The Shah was impressed yet bewildered by the level of fanaticism displayed by his young opponents.
On Sunday, March 21, the imperial family gathered in the rain before the tomb of Reza Shah to mark their jubilee. The dour public mood was as overcast as the gray skies. A rumor had taken hold that the jubilee would bring bad luck to the crown. “Particularly on that day I felt something had changed between the people and the monarchy; I could feel it in my bones, like a sudden icy wind,” recalled Queen Farah. “There seemed to me an intangible shadow over the harmony and confidence between us.” Six months earlier the queen had hosted an international symposium in Persepolis to consider the impact and future of Iran’s economic changes and social reforms. In her opening remarks she acknowledged that the people of Iran were “traumatized by the conflicting winds of tradition and change.” Others at the assembly warned of the “alarming” buildup of pressure within the political system, and of a ruling elite that was “vulnerable to popular disaffection.” In the summer of 1976 the queen took her concerns public when she described as “dangerous” the exodus of rural migrants into cities where they faced social isolation, unemployment, and destitution.
The Shah was surrounded by enablers and sycophants. On the eve of the Pahlavi jubilee celebrations the royal couple hosted a dinner party. When the queen made a gesture to stop her husband’s dog “from poking his nose into people’s plates,” the Shah asked what she thought she was doing. “Flatterers everywhere!” she snapped. “I refuse to follow their example. Even this dog is fawned upon just because he’s yours. I alone refuse to stoop to such nonsense.” The queen noticed something else—swelling on her husband’s upper lip. She still knew nothing about his lymphoma but later remembered that it was around this time the Shah began immersing her and their oldest son, Crown Prince Reza, in the art of statecraft. He was in a race against the clock to train his heirs and lay the groundwork for a peaceful transfer of power. Still, he did not think the time right to confide in his wife. “Several times a week Reza and I were taken to confer with the prime minister, then with each of the ministers involved in current affairs,” she recalled. “We also received the chiefs of the armed forces, representatives of different institutions, and particularly those of the parliament. I found it a difficult and delicate situation, for I didn’t imagine for one second that I would have to succeed him one day, and yet I obviously had to take this ‘training’ seriously and question him as if he were going to die.”
To mark the Pahlavi jubilee President Ford wrote a letter of congratulations and sent Vice President Rockefeller to Iran. The Shah was deflated. He noticed how the dynasty’s jubilee had been welcomed with greater enthusiasm by eastern bloc countries than by Iran’s allies in the West. The Pahlavis received Rockefeller at their winter palace on the island of Kish. Cynthia Helms watched the Shah’s stricken reaction when the vice president publicly lauded him as the heir to Alexander the Great, seemingly unaware that Alexander was the man who invaded Persia and “destroyed Persepolis and stole Persian wealth.” In the car on the way to the airport, Rockefeller, still bitter from the events of last November, told Alam that he resented “the slowness of decision-making in the USA, a great contrast to the way things are done here.” He seemed to think the lash would do the American people some good: “You should lend us His Imperial Majesty for a couple of years. He’d soon teach us how to govern America.”
Iranian society, meanwhile, was coming unhinged. During a state visit to Tehran, President Anwar Sadat of Egypt and his wife, Jehan, were the guests of honor at a dinner hosted by an Iranian government official. “The steps leading up to the very large house were made of crystal. Crystal! Never had I seen that before—nor have I seen it since,” remembered Jehan Sadat. “Nothing was ordinary. Chocolate mousse was offered as one of the desserts in swans made of spun sugar and presented against a backdrop of a huge aquarium filled with tropical fish. Fountains splashed, the guests strolled between the food tables and the dining tent on a bridge over a small pond, and we ate off place settings of gold.” To Sadat she whispered: “There will be a revolution. I can feel it. The rich here are too rich and the poor too poor without enough of a middle class to provide stability. The Shah must do something quickly to calm the people, give more of his land away, perhaps drop the title of emperor and call himself president . . . . I am going to tell this to the Shah.” Her husband forbade her to do any such thing. “You must not stick your nose into other people’s business,” he cautioned her. “The Shah will listen to you out of politeness and then he will not change anything. So what’s the use?”
