Some of the most interesting British government documents declassified in the last few years are the Cabinet Secretary’s Notebooks from the wartime and early post-war era. In each cabinet meeting in Number 10, the Cabinet Secretary took personal notes, catching snatches of the conversation verbatim. Assuming the practice is ongoing, I hope I live long enough to read what Jeremy Heywood and Mark Sedwill, the two most recent occupants of the office, scribbled down during the interminable Brexit negotiations. Compared to the bland formal minutes, the notebooks from the forties and fifties provide a fascinating insight into what was actually said.
Most strikingly, the notebooks from seventy years ago show that Attlee’s ailing Labour government had discovered the true cost of the NHS. Having launched a free health service with much fanfare two years earlier, by 1950 the cabinet was agonising over whether to introduce charges for NHS spectacles and false teeth.
In foreign policy, there is a similar dissonance. At a time when Churchill, as leader of the opposition, was conjuring the idea of the existence of the ‘Special Relationship’, the notebooks tell a different story. The true imbalance of Anglo-American relations was nicely summed up by Attlee. ‘The truth is’, the Cabinet Secretary recorded him as saying, ‘the United States wants her interests at our expense.’ The notebooks record cabinet ministers’ discussions of a barely remembered American who was at the forefront of this drive. His name was George McGhee.
Debonair and open-faced, McGhee was not an obvious bogeyman. And yet he played the key part in engineering a turning-point in Britain’s fortunes in the Middle East. This happened six years before the Suez Crisis, and it was a huge factor in destroying British credibility in the region. The events of 1950-51 revealed the country to be as toothless in foreign affairs as far too many members of its own population.
An oil geologist by training, McGhee was born in Texas in 1912, at a time when America supplied most of the world with oil. Born just before one world war, he made a fortune shortly before the outbreak of the next when he discovered a significant oilfield in Louisiana. He married into another when he wed Cecilia, ‘the most beautiful and richest girl in Texas’, daughter of Everette DeGolyer, the most famous American oil prospector of that time.
After wartime service, McGhee joined the State Department. He was so wealthy at the time that he insisted on working pro bono. He spent two years working on the European Recovery Program, better known as the Marshall Plan. Then late in 1949 he was made assistant Secretary of State for Near Eastern affairs by George Marshall’s successor, Dean Acheson. He inherited a delicate situation.
The Americans’ greatest Middle Eastern interest was Saudi Arabia. In the desert kingdom, ruled by its founder Ibn Saud, they ran an airbase, at Dhahran, which put its bombers within striking distance of the heavy industry of southern Russia. Aramco, a joint venture then owned by four big US oil companies, had extensive rights to drill for oil. The company was on the verge of opening a pipeline to the Mediterranean coast that would enable it to boost its output. The Americans hoped this project would not only improve their prickly relationship with the king (whose income hinged on Aramco’s production, at 33 cents a barrel) but also recoup some of what Marshall had committed to spend on Europe’s reconstruction. As Aramco was US-owned and domiciled, through dividends and tax, American shareholders and the US Treasury would ultimately benefit.
When McGhee took up his Middle East job the company’s relationship with the Saudis was deteriorating. When worldwide demand for oil fell that year Aramco had cut back production and Saudi income fell by a quarter. Looking to recoup the loss, the Saudis decided that Aramco was not paying them anything like enough money for the drilling rights it had. A flying visit by McGhee to Riyadh failed to mollify the ageing and increasingly cantankerous Ibn Saud. Further digging by the Saudis revealed that the company paid Washington several million dollars more in tax than it coughed up in royalties to their king. And a new law in Venezuela, which subjected oil company profits to a fifty per cent tax, gave them an idea. If they did the same thing, they could wring at least half as much again from the company.
Switching the basis of the deal from royalties to tax had another significant advantage. The big risk of squeezing the oil company for more was that it would have less to re-invest in its operations. But a tax adviser hired by the Saudis pointed out that US law enabled companies to net foreign tax liabilities (but not the royalties Aramco was currently paying) against their US tax bill. If Saudi Arabia changed the basis of the arrangement with Aramco from a per-barrel royalty to a profit tax, and so long as that tax bill was no greater than the sum it paid the US Treasury, the company would be no worse off. As we will see, this arcane issue had massive ramifications for the British.
