America expanded trade and cultural relations as it faced foreign competition from the entrenched powers in Iran, Great Britain and the Soviet Union. The Anglo-Iranian Oil Company maintained its strong economic control over Iran. Despite these limitations, the Pahlavi state centralized and engaged in nation-building. However, it imposed political restrictions and censorship that privately concerned American diplomats. Iran embarked on an immense project to build a national railway system, which it inaugurated just before another global war. The repression of political dissent, particularly religious or socialist viewpoints, raised concerns about Reza Shah’s style of leadership. Some Iranian intellectuals gravitated toward intolerant ideologies that clashed with the country’s legacy of religious and ethnic accommodation.

In 1951, Mohammed Mosaddeq rose to power in Iran and nationalized the country’s British-owned oil industry. The nationalization triggered an international crisis as the British, together with major oil companies, placed an embargo on Iran, effectively de-integrating Iranian oil from the global oil market. Convinced that pressure on Mosaddeq would worsen Iran’s political instability and push the country toward communism, the United States attempted to broker a settlement that would produce a suitable definition of “nationalization,” satisfying Iranian nationalism while preserving the dominance of the oil oligopoly. Successive negotiations in 1951 and 1952 failed to produce a settlement. A myth of Iranian incapacity obscured the companies’ use of market power to isolate Iran while the United States helped redirect flows of oil to make up for Iran’s de-integration.

In the wake of the Azerbaijan Crisis, the United States supported the Pahlavi development program, the Seven-Year Plan, masterminded by Abolhassan Ebtehaj, the country’s premier developmentalist. Assistance came from proxy groups, particularly the World Bank. The bank neglected to provide loans until Ebtehaj and the shah agreed to place the plan under foreign management. Primary financial support for the plan was to come from the Anglo-Iranian Oil Company. But negotiations failed to produce an agreement that would increase Iran’s revenues. The rise of an Iranian petro-nationalist movement, an economic crisis, and political paralysis within the Pahlavi government coalesced in 1950, and despite a late intervention the United States and its allied proxies failed to rescue the plan or the shah’s government from succumbing to the nationalization campaign of nationalist leader Mohammed Mosaddeq in early 1951.

This chapter examines the consolidation of Pahlavi rule after the removal of Reza Shah from power, especially after 1953, when the reign of Mohammad Reza Pahlavi was reestablished following a CIA-sponsored coup. The chapter explores the tenuous beginnings of the reign of the new Shah, the increasing legislative and policy-making significance of the Majles in the 1940s, and the era of oil nationalization, from 1951 to 1953. Prime Minister Mohammad Mosaddeq was successful in getting the powers of the monarchy to be significantly reduced, but his overthrow was followed by the restoration of absolute monarchy built on a massive army and a feared secret service called SAVAK. Ultimately, however, the Pahlavi state failed to incorporate within its orbit and its social base remained weak. As the oil revenues began to lag, and the state was forced into making “housecleaning” concessions, it began to crumble under the weight of the gathering storm.