“Many countries have in fact virtually reached the end of their ability to borrow.”
—President Gerald Ford, 1976
“Nothing could provoke more reaction in us than this threatening tone from certain circles and their paternalistic attitude.”
—The Shah, 1976
Henry Kissinger made his final trip to Iran as secretary of state in August 1976. Three days before Kissinger flew to Tehran with wife, Nancy, and David, his son by his first marriage, Senator Hubert Humphrey’s subcommittee on Foreign Assistance, of the Committee on Foreign Relations, released a damning report on U.S. arms sales to Iran. It described them as “out of control” and concluded that the Iranian military was now so dependent on U.S. technical support that Iran could not go to war “without U.S. support on a day-to-day basis.” The report warned that tens of thousands of Americans living in Iran were potential hostages if relations between Washington and Tehran ever broke down. President Ford’s challenger for the presidency, Jimmy Carter, attacked as “cynical and dangerous” the Ford administration’s policy of “almost unrestricted arms sales” to Iran. Kissinger’s anger was directed not at the Democrats but at his fellow Republicans whom he knew had influenced the report’s findings. “It couldn’t be a worse time,” he complained to Ford. “Treasury and Defense are going after the Shah. Simon is going around saying the Shah is dangerous and shouldn’t have exotic weapons. And [Robert] Ellsworth and Defense are viciously anti-Iran.” He wanted Ford to clean house after the November election: “You can’t do anything before November, but between Treasury and [Defense] they are on a vicious campaign.”
“I will talk to Don [Rumsfeld] because I think Iran is very important to us,” Ford responded.
“We are playing with fire,” Kissinger warned Ford. “We have thrown away Turkey and now Iran . . . . Anyway, it will be rough in Iran. But if we get rid of the Shah, we will have a radical regime on our hands.” Kissinger fretted that the anonymous slashing attacks from within the administration ran the risk of demoralizing the Shah and emboldening his domestic foes. It was beginning to look as though the United States was abandoning its ally.
Kissinger vented again in Tehran on August 7 when he hosted a gathering of America’s Middle East ambassadors inside the U.S. embassy compound on Takht-e Jamshid Avenue. “I am really mad at all this criticism,” the secretary told his envoys. “When has [the Shah] done anything that we disapprove of?” In the seven and a half years he had been in Washington the Iranian leader had never let him down. “Whenever we have needed his help he has been willing to apply positive pressure to help, to send special messages or emissaries,” said Kissinger. “Look at the time when we wanted some pressure applied to Iraq and he responded right away.”
“And when we wanted those 36 aircraft for Vietnam, the Shah sent them immediately,” Ambassador to Jordan Thomas Pickering reminded his colleagues.
The Humphrey report, said Kissinger, “illustrates the problem we have at home.” He blamed the Israeli government and the sympathetic coalition of strange bedfellows it had assembled in Washington from among the ranks of the neocons and liberals. The Israelis were prepared to hurt the Shah to achieve their broader objective of choking off arms sales to Arab governments in the Middle East. The Israelis, explained Kissinger, were “lobbying to change the entire course of our policy to coincide with their own policy rather than our interests. Look at the parallelogram of forces and you can see. Even on Iran, 50 percent of our trouble is the Israeli lobby. They want a carom shot off of Iran onto arms sales for Saudi Arabia and Kuwait. Since we are doing so much for Israel and it is so strong, it is hard to kill arms sales to the Saudis who are much weaker. So the best approach is to attack through Iran and kill the idea of all arms sales to the Gulf, thus blocking the Saudis and Kuwaitis.” The secretary believed the real threat to the Shah came from the neocons: “This is despite the close relationship between Iran and Israel. Look at Commentary magazine and you can tell me what is happening. There is a Joe McCarthy–like cold war line so that if we wanted to get Israel to give up two kilometers on the Golan it would be made to appear that we were selling out to the Soviets as part of a vast worldwide plot against Israel and the free world.”
Kissinger wanted to reassure the Shah that he retained Washington’s full backing. He urged Iranian officials to shrug off the criticism contained in the Humphrey report and downplayed it as election year politics. To Court Minister Alam, Kissinger lavished praise on the Shah, knowing the compliments would be relayed to his master. His Imperial Majesty was “the most diligent statesman in the entire world,” and he spewed bitter invective against the Saudi royal family, disparaging them as “a stupid, narrow-minded bunch interested in nothing but money . . . . As things stand they seem to live in a world of make-believe.” Kissinger should have cautioned the Shah that the Iranian embassy was being outgunned by an intensive Saudi lobbying effort on Capitol Hill conducted with stealth precision.
The Shah hosted the American delegation at his palace on the Caspian Sea. He had arranged a sightseeing trip for them to a caviar-processing factory at the port of Bandar Pahlavi. He no doubt wanted to remind his guests that there was more to Iranian industry and commerce than oil production. Kissinger viewed the excursion as a waste of his time and embarrassed U.S. embassy personnel by making his feelings publicly known. At the factory he shamelessly mugged for the American press pool, making it clear he would rather be anywhere but here. “The secretary appeared bored with the whole thing, his eyes somewhat glazed as an official explained the process,” reported the Associated Press. “At times he had to suppress laughter when he noticed reporters grinning at his reception.” Kissinger’s showmanship came to an abrupt end when a sturgeon was sliced open in front of him and its innards exposed. The combination of 110 degree heat and gutted intestines proved too much and a blanching Kissinger “looked away, paled and seemed extremely uncomfortable.”
During the formal talks the Shah took a hard line. He made it clear to Kissinger that he expected the United States to continue selling him all the military equipment he deemed necessary to defend the Persian Gulf oil fields and shipping lanes. For a start, he wanted to buy the next generation of American fighter aircraft, including three hundred F-16s and two hundred F-18s. Iran did not have the money to buy the planes, the technicians to maintain them, or the pilots to fly them, but no matter. Every weapons purchase and transaction had become a test of Kissinger’s willingness to follow through on his and Nixon’s unwritten secret commitments. The Shah repeated the threat he had lodged back in March that the United States should not reimpose restrictions on arms sales to Iran. He would not tolerate a return to the days of the Twitchell Doctrine. “Can the United States or the non-Communist world afford to lose Iran,” he asked reporters at a press conference with a tense-looking Kissinger at his side. “What will happen if one day Iran will be in danger of collapsing? Do you have any choice?”
Before his departure the secretary announced that the United States had agreed to sell another $10 billion in military equipment to Iran. A diplomat at the scene reported that Kissinger came up with the total dollar amount practically as an afterthought. For Kissinger, the important thing was to provide the Shah with the necessary reassurance. That Iran lacked the money to buy the equipment and could not possibly use any of it was irrelevant to Kissinger, whole sole motive now was to distract the Shah with tanks and guns. The trip had done nothing to advance the cause of American-Iranian relations. As Kissinger was leaving Tehran he casually remarked to the newsmen traveling with him that, “on historical precedent, a rate of economic advance like Iran’s was bound to lead to revolution.” Recalling the incident in his memoir, Kissinger played it down as “idle musing, for I added immediately that apparently the momentum of a very rapid growth could overcome the political perils of industrialization.”
When he returned to the White House Kissinger renewed his call for President Ford to sack Rumsfeld and Simon. “In Iran, I don’t think we realize what our domestic politics do to these people,” he bitterly complained to the president. “This Humphrey report was a disaster. We have no better friend than the Shah. He is absolutely supportive.”
“What is Humphrey doing?”
“He now feels badly,” said Kissinger. “But he has [Bob] Ellsworth’s former staff assistant who did the study and Bob is anti-Iranian. Then the Jews want to stop arms to the Middle East and there is an anti–arms sale binge on the Hill.”
Frank Zarb followed Kissinger to Tehran in August. Once again he came up short. Ansary followed Kissinger’s advice and still refused to settle for Zarb’s request for a $3 discount on each of the 300 million barrels the Shah wanted to off-load. The Iranians had their own reasons for holding out for better terms. Back in the spring the modest improvement in economic growth in the West had led to bigger factory orders and an increase in demand for heavy fuel oil. The Iranians were confident that when full economic recovery took hold, demand for their oil would rise, the market would tighten, and they could charge even higher prices for their exports of heavy crude. The negotiations deadlocked and Zarb returned to inform the president that the Iranians were still not prepared to offer enough of a discount to help the U.S. economy. Ford told his staff that the negotiations were over. Kissinger predictably blamed Zarb for the fiasco and called him a “nit-picking Talmudic scholar” for driving too hard a bargain and refusing to accept the Shah’s terms.
