The Consul General at Harbin (Adams) to the Secretary of State
[Received May 18.]
Sir: I have the honor to state that from time to time, and in more or less disconnected form in various despatches, I have commented on the policy of the Kwantung Army in Manchuria. Because of the outstanding importance of the effects of that policy upon developments in Manchuria and possibly the Far East generally, I believe it advisable, even at the risk of tedious repetition, to embody in one despatch the disconnected observations already made and to report some recent developments.
When the Kwantung Army obtained control in Manchuria through the Mukden incident of 1931 and subsequent military operations it [Page 119] soon made apparent its intention of reserving to itself the benefits of its enterprise and of building for itself a home or empire in Manchuria where it could rule without hindrance from the Diet or the civil government departments in Tokyo, and where it could raise and appropriate as it pleased its own revenues. It created, as its agency, the government of “Manchukuo” and began to formulate and execute plans for control, by that government, of the development of private manufacturing enterprises through a licensing system, and for control and operation by it of public utilities and essential industries.
The Army found, however, several obstacles to the full and effective exercise by it of control over Manchuria. These obstacles were the Government of the Kwantung Leased Territory, the large Japanese and Korean communities and interests in Manchuria, the Chinese Eastern Railway and the South Manchuria Railway Company. The Kwantung Leased Territory comprised a free port area which occasioned a material loss of customs revenue to “Manchukuo” through extensive smuggling. The Overseas Department in Japan had a considerable voice in the Government of the Kwantung Leased Territory, control over its policing and over the policing of the South Manchuria Railway zone. The large Japanese and Korean communities in Manchuria and the extensive business and industrial interests controlled by them were through their extraterritorial status, immune from the tax agencies and courts created by the Kwantung Army. The Chinese Eastern Railway, carrying with it still the prestige and power of former days, was under effective Soviet control and was in fact in a position to resist taxation. The only direct contributions which it made to “Manchukuo” were sums, whose amounts were decided upon by the railway itself, for bandit suppression work. The South Manchuria Railway Company, representing huge financial interests in Japan, and exercising certain quasi-governmental functions itself, was controlled by a board of directors appointed by the home government in Japan. It possessed extraterritoriality and was therefore immune from taxation by the “Manchukuo” government.
It will thus be seen that the Kwantung Army found that Manchuria, as a revenue producing area, was far from perfect as then organized, and that much work was necessary to develop the country into an efficient producer of revenue. The Army lost no time in beginning that work.
The problem of the Kwantung Leased Territory was partially solved by the creation in Tokyo of the Manchuria Affairs Bureau, under a military chief, with effective power of decision in matters relating to Manchuria. This eliminated the Overseas Department from the Kwantung Leased Territory and the South Manchuria Railway zone. The police of the Kwantung Leased Territory were [Page 120] placed under the control of a gendarmerie officer and a Kwantung Bureau was created in the Japanese Ambassador’s office in Hsinking where the effective government of the area resided. With respect to the smuggling for which the Kwantung Leased Territory formed a base, Consul Grummon at Dairen had the following to say on April 5, 1935:
“…57 Mr. J. Fukumoto, Commissioner of Customs of ‘Manchukuo’ at Dairen, informed an officer of this Consulate that serious consideration was being given by the authorities to the advisability of abolishing the freedom of duty of goods entering and leaving the Kwantung Leased Territory. Mr. Fukumoto remarked that in the event that customs duties were to be collected in the Territory the ‘Manchukuo’ customs tariff would be applied.
“… The smuggling activities across the borders of Kwantung Leased Territory which are exceedingly difficult to curb effectively and result in a considerable loss of revenue to ‘Manchukuo’ would undoubtedly cause the Hsinking authorities to look with favor upon such a change of status in the Leased Territory.”
There was not even a whisper of demand from the 29 million Chinese in Manchuria for the abolition of extraterritoriality. As soon as the subject came up the Japanese and Korean communities in Manchuria promptly showed that they were opposed to the abolition of their extraterritorial status. Despite the entire absence of demand and the opposition of the civilian Japanese in Manchuria, however, the Kwantung Army through its influence at home caused the Japanese Government voluntarily to bring up the subject. This gesture was naturally favorably received by the Kwantung Army’s agency, the “Manchukuo” government. According to a special telegram, dated April 18, 1936, from Hsinking to the Manchuria Daily News, Dairen, a virtual agreement has been reached and it is expected that the agreement between “Manchukuo” and Japan providing for the abolition of Japanese extraterritoriality in Manchuria will be signed during the latter part of May, to become partially effective on July 1, 1936. All through the discussions that have occurred the question of taxation was paramount.