European jet-setters flocked to Tehran’s nightlife and kept the discotheques and hotels full. Yet Iranian society was coming to the boil. Many young Iranians, traumatized by the disorienting, chaotic effects of Western modernization, found solace in the mosques or simply retreated behind the veil. Alam visited Pahlavi University in Shiraz where, he told the Shah, he had been “rather alarmed to see so many of the girls wearing the veil.” Students continued to protest against the Shah’s policies. Alam urged the Shah not to put too much pressure on the university presidents because they have “enough trouble as it is and are literally battling for survival . . . they are genuinely afraid of assassination by the terrorists.”
Few events in late imperial Iran were as revealing as the “Charles Jourdan Incident,” a scandal that became a byword for the regime’s air of fin de siècle exhaustion and decadence. Parviz Sabeti was a high-ranking SAVAK official. One day his wife went shopping in Tehran’s chic Charles Jourdan ladies shoe store, only to discover when she reached the cashier’s desk that her purse was missing from her bag. According to the version of the story that circulated at court, Mrs. Sabeti raised such a loud fuss that her bodyguards barred anyone from entering or leaving the store. “Close the doors,” they announced. “We are going to search the people.” Also in the store that day were two members of a family of high social standing, a middle-aged woman who was helping her daughter prepare for her wedding day.
“We have finished our business,” said the aggrieved older woman. “We have not stolen anything. We are respectable people. We are going to go out.”
“No,” said the guard, “you cannot go out.” The guard physically blocked her from leaving. The daughter’s fiancé was waiting for the women outside in his car. He saw the commotion through the glass doors and ran to their assistance. Mrs. Sabeti’s bodyguard reacted to the sudden movement by pulling out a gun and opening fire. The young man was shot to death in front of his fiancée and future mother-in-law. The store erupted in pandemonium. The story of the wedding tragedy quickly spread around town. Even the most cynical Tehranis were amazed that a son of privilege could be executed in broad daylight merely for defending the honor of female relatives.
The tragedy split Pahlavi society at the highest levels. When Mrs. Sabeti offered to attend the funeral of the young man, his family reportedly sent her this message: “Come if you want. But if you come, you must know you will be torn to pieces.”
Perceptive diplomats and intelligence analysts living in Tehran sensed that something was happening though they could not as yet put their finger on what it might be. The capital was seething. In 1976 at least eighty-nine people in Tehran were killed in shootouts between the security forces and the underground or were executed by the regime for plotting terrorist actions.
On Saturday night, May 15, four policemen and eleven terrorists were killed in shootouts in three locations in Tehran. Six of the terrorists died within the city limits and five in Tehran’s northern outskirts. Police seized machine guns, handguns, and explosives for bombs and booby traps. The following Tuesday a second firefight left seven male and three female terrorist fighters dead. Four innocent passersby were killed in the heavy barrage of crossfire between security forces and the young extremists. Rumors circulated that the crackdown and the killings were the work of a team of trackers operating on the margins of the Shah’s security apparatus. Ambassador Helms raised the issue of the violence and unrest directly with Alam. Alam told Helms that “the entire movement is obviously inspired from abroad.” Helms didn’t buy it. He told Alam that “we cannot rule out public dissatisfaction here in Iran.”