Ford’s patience with the Iranians and, it seems, with Kissinger’s coddling of the Shah, had finally run out. Even Ford’s hard-fought nomination victory over Ronald Reagan in Kansas City’s Kemper Arena late in the evening of August 19, 1976, had been clouded by reports of Iranian intrigue, this time involving Ambassador Ardeshir Zahedi. Zahedi had grown close to Reagan through Mr. and Mrs. Walter Annenberg, so close indeed that the Reagans warmly regarded him as an honorary member of their famous “kitchen cabinet” of political advisers. The previous Christmas the Fords had extended an invitation to Zahedi to visit them in Vail. Zahedi had turned them down, citing as an excuse a prior engagement with the Reagans. The timing was unfortunate because Reagan had just announced his intention to run against Ford and claim the mantle of the 1976 Republican Party presidential nomination for himself.
Zahedi flew to Kansas City in August to attend the GOP convention after spending a weekend golfing with Annenberg. It was not unusual for foreign diplomats to attend national political conventions as impartial observers. The difference this time was that the Iranian ambassador stayed in the Reagans’ hotel and was with the couple and their supporters in their suite on the night of the dramatic delegate count when Reagan lost to Ford by a narrow margin. Zahedi recalled that he was there as a friend and not as a political supporter. Yet there was no doubt where his own sympathies lay. “Ford was a nice, wonderful person, but he was weak and he was dominated by Henry,” he said. At some point during the long, drawn-out night, amidst all the excitement, Zahedi’s enthusiasm got the better of him. “With [Walter] Annenberg, I was trying to bring these two men together,” he said of his participation in the fraught mediation efforts between the Reagan and Ford camps over what role if any the Californian would play in the upcoming national presidential campaign against the Democrats. “I was trying to tell the Republicans that they should make up between themselves. If Reagan and Ford could come in to the picture [together, the GOP would emerge unified].” Zahedi’s intervention hurt him when furious White House officials saw him in the company of the same cabal of wealthy Californians who had just tried to roll a sitting president. They may have concluded that the Shah, through his ambassador, was trying to influence the outcome of a Republican Party presidential contest. “This is why Ford was maybe a little upset,” said Zahedi when he recalled the air of tension that surrounded his relations with the Ford administration during the tense end-of-year confrontation over oil prices: “They were not happy with me because of this Ford business.”
Ardeshir Zahedi had underestimated the personal antipathy between Reagan and Ford, the depth of the ideological chasm dividing the Republican Party, and the bitterness that lingered long after GOP delegates left Kansas City. Ford never forgave Reagan for his primary challenge, which in his view constituted an act of unforgivable treachery against a fellow Republican. Returning to Washington to receive an update on foreign policy matters from his secretary of state, the president let loose in the privacy of the Oval Office. “Now that we have gotten rid of that son-of-a-bitch Reagan, we can just do what is right,” he brusquely told Kissinger.
From every side, the American-Iranian alliance so carefully constructed years earlier by Richard Nixon and Mohammad Reza Shah Pahlavi was unraveling. The next blow to the relationship drew headlines around the world for its shocking brutality.
In Tehran on August 28, at the height of the morning rush hour, a red Volkswagen veered sharply in front of a car with an Iranian driver and three American passengers, forcing it to a halt. A minibus then rammed the car from the rear and several men brandishing guns jumped over a wall adjoining the roadway. One of the gunmen told the driver to lie down. When the driver raised his head he was sharply reminded to get down. The first assassin then shot the passenger in the front seat, William Cottrell, who fell out onto the street. Cottrell moved a hand and was finished off with a bullet to the face. Cornered in the backseat, Robert Krongard and Donald Smith were shot in the head at point-blank range. The attackers sprayed the men with automatic weapons fire and the car’s interior exploded in a fury of blood and lead. The assassins left behind a note claiming responsibility for the previous killings of the three American colonels. This was no random attack. Cottrell had been shadowed for two weeks by a team of between six and eight terrorists who had good reason for tracking him down. Cottrell was employed by Rockwell Corporation to manage construction of the first phase of the top secret Ibex electronic surveillance program. The two other victims were Rockwell technicians who had hitched a ride to work with Cottrell after missing their morning shuttle bus. Someone had betrayed Cottrell’s identity to the underground. There had apparently been a second major security breach. “One of the pistols was stolen from the United States Military Assistance Advisory Group (MAAG), and another one was believed, from the cartridge cases, to be a Browning,” Ambassador Helms confided to a colleague. The assassins, he made clear, had inside help. “There were about 43 rounds of expended ammunition on the ground . . . . The job was professional with the same modus operandi as in the past.”
The cover-up began almost immediately. The Shah had been tipped off by Israel’s Mossad that the Islamic guerrilla underground would try to exploit the findings contained in the Humphrey report and find ways to drive an even bigger wedge between Washington and Tehran. The Shah instructed his court minister to pin the blame “for this atrocity” on the Communists in an obvious attempt to win back sympathy in Washington. Helms was told that Russians were behind the attack. He knew better but accepted the Shah’s line that Moscow was to blame. This was reminiscent of how his predecessor, Ambassador Douglas MacArthur II, had dealt with the 1970 attack against his car in Tehran.
Until now the lives of American civilians in Iran had been spared by the urban terrorists. In the days that followed the attack, foreign expatriates “stayed close to home and kept their children away from the public playgrounds and sports fields that they normally frequent,” and 170 frightened Americans, mostly representatives of companies doing business in Tehran, packed the U.S. embassy auditorium for a security briefing. Everyone’s nerves were on edge. Businessmen representing defense contractors began registering at hotels under false names. The embassy’s twenty Chevrolets and limousines were outfitted with sealed side windows resistant to single bullet shots, though not machine gun fire, and metal plates were installed behind the backseats. Cynthia Helms recalled that she “sometimes had nightmares. I awoke one night when Dick was in Washington to what I thought was the sound of a shot. Convinced that I was about to be kidnapped, I leapt out of bed, grabbed my nightie, and rushed to the door.” She accompanied her husband to the Fourth International Trade Fair in Tehran surrounded by sixteen American and Iranian plainclothesmen and tailed by two backup cars.
Before the Rockwell murders the estimate of the number of Americans living in Iran was assumed to be anywhere from between 24,000 to 31,000, though no complete census had been undertaken. The State Department was operating on the mistaken assumption that, based on current growth patterns, fifty thousand Americans would most likely be living in Iran by 1980. Ambassador Helms now asked his staff to check those numbers. He was under pressure to back up the official estimates appearing in press accounts back home. Embassy staff contacted U.S. companies based in Iran and asked them to fill out a questionnaire asking questions about the number of employees and family members. They were taken aback when the questionnaires revealed that between 45,000 and fifty thousand Americans might already be living in Iran. In truth, no one really knew. Sales of military equipment were not the only aspect of U.S.-Iran relations that had spun out of control.
Democratic vice presidential nominee Walter Mondale cited the deaths of the Rockwell employees as the inevitable outcome of “scandalous” arms sales undertaken by two Republican administrations. “Richard Nixon gave a blank check to Iran for the purchase of the most sophisticated arms in the US arsenal,” he told a crowd in San Francisco. “Unfortunately, it’s a check that President Ford has fully endorsed.”
On August 30, half a world away from the anxieties of Tehran, Alan Greenspan reported to the president and his cabinet that the economic recovery of the spring had slowed down. “The pattern is spurt and pause, spurt and pause,” explained Greenspan. “We are in one of those pause periods.” In his memoir, The Age of Turbulence, Greenspan wrote that the economy’s growth rate of less than 2 percent was not unusual given the depth of the 1974–75 recession. “From an economist’s standpoint, this was not a cause for concern,” he wrote. “Because a modern economy involves so many moving parts, it rarely accelerates or decelerates smoothly, and in this case all the major indicators—inflation, unemployment, and so on—looked fine.” But the major indicators weren’t fine. New figures showed the nation’s rate of unemployment increased for the third month in a row, to 7.9 percent. The White House was forced to retract Greenspan’s earlier confident prediction that unemployment would fall to 6 percent by Election Day. Confirmation of the economic slowdown couldn’t have come at a worse time for President Ford.
The origins of what pundits instantly dubbed the “Greenspan Pause” were not in dispute. For reasons that no one could adequately explain, billions of dollars set aside for federal stimulus programs remained unspent. “Economists and analysts noted that during the first three quarters of 1976 the Federal Government spent $15 billion less than it was supposed to,” reported Leonard Silk in The New York Times. The dollar amount “translates into a shortfall of $20 billion at an annual rate. Talk about balancing your checkbook!” Arthur M. Okun, a former chairman of the Council of Economic Advisers, described the oversight as “the biggest budgetary gaffe since the buildup of the Vietnam war in 1966, when military spending was underestimated by some $10 billion—with inflationary results.” Another prominent economist lamented that the federal budget was “in a state of chaos.” The administration’s shortfall in stimulus spending, which now threatened to tip the U.S. economy back into recession, added urgency to White House anxiety on oil prices: “If the oil-producing countries impose another price increase, it not only will affect the American economy directly by draining purchasing power, it also will weaken other industrial economies, further eroding demands for U.S. exports and, therefore, slow U.S. production.”
