The Pahlavi I regime that unilaterally cancelled the D’Arcy Concession embarked on a new trend in the Iranian oil sector, i.e. the 1933 Agreement.

Under the Pahlavi I dictatorship, the bulk of Constitutionalist dreams were shattered. Following the occupation of Iran in September 1941, any remaining dream was shattered, too.

After 40 years of struggling against the unjust and libertine Qajar dynasty, Iranians once more experienced the bitter taste of autocracy and colonialism. After Amir Kabir’s murder, Iranians did their best to bring to fruition Constitutionalism; however, rather than freedom and justice, they saw foreigners placing their boot on the ground.

Firmly anchored in power, the Pahlavi I regime revealed its violent and autocratic face. It turned to oil in 1933 in order to stabilize its power and brought about important changes.

Dictatorship Stabilized

The Pahlavi I regime and its agents were assured that the country could no longer be run Qajar-style. Of course, the monarchy had some instructions to follow. Under the Pahlavi I regime, new bureaucracy was set up while a modern Army was established. These two state organs further empowered the Pahlavi I regime. Edmund Ironside, in The Ironside diaries, writes: “The policy of supporting Reza Khan and forming a strong central government in Iran could best serve British oil interests. However, in more general terms, the Bolsheviks were threatening the British Empire in India rather than British oil interests in Iran.”

Following the 1920 coup which brought Reza Mir Panj to power to become war minister, the British were weakening Qavam ul-Saltaneh, and instead empowered Reza Khan with oil revenue with a view to installing him as prime minister and replacing the Qajar dynasty with the Pahlavi regime.

Ervand Abrahamian, in Iran Between Two Revolutions, writes: “For instance, the British were instrumental in the downfall of many governments opposed to Reza Khan. This issue was important with regard to the downfall of the Qavam government because Britain paid its arrears in oil money to Iran, unpaid since 1915. The British government used to evade paying Iran’s oil money, but by paying the money it directly backed Reza Khan. For instance, in early 1922, Britain paid Iran 120,000 pounds and agreed to pay another 880,000 pounds in early 1923.That money helped fund the ministry of war. With the same money, Reza Khan divided the country into five military zones with 15,000 troops to be deployed in each zone. Britain saw Reza Khan as the executor of the military part of the 1919 agreement and was struggling to install him at the head of a military government to stand against the Bolsheviks and protect British interests. Under such circumstances, arrangements were made for the overthrow of the Qajar government in 1925 and the Napoleon-style crowning of Reza Khan in military fatigue a year later.”

Oil Money for Dictatorship

Now it was time that the Pahlavi I regime flexed muscles. Reza Khan had served as war minister in the Qajar government. He knew quite well that their model of governance was impossible.

Stephanie Cronin, in his book The Army and Creation of the Pahlavi State in Iran, 1921-26, writes: “After the successful coup and the coming to power of Reza Khan, arrangements were made for the establishment of a government based on a modern Army and state bureaucracy. That is why under Reza Khan, the Army grew ten times and Bureaucracy 18 times. Subsequently, state budget rose from IRR 245 million to IRR 4.3 billion in 1941. Iranian military servants increased from 22,000 to 170,000. In the administrative sector, more than 90,000 full-time employees were recruited in nine ministries. However, generally speaking, military organs overpowered civil organs. Even in provinces where government officials were present, they received orders from the Army. Oil saw its share in the budget grow and the Army and Bureaucracy both grew. The oil revenue grew significantly under Reza Khan. The oil income was directly and indirectly the biggest state figure, constituting one-third of government expenses. The injection of petrodollars into Iran’s economy was slow in the beginning and no share was considered for it in the budget. However, it made Reza Khan an independent power and boosted the military organs under his authority. That is the period when Anglo-Persian Oil Company (AOPC) was the fifth largest producer in the world.”

Pahlavi I saw himself as proprietor of Iran’s oil. Abol-Hassan Ebtehaj writes in his diary: “Reza Khan paid special attention to oil and oil income. He believed that due to his struggles Iran could get back its oil income. In other words, Reza Khan saw himself as owner of oil. He was instrumental in pressuring Bakhtiari chieftains, particularly Sheikh Khazal, into awarding oil shares to the central government. Having torn apart the D’Arcy Concession, he maintained that he had taken a great stride with regard to restoring Iran’s oil rights. That is why after the annulment of the D’Arcy agreement, Tehran and many other cities were basking in lights. Reza Khan took political advantage of his heroic act and launched efforts to bring an end to the dispute with Britain and finally signed an agreement which elicited harsh criticism.”

Oil and Military Power

Having received oil money, Pahlavi I strengthened its military power. He had a military mindset and thought that he would be able to cover up his dependence on Britain and other colonial powers by purchasing arms and forming a powerful army.

According to Cronin and Abrahamian, Iran’s oil revenue was totally spent on equipping the new Army and increasing Reza Khan’s personal wealth because he felt he owed to the modern army he had established.

Reza Khan’s modern Army was not initially consistent with the financial conditions of crisis-stricken Iran. By 1921, all organs were suffering from financial shortcomings. This issue was of such significance that Reza Khan did not shy from any action in 1921 to allocate budget to the Army and the war ministry. He even threatened Qavam and Ahmad Shah in person. An increase in Iran’s oil revenue changed rules of the game. Iran’s oil royalties increased from about 1 million pounds to about 4 million pounds. Therefore, oil became one of the main sources of financing huge projects particularly army reorganization and expansion, as well as development of industrial plants and education centers affiliated with the Army.

Oil Chaos

The Army expenditures were extremely high and the Shah was determined to build arms manufacturing plants. His Army did not survive even one week. The Army was devouring the oil money. Some sort of chaos was governing oil spending under the Pahlavi I regime.

Mohammad QoliMajd, in his book called Reza Shah and Britain, writes: “Formation of new Army for Iran cost too much because the Army devoured 30% of Iran’s total budget and in some cases the country’s reserve money was used for purchasing arms. In addition to that, establishment of arms manufacturing plant, construction of an Army officers club in Tehran and in other cities as well as military barracks cost too much. Another important issue was that supervisory bodies in Iran exercised no supervision over Iran’s oil revenue from 1927 to 1941 and everything was in Reza Khan’s hands. Furthermore, oil revenue was deposited directly into Reza Khan’s bank account in London. It was due to Reza Khan’s wealth accumulation that Iran’s parliament adopted a law for supervision on Anglo-Iranian Oil Company’s revenue. There is evidence showing that of a total $155 million paid in royalties to the Iranian government, $100 million had been paid directly into Reza Khan’s private account. Despite production of documents, this sum was much less than spent for the Army.”

Courtesy of Iran Petroleum