The bloodshed coincided with the Saturday night departure of Air Iran’s inaugural 747 flight between New York and Tehran. In the tradition of the decade’s great celluloid disaster epics the inaugural eleven-hour flight was packed with 150 celebrities from Hollywood and Washington. “Startrek to Iran, with Glitter,” gushed The Washington Post of the junket billed as Iran’s Bicentennial gift to the United States. Elizabeth Taylor led the way. The actress had spent the preceding week in Washington romancing Ardeshir Zahedi. Others on board included actress Cloris Leachman (“by all accounts the most refreshing and vivacious celebrity on the trip”), singer Connie Stevens, and oldies crooner Tony Martin, who had entertained the Pahlavis at the Nixon White House in 1973. Upon their arrival the Americans were greeted at Niavaran Palace by Queen Farah and treated to a reception. At the central bank they were given a guided tour of the vault containing the crown jewels. A belly dance performance brought a smile to the face of Ambassador Helms. The party hit the road, moving on to Isfahan, Shiraz, and finally Persepolis, where Ms. Taylor, evidently in need of rest, announced she was going to spend a few days in the Shah’s tent city. It had indeed been a long week. “They were wined, dined and entertained in a splendor that rivaled the excesses of Xerxes,” crowed Jack Anderson, who as usual couldn’t resist an opportunity to rain on the Shah’s parade. “None was invited, of course, to see Iran’s seamier side. But behind all the glitter, the Shah rules by torture and terror, which are the antithesis of the U.S. principles he pretends to honor.”
Over the summer of 1976 all of Iran was fixated on a murder mystery: who killed Ayatollah Abolhassan Shamsabadi in Isfahan? The revered cleric’s funeral drew crowds estimated at 100,000 and stoked widespread indignation against the Shah. A rumor took hold that SAVAK had disposed of the respected religious leader in a clumsy effort to silence one of the Shah’s leading religious critics. Iranians were also deeply offended, not to say left disoriented, by the Shah’s unilateral decision to mark his jubilee by abolishing the country’s Islamic calendar and instituting a new imperial calendar. “Few regimes have been foolhardy enough as to scrap their own religious calendar,” wrote Iranian historian Ervand Abrahamian. The new Pahlavi calendar “allocated 2,500 years for the presumed length of the Iranian monarchy and another 35 years for Mohammad Reza Shah. Thus Iran jumped overnight from the Muslim year 1355 to the imperial year 2535.” Mass confusion ensued. The Shah also announced intrusive new measures designed to increase state control over Shi’a religious institutions, publications, and teachings.
The final and most dangerous phase of the oil shock for Western democracies was about to begin. For the past two years U.S. officials at State and Treasury had closely watched as two separate sets of dominoes, one geopolitical and the other financial, trembled under the impact of skyrocketing oil prices. The great danger was that governments in Europe, unable to pay their debts, would falter and trigger a wave of defaults. The defaults would wash through the canyons of Wall Street toppling banks that had taken on too much debt at the height of the recession. Europe’s bleeding southern gut had been stitched together with transfusions of emergency bank loans, intensive diplomacy, and, in the case of Italy, outright bribery in the form of $6 million in cash from the CIA to prop up Rome’s ruling Christian Democrats. The stitches came undone when revelations of these payments in January 1976 caused a national scandal that led to the fall of Italy’s thirty-seventh postwar government and the collapse of the lira.
Italians sensed that this political crisis would not be like the others. Many middle-class and wealthy Italians began spiriting money out of the country. In one month Italy’s caretaker government spent more than $500 million—half its foreign currency reserves—to defend the lira. It closed the foreign exchange market, applied for a $500 million loan from the International Monetary Fund, and appealed to the United States Federal Reserve to activate the terms of an accord under which Washington would make emergency funds available to prevent outright collapse. By the spring of 1976 Enrico Berlinguer’s Communist Party governed all major cities north of Rome. There were Communist or Communist-Socialist administrations in five of Italy’s twenty regions and in forty-two of its ninety-four provinces. Local Communist governments ruled 48 percent of the Italian population. “It has reached the point where the Christian Democrats cannot agree to govern with the Communists but cannot agree to govern without them either,” a diplomat told The New York Times. “I find it hard to accept that all Western European countries are now watching like frightened rabbits while Italy goes Communist, doing nothing,” Kissinger confided to Sir Anthony Crosland, Britain’s foreign secretary, in the officers mess at the Royal Air Force Base at Waddington on April 24. “I can’t think nothing can be done.”