Uncertainty in the United States quickly spread across the Atlantic to the anemic economies of Great Britain and France. Prime Minister James Callaghan’s Labour government was faced with the toxic combination of a sharp fall in the value of the pound, 13.8 percent inflation, and 1.5 million people out of work—the highest number of unemployed since the end of the war. Trade unions vowed to fight Callaghan’s pledge to cut spending. “Things are going to get worse before they get better,” said an official with Britain’s Confederation of Industry, adding that if the economy did not pick up soon the country would be “effectively bust as a viable industrial nation.” Across the Channel in Paris, where inflation was at 12 percent, Prime Minister Raymond Barre imposed a three-month wage and price freeze and a ceiling of $11 billion on oil imports for the next year. Barre blamed high energy costs for France’s worsening trade balance.
The White House stepped up its campaign to win support from Saudi Arabia for an oil price freeze at Doha. The deal to sell thousands of new-generation smart missiles to the Saudis was part of that effort. But it ran aground when liberal and conservative members of Congress protested the sale of sophisticated weapons systems to a country still technically at war with Israel. They were reluctant to be seen doing favors for the world’s richest oil producer during an election campaign. For good measure, lawmakers expressed support for legislation that if signed into law would punish any American company that complied with the Arab trade boycott of Israel. Gerald Ford appealed to Republican opponents of the deal not to antagonize the Saudis and to keep their support for Israel in its proper perspective. “The Saudis have been very helpful in keeping oil prices under control,” he reminded Senators Jacob Javits and Clifford Case in the Oval Office. “I don’t think we can kick them in the teeth on this in light of their importance.”
On September 7, U.S. Ambassador William Porter traveled to Taif in Saudi Arabia to deliver a letter from President Ford assuring King Khalid that Washington remained committed to the missile deal. Crown Prince Fahd accepted the letter on the king’s behalf and assured Ambassador Porter that His Majesty “will certainly not approve a price rise this year. He is against any increase in the price of oil. If other OPEC members continue to apply pressure we will agree to talk to them next year, but there is nothing planned for then as far as the Saudis are concerned.” Fahd made it clear that discussions on the matter must be kept quiet. “At that point he asked for [United States government] assistance with Iranians and Venezuelans,” Porter cabled Washington. “Anything we could do to make them understand dangers of raising prices would be helpful all around especially for Saudi Arabia. I said I would send the message.”
On September 16, Ford had a new letter to send to King Khalid. National Security Council officials Robert Hormats and Robert Oakley explained in a memo to the president that
the main objective of the letter is to attempt to lock the Saudis into the position taken by Fahd, in Khalid’s name, opposing any decision this year to increase oil prices. If we can hold the Saudis to this, it will at least mean no price rise at the December OPEC meeting, buying us several months more of status quo. It could produce a freeze of longer duration, but this is more problematical. As an encouragement to Fahd and Khalid, the letter indicates that the U.S. will follow their advice and make known to other OPEC countries (especially Iran and Venezuela) our opposition to a price increase.
At 11:00 A.M. on Friday, September 17, President Ford, National Security Adviser Scowcroft, Assistant Secretary of State Charles Robinson, and Ambassador Porter met with Saudi Arabia’s foreign minister Prince Saud bin Faisal al-Saud, Ambassador Ali Abdullah Alireza, and Hassan Shawwaf, the chef de cabinet, to discuss oil prices and arms sales. The Saudis were offended by the recent controversies over the missiles and the trade boycott. They felt they were being singled out for punishment. “There are many aspects of the U.S.-Saudi relationship which we would hope to discuss,” said Prince Saud. “We are not a warlike country, but the threats in the area compel us to improve our forces,” he explained. “The constant questioning of our efforts by the United States leads to grave questions on the part of the Saudi people. We don’t see why they should be looked on with suspicion. Our efforts are not just in arms, but for schools, hospitals, barracks, etc. What we are asking for is less even than your military experts say is needed.”
The president said he was in total agreement with the prince’s sentiments. He promised to fight for Saudi interests in the Congress and he gave an assurance that his administration was applying pressure to Israel to accept Syria’s occupation of Lebanon. “Let me say we agree completely that you have no aggressive designs and we fully support your defense efforts,” he assured his guests.
The reluctance is not on the part of my Administration. Our cutbacks have been pragmatically designed to get Congressional approval. This is a difficult time for us. I would hope that in January we could move ahead in a better climate here. Last year we spoke of progress in the Middle East. Tragically the Lebanese conflict has intervened. We appreciate the Saudi support in the area. We are doing what we can to support Lebanon and the moderate forces and keep Israel restrained . . . . I understand and fully support your needs.
Ford wanted to move on the pressing issue of oil prices. “If I could speak for a moment about oil prices,” he began.
I greatly appreciate His Majesty’s comments about a price increase. Last year when you were here, we were at the bottom of a recession. We are moving out now, but it is fragile. The OPEC action last summer under your leadership was very far-sighted, but any increase this December or for ’77 would be extremely damaging, not only for the United States, but even more so for our industrial colleagues who are in a much more fragile situation. We plan to discuss this matter with you but also with Iran and Venezuela.” It would be disastrous to push the world economy back to the recession of last year. So we hope His Majesty’s views will prevail.
“His Majesty is just as determined as last summer not to have an increase,” said Prince Saud. “But it will be difficult, and it will depend heavily on what you can do with Iran and Venezuela. His Majesty has said at least he will refuse more than a modest increase, and will categorically refuse anything beyond 5 percent. If we can get support from Iran and Venezuela, we can hold to no increase, but without that, it will be extremely difficult.” President Perez of Venezuela continued to support the Shah’s hawkish stance on oil producers on behalf of non-Arab producers.
“I appreciate that and we will work on them to the best of our ability.”
“Our ability in this regard depends strongly on the overall state of U.S.-Saudi relations, not only in military supplies but in other things,” Prince Saud reminded the president. “We need a measure of reciprocity to justify and strengthen our ability and to keep our public opinion and the Arab public opinion mollified.”
“None of these acts is needed and I will do my best to defeat it,” the president observed of the boycott legislation. “Part of this is an education process, and my Administration will do its best to explain the situation to the American people.”
The National Security Council convened to discuss oil prices at 3:00 P.M. on September 23. The stock market had just crawled past the 1,000-point mark to reach 1014.79—“the highest record in almost four years.” Ford’s national security team assumed that the majority of OPEC members, starting with Iran, favored a price increase at Doha of between 10 and 20 percent. The president’s men faced a delicate balancing act. The country was headed into the final stretch of a presidential election campaign. Speculation about a possible banking crisis had not yet spilled over into the mainstream press. Their efforts to apply pressure to the oil producers had to be kept quiet to avoid triggering public panic and a contagion of fear that might lead to the very crisis of confidence in the banks they wanted to avoid. The NSC decided to focus its efforts on three countries: Saudi Arabia, Iran, and Venezuela. Officials urged President Ford to write letters to the three leaders appealing to them for price restraint. Frank Zarb was assigned the task of applying pressure to the Venezuelans. It was important to drive a wedge between the Shah and Perez. Kissinger was asked to meet again with Prince Saud, who was in New York for the opening of the United Nations General Assembly. Around the world, American diplomats were instructed to mount an intensive but low-key effort to persuade oil producers and consumers alike that a price increase posed a serious threat to the world economy and to their security. No one wanted to panic the markets.
Administration officials already knew their leverage over Iran and Saudi Arabia was limited. The Shah held a persuasive bargaining chip in the CIA bases in northern Iran. White House hands were also tied when it came to Saudi Arabia. Officials considered issuing a threat to withdraw the U.S. Army Corps of Engineers, which was building the kingdom’s military facilities and offering trade and investment incentives. None of the other measures considered was deemed practical, desirable, or even legal. The use of force was not considered. In short, the administration lacked leverage over the Saudis except in the area of arms sales—and the missile deal and military equipment were being dangled as incentives to get them on board anyway. It was for this reason that American oil companies rushed to top up their storage tanks. By the end of October stocks of crude oil were at their highest level since April 1939, a record 293 million barrels. The oil companies weren’t taking any chances. They anticipated that the long awaited showdown was coming between the United States and OPEC and they wanted to be ready for it.
