In 1933 With the accession of Adolf Hitler as state leader of Germany, Reza Shah starts building close economic and political ties to the country. This aimed at reducing the British dominance in Iran. Germany would become the most imporant trade partner of Iran.
Reza Shah initiated changes in foreign affairs as well. Despite the support initially given to him by the British, the Shah worked to balance British influence with other foreigners and generally to diminish foreign influence in Iran.
In 1931, he refused to allow Imperial Airways to fly in Persian airspace, instead giving the concession to German-owned Lufthansa Airlines. The next year he surprised the British by unilaterally canceling the oil concession awarded William Knox D’Arcy (then called Anglo-Persian Oil Company, which was slated to expire in 1961. The concession granted Persia 16% of the net profits from APOC oil operations. The Shah wanted 21%. Following a brief challenge by the British before the League of Nations, the British acquiesced. He previously hired American consultants to develop and implement Western-styled financial and administrative systems. Included among them was U.S. Economist, Dr. Arthur Millspaugh who acted as the nation’s Finance Minister. Reza Shah also purchased ships from Italy and hired Italians to teach his troops the intricacies of naval warfare. He also began bringing in hundreds of German technicians and advisors for various projects. Mindful of the Persian’s long period of subservience to British and Russian authority, Reza Shah was careful to avoid giving any one foreign nation too much control. He also insisted that foreign advisors be employed by the Persian government so that they would not be answerable to foreign powers. This was based upon his experience with Anglo-Persian which was owned and operated by the British government.
In his campaign against foreign influence he annulled the 19th century capitulations to Europeans in 1928. Under these, Europeans in Iran had enjoyed the privilege of being subject to their own consular courts rather than to the Iranian judiciary. The right to print money was moved from the British Imperial Bank to his National Bank of Iran (Bank-i Melli Iran), as was the administration of the telegraph system from the Indo-European Telegraph Company to the Iranian government, in addition to the collection of customs by Belgian officials. He eventually fired Millspaugh, and prohibited foreigners from administering schools, owning land or traveling in the provinces without police permission.
Not all observers agree the Shah minimized foreign influence. A complaint of his development program by some was that the north-south railway line he had built was uneconomical but served the British who had a military presence in the south of Iran and desired the ability to transfer their troops north to Russia as part of their strategic defence plan. In contrast the Shah’s regime did not develope what the critic believes was an economically justifiable east-west railway system.
On 21 March 1935, he issued a decree asking foreign delegates to use the term Iran in formal correspondence in accordance with the fact that Persia was a term used for a country identified as Iran in the Persian language. It has however contributed more to the Iranian people than others, particularly its language. Opponents claimed that this act brought cultural damage to the country and separated Iran from its past in the West (see Iran naming dispute). The name Iran means “Land of the Aryans”.
Tired of opportunistic policies of both Britain and the Soviet Union, the shah circumscribed contacts with foreign embassies. Relations with the Soviet Union had already deteriorated because of that country’s commercial policies, which in the 1920s and 1930s adversely affected Iran. In 1932 the shah offended Britain by canceling the agreement under which the Anglo-Persian Oil Company produced and exported Iran’s oil. Although a new and improved agreement was eventually signed, it did not satisfy Iran’s demands and left bad feeling on both sides. To counterbalance British and Soviet influence, Reza Shah encouraged German commercial enterprise in Iran. On the eve of World War II, Germany was Iran’s largest trading partner.
The Germans agreed to sell him the steel factory he coveted and considered a sine qua non of progress and modernity. Nevertheless, according to the British embassy reports from Tehran in 1940, the total number of German citizens in Iran – from technicians to spies – was no more than a thousand
His foreign policy, which had consisted essentially of playing the Soviet Union off against Great Britain, failed when those two powers joined in 1941 to fight the Germans. To supply the Soviet forces with war material through Iran, the two allies jointly occupied the country in August 1941.
