In short, the US government illegally sold weapons to Iran in exchange for hostages, and used the money they got from using Israel as an intermediary to fund rebel groups (The Contras) who opposed the Commies (Sandanistas) in Nicaragua, which is also illegal.

To get around actually funding the Contras, which Congress said was illegal, they gave money to Israel who would supply Iran with the weapons at a markup and then return a portion of the profits to the U.S., and then funneled that money directly to the Contras in the guise of foreign aid.

This circumvented the Boland Amendment which restricted U.S. aid to the Contras for the purpose of overthrowing the Nicaraguan government, but did not restrict the U.S. asking other countries to give aid for other purposes.

So basically, they knowingly bypassed a Congressional order and federal law, which is technically treason.

I'm not a historian, but I'm fascinated by Nicaraguan history, so since no one else has answered I'll give it a shot. This is based on years of (non scholarly) research.

You have to go back many years to understand American interests in the region. Before the Panama Canal, Nicaragua was one of the main transport regions between the Atlantic and Pacific oceans. There was even talk of the original canal being built in Nicaragua (a plan which is currently being revisited).

Being such a vital point for the United States for transit of commerce, the US has always had a vital interest in the region. This has led, over time, to some pretty heavy handed American actions in the country, including various US occupational forces.

The most important occupational force, in regards to current history, would be in the 1930’s. The famous Smedley Butler was involved in the area at this time. There was an uprising against the American occupation by a man named Augusto Cesar Sandino, whose name will become important later.

Sandino’s forces led a so-so antagonization campaign against the American forces, but he was able to become a folk hero of the country despite having no major military achievements. His biggest break came when the Great Depression hit the US and intervention no longer seemed like a viable option for the cash starved greater power.

Around this time the reform president of Nicaragua was ready to talk peace with Sandino. He saw the writing on the wall and knew the US was losing interest, so it seemed like a good idea. However there were elements of his government still loyal to the US interests, most importantly the head of the National Guard (the de facto military force in Nicaragua set up by the US): Anastasio Somoza Garcia.

While leaving the peace conference Sandino was arrested and executed by the National Guard. Anastasio Somoza Garcia later led a coup d'etat against the president and began a military dictatorship dynasty that lasted 44 years. He ruled with a heavy hand, but Franklin D. Roosevelt once famously said of him: “He may be a son of a bitch, but he’s our son of a bitch”.

This seems like a lot of backstory to give for a simple question, but when talking about Nicaraguan history there really are no simple answers. You have to understand the motivations behind everyone involved.

Fast forward to the 70’s. The Somoza family is still in charge. The National Guard are still the fearsome muscle backing his power. Corruption is rampant, political prisoners are thrown into volcanos, and poverty abounds. During this time, the same time radical protests were occurring in the US and across the globe, a radical socialist group was founded who took their inspiration from Sandino’s failed revolt against the US occupation. They named themselves in his honor: Sandinistas. The Sandinistas acted out against the Somoza government with backing from Castro’s Cuba. After the horrifying earthquake of 1972 (baseball fans will remember that Roberto Clemente died trying to get supplies to the citizens) and the subsequent corruption by the Somoza region of relief, the Sandinistas gained popular support and eventually helped overthrow the old regime. This was helped by Jimmy Carter pulling support to the Somoza government after their abuses are exposed by the media.

Ok, so the old government is gone. The leaders of the National Guard, which has long been hated and feared by the populace, have fled to safe haven in the US. The original provisional government is eventually overrun by the Sandinista victors. The Sandinista revolutionary movement has taken over the government of Nicaragua.

The new Sandinista government begins to ally themselves with their old Cuban friends and the Soviet Union. This is unacceptable to the hardline Reagan administration, who had recently come into power decrying everything the Carter administration had done, including their handling of the Nicaraguan situation.

Now is where I’ll (finally, phew!) try to keep it brief. There are many conspiracy theories and differing viewpoints that can muddy the water, and I’ll try to avoid them.

What is known is that based on US history in the region and based on the fact that the new Nicaraguan government was anti US and pro USSR, the United States felt like something had to be done. So they organized ex Somoza supporters and National Guardsmen and formed a new guerrilla group to antagonize the Sandinistas. They were called the Contras.

The Contras were not nice people. That can arguably be said for both sides, but Contra brutality became harder for the American public to ignore since they were the ones funding them. Eventually congress cut off their funding, but the White House didn’t want to cut off their support. So in order to fund the Contras the White House devised a plan to sell arms to Iran and funnel the money to their anti Sandinista pet project.

The plan was exposed and there was a ton of hoopla around it. But in the end the only major person involved that was convicted of wrongdoing was Oliver North.

I hesitate to go into any more detail, because, like I said, I’m no scholar and there are a lot of gray areas that border into conspiracy theories that I don’t think are befitting of this subreddit. There’s also the problem of political bias which I’d rather avoid. But I hope I’ve offered a good background to the events leading up to Iran/Contra. And I hope that someone more scholarly than myself can go into more detail.

As a main source I will site "Blood of Brothers: Life and War in Nicaragua" by Stephen Kinzer, which I would recommend to anyone interested in the subject.