Bill Simon charged into battle. In the first week of October 1976 the treasury secretary joined finance ministers, bankers, and more than three thousand advisers and guests in Manila for the annual meeting of the IMF and its sister organization the World Bank. The big men of American banking were in attendance, among them the chief executives and chairmen of Bank of America, Chemical Bank, Citicorp, Morgan Guaranty Trust, and Morgan Stanley. Everyone was now focused on the “debt bomb” and the prospect of another big hike in oil prices. Britain’s borrowings had reached $45 billion and the government was about to ask international lenders for another emergency infusion. Brazil, Mexico, and Italy owed more than $20 billion each; France, Finland, and Indonesia had foreign debts near $10 billion each. “No one really knows just how large the mountain of debt is,” wrote one analyst. “But what is important is not the aggregate figure, which runs into hundreds of billions of dollars, but the ability of particular nations to meet their payments.” The wild card in the risk factor was the prospect of another big hike in fuel costs. “If OPEC puts the price up substantially—say by 10 percent or more—would this aggravate the payments problem of all oil-importing countries and push some closer to the brink of default? Can the United States and others dissuade OPEC from a stiff increase?”
H. Johannes Witteveen, the head of the IMF, repeated his call from earlier in the year for rich and poor nations to stop borrowing to cover their balance of payments deficits. Speaking to the delegates in Manila, Witteveen warned that bad lending practices had begun “to affect the credit worthiness of some borrowers and to create the possibility of economic and financial problems.” Witteveen’s dour prognosis was followed on Tuesday, October 5, by an even harsher assessment provided by Treasury Secretary Simon, who urged a cap on lending by the World Bank and reminded delegates that they “are approaching the limits of their ability to take on more debt.” Simon issued a stark warning of the dangers of another increase in oil prices, and drew a line in the sand. “If the oil-producing nations take, as is now rumored, the dangerous step of again raising the price of oil, it would seriously aggravate an already troublesome economic and financial situation.”
Britain turned out to be the weakest link. Amid boisterous scenes in the House of Commons on October 12, Prime Minister Callaghan tried to calm public fears and offer reassurance to nervous investors about the state of his country’s sickly finances. “We shall not waver!” he cried. “We shall bring the country through!” The IMF made it clear that it would not even consider Britain’s request for further aid of $3.9 billion if Downing Street did not agree in advance to tough cuts in public spending. The loan was Britain’s fourth overseas bailout in twelve months. Callaghan’s own backbenchers opposed fiscal austerity and there was no guarantee the government would get its way. Insolvency beckoned and with it the specter of national bankruptcy. Chancellor of the Exchequer Denis Healey defended the loan and warned Britons that failure to act would result in an “economic policy so savage that I think it would produce riots in the streets. It would mean an immediate and very heavy fall in living standards and unemployment, maybe 3 million.” Healey also knew that Britain was obliged to somehow meet the first payment on a separate $5.93 billion international standby credit due to fall on December 9. There was wild talk of the overthrow of the government. “Nobody wants to talk about it, but the possibility of a breakdown in law and order, or an extremist revolt in Great Britain, gives the United States and other NATO governments the chills,” reported The Washington Post.
The threat of contagion was real too in Italy, Portugal, and Spain, where the economic slowdown suddenly threatened to unseat the reformist governments of Giulio Andreotti, Mario Soares, and Adolfo Suárez. “Of course, the economic situation is serious,” Italian foreign minister Arnaldo Forlani confided to Kissinger. “The problem as I see it in Italy is this,” replied Kissinger. “We favor reforms if we have to and if you have to but we don’t want you to take a stringent policy of deflation to the point that it helps the Communists. We will push you for reforms. We will push you but you will have to tell us what is not politically tolerable for you. Don’t let our technical people push you around to a point beyond what is politically tolerable for you.”
In early November Prime Minister Soares of Portugal appealed to Washington to release an emergency $300 million loan to prevent the wipeout of its foreign exchange reserves. Tens of thousands of Portuguese settlers were pouring back into the mother country after fleeing the fallen empire’s newly independent and war-torn African colonies. Inflation was running to 30 percent and nearly 20 percent of the population was unemployed. Strikes, terrorist bombings, food lines, and the emergence of a black market economy confirmed the image of Portugal as a stricken, sinking ship. Political observers agreed that the future of the Soares government and perhaps democracy in Portugal would be determined by the outcome of local and regional elections set for December 12 when the radical left and right would surge in strength.
Spain was not only broke but in the dark. Madrid experienced blackout conditions when the government decided to trim its $4.3 billion oil bill by turning out the lights in the capital after 8:00 P.M. and ending television transmissions at 11:30. The national speed limit was reduced to 62 miles per hour. “The energy crisis has turned the country’s economy topsy-turvy,” reported one visitor to the Spanish capital in October 1976. “Spain’s once glittering, throbbing capital will now have to throb without the glitter.” Political observers in Spain forecast a “hot autumn” ahead as labor unions and Franco loyalists flexed their political muscles in the weeks leading up to a nationwide referendum seen as crucial to the king’s plan to hold free parliamentary elections in early 1977. The date set for the referendum was December 15. Wall Street had a big stake in the outcome of the vote. One third of Spain’s outstanding foreign debt of $12 billion was owed to American banks, which had rushed to establish a presence in the country earlier in the year. “The growing foreign debt is linked heavily to Spain’s petroleum imports,” noted The New York Times. An oil price rise of 10 or 15 percent “would push the current account deficit toward $4 billion,” up from its current figure of $3.5 billion.
Wall Street’s debt bomb and the turmoil spreading through Europe looked set to converge in the space of a few hair-trigger days in mid-December. Britain’s scheduled debt repayment fell on the 9th; Portugal’s elections on the 12th; Spain’s referendum on the 15th; oil ministers from OPEC were also due to meet on the 15th. Over the next six weeks the future of the Ford presidency, worldwide financial networks, Wall Street banks, NATO allies in Europe, millions of jobs, and America’s economic recovery could well be decided by the actions of a few governments in the Middle East. What would be the impact of the uncertainty surrounding these events on the presidential election in the first week of November?
Around Washington, patience was running out with the Shah. “How much pressure has there been from the United States to keep this oil rise down,” a British journalist asked the Shah. “Oh . . . A lot,” he admitted. But he refused to back down and rejected evidence of a possible economic disaster in the West if prices went up. “I cannot accept this as a crisis,” he said in reference to a question about West Germany’s unemployment rate. “It is a strange situation. There are three million guest workers in England and West Germany. For this very reason I shall have none of your talk about unemployment.” He advised the Germans to come to Iran, where he would put them to work. Western criticism of Iran’s oil policy was based on “pure jealousy.” He said he was confident that the United States, West Germany, and Japan would have no trouble absorbing a 15 percent rise in oil prices but agreed it would be difficult for Italy, France, and Britain. “If you just decided to work a little more, just decided to have a little more discipline, and modernized your industry, you could become the strongest country in Europe,” he lectured a British visitor to the palace in the autumn of 1976. He felt confident that he would get his way.
At Kissinger’s request the Shah had agreed to delay the Bali price increase until Doha, after the outcome of the presidential election. Despite Washington’s protestations, the Shah still fully expected a quid pro quo from the American side. Besides, Kissinger had assured him that the administration still supported Iran’s high levels of spending on defense and would see to it that he generated the oil revenues to pay for them. The Shah never took seriously Saudi opposition to an end-of-year price rise. Over the years the Saudis had protested loudly in favor of price restraint but never summoned the courage to actually stand up to the rest of the cartel and exert their swing power.
The Shah’s hard line on oil prices, at least in public, obscured a behind-the-scenes debate among his military and civilian advisers about the wisdom of seeking a 15 percent increase. Iran’s top generals argued that a price rise was more than justified to recoup the exorbitant cost of imported U.S. military equipment. General Hassan Toufanian was still smarting from his clash earlier in the year with Donald Rumsfeld over allegations of corruption and price gouging by the U.S. Defense Department and American defense contractors. An American visitor to Toufanian’s office received a lesson in the economics of military procurement when the general pulled out from his desk drawer a cardboard box “filled with small aircraft parts and produced some odds and ends.” Toufanian held up one small gadget, the door handle to a helicopter, and said, “This costs us one barrel of oil.” He explained that it cost Iran the equivalent of ten thousand barrels of oil each year to pay for just one of the thousands of American blue suiters and mechanics brought in to help the Iranians maintain their arsenal of military hardware. Americans who described themselves as “logistics representatives,” but who in reality were storekeepers, billed the Iranian government for annual salaries of $115,000. This kind of “imported inflation,” Toufanian complained, had so far added $2 billion to Iran’s defense expenditures. He argued that raising the price of oil by 15 percent to recover these costs was more than justified.
But the Shah’s civilian advisers were not so sure. Officials at the National Iranian Oil Company were worried that another big price hike might suppress consumer demand for oil at a time when Iran’s petroleum revenues remained in a slump. They recommended a price increase of no more than 10 percent. The Shah chose to disregard their warnings, no doubt because he shared Toufanian’s anger at the way the Ford administration handled arms sales.