Further west, the Iberian Peninsula was in ferment. Following the death of Spain’s Francisco Franco in November 1975 the dictator’s successor, King Juan Carlos, had decided to break with more than three decades of Fascist rule and steer Spain toward Europe and liberal democracy. The king’s chances of success were not high. Spain’s economy was ravaged by high fuel costs and double-digit levels of unemployment and inflation that stoked political unrest in the form of strikes, protests, and extremist violence. “We think that the political situation has improved but that there is a serious economic problem that will have to be dealt with,” Foreign Minister Jose Maria Areilza confided to Kissinger during a trip to Madrid. Spanish democracy would rise or fall with the economy. “We want to improve the economic situation and gradually move towards Europe but this we can only do when the reforms have taken hold.” The king faced the very real danger of a coup from the far right and political violence from the far left. The loyalty of the Spanish army was in question. Areilza said it was “a question of order and discipline . . . . The most dangerous thing for an army is to be defeated and bored. We have some 200,000 conscripts but we only have enough money to have any kind of maneuver once each month.”
Neighboring Portugal was preparing for its first free parliamentary and presidential elections. Washington’s preferred candidate for the post of prime minister was Socialist Party leader Mario Soares. Soares was a respected pragmatist quietly working behind the scenes with leaders of the Catholic Church to block the Communists from making electoral gains. “We are now entering a period of progressive democratic nationalization,” Soares told Kissinger. “Unless the economic situation produces an explosion with unexpected social agitation; the Communists would use that to attack us.” Kissinger told Soares that while he still opposed allowing Communists into government on principle, he had erred in “analyzing your situation in an Italian framework.” He agreed that the Portuguese Communists lacked real leadership and had overreached, though he felt this was something Enrico Berlinguer was not likely to do in Italy. “The tactical adjustments you have to make I cannot comment on,” he told Soares. “But I must tell you that what you have done surprised me. I must admit this. I don’t often make mistakes of judgement.” Soares warned Kissinger that Euro-Communism was cresting across Western Europe. His own view was that “the overall situation in Italy is more dangerous than that in France.” Mario Soares went on to form Portugal’s first democratic government in April.
Euro-Communism was at high tide across the continent. The sense of crisis deepened in early June when Enrico Berlinguer flew to Paris to appear before a roaring crowd of forty thousand with Georges Marchais, leader of the French Communist Party. On the eve of the Italian parliamentary elections on June 21, widely seen in the United States as a crucial showdown between the ruling Christian Democrats and Berlinguer’s Communist Party, a Gallup poll showed that 22 percent of Americans supported military intervention in Italy if Berlinguer came to power, 49 percent believed the United States should impose economic sanctions and use political pressure, and a further 13 percent advocated American withdrawal from NATO. In the event, the election ended in a virtual dead heat. The Christian Democrats won a victory in the popular vote but the Communists captured forty-nine new seats in the lower house Chamber of Deputies. The Communists also picked up twenty-three seats in the Senate, leaving Berlinguer’s 116 seats within striking distance of the Christian Democrats’ 135. There was a dramatic rise in support for Italy’s neofascist far right. But Kissinger’s sole focus as usual was on the role the Communists would play in the next coalition government. “The essential problem which we confronted in the spring has not been fundamentally changed by the Italian election,” he announced. Kissinger put the Italian political establishment on notice not to cut any side deals that might give Berlinguer political legitimacy. Western leaders gathered in Puerto Rico to announce they were placing tight strings on the availability of any new financing to bail out Italy’s listing economy. Italy had already drawn its full quota of funding from the International Monetary Fund. “Bill Simon is going to treat Italy the way he treated New York,” said one U.S. official, referring to Simon’s unwillingness to provide loans to New York City during a financial crisis the previous year.
There was a sense that events in Italy were rushing to a climax. On July 1, West Germany’s defense minister Georg Leber called on Kissinger at the State Department. “Italy needs a democratic alternative or [Berlinguer] will win out,” he said.
“We agree with you on the [Communist Party] danger in Italy,” said Kissinger. “They cannot participate in government. If they get in, it will influence elections in France, Spain and Portugal.”