Over the summer of 1950 the Saudis made a series of alarming demands of Aramco, to make the fifty per cent tax by far the better option. McGhee also urged the company to accept a ‘fifty-fifty’ deal, having appreciated that the arrangement amounted to a well-hidden US subsidy to Saudi Arabia, at a time when, to avoid angering pro-Israelis, Truman would not countenance open support of a country – no matter how strategically important it was – whose king denied the legitimacy of the new Jewish state.
There was a further reason why McGhee liked the precedent a fifty-fifty deal would set. That was the pressure that it put on the United Kingdom to offer a better deal in Iran.
On the other shore of the Persian Gulf, the Anglo-Iranian Oil Company’s operations in Iran dwarfed Aramco’s. At a time when the Americans were filling half a million barrels a day, AIOC produced almost half as much again. A network of subsidiaries then sold the commodity, that cost 5 shillings per ton to produce, for up to twenty times as much.
The main beneficiary was the British government, which owned the majority of AIOC. The company’s refinery at Abadan, on the Shatt al Arab waterway, was the UK’s most significant overseas investment. By turning crude oil into petroleum priced in sterling this stinking, shimmering distillery gave cash-strapped Britain some raw financial power.
The Iranians earned peanuts by comparison. As a British minister admitted, the ‘Persians are not getting anything like as much out of this as we’. However, like the Saudis, the Iranians had hired an expert to shed light on the true state of Anglo-Iranian’s finances, the rude health of which HMG conspired with the company to conceal. Armed with this information, the Iranians pressed Anglo-Iranian for better terms.
In response Anglo-Iranian, which had many of the country’s politicians, and probably the shah, in its pocket, made a trivial concession. Backed by his main shareholder, the company’s forbidding Glaswegian chairman, Sir William Fraser, insisted the company was not as rich as the Iranians thought it was. ‘The trouble with you, McGhee’, he once said, ‘is that you are operating on the basis of the wrong information.’
McGhee however genuinely believed that private companies were an important weapon in the fight against communism, and that oil revenues ‘could make possible the economic rebirth of the Middle East.’ Fraser’s parsimoniousness grated at a time when Iran looked like a country on the brink. The 1950 harvest failed and the Soviet-backed Tudeh party was gathering strength among people angry at the selfishness and corruption of their leaders, which AIOC of course preyed on and aggravated. The shah, suffering from depression, could not show any leadership. Something needed to be done to avert the danger of Iran’s slipping under Soviet influence, McGhee felt. But, as Attlee complained, it was the British who would pick up the tab.
In August 1950 Aramco’s board caved in to the combination of Saudi and McGhee’s pressure and agreed to negotiate. The US Treasury proved a willing accomplice and in January 1951, the company announced that it had reached a fifty-fifty deal with the Saudis.
McGhee’s hope that the precedent set by Aramco would force a change of attitude in London was a miscalculation. Because Anglo-Iranian served as a cash cow, there was no way the British government would offer it the same foreign tax relief that the US Treasury had readily granted Aramco.
McGhee’s campaign, however, had a significant and unintended consequence. Soon after Aramco announced its new arrangement with Saudi Arabia, an Iranian politician, Mohammed Mossadegh, went even further, calling for Anglo-Iranian’s nationalisation. The following month the Iranian prime minister was assassinated, and the country’s parliament approved Mossadegh’s proposal to take Anglo-Iranian’s Iranian operations, including the refinery, into public ownership.
Alarmed that the Iranian parliament’s decision might give the Saudis ideas, McGhee now tried to stop nationalisation happening with a burst of shuttle diplomacy through 1951. The problem, as he clearly knew himself, was that the fifty-fifty deal was doomed because of British and Iranian intransigence. As a British envoy commented after a visit to Teheran, ‘Fifty-fifty won’t do in Persia, because they’ve had a worse basis for so long.’
McGhee had been a Rhodes Scholar at Oxford, but if the British hoped this experience might now pay a timely dividend they were mistaken. ‘McGhee’s approach to some of our Middle East problems struck me as being a little light-hearted’, the foreign secretary, Herbert Morrison reported. The Labour government was in a bind: having nationalised so many industries itself, attacking the Iranian move looked decidedly hypocritical. It lost the election it called that October, bringing Churchill back into power.
Days earlier Iran had taken over Abadan, a move to which Britain could offer no response. Across the Middle East the Egyptian government proposed the abrogation of the agreement that granted Britain a base on the Suez canal. Here starts the story of the 1956 Suez crisis.
Reviewing the situation he had inherited from Attlee, Churchill described the developments in Egypt as the ‘bastard child of the Iranian situation’. But he would never admit that the father in both cases was an American.