The CIA saw in the Shah’s stubborn refusal to cooperate evidence of a deeper structural problem in U.S.-Iran relations, perhaps even an intelligence failure. On October 14 the agency invited colleagues from the NSC, the departments of State, Treasury, and Defense, the Defense Intelligence Agency, the Army, Navy, Air Force, and the Joint Chiefs of Staff to a three-hour seminar to help it review the performance of Ambassador Helms and his staff in intelligence gathering. For many of the officials it was the first time they had had a chance to compare notes. Concerns quickly poured forth and from the most unlikely sources. The representative from the National Security Council complained that private defense contractors were doing end runs around the White House by setting up their own lines of communication to the palace. A Pentagon official appealed to the CIA to help the Defense Department learn more about Iran’s military preparedness. One of Kissinger’s own staffers asked if anyone knew anything about the royal succession. Those in the room realized they could not answer even the most basic questions about the Shah, conditions inside Iran, or the U.S.-Iran relationship. “Washington does not have a clear perception of the Shah’s long-range objectives,” concluded David Blee, the CIA’s national intelligence officer for the Middle East and the official who summarized the discussion for his superiors.
For example, why is he acquiring such a vast array of sophisticated military hardware? The Shah states that adequate defenses against Communist-equipped Iraq are precautionary, yet the placement of new bases suggests other interests. In 1985 when oil revenues from Iranian production have peaked, and his oil rich neighbors are just across the Gulf, what does the Shah intend to do with his accumulated weaponry? Will he still claim and demonstrate concern for the stability of the area? Or will he have destabilizing objectives?
Henry Kissinger had personalized relations with the Shah, hoarded information, and sidelined the Shah’s critics in the White House. He dominated policy making to such an extent that virtually no one else in the U.S. government—including his own senior staff—had the vital information they needed to do their jobs. Some of the participants in the CIA forum expressed concern that the Shah was too removed from the realities of ordinary life in Iran. “In this regard, it is particularly important to know what subjects are withheld from the Shah and the degree to which reports to him are doctored by his subordinates,” wrote Blee. “To what extent do such practices warp his perspective, isolate him, and imperil his regime?” Until now, Ambassador Helms had insisted that his diplomats avoid antagonizing the Shah by shunning contacts with Iranian opposition leaders. Seminar participants unanimously agreed that the time had come for Helms and his staff to enter into a dialogue with the Shah’s domestic critics: “While it is a politically difficult and sensitive matter for Embassy officials to meet with identified opponents of the Shah, the Mission should have the widest possible range of contacts.”
Five days later General George S. Brown, the chairman of the Joint Chiefs of Staff, publicly raised doubts about the Shah’s ambitions and his loyalty as an American ally. “Gosh, the programs the Shah has coming, it just makes you wonder about whether he doesn’t someday have visions of the Persian Empire,” he told an Israeli interviewer in remarks that made headlines. “They don’t call it the Persian Gulf for nothing.” Secretary of Defense Donald Rumsfeld played down the general’s “obviously inelegant phraseology” and pointedly refused to reprimand him. Several days later the Shah told Tehran’s English-language newspaper Kayhan International that Brown’s comments were “truly hilarious” and that Brown had passed on an apology and regrets.
The Defense Department was digesting the results of its own intelligence assessment on U.S.-Iran relations, this one in the form of a survey of arms sales undertaken by David Ronfeldt, an analyst at the RAND Corporation. Ronfeldt set himself the task of answering two very basic questions—questions that no one at CIA or State had so far thought to ask: How did we get here? Where do we go from here? The United States, Ronfeldt concluded, had stumbled into a strategic trap of its own making by surrendering its leverage over its ally. The superpower had created a “superclient” and to the point where Iran’s Shah, not America’s president, managed the terms of the relationship. U.S. officials had naively underestimated the Shah’s policy of “aggressive nationalism” and his desire simultaneously to lure the United States into deeper engagement in Iran while moving Iran “still further away from an image of excessive dependence on the United States.” The United States, having lost sight of its policy objectives, and having lost control of its programs, now found itself trapped in Iran.
Ronfeldt delivered a blistering critique of the Nixon Doctrine, which had set up the Shah and other Third World dictators as regional gladiators: “In recent years the U.S. Government is frequently accused of favoring, if not of imposing, dictatorial rule in client states. The presumption is that dictators are somehow more subservient to U.S. interests. However, in the case of Iran and probably other countries this view seems inaccurate.” America’s multibillion-dollar investment in Iran made the United States “a potential hostage” to the Shah’s ambitions with the added risk that America could be drawn into a future war fought by the Shah on his terms.
The report severely criticized the approach taken by Kissinger’s State Department, which encouraged and signed off on unrestricted arms sales to Tehran as a way of recycling Iranian petrodollars. Given what the Defense Department was now dealing with, “there is little evidence that State’s policies have indeed protected, much less enhanced, U.S. influence and leverage.” Iran was totally unprepared for life after the Shah and a successor regime could turn out to be virulently anti-American. The Shah had so far resisted American efforts to broaden his political legitimacy. Nor would he do so until such time as he experienced “a major failure of leadership . . . . The Shah has not yet experienced such a failure—yet the excessive ambition of his recent goals in acquisitions for the development of Iran may well result in notable disorganization and disarray.”
The United States was deeply, incontrovertibly enmeshed in Iran in ways reminiscent of its early and disastrous involvement in Vietnam. Decisions taken years earlier by the Nixon administration meant that President Ford lacked the ability to exert pressure on the Shah to compromise on the oil prices that now threatened to ignite a debt bomb, bring down the banks, and topple allied governments in Europe. Nor was that all. There had always been the risk that oil prices, arms sales, and the CIA bases would become entangled. That happened now, with just two weeks to go before Election Day, when in late October the influential television news show 60 Minutes broadcast an interview in which the Shah frankly admitted that SAVAK conducted surveillance operations on American soil against Iranian dissidents. The disclosures caused such widespread revulsion and alarm that Kissinger had no choice but to launch an investigation. Jack Anderson reported that he had suddenly come into possession of a cache of files revealing that the CIA had trained the Iranian secret police in the fine arts of forgery, wiretapping, illegal entry, and break-ins. Anderson also publicly announced the name of SAVAK’s senior handler, a diplomat assigned to the Iranian mission to the United Nations.
Richard Helms’s decision to step down as U.S. ambassador to Iran at the end of 1976 was made in the knowledge that the CIA review was about to expose his record of failure as envoy to Tehran. His tenure had been an unmitigated disaster, not only for the U.S. national interest, but also for the Shah, who never learned the extent of the growing opposition to his policies in Washington. The scandal involving SAVAK was symptomatic of a relationship that had increasingly come to be one-way. Helms was aware that he faced almost certain prosecution on a charge of perjury related to a lie he had told senators during his confirmation hearing in February 1973. Watergate was about to claim its last victim. With his career and reputation in ruins, the ambassador called on Court Minister Alam on October 24 to inform him of his decision. Helms broke with protocol when he urged Alam to talk to the Shah. He said the Iranian government had to respond more forcefully to attacks from human rights groups. And he warned against raising oil prices again, saying it would worsen Iran’s standing in the United States.
President Ford’s formal request to the Shah to oppose an increase in oil prices in December could not have come at a worse time. On October 30, Ambassador Helms received an “eyes only for the ambassador” cable with the following instructions from Henry Kissinger: “At the earliest appropriate time, and in any event, no later than [close of business] Monday, November 1, please deliver the following personal message from President Ford to His Imperial Majesty, Mohammad Reza Pahlavi.” Embedded in the cable was President Ford’s personal appeal to the Shah not to increase oil prices. Election Day was November 2. In the last week of the campaign the president was barnstorming the country furiously, trying to erase Jimmy Carter’s slender lead in the polls. The American people knew nothing of the behind-the-scenes drama preoccupying his foreign policy team.
The president’s letter to the Shah was firm and direct. Ford pointed out that improvements in the world economy over the summer had led to a modest but discernible increase in demand for Iran’s oil. Iran’s oil production had climbed back above 6 million barrels a day. Ford was making the point that the White House no longer accepted the Shah’s argument that Iran’s economy needed an end-of-year bailout in the form of another big increase in oil prices. Instead, it was the United States that needed a bailout if it was to prevent a financial meltdown. “Many countries have in fact virtually reached the end of their ability to borrow,” wrote the president. “Several important industrialized countries which are experiencing economic difficulties and the attendant danger of political instability would encounter still more severe economic problems if faced next year with a new oil price increase . . . . This would add major new strains to the international financial system and intense pressure on both industrialized and oil-producing nations to provide balance of payments support. Thus, the fragile and uneven nature of the global economic recovery requires that responsible nations avoid action which would endanger it.” President Ford made it clear that from now on progress on arms sales would be contingent on cooperation with oil prices. He urged the Shah not to play into the hands of his critics: “I am sure you have been fully informed of the Administration’s successful resistance to Congressional attempts to block the sale of F-16 aircraft and other military equipment to Iran. The struggle with certain segments of American opinion on this subject has not been won, however, and I fear that there will be further and perhaps greater pressures next year.”