After a long fight, full of bitterness and vituperation, “Manchukuo” finally obtained control of the Chinese Eastern Railway by purchase of the Soviet interest therein on March 23, 1935. The railway was promptly absorbed into the “State Railways” system and handed over for management to the South Manchuria Railway Company, giving that company a complete monopoly of rail transportation in Manchuria. In this connection it is interesting to note that the Japan-Manchukuo Year Book of 1936 gives the length of the South Manchuria Railway Company’s tracks as 1,129 kilometers, and the [Page 121] length of the State Railways (controlled and operated by the South Manchuria Railway Company) as 6,671.6 kilometers. It will thus be seen that the subsidiary has grown to six times the size of the parent and managing company. While the South Manchuria Railway Company financed most of the railway construction in Manchuria, the nominal ownership by “Manchukuo” of six-sevenths of the railways of Manchuria naturally gives the Kwantung Army considerable voice in railway affairs. Of course, the abolition of extraterritoriality will go far towards solving the problem of the South Manchuria Railway Company for the Kwantung Army. The right of “Manchukuo” to tax the South Manchuria Railway Company will destroy the independent position of that company and give “Manchukuo” an effective voice in its management.
It is interesting to note that the army already has sufficient influence over the South Manchuria Railway Company to cause it to work for the destruction of its independence. An instance of this was the election on March 29, 1936, of nine councilors of the Japanese Residents’ Association of Harbin. The Japanese Residents’ Association is a quasi-municipal enterprise which looks after the interests of the Japanese community. Its main activities consist of the operation of schools for Japanese children and the conduct of measures of sanitation. It also makes representations in matters affecting Japanese interests generally. It is governed by 18 councilors whose term of office is two years; the election of half of this number takes place every year. Shortly before the election the State Railways Office (which is under the control of the South Manchuria Railway) surprised the Japanese community by suddenly putting forward five members of its staff as candidates, besides one former South Manchuria Railway man. It is said that the members of the railway staff were required by the railway management to vote for the railway candidates. About half of the independent voters refrained from voting as a protest against the railway candidates, the stated objection being that most of these candidates were newcomers to Harbin and had little connection with the affairs of the Japanese community. Four of the five railway candidates were elected, and amongst the other five elected was one who was until recently connected with the railway and who is looked upon as a railway man as far as the Council is concerned.
There appears to be little doubt in the minds of local Japanese that the councilors elected by the South Manchuria Railway will use their influence to hinder Japanese civil opposition to the abolition of extraterritoriality.
In connection with the progress of the plans of the army to obtain control of the South Manchuria Railway, I beg to invite attention [Page 122] to Consul Grummon’s excellent despatch of April 6, 1936, to the Embassy in Tokyo, entitled “Reorganization Plans of the South Manchuria Railway Company”.58 The matter was summed up by Consul Grummon in the statement that the South Manchuria Railway is now in the process of being absorbed by its creature, the State Railways, so that it may, according to army plans, function as an instrument of national policy.
The Kwantung Army has steadily pursued its policy of severing all connections between “Manchukuo” and Japan, excepting the link which the army itself affords. Insofar as the general administrative structure of the Japanese Government is concerned there is something to be said for the claim that “Manchukuo” is an independent country.
The beginning of the Kwantung Army’s levies upon Manchuria was extremely moderate. In the fiscal year 1934–1935 the “Manchukuo” government’s contribution to the expenses of the Kwantung Army was stated to be $9,000,000. For the current fiscal year that contribution was fixed at $19,500,000. When the measures which the Army has initiated for increased revenues for “Manchukuo” become effective, it may be expected that the contribution of “Manchukuo” to the expenses of the Kwantung Army will increase rapidly.
It seems that the situation outlined in this despatch is worthy of careful future observation because, with its further development, it may in the course of a few years materially affect happenings in Japan as well as in Manchuria and China proper. I believe that the astonishingly rapid progress which the Kwantung Army is making towards the realization of its aim for an independent position on the continent of Asia is, from a political viewpoint, possibly the most important development that is occurring in Manchuria and north China.