[Omitted here is discussion unrelated to Iran.]

2. Iran. Another situation had developed to a critical point. This was the dispute between Iran and the United Kingdom over oil. We had been trying for a year and a half to find a fair solution which would provide compensation for the British and allow oil to flow from Iran and funds to come to Iran. Both parties had been wholly unreasonable, but in different senses of the word. The Iranians were unreasonable in that they were not activated by reason but by emotion. The British did not seem to understand this. They thought that by putting economic pressure on Iranians they would act as reasonable people might under the same circumstances. The result had been the opposite. They were more concerned with freeing the oil of British control than they were in the economic benefits which might come to them from the oil industry. This had already led to very grave disintegration both within the Government and within the social structure within Iran, in economic difficulties, and a political break with the British, who had been expelled from Iran.

We were informed by our Ambassador that if the Iranians managed their affairs reasonably they might survive for as long as a year without selling oil and without major external help. [Amb. Loy Henderson] However, they would not act in this way. They would act emotionally, perhaps break altogether their relations with the United States in various stages, discharge large numbers of public employees, who would add to the unrest of that country, and in a very short time might have the country in a state of chaos.

We were deeply disturbed at this prospect. The British seemed more concerned about the consequences of a settlement which differed from their desires as affecting British investments in other parts of the world. This had led to a fundamental difference of view. Although we had been working with the British for months, it seemed unlikely to us that persuasion would result in any workable solution in time.

The Secretary said that we were also going forward under the President’s authority to consider what the United States alone might do to solve this problem. It seemed unlikely to us that it ever could be solved in the face of determined British opposition. Without going into detail, the reason for this conclusion was that Iran could only sell its oil in volume in markets which would bring American distributors into violent competition and conflict with British distributors. Therefore, some degree of British cooperation was necessary. It seemed to him likely—although here he was speculating—that this could only be done by a series of steps in which apparent American unilateral action was started and thereupon stimulated some degree of British cooperation. He thought we would probably proceed by jerks in this way, with alternating periods of considerable bitterness.

It seemed to Secretary Acheson most important that the new Administration should be closely in touch with this situation, because considerable difficulties were likely to arise from it.

[Omitted here is discussion of matters unrelated to Iran.]