Helms took the letter to Niavaran Palace on Sunday, October 31, where he was received by the Shah in his study at 10:00 A.M. local time. It was a poignant encounter for both men. They had known each other and collaborated since 1957. Helms had been involved in the planning for Operation Ajax, which had restored the Pahlavis to power. He had been the Shah’s back channel, enabler, interlocutor, and apologist for two decades. Now they faced each other as adversaries. The cable that Helms sent back to Kissinger made it clear that he had stood his ground with the Shah to the point of breaching imperial decorum and court protocol:
After His Majesty has opportunity to study message, reply will be forthcoming. His Majesty and I held a rapid-fire debate for about 10 minutes on various facets of crude oil price increase issue. Please assure the President that whatever the outcome of the December OPEC meeting, I took pains to insure that His Majesty is fully aware of the American position, American views, and American reasons for not wanting to see another price increase in the near future.
Foreign ambassadors do not engage in “rapid-fire” debates with foreign chiefs of state, least of all with one whose titles included King of Kings, Light of the Aryans, and Shadow of God. Helms gave the Shah what in diplomatic terms was the equivalent of a dressing-down. The letter the Shah wrote in reply and dated November 1 reflected deep anger at the humiliation he received at the hands of a mere ambassador. Ambassador Zahedi held the letter in reserve until the outcome of the presidential election was known in Tehran. The Shah stood his ground at least in part because he believed—erroneously as it turned out—that the oil market had turned in his favor. In fact, much of the recent demand for Iran’s oil could be attributed to short-term panic buying by oil consumers stockpiling in advance of the OPEC meeting.
On Tuesday, November 2, Jimmy Carter defeated Gerald Ford to win the White House. Richard Helms’s resignation as ambassador to Iran was announced the same day. Kissinger had long since given up on Ford. The president’s clumsy responses to foreign policy questions during the televised debates with Carter had exasperated his secretary of state. “Look, I don’t give a good god damn—I think this campaign is lost,” he groused to Brent Scowcroft two weeks before Election Day. Before the votes had even been cast, Kissinger placed a call to Senator Ted Kennedy to assure him of his support should the senator from Massachusetts make a run for the presidency in 1980.
“You were right about the pause,” Kissinger tartly remarked to Alan Greenspan. “It’s just too bad it happened to coincide with the presidential election.”
The last thing Kissinger needed on the eve of the OPEC meeting was a showdown with the Shah over the nefarious activities of Iran’s secret police. It was better that that particular stone was left unturned. On November 4, Kissinger, Harold Saunders, and Roy Atherton met to discuss the progress of their investigation into whether SAVAK had violated U.S. laws. Saunders reported that the FBI and CIA were of no help because they had “no formal liaison with SAVAK agents on American soil.” Kissinger wanted the matter put quickly and firmly to rest. “I told Zahedi I hoped that none of this was true because we could never accept it,” he said. Kissinger said he wanted an assurance from the Iranian ambassador that “there is no evidence that they are doing it [spying and perhaps committing sabotage] and that we would never tolerate it.”
Ardeshir Zahedi delivered the Shah’s letter of reply to President Ford’s appeal on oil prices on November 5. He had been careful to await the outcome of the election result. Any doubts about the deep offense the Shah had taken to recent events were confirmed by the tone of his letter. The Shah began by pointing out that Iran had held the line on oil prices at Bali although it had not been in its economic interest to do so. He stressed the importance of energy diversification, price indexing, and conservation. Even though Great Britain, France, and Italy faced a critical situation with their balance of payments, the Shah told the president that “this certainly does not justify our committing suicide by paying for their failure or inability to put their house in order by succeeding in making the necessary adjustments in their economy through domestic measures.” The Shah declared President Ford’s effort to reduce America’s dependence on foreign oil a failure and blamed price increases for American commodities for Iran’s own financial troubles. Then the leader of Iran issued a threat:
You are no doubt aware, Mr. President, of my deep concern for the need to maintain close cooperation between our countries. However, if there is any opposition in the Congress and in other circles to see Iran prosperous and militarily strong, there are other sources of supply to which we can turn for our life is not in their hands. If these circles are irresponsible then it is hopeless, but should they be responsible, they will certainly regret their attitude to my country. Nothing could provoke more reaction in us than this threatening tone from certain circles and their paternalistic attitude.
What the Shah left unsaid—presumably he felt he did not need to spell it out in black and white—was that he had agreed to forgo a price increase at Bali in May 1976 as part of a broader deal with the White House not to raise the price of oil until the presidential election was out of the way. Ford had lost the election anyway. As the Shah saw it, he had kept his end of the bargain. Now, more than ever, the Shah needed to raise government revenue to meet Iran’s internal and external financial commitments. The Shah believed that he had stuck to the terms of a deal that the American president was about to renege on. He remained convinced that he had been a loyal friend to the United States and a firm defender of America’s interests in the Persian Gulf.
The Shah now turned his attention to the SAVAK affair. The Iranian Foreign Ministry issued a carefully worded statement that warned of retaliatory action if the Ford administration tried to punish or expel Iranian intelligence personnel based in the United States. Helms sent Kissinger a cable on November 7 to emphasize that the Shah was deadly serious about his threat of reprisal. The Iranian leader wanted the White House to stop the investigation. “The statement serves notice,” Helms wired Kissinger, “that any restraints imposed upon, or actions taken toward, Iranian representatives in the United States would be reciprocated here.” This was an unmistakable reference to the activities of CIA employees working out of Embassy Tehran and in the secret listening posts strung along the northern border with the Soviet Union. The Shah was now using the bases for leverage with the Americans. He would not tolerate another humiliation or accept any more terms imposed by his so-called allies. The gladiator was fighting back and would take no more orders from Caesar.
At 9:55 on the morning of November 8, Henry Kissinger telephoned Roy Atherton, who did not know about Helms’s cable. Atherton said he had already spoken with Zahedi once about the matter and the envoy had assured him that the Iranians had done nothing wrong and that everything could be settled quietly. “With the line we were taking [Zahedi] said he had no problem,” said Atherton.
“I don’t want to know his problem,” snapped Kissinger. “I want his assurances.”
“We agreed to get together early this week. I want to go over with him . . . ”
“I want an assurance from the Iranians that it was not being done.”
“He told me they would not do anything improper or illegal,” said Atherton. “I wanted to go over with him what is proper and legal within our laws.”
“You will do it today.” Kissinger was not going to put up with Zahedi’s word games. He and Atherton both knew what the stakes were. Their comments also suggest that they knew the truth of the matter, that SAVAK agents had indeed engaged in espionage and quite possibly committed acts of sabotage on American soil. The potential existed for an explosive political scandal. The investigation had to be shut down.
“The problem is that there are a lot of things under our law that he may not be aware of,” Atherton offered by way of an explanation: “He may give us an assurance of things that he does not know that are illegal.”
“By the end of the day you will have done it, G-D, Roy. I want it by the end of the day.”
“I will do it.”
“Just cut out those staff meetings and speeches.”
“Alright, I will get him in today.”
Zahedi and Atherton met the next day. One of the Americans at the meeting recalled that the Iranian envoy delivered a typically “virtuoso performance” in which he smoothly blamed Iranian exiles living in Los Angeles for stirring up trouble. They were the ones, he insisted, who engaged in “intimidation and harassment.” It was obvious that both sides wanted the issue to go away—and fast.
“Ambassador Zahedi was quick to assure us that SAVAK had violated no laws—even before we explained what laws were at issue,” said the State Department official. “We cannot say that we gave him a thorough briefing on relevant U.S. law, although we can say that he had been warned.”
On November 10 the State Department issued a public announcement. Its “inquiry” had failed to turn up evidence confirming “any illegal or improper activity” by Iranian diplomats in the United States. As far as Kissinger was concerned the matter was closed.
Over the next forty-eight hours two important developments touching on the Middle East helped convince Saudi leaders that the Ford administration was serious in its commitment to brokering a regional peace settlement. The United States accepted the Syrian presence in Beirut and the city succumbed to foreign occupation. On November 11, the United Nations Security Council unanimously voted to condemn Israel’s construction of settlements on occupied Arab land. It was the first time the United States had sided with Israel’s critics in the Security Council and cast a vote censuring its policies.