Two days later, Berlinguer won a major psychological victory when Italy’s other political parties elected a Communist to the powerful post of president, or speaker, of the Chamber of Deputies. Kissinger swung into action. His telephone logs record that on July 10 he telephoned Henry Cabot Lodge, President Ford’s envoy to the Vatican, to carry out a special assignment for the White House. Lodge had gained notoriety in South Vietnam in 1963 for advocating the coup that led to the ouster and assassination of President Ngo Dinh Diem. Lodge was widely regarded as an old-guard stalwart of the Washington establishment. Kissinger advised Lodge that “we need somebody to go to Italy and talk to some of the leaders there about our view on communist participation in government, and to do it as a sort of private emissary. We were wondering if you would be willing to do that.”
Lodge accepted the assignment.
The Italians took the hint. On July 13, President Giovanni Leone asked the outgoing Christian Democratic minister of the budget, Giulio Andreotti, to form Italy’s new government. U.S. officials breathed a sigh of relief.
OPEC ministers met in Bali at the end of May and failed to agree on a new oil price. The current posted price of $11.51 per barrel remained frozen while members of the cartel agreed to try again at their December 15 meeting in Doha, the capital of Qatar. Bali was the scene of a bitter standoff between Saudi Arabia and Iran. The Iranians supported a 15 percent price rise, something that Sheikh Yamani made clear was unacceptable. In Washington, President Ford welcomed the stalemate and the news that oil prices would remain frozen through the summer. “In today’s interdependent world, a stable and growing world economy is in every country’s interest and the United States looks toward further improvements in the relationships between oil producing and consuming countries,” he said. Ford had asked Kissinger to ask the Shah to hold the line on oil prices through the summer. In his diary on June 8, Court Minister Alam wrote that the Shah had recently sent a back channel through Helms agreeing not to approve an increase in oil prices at Bali, “in order to save President Ford embarrassment in the midst of his re-election campaign.” Ford wrote a letter of reply to the Shah thanking him for the price freeze but making no mention of his presidential campaign.
While American officials focused their attention on Southern Europe a new crisis exploded in the Eastern Mediterranean. On June 1, Syrian armored divisions invaded Lebanon to end the civil war that threatened to draw in its neighbors and engulf the region in a wider conflict. The U.S. and Israeli governments shared President Hafez Asad’s fear that a victory by Palestinian and Muslim guerrilla fighters over Lebanon’s Christian community would lead to the creation of a radical state aligned with Saddam Hussein’s leftist regime in Iraq. While Syrian troops massed on the outskirts of Beirut waiting for the order to relieve a besieged, desperate city where armed gangs roamed with impunity and whose residents were running low on supplies of water, food, and fuel, gunmen ambushed a car driving U.S. ambassador Francis Melloy to a meeting with Lebanon’s president. The bodies of the ambassador, his economics counselor, and their chauffeur were later found in a seaside garbage dump. Melloy had been shot in the head and chest.
President Ford ordered the evacuation of all 1,400 American nationals from Beirut and U.S. naval warships steamed toward the Lebanese coast. There were scenes of panic at Beirut airport when incoming shells ripped through an airliner sitting on the tarmac ready to fly out foreign nationals, killing the pilot and injuring crew members. Hundreds of Americans and other foreign nationals made a dash for the Syrian border in a land convoy. Secretary Kissinger ordered the embassy staff to get out immediately because “the PLO might be so desperate that they would be delighted to kill a few hundred Americans.” Into the breach stepped King Khalid and Crown Prince Fahd of Saudi Arabia. The Saudis used their influence among the warring factions in Lebanon to help guarantee security for Americans who left Beirut by road. They were more than willing to prove their goodwill to the White House. With all his nationals accounted for, President Ford cabled King Khalid to thank him for “the effective assistance which you and your Government rendered us in our successful efforts to bring a substantial number of Americans and other citizens out of Beirut to safety. We were gratified that with this assistance the difficulties we encountered when we were preparing our road convoy were ultimately removed. This is the kind of cooperation which, I am sure, will continue to characterize our relations as we work together to bring the Mideast to a just and lasting peace.”
On Saturday, June 26, Mohammad Reza Shah played host to the president of India, who was known to have a heart condition. The Shah ordered that the route of the processional drive through the streets of Tehran from the airport be shortened to take into account his guest’s declining health. The Shah’s own health was less than ideal that month. In June he complained of stomach pains, a skin rash, and headaches.
