San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

Mohammad Mossadeq, the Nationalization
of the Anglo-Iranian Oil Company and
the Attempted Overthrow of the Shah

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.

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.

Mohammad Mossadeq
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.

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