Alan Greenspan, the chairman of the Council of Economic Advisers, was anxiously “pacing the floor” of his suite at the Thunderbird Country Club in Palm Springs on November 12. Greenspan conceded to a visitor that the American economy was “tracking under our projections” and that the summer-long “pause” had lasted longer than he expected. He said the problem was “a lack of confidence by investors in long-range prospects for the economy.” There were fears of another round of high inflation “based in part on the huge external debt being carried by a number of industrialized countries as a result of past oil-price increases.” Wall Street was nervous. Banking legend Felix Rohatyn declared that the growing debt situation “could lead to disaster because the political structures aren’t there to cope with it.” “After a brief Indian Summer in which recovery trends seemed discernible, the outlook for the industrialized nations of the world now has turned to decline—and the worst pessimism since the 1930s,” reported the Los Angeles Times. “On top of all this, the industrialized world is holding its breath to see whether its oil bill is going to be hiked by another 10% or 15% when the Organization of Petroleum Exporting Countries meets to fix its new price scales in Qatar in the Persian Gulf in mid-December.”
In November 1976 San Francisco–based Bank of America was the world’s largest bank. To reassure investors that the bank was not at risk five senior bank officials traveled to New York City to announce the adoption of a “Voluntary Disclosure Code.” It had taken officials ten months to produce a twenty-six-page public relations brochure. As part of its new commitment to full disclosure, Bank of America announced that it would bring greater transparency to the shaky home mortgage sector by sharing with borrowers “the bank’s appraisal of the value of property they offered as collateral.” It would also make public its foreign currency trades. Curiously, the code had little or nothing to say about the issue that forced its adoption in the first place—risky lending practices to foreign governments. Only groups and individuals deemed by bank officials to have “a legitimate need” to know would be eligible to receive that sort of information.
The situation in Western Europe deteriorated further. In the aftermath of the oil shock Richard Nixon and Henry Kissinger had drawn the historical analogy of the 1930s. They had no faith in the future of democracy in Southern Europe and were convinced that weak governments in Rome, Lisbon, and Madrid were ripe for subversion. Two years later their views had gained widespread currency. “I have never seen Europe so confused, so uncertain, and so pessimistic,” said an American analyst. “Everybody sees things turning down again and this time nobody has any idea of how to get out of it.” An economist with the OECD, the Organisation for Economic Co-operation and Development, concurred: “The real worry now is that another round of recession could provoke a real political and social crisis for some of our democracies.” Nixon’s fear of a leftist Popular Front–style government taking office in France seemed on the verge of coming to pass when Prime Minister Raymond Barre’s austerity budget faltered. Unemployment in France had rocketed by 300,000 in just two months and now surpassed the one million mark. A poll conducted by the French magazine L’Expansion showed that three out of four businessmen regarded a Socialist-Communist victory in the 1978 general election to be a foregone conclusion. Capital began leaving France for safe havens. “Some observers believe the situation is beginning to resemble what happened in Italy two years ago, leading to the dramatic fall in the lira’s value,” reported The Washington Post. “There is a feeling quite suddenly which we have never experienced before, at least not since the war, that economic events are out of our hands, beyond our control—that whatever policies governments adopt they can no longer really cope or control the economic influences which are working against us” said one French government official. “France scares the hell out of me,” a Ford administration official admitted to The Wall Street Journal.
In Rome, the government approved an austerity budget that called for deep spending cuts; its passage required the cooperation of Enrico Berlinguer’s Communist Party. Italy’s external debt had ballooned from $7 billion to $17 billion in just three years and for the last eight months of 1976 the cost of the country’s fuel imports had soared by 45 percent above the corresponding period last year. “What will it take to convince the Western world that the OPEC problem is not, in fact, manageable?” asked an Italian economist. “A mass moratorium on debt payments by the poor countries? Something has to be done to meet the problem. So much of it traces right back to oil.” Another 10 percent price hike would throw the carefully crafted Italian austerity program off-balance by $700 million. A 15 percent price increase would mean a revised balance-of-payments deficit of $1 billion.
Prime Minister Mario Soares held on in Lisbon as rumors swirled that extremists within the Portuguese military were plotting a right-wing coup. The Spanish government also held its ground in the face of severe challenges from the left and right of Spanish politics. A nationwide strike led by trade unions was followed several days later by a huge rally in downtown Madrid to mark the one-year anniversary of the death of dictator Francisco Franco.
The alarm spread to North America on November 15 when voters in the French-speaking Canadian province of Quebec awarded a majority of seats in the national assembly to the separatist Parti Québécois led by René Lévesque. Here too the lingering effects of the oil shock had come into play. Unemployment in Quebec was 8.5 percent, well above the national average of 7.1 percent, and was forecast to hit 9.1 percent in 1977. Lévesque had made the province’s high unemployment and low economic growth a centerpiece of his campaign. Canada’s weak economy was blamed for fueling provincial populism and for taking the country to the brink of dissolution. “Discontent over inflation and unemployment is shaking governments in Britain and Italy, fomenting rising left-wing sentiment in France, and rekindling separatist dreams in Canada,” reported Time. It noted that “the quiet optimism” of the spring had given way to “galloping global jitters . . . . The shock that could turn sluggishness into recession could come from another big hike in oil prices by the Organization of Petroleum Exporting Countries, which has scheduled a price meeting in Qatar for December 15.”
The White House moved into high gear. By now there should have been no doubt in anyone’s mind that the Ford administration had decided to break OPEC in whichever way it could. Kissinger’s argument that Middle East petrodollars could be recycled to benefit the domestic U.S. economy had been exposed as a fallacy. Higher oil prices had not moved the American economy away from its dependence on foreign oil. Higher prices had not increased Western security in the Persian Gulf, strengthened the region’s conservative pro-American monarchies, or enhanced America’s strategic objectives. Instead, high oil prices had brought the economies of the Western industrialized world to the brink of disaster and overheated the economy of Iran. “It seems to have taken the defeat of the Ford administration, the near-bankruptcy of Italy and England, the seemingly unsolvable dislocations of international trade and payments—with no end in sight—to jolt US policy makers from their theory that OPEC’s price rises would somehow pay off for the United States,” observed the Los Angeles Times. One of President Ford’s economic advisers put it this way: “How can you run a rational international system when equilibrium means a $40 billion deficit for the whole world against three oil producers with a population less than New York’s?”
On November 18, three days after the disastrous electoral result in Quebec, Kissinger informed Ford that he had spoken to the Iranian and Saudi ambassadors about the grave danger of imposing higher fuel bills on Western democracies. “I called in the Saudi and Iranian Ambassadors,” said Kissinger. “The Saudi was sympathetic but the Iranian was belligerent. We have weighed in with our European allies.” He thought they had done enough. “I think a public mission would be counterproductive,” he said. “So do the two Ambassadors and our own Ambassadors. [Germany’s Helmut] Schmidt has already said he could absorb 15 percent. The Saudis said they might have to accept 5 percent.”
Ambassador Zahedi had a very different recollection of his meeting with Kissinger. He said Kissinger gave every appearance of being embarrassed at having to raise oil prices for discussion. “He was shy,” said Zahedi. “He knew we would not budge. Maybe in his heart he thought we were right. He did not even talk seriously. It was in his office. We walked into his office.” Kissinger did not make an outright request to the ambassador about the Doha conference but dangled instead the promise of a meeting with President-elect Carter if Zahedi could persuade the Shah to reverse course and support a price freeze. Then Zahedi understood Kissinger to say something that gave the ambassador pause. Kissinger, Zahedi recalled, indicated that he would not be handing over certain of his Iran files to Carter’s White House transition team. Instead, Kissinger said he was having them sent to Nelson Rockefeller’s estate at Pocantico Hills in New York for safekeeping. “He was not willing to give the records to the Carter administration,” said Zahedi. He was now in the uncomfortable position of believing that information possibly vital to the future of U.S.-Iran relations was being deliberately withheld from officials with whom he would now be working. Zahedi did not know what the files Kissinger was referring to contained—or why the American secretary of state wanted to hold them back from the incoming administration. The first the public knew of Kissinger’s decision to store his papers on the Rockefeller estate came over the Christmas holiday break when the State Department admitted that the secretary’s telephone transcripts, which had been trucked to Pocantico, would now be granted along with other official documents to the Library of Congress, there to remain under his control for at least twenty-five years. Kissinger acted to head off a threatened lawsuit by a group of reporters who had learned of the stash. However, Zahedi’s recollection of his conversation with Kissinger raises the possibility that other papers, in addition to the telcons, were also sent to Pocantico. If the papers are in existence, their location remains a mystery. Dr. Kissinger did not reply to the author’s request for an interview.
Kissinger did not lead the effort to resolve the worsening financial crisis nor was he at the president’s side during the final confrontations with Saudi and Iranian envoys. Was Kissinger disassociating himself from a strategy that he believed would end in disaster? Washing his hands of a potential debacle? Or had Ford shut him out of the process? Kissinger certainly understood that Bill Simon and Sheikh Yamani now held all the cards. President Ford, desperate for a way out of this crisis and faced with the Shah’s refusal to cooperate, had no choice at this late stage but to throw in his lot with the Saudis.