The Shah’s decision to alter the route at the last moment may have saved the lives of both heads of state. The Iranian hosts were at the airport waiting for the Indian delegation to deplane when Alam learned that a female terrorist had struck the original route back to the palace. Seeing that she had missed her chance, she tossed a grenade at two police officers who opened fire, killing her. The next day Alam advised the Shah to end the tradition of driving state guests through city streets; it was too dangerous. He suggested in the future driving straight back to the palace and either avoiding the ceremonial procession or helicoptering from the city outskirts. Alam pointed out that but for the Shah’s “change of plan, a stroke of inspiration,” the day could have ended in disaster. “Not inspiration, merely common sense,” the Shah replied. “Though perhaps the Almighty does have some sort of desire to protect me. No doubt so I may fulfill my mission to the people of Iran.”
Tehran simmered. In the early morning hours of June 29, Iranian security forces quietly entered the basement of a building near Mehrabad airport. After months of surveillance they discovered that inside the building was Hamid Ashraf, the most wanted man in Iran, an iconic figure in the underground and a hero to many young Iranians. Ashraf was the oldest surviving member of the group of revolutionaries who carried out the original 1971 attack on the gendarmerie station at Siakal. Ashraf had taunted the Shah for years and carried out a string of headline-grabbing acts of sabotage. According to one scholar the security forces ringed the neighborhood seven times to make sure their quarry did not get out alive. Gunfire erupted as the commandos were trying to evacuate a couple and their child trapped in the building. With Ashraf were nine of the most senior members of the resistance leadership. They had gathered in an emergency session and been caught by surprise. In the ensuing firefight snipers in helicopters picked them off as they clambered up onto the roof to try to escape. The death of Ashraf and his nine comrades was a significant propaganda victory for the regime.
On July 2, the Ford White House received jarring news in the form of a report on the number of jobless Americans. A month earlier, the chairman of the President’s Council of Economic Advisers, Alan Greenspan, had gone before Congress and confidently predicted that the United States was well on track to economic recovery: the worst of the oil shock was behind it. He forecast strong job growth and a drop in unemployment below 7 percent, a fall in annual inflation to between 5 and 6 percent, and an expansion in the gross national product by about 7 percent annually in real terms. He said the Ford administration did not need to provide fiscal stimulus to boost economic growth. America had cleared the hurdle of recession. Instead, Greenspan cautioned members of Congress that increased government spending might increase inflation. Ten days later the White House confidently brushed aside figures that showed the steepest fall in consumer retail spending in fourteen months. “Variations in the pace of economic activity during an expansion aren’t unusual,” said one economist at the Treasury. “The consumer can’t be exuberant every month.”
Yet the bad news kept coming, this time with the June jobs report. Instead of a decrease in the number of unemployed, the jobless rate climbed from 7.3 to 7.5 percent. “Temporary pauses of this kind aren’t uncommon during periods of cyclical expansion,” said Federal Reserve chairman Arthur Burns, who tried to reassure Americans they were not headed back into recession. Credit would remain tight because he and Greenspan wanted “to reassure the business community and financial community that we intend to stick to a course of monetary policy that will support further growth of output and unemployment, while avoiding excesses that would aggravate inflationary pressures.” The danger for President Ford was that the economy was teetering on the brink of a double-dip recession in the middle of his presidential campaign with Jimmy Carter.
America’s Bicentennial summer reached its fever pitch with a state banquet at the White House where Queen Elizabeth II was serenaded by pop duo singing sensation the Captain & Tennille warbling “Muskrat Love,” a popular love ballad. Critics deemed the song “unsuitable entertainment” for British royalty but Her Majesty “seemed to enjoy it thoroughly,” said first lady Betty Ford.
