In late 1951, Iran's Parliament in a near unanimous vote approved the oil nationalization agreement. The bill was widely popular among most Iranians, and generated a huge wave of nationalism, and immediately put Iran at loggerheads with Britain (the handful of MP's that disagreed with it voted for it as well in the face of overwhelming popular support, and the Fadaiyan's wrath). The nationalization made Mossadegh instantly popular among millions of Iranians, cementing him as a national hero, and placing him and Iran at the center of worldwide attention. Many Iranians felt that for the first time in centuries, they were taking control of the affairs of their country. Many also expected that nationalization would result in a massive increase of wealth for Iranians.
Britain now faced the newly elected nationalist government in Iran where Mossadegh, with strong backing of the Iranian parliament and people, demanded more favorable concessionary arrangements, which Britain vigorously opposed.
The U.S. State Department not only rejected Britain's demand that it continue to be the primary beneficiary of Iranian oil reserves but "U.S. international oil interests were among the beneficiaries of the concessionary arrangements that followed nationalization."
Iran sought to rid itself of British political influence and the exploitation by AIOC. Negotiations between Anglo-Iranian Oil Company and the government failed and in 1951 the oil industry was nationalized. As a result of Britain's boycott and the Abadan Crisis, Iranian production dropped to virtually zero. On British initiative the CIA overthrew Prime Minister of Iran Mosaddegh in Operation Ajax. Formally the nationalization remained effective, but in practice a consortium of oil companies was allowed in under a by then standard 50/50 profit-sharing deal.
The whole process had left the British a major share in what had been their single most valuable foreign asset. It had stopped the democratic transition in Iran however, leaving its mark for decades to come. The coup is widely believed to have significantly contributed to the 1979 Iranian Revolution after which the oil industry would be nationalized again.
The confrontation between the monarchy and the legislature in Iran in the period 1949 to 1953 reminds one of a similar confrontation between the English kings and Parliament in the seventeenth century. The circumstance were quite different and the outcome the opposite, but it is useful to see past the personalities involved to understand the underlying issues.
One major issue for the Iranians was the division of the revenues from the petroleum industry. The Anglo-Persian Oil Company made early and important oil strikes in Iran. The company paid a royalty to the Government of Iran on the oil extracted. The profits of the company were taxed by the British Government and it was an annoying, exasperating reality that the tax collected by the British Government on the Iranian oil was greater than the royalties the Iranian Government received from the company.
Vendor distributing kerosene produced at Abadan refinery
Governments usually consider the nationalization of a foreign-owned or locally-owned enterprise a moral right. Although morality is not the real issue, there is no moral right to the confiscation of a property that someone else developed. But such a morality stance is just a guise for a government doing what it has the naked power to do. Although a government can so confiscate others' property it does this at a cost. The cost is the tampering with the institution of property rights. Once the sanctity of property rights is deprecated, foreign and local enterprises are less willing to make investments in the country and the long run cost of the diminished investment may be greater than the gains from the naked use of power to confiscate property. Mexico paid a high price in reduced economic development in the 1940's and beyond for the confiscation of petroleum properties in the 1930's.
In addition to the future investment consequences of tampering with property rights there is the immediate matter of those whose property has been confiscated using every tactic in their power to harm those who did the confiscating. This is the nature of the episode of Mossadeq's rise and fall in Iran. Mohammad Mossadeq was a member of ruling elite of Tehran. In fact, Mossadeq's mother was related to the Qajar line of shahs.
Mossadeq had distinguished career in public office long before he rose to prominence during the period of World War II. He was educated in law in Switzerland and returned to Iran in 1914 with a doctorate in law from Laussane University. He was first appointed to be the chief administrator in Fars Province. Later he was the Minister of Finance and briefly the Minister of Foreign Affairs in the national government. He opposed the assumption of the title of shah by Reza Khan in 1925 and withdrew from government office. He returned to public life only after Reza Shah was forced to abdicate in 1941 by the Allied Powers during World War II. Because of the war Mossadeq's second public career did not commence until 1944 when he was elected to the Majlis. He led the opposition to granting the Soviet Union special concessions for oil exploration and development in norther Iran.
In the early 1950's the struggle for power in Iran between the Shah and the Majlis focused on the control of the armed forces.
In the 1949 election of the Majlis the one major issue was gaining more revenue from the petroleum companies operating in Iran, primarily the Anglo-Iranian Oil Company (AIOC). The members of the Majlis elected in 1949 sought to renogiate the agreement with the AIOC. Another company, Persian Gulf Oil, had an agreeement that called for equally sharing of profit with the government and the Majlis wanted the same arrangement with the AIOC. In 1950 AIOC offered an increased share of profits to the Iranian government but not the 50-50 sharing that the Majlis wanted. Mohammad Mossadeq gained the chairmanship of the committee of the Majlis that dealt with government-company agreements. This committee, under Mossadeq's leadership, rejected the AIOC offer. Later, in 1951, when the AIOC was willing to grant a 50-50 profit sharing Mossadeq's committee rejected that offer and opted for full nationalization of AIOC's properties. When the Prime Minister recommended against nationalization he was assassinated. The Majlis in March of 1951 enacted the legislation nationalizing the petroleum industry. Mossadeq and his National Front Party were politically dominant. The Shah was reluctant to appoint Mossadeq as the new Prime Minister but after public demonstrations he did so.