The Nixon-Kissinger policy of delegating power and arms to Iran to patrol the Persian Gulf, defend West Asia, and safeguard the oil fields of Saudi Arabia had been torn apart by its own irreconcilable contradictions. King Khalid of Saudi Arabia was on the verge of replacing the Shah as master of OPEC and Iran as America’s indispensable partner in the region. Kissinger knew what that meant but even now failed to grasp the full dimensions of the financial hurricane moving in from offshore. The day after the election Kissinger had met with Ed Yeo, Under Secretary for Monetary Affairs at Treasury. Yeo had just flown back from West Germany after meeting with German officials to try to put together a rescue package for Great Britain. A transcript of their conversation confirms that Kissinger had not devoted much if any attention to Britain’s worsening financial situation. Yeo relayed German chancellor Schmidt’s view that it was imperative they keep Prime Minister Callaghan in power. “He has a terrible view of Margaret Thatcher,” reported Yeo. “He says that she is a bitch, she is tough, she lacks scope and cannot lead.” Callaghan’s own cabinet “is all trying to hang him. He is terribly concerned about the instability of sterling . . . . There is terrific intrigue in the cabinet. They are chopping each other to pieces.” Kissinger was puzzled by the scale of the crisis.
“You know I didn’t realize before how staggeringly high the British interest rates are,” he confessed. “Why can’t the British have our system?” When Yeo began to explain, Kissinger asked him to slow down. “Remember, I am just using you as my economic tutor,” he interjected. “Give me the idiot lecture.” Later, the secretary of state plaintively asked, “What happened to bring Britain to this place?”
Ford and Kissinger reconvened on November 23. The president appeared agitated. “After you left the meeting on Friday, we discussed oil prices,” he said. “Then on Saturday Arthur Burns told me he was very worried about the impact of a price increase. He thought a delegation should go there [to Doha], headed by me or the Vice President. I told him I would talk to the Vice President. The Vice President mentioned the oil deal with the Shah.”
“We can’t get it now,” said Henry. He was referring to Frank Zarb’s ill-fated negotiations with Hushang Ansary to buy oil from Iran under the table. Cutting a deal was no longer in the Shah’s best interests. “There is no shortage [of oil] now. We could have gotten it last summer. It would be humiliating for you to go. You would have come back with no price increase if you were not to be humiliated. I feel the same way though less so about the Vice President’s going. If you really feel strongly, he could go. If you feel you need it—but the Europeans aren’t doing much, and you have no clout. I just don’t think it is the thing to do. You could call in the Ambassadors.”
“Let’s set that up for early next week,” said the president. He was now focused on this, his last and greatest crisis as American president. “I want to be well-prepared, with the facts on the economics, political support, etc.”
Kissinger had some bad news for Ford. When it came to oil prices, the administration had no leverage left with Tehran. “On the economics, you have a tough agreement with the Shah,” he explained. “He will show how you jacked military prices up 80 percent over the past few years. The best is the political argument—that you will have to blast them for an increase and that they shouldn’t put themselves in a bad light when they need our help in the Middle East. Burns is irresponsible making a suggestion like that.”
“He is concerned about the world financial impact,” said Brent Scowcroft in a rare moment of public disagreement with his mentor. Tensions in the White House were running high. How had they let things get so out of hand—to the point where the United States was faced with a choice between Italy and Iran? Here was the true cost of eight years of secret deals and blank checks: the possible collapse of the U.S. banking system, the peaceful Communist takeover of NATO allies, and a devastating recession in the industrialized nations.
“I agree with that, just not his prescription for dealing with it,” said Kissinger. “Maybe we could get it postponed. I would call in the Saudi first. Zahedi, of course, is such a fool. What he will report will bear no relation to what you tell him.”
Later in the day President Ford placed a telephone call to the West German chancellor, Helmut Schmidt, who had narrowly won his own reelection campaign. The two leaders worked well together and Schmidt was genuinely sorry to see Ford leaving office. Ford told Schmidt that he had been on the phone to Prime Minister Callaghan, who warned that if the IMF imposed too stringent conditions on its loan, the resulting spending cuts “could touch off massive strikes and bring down the pound as well as his government.” Schmidt wanted the British prime minister to make tough cuts in spending without placing his own political future at risk. “It is in the economic interest that we impose strong conditions on the British,” he told Ford. “We should not go so far as to overthrow this government. There is no one else to take the reins and there may be a period of disorder which could affect us all deeply.”
Ford told Schmidt he was “very worried” about oil prices. The chancellor concurred and pledged his support to White House efforts to restrain the big producers.
Ambassador Ali Alireza was ushered into the Oval Office at 9:58 A.M. on Monday, November 29, 1976. The White House was monitoring events in the South Pacific, where a few hours earlier Australia had devalued its currency and New Zealand’s government suspended foreign exchange trading. Officials still weren’t sure if they were watching the first signs of a global financial panic. The president met the ambassador alone. The White House did not want to draw attention to the meeting or encourage media enquiries.
“I am gravely concerned about the world economic situation and the possible impact of an increase in oil prices,” said President Ford. “I am deeply worried about the economic situation both in the more industrial states and in the less developed countries, which are very vulnerable. In Portugal we have been working hard to get a moderate government operating and eliminate Communist influence. A deterioration in this economic situation could reverse the progress we have made. In Italy also there are grave economic problems, which if the present government can’t solve, it will undoubtedly bring Communists into the government. Great Britain is now trying to negotiate an IMF loan to stabilize its currency.” He mentioned the situation Down Under. “I have fought hard for Saudi Arabia and supported the closest of relations between us,” President Ford reminded his guest. “I have [fought] against irresponsible actions on the boycott of the part of the Congress. I will continue to do so because our aims and our objectives are identical. I will continue to do so even after I leave office. But it is difficult when the American people see a price increase which does such damage around the world. I want to help, but when my economists tell me of the jeopardy a price increase could put the world economy recovery in, I want to work with you to deal with this problem.”
Ambassador Alireza did not need to mention the Shah when he responded that when it came to oil prices “the problem is political not economic. We will do everything we can without breaking OPEC. But if you could bring pressure to bear on other members it would be helpful. If through your good office you can persuade other producers.”
Ford expressed his appreciation for Saudi Arabia’s willingness to extend financial assistance to Italy and Great Britain. He was appreciative, he said, of Saudi Arabia’s “responsible leadership in Lebanon.”
Ambassador Alireza picked up on this point. “I hope you can restrain the neighbor to the south,” he said in an allusion to Israel. “Without Syrian troops in the area, the guerrillas will have a free hand.” The Saudi was apparently responding to a statement issued the day before by Prime Minister Rabin of Israel when he declared that the possibility of a Syrian military presence on his country’s border with southern Lebanon was “intolerable.”
The president said the White House was aware of the situation: “We are working with the Israelis on that point and I am hopeful that the Lebanese situation can be resolved.”
Kissinger was back in the Oval Office on Friday, December 3. He had just returned from Mexico City, where he had escorted Rosalynn Carter, the wife of the president-elect, to the inauguration of President José López Portillo. “She was actually quite nice,” Kissinger told Ford. “I got the impression that he has been telling her how to stand, what to say, which side to present to the camera, until she is stiff as a board. But believe me, she knows nothing. Her whole world is rural Georgia. You can’t believe the things she asked me.” Gerald Ford, who knew better than most the full weight of the awesome responsibility now thrust on the Carters, expressed sympathy for them: “Actually, in that regard I feel a little sorry for them.”
The White House was still absorbing the latest bad news on the economic front. The number of jobless Americans had climbed back up to 8.1 percent. Alan Greenspan admitted that the U.S. economy had weakened beyond his earlier optimistic predictions. He reported “a higher degree of caution” from both consumers and the business sector. Then the country’s two biggest steel companies announced plans to hike their prices by 6 percent for 1977. Oil producers were big customers of the U.S. steel industry. They argued that they were now justified in their decision to raise their own prices to offset this latest new import expense from the West. President Ford and his advisers called on the steel companies to reverse their decision, arguing that it jeopardized the entire economy. It was hard to ask Middle Eastern oil producers not to raise the prices of their commodities when U.S. industry was doing just that. Kissinger told the president he had spoken again with the Saudi ambassador: “He said you were very impressive but the steel price increase was killing them.”
“I raised hell with my people about that,” replied Ford. “It is outrageous. Should I get Zahedi in?”
“I think so, just so we keep the record straight,” said Kissinger. He told the president he had some good news: “I think the Shah has the message. He is talking 10 percent now, so I would guess it will be 7–8 percent.” Kissinger’s enthusiasm was misplaced. The president and his economic advisers had made it very clear that they wanted no price increase for 1977. And once again Kissinger had misinterpreted the Shah’s intentions. The Shah had been clear that he would not, indeed could not, settle for anything less than a 15 percent price increase.
“Okay, let’s get him in,” said the president, “but it gripes me when our people pull the rug out from under me.”