Even now the country could not escape the shadow of Vietnam. In New York City on July 4, 225 tall ships sailed up the Hudson River to take the salute from President Ford on the carrier Forrestal. Kissinger was furious with a snafu involving the diplomatic corps. “The Pentagon is incredible and the Secretary of the Navy must be the dumbest alive,” he unloaded to his staff. “For the review of ships on the Bicentennial he decided that the Navy had lost too many helicopters in Vietnam so the diplomatic corps would have to use barges to get to the Forrestal for the review.” The result was that the ambassadors were stranded on the carrier without refreshments for hours and most watched the Bicentennial fireworks from a bus stuck in a traffic jam: “They were infuriated at such treatment.” In Tehran, where the American School was the focal point of celebrations, the expatriate colony raised a toast as a giant American flag lit up a mountainside overlooking the metropolis.
The next morning’s New York Times reported that yet another aftershock caused by high oil prices was headed toward American shores. The massive transfers of petrodollars that had followed the quadrupling of oil prices in 1973 had mostly been handled by American banks. The flexibility they had shown to international lenders and debtors had so far helped avoid the worst-case scenarios outlined by Ford, Kissinger, and Simon in their doomsday speeches from September 1974. But this had led to another potentially bigger threat to the world economy. “So great was the activity that American banks have been thrust into the role of the major suppliers of money to the world,” reported the New York Times. “This development is causing some mixed reactions abroad and concern in the United States.” Spain was about to receive a $1 billion loan from a syndicate of private lending institutions. Wall Street was eager to establish a presence in a country whose banking sector had until now been closed to foreign competition. Peru and Argentina were cited as just two of the dozens of countries lining up to take loans out from U.S. banks. Underwritings of this sort were “proceeding outside the control of monetary authorities.” The danger for Wall Street was that American banks might be dangerously overexposed and left at risk from a single default somewhere along the line. “Concern has been expressed in Congress that American banks may be exposed to risks of withdrawals—and possible blackmail—by the large petrodollar depositors from the oil countries. Risks of insolvencies by major debtors are another cause for anxiety.” Some 40 percent of Bank of America’s earnings now came from its international business activities. The Morgan Guaranty Trust Company acknowledged that half of its outstanding loans were now made through overseas branches. Citibank and Chase Manhattan were also now heavily invested in lending to governments staggered by high fuel bills.
Wall Street banks had already been put on notice by H. Johannes Witteveen, the managing director of the International Monetary Fund. Earlier in the year Witteveen sounded the alarm when he declared that banks had to accept “some share of responsibility” if mounting debt burdens became hazardous for developing countries. He reminded them that “credits were sometimes granted in a market climate that wasn’t very conducive to the maintenance of adequate [credit-worthiness] standards.” Developing countries able to borrow money on an “all-too-easy” basis, warned Witteveen, were now struggling to meet their debt repayment schedules. Witteveen asked at what point “the mounting debt burden becomes hazardous.” Total international lending to governments by private commercial banks had reached $250 billion at the end of 1975, a substantial increase from the $150 billion recorded in December 1973. U.S. banks and their foreign branches accounted for 40 percent of those totals.
Others took up the cry. In early June the Bank of International Settlements in Switzerland announced that the debt load taken on by many countries had reached “disturbingly high levels.” The following week Allen Lambert, president of the International Monetary Conference, drew headlines when he warned that many countries hit by the fourfold increase in oil costs had taken out unwieldy loans and “the ability of these countries” to repay them “will be a dilemma which all of us must face.” Peru, Indonesia, and Argentina were already trying to renegotiate their existing debt load. Panama, Zaire, Ghana, and countries in Southeast Asia were expected to join the queue. The real problem would come when these countries, especially the least developed states, which had taken out between $15 billion and $17 billion in private bank loans in 1975 alone, faced a hike in fuel costs. Another big increase in the price of oil might tip one or more countries to default on their debt repayments. The president of Morgan Guaranty Trust lectured his colleagues that “in a greedy drive for profits, American banks in the early 1970s had made bad loans in real estate investments and for other questionable purposes.”
