Foreign Relations of the United States Diplomatic Papers, 1939, The Far East, Volume III

793.94/15697

Memorandum Prepared in the Department of State³⁴

[Washington,] December 29, 1939.

There exist at the present time several reasons why it seems to be important to formulate without delay a program of possible future action in relation to the Far Eastern situation.

At the forthcoming session of Congress there will undoubtedly be presented for consideration various legislative proposals relating to the Far Eastern situation. Senator Pittman has already publicly indicated that he would press for the adoption of the bill introduced by him during the last regular session of Congress³⁵ under which the President would be authorized to prohibit the export to Japan of various commodities important to Japan in the carrying on of its hostilities in China. Other legislative proposals such as that presented by Senator Schwellenbach at the last session of Congress and which envisages a broader embargo on exports from the United States to Japan than that contemplated in Senator Pittman’s bill are also likely to come up for consideration. It is believed that various definite disadvantages would attach to and flow from an enactment in the near future of embargo legislation. There are likewise strong objections to the defeat of such bills should they be brought up for active consideration. The proponents of such measures could probably not be dissuaded from pressing for their enactment unless the administration presents a clearly defined alternative course of action which would appear to be safer and to hold promise of achieving the same end, namely, the protecting of American rights and interests in the Far East, including the upholding of principles common to our foreign policy as a whole.

The commercial treaty between Japan and the United States expires on January 26, 1940, thus freeing this Government to take various types of action against Japan which, if taken before then, would have raised questions of our treaty obligations. The Department will be subject to strong conflicting pressures, and in order to make the wisest use of the freedom of action resulting from termination of the treaty, it would seem to be desirable for the Department to plan its steps in advance.

The Chinese Government seems to be approaching a critical period in which substantial economic and financial assistance from abroad may be essential for maintenance of the Chinese currency and for continuation of effective resistance on the part of the Chinese Government. Should the Chinese currency collapse, not only would it be difficult for the Chinese Government to continue organized resistance but the Japanese and the regimes which they sponsor in China would probably establish new currencies and new trade and exchange controls which would threaten American trade and investments in China with virtual extinction.

There are given below some suggestions as to action which this Government might take (a) to assist China and (b) to exert economic pressure on Japan:

I. Aid to China

1. Additional Export-Import Bank credits.

2. Support for China’s currency.

3. A Congressional appropriation for the relief of civilians in China.

4. A direct loan to the National Government of China.

II. The Taking of Restrictive Measures Against Japan by Executive Action and on the Basis of Existing Law

1. Continuance (and possible strengthening) of present policy of discouraging extension of credits to Japan.

2. Continuance (and possible extension) of existing moral embargo on export to Japan of airplanes, aeronautical equipment, material for the manufacture of airplanes, and technical processes for the manufacture of aviation gasoline.

3. Denial of trade agreement rates to Japan: “blacklisting”. (Note: Under the Trade Agreements Act³⁶ the President may deny the benefits of trade agreement rates to countries whose acts or policies obstruct the expansion of American commerce.)

4. Imposition of additional duties on imports from Japan under Section 338 (e) of the Tariff Act of 1930. (Note: Under this Section the President may impose new or additional duties up to 50 percent ad valorem on the products of industries of a country when those industries benefit by discriminations maintained in third countries against American commerce.)

The suggestions listed above are not recommended as a “program” to be adopted in toto and to be carried in definite sequence to completion. It is felt that in the present rapidly developing international situation where there are involved interplay of many varying factors, the carrying out in orderly sequence of a predetermined program or schedule of action might not be appropriate to a particular moment. For example, the taking of restrictive measures against Japan at this time, while conversations are taking place in Tokyo between the American Ambassador and the Japanese Minister for Foreign Affairs in regard to an improvement in American-Japanese relations, might adversely affect those conversations. It is therefore believed that definitive choices of action should be made from time to time in the light of all circumstances existing at a particular moment. However, it is suggested generally that at the present time the extension of aid to China appears to hold more of promise toward protecting the interests of this country in the Far East than does the adoption of economic measures against Japan. Moreover, the suggested measures to aid China require preliminary discussion with other departments or agencies of the Government and with members of Congress. In the comments which follow there are therefore included several specific recommendations in regard to procedure which it is believed it would be advisable to carry out immediately.

I. Aid to China³⁸

1. Additional Export-Import Bank credits.

Although the Export-Import Bank does not have visible funds available for an extension of additional credit to China at the present time, it is understood that certain adjustments of the bank’s loans may be made in such a way as to free the bank from some of its existing obligations and put it in position to assume others. Furthermore, it is expected that the bank may receive authority from the forthcoming session of Congress to increase the amount of its commitments. As a matter of procedure, it is suggested that the Secretary of State communicate with Mr. Jesse Jones,³⁹ informing him that this Department would favor the extension of further substantial credits to China.

2. Support for China’s currency.⁴⁰

The Chinese Government has upon several occasions called attention to the fact that its currency reserves are dwindling and has emphasized the extreme importance which it attaches to the maintenance of the external and internal value of the Chinese currency. Dr. Arthur Young, American Financial Adviser to the Chinese Government, who was recently in Washington, is convinced of the necessity of maintaining the value of China’s currency if China’s resistance is to be continued. It is feared that during the coming months the Japanese will renew their offensive against the Chinese currency and that, given the present meagerness of China’s reserves, the currency may collapse and prices get out of hand, with consequences injurious not only to China but also to the United States.

The circulation of Chinese national currency at Shanghai and in the surrounding areas of Japanese-occupied central China is the main obstacle to the monopolization by Japan of the markets of those areas. The technique developed by Japan for the monopolization of the trade of large areas has become quite familiar through its use in Manchuria and north China. The first step is the military occupation of a given area. The second step is the establishment therein of a Japanese-controlled regime. The third step is the creation of a new currency. The fourth step is the driving out of existing currencies and the pegging of the new currency to the yen coupled with the imposition of exchange and import and export controls which permit a comparatively free flow of funds and merchandise between the area concerned and Japan but which restrict and impede the flow of funds and merchandise between the area concerned and other foreign countries. In central China the Japanese have accomplished the first three of the above-enumerated steps but the continued circulation therein (with the assistance afforded by the independently policed International Settlement at Shanghai) of Chinese national currency has thus far prevented the accomplishment of the fourth and last step. The collapse of the Chinese national currency would remove the last main obstacle to that accomplishment. Such collapse would result in a lowering of Chinese morale and in disorganization which would tend to reduce the effectiveness of any assistance which the Government of the United States might desire, in the protection of its interests in the Far East, to extend to the Chinese Government.

Under existing legislation the Secretary of the Treasury is empowered to engage in currency stabilization operations, and there exists a stabilization fund of approximately two billion dollars which remains at this moment practically idle. However, the Secretary of the Treasury gave during the last session of Congress an oral commitment to the Senate Committee on Finance and Banking that he would not purchase foreign currency without collateral. It is understood that the Secretary of the Treasury now feels that he cannot engage in such operations without Congressional authority. A joint resolution by Congress authorizing the Secretary of the Treasury to buy