After Mohammad Mossadeq gained the office of Prime Minister of the Majlis he demanded to be also made Minister of War. As Minister of War he would have direct control over the army. When the Shah demurred on granting Mossadeq's demand again public demonstration persuaded him to do so.
When Mossadeq was made Minister of War he immediately started replacing the officers of the high command who were loyal to the Shah with ones who were loyal to him. The dismissed officers became the nucleus of a coup d'etat which deposed Mossadeq.
The British oil companies retaliated against the nationalization of their petroleum assets by withdrawing their technical personnel. Petroleum production fell to near-zero levels. The British government froze Iranian government financial assets around the world and instituted an embargo on the purchase of Iranian oil.
In 1953 after considerable economic turmoil for Iran Shah Reza Pahlavi tried to dismiss Mossadeq as Prime Minister. There was violent public protest and the Shah left Iran, apparently having been deposed. But the U.S. and British governments, acting in collaboration with the military officers Mossadeq had dismissed, organized a coup d'etat. Street mobs were hired to demonstrate against Mossadeq and then the military took control in the name of maintaining public order. The Shah returned to Iran and took control of the government. Mossadeq was tried and convicted of treason and sentenced to three years in prison and house arrest for the rest of his life.
The involvement of the U.S. government in the downfall of Mossadeq stemmed in part from the support that Mossadeq was receiving from the Iranian Communist Party, the Tudeh Party. Reza Shah had banned the Tudeh Party but it still functioned on a clandestine basis. The U.S. government feared that a victory for Mossadeq would lead to a strong influence of communists in the government of Iran and an eventual drawing of Iran into the Soviet sphere of influence. The Soviet intelligence agency OGPU (later the KGB) had recruited some high level officials and had penetrated separatist movements of the Kurds and the Azerbaijanis as well as the trade unions of Iran. When Qavam es-Saltanah became prime minister of Iran in the period after World War II when British and Soviet military occupation of Iran ended three representatives of the Tudeh Party were made members of Qavam's cabinet.
Discovery of oil
Meanwhile, D'Arcy was getting anxious at the speed that his capital was getting depleted and yet no oil was found in commercial quantities. He began negotiations with Burma Oil Company and the British Government in addition to private investors in order to sustain his operations. Reynold's perseverance paid off. On the 16th of May 1908, drillers working at Masjid-I-Sulleiman detected a "strong smell of gas" in the well. At 4 o'clock in the morning of May 26th, oil was struck and it was in commercial quantities. This, without question was the tip of a vast reservoir that lay beneath that barren land deep in the winter grazing grounds of the Bakhtiaris. Between the start of D'Arcy's exploration and striking oil, 7 agonizing years of patience and impatience; hopes raised and dashed; thirst, hunger, dehydration and heat strokes had passed. Reynolds wrote in his telegraph to London: "I have the honour to report, that this morning at 4 a.m. oil was struck in the No. 1 hole at a depth of 1180 feet…." The discovery of oil in commercial quantity was a milestone and a turning point in the history of Persia. It also brought the Bakhtiaris and the British close together out of necessity and mutual goals, an association that the central government in Tehran eyed with great suspicion.
Formation of Anglo-Persian Oil Company
On the 14th of April 1909 the Anglo-Persian Oil Company was formed with an initial capital of 2 Million Pounds. At the Admiralty's suggestion, a highly respected public figure, the eighty-nine year-old Lord Strathcona, accepted the post of Chairman with D'Arcy as a director until his death in 1917. The new company created tremendous public interest in Britain. Burmah Oil provided all its initial capital except a small amount subscribed by Lord Strathcona. D'Arcy however did not go un-rewarded. He was reimbursed in cash for all he had spent, and was given shares in Burmah Oil valued at that time at 900,000 Pounds Sterling11. The Admiralty had seen the importance of oil as fuel for the Navy and to investigate the fields and the reserves they held, the British Government dispatched professor John Cadman the greatest oil expert at that time, to Persia to investigate. Upon receiving Cadman's report, Lord Fisher of the Admiralty with the help from Winston Churchill, a Member of Parliament, persuaded the British Parliament to permit the Government to purchase 51% of the Anglo-Persian Oil Company in 1912. Whitehall then put a director on the Board with veto powers. The British fleet was shortly afterwards converted to oil from coal.
From 1949 on, sentiment for nationalization of Iran's oil industry grew. In 1949 the Majlis approved the First Development Plan (1948-55), which called for comprehensive agricultural and industrial development of the country. The Plan Organization was established to administer the program, which was to be financed in large part from oil revenues. Politically conscious Iranians were aware, however, that the British government derived more revenue from taxing the concessionaire, the Anglo-Iranian Oil Company (AIOC--formerly the Anglo-Persian Oil Company), than the Iranian government derived from royalties. The oil issue figured prominently in elections for the Majlis in 1949, and nationalists in the new Majlis were determined to renegotiate the AIOC agreement. In November 1950, the Majlis committee concerned with oil matters, headed by Mosaddeq, rejected a draft agreement in which the AIOC had offered the government slightly improved terms. These terms did not include the fifty-fifty profit-sharing provision that was part of other new Persian Gulf oil concessions.
Mossadegh was well aware that his radical move to nationalise the U.K.-controlled oil industry would have dangerous portents. Initially, the steps he undertook evoked widespread support. He was hailed as a hero in the region and beyond. For a short period, one of Mossadegh’s main allies was the influential cleric Ayatollah Abol-Ghasem Kashani, who said that those opposing nationalisation of the Iranian oil industry were "enemies of Iran”.
Subsequent negotiations with the AIOC were unsuccessful, partly because General Ali Razmara, who became prime minister in June 1950, failed to persuade the oil company of the strength of nationalist feeling in the country and in the Majlis. When the AIOC finally offered fifty-fifty profit-sharing in February 1951, sentiment for nationalization of the oil industry had become widespread. Razmara advised against nationalization on technical grounds and was assassinated in March 1951 by Khalil Tahmasebi, a member of the militant Fadayan-e Islam. On March 15, the Majlis voted to nationalize the oil industry. In April the shah yielded to Majlis pressure and demonstrations in the streets by naming Mosaddeq prime minister.
Oil production came to a virtual standstill as British technicians left the country, and Britain imposed a worldwide embargo on the purchase of Iranian oil. In September 1951, Britain froze Iran's sterling assets and banned export of goods to Iran. It challenged the legality of the oil nationalization and took its case against Iran to the International Court of Justice at The Hague. The court found in Iran's favour, but the dispute between Iran and the AIOC remained unsettled. Under United States pressure, the AIOC improved its offer to Iran. The excitement generated by the nationalization issue, anti-British feeling, agitation by radical elements, and the conviction among Mosaddeq's advisers that Iran's maximum demands would, in the end, be met, however, led the government to reject all offers. The economy began to suffer from the loss of foreign exchange and oil revenues.
Meanwhile, Mosaddeq's growing popularity and power led to political chaos and eventual United States intervention. Mosaddeq had come to office on the strength of support from the National Front and other parties in the Majlis and as a result of his great popularity. His popularity, growing power, and intransigence on the oil issue were creating friction between the prime minister and the shah. In the summer of 1952, the shah refused the prime minister's demand for the power to appoint the minister of war (and, by implication, to control the armed forces). Mosaddeq resigned, three days of pro-Mosaddeq rioting followed, and the shah was forced to reappoint Mosaddeq to head the government.
As domestic conditions deteriorated, however, Mosaddeq's populist style grew more autocratic. In August 1952, the Majlis acceded to his demand for full powers in all affairs of government for a six-month period. These special powers were subsequently extended for a further six-month term. He also obtained approval for a law to reduce, from six years to two years, the term of the Senate (established in 1950 as the upper house of the Majlis), and thus brought about the dissolution of that body. Mosaddeq's support in the lower house of the Majlis (also called the Majlis) was dwindling, however, so on August 3, 1953, the prime minister organized a plebiscite for the dissolution of the Majlis, claimed a massive vote in favour of the proposal, and dissolved the legislative body.
The administration of President Harry Truman initially had been sympathetic to Iran's nationalist aspirations. Under the administration of President Dwight D. Eisenhower, however, the United States came to accept the view of the British government that no reasonable compromise with Mosaddeq was possible and that, by working with the Toudeh, Mosaddeq was making probable a communist-inspired takeover. Mosaddeq's intransigence and inclination to accept Toudeh support, the Cold War atmosphere, and the fear of Soviet influence in Iran also shaped United States thinking. In June 1953, the Eisenhower administration approved a British proposal for a joint Anglo-American operation, code-named Operation Ajax, to overthrow Mosaddeq. Kermit Roosevelt of the United States Central Intelligence Agency (CIA) traveled secretly to Iran to coordinate plans with the shah and the Iranian military, which was led by General Fazlollah Zahedi.
In accord with the plan, on August 13 the shah appointed Zahedi prime minister to replace Mosaddeq. Mosaddeq refused to step down and arrested the shah's emissary. This triggered the second stage of Operation Ajax, which called for a military coup. The plan initially seemed to have failed, the shah fled the country, and Zahedi went into hiding. After four days of rioting, however, the tide turned. On August 19, pro-shah army units and street crowds defeated Mosaddeq's forces. The shah returned to the country. Mosaddeq was sentenced to three years' imprisonment for trying to overthrow the monarchy, but he was subsequently allowed to remain under house arrest in his village (Ahmad Abad) outside Tehran until his death in 1967. His minister of foreign affairs, Hosein Fatemi, was sentenced to death and executed. Hundreds of National Front leaders, Toudeh Party officers, and political activists were arrested; several Toudeh army officers were also sentenced to death.
Department of Economics, San José State University
Iran Chamber Society