Only now was Wall Street beginning to take stock of its post-1973 lending binge. “How can presumably sophisticated bankers, who weigh every nickel of a $20,000 home mortgage loan, get so tangled up in bad or weak-quality loans running into the billions?” asked Washington Post columnist Hobart Rowen. The real issue, as he saw it, was their unwillingness to conduct effective risk assessment of those they extended loans to. “Banks simply must do a better job to assure their survival,” he wrote. “To be sure, they are private institutions, but their solvency and stability have public ramifications.” The warning signs “should be taken seriously by those bankers who still regard news media discussion of banking problems as an assault on the free enterprise system.”
There were many weak links in the debt load chain. In the first six months of 1976 the IMF lent more money to member countries than in any previous year in the fund’s history. By June 30, the total outstanding drawings, or loans, was counted at $15 billion. The biggest user of the fund was Great Britain, which had requested and received two separate drawings, one for $1 billion, and a second for $700 million. The British economy, which for the past several years had been treated with the fiscal equivalent of Band-Aids, was about to hemorrhage. On the evening of July 20, 1976, Chancellor of the Exchequer Denis Healey gravely informed backbench members of the governing Labour Party that if the government did not implement drastic cost cutting to reduce the deficit, the country faced the “possible collapse of the economy.”
The threads of the final crisis of Gerald Ford’s presidency were coming together and in the midst of his campaign for election. Officials in the White House were focusing on the December 15 OPEC ministers meeting in Doha, Qatar. Bill Simon’s moment had arrived: it was time to bring the Saudis in from the cold. King Khalid’s support for an oil price freeze and Saudi assistance in the evacuation of foreign nationals from Beirut had impressed administration officials as acts of statesmanship and proof that the kingdom was ready to take its place on the world stage. Oil prices, financial stability on Wall Street, political stability in Europe, the civil war in Lebanon, and the Middle East peace process were all elements of a grand bargain about to be struck by the American and Saudi leaders. They had to move quickly.
At 10:30 A.M. on Friday, July 9, 1976, Ford, Kissinger, and Scowcroft received Prince Abdullah bin Abd al-Aziz-Saud, Saudi Arabia’s second deputy prime minister and commander of the Saudi National Guard; Sheikh Tuwayjiri, deputy commander of the National Guard for Finance and Administrations; and Saudi ambassador Ali Alireza. President Ford wasted no time in getting down to business. “We are grateful for the strong position that your government took on oil policies,” he told his guests. “We think it is the right thing to do in terms of economic recovery and it’s in the long term interests of both producers and consumers. As I am sure you know, we are doing our utmost to be helpful to the political settlement in Lebanon and we want to move as rapidly as possible to a settlement in the Middle East as a whole.”
“This is a true fact, expressed brilliantly yesterday by the Secretary of State,” Prince Abdullah complimented the president. “The dilemma we are in is that rumors are spreading that we are in collusion. As you are aware, these rumors are spread by enemies of us both—the Communists.” Abdullah proceeded to lecture his hosts, politely but nonetheless firmly, of the risk the Saudi royal family was taking in associating so closely with the Americans “because we as your friends have been embarrassed on many occasions. For example, with Pakistan, Vietnam and Angola. We were told by people to look at the way you abandon your friends. The fact is we have been embarrassed by those accusations of the Arab people. It is known that the United States stands by its friends no matter what the situation is. But this talk is exploited by the Communists. This is my point.”
Ford assured Abdullah that “after the election we will take action in accordance with the aims and principles we have in mind.”
“That is what we expected,” said Abdullah. The prince parted with a comment about power and its uses that had preoccupied American officials since Watergate, the October War, and the oil embargo: “The rule of government is prestige—if prestige disappears, the government is lost.”
On July 31, the Ford administration announced that it had decided to sell thousands of new-generation “smart” missiles and bombs to Saudi Arabia. The sale included 2,500 Maverick air-to-surface missiles, 1,000 laser-guided bombs and 1,800 TOW missiles. This sale was in addition to a separate one involving 2,000 Sidewinder interceptor missiles and 16 Hawk ground-to-air missile launchers. Over the past two years the United States had sold the Saudis $6 billion in military equipment, second only to the amount purchased by Iran. U.S. officials stressed that “the continuing build-up of Iran’s armed forces was not a factor in the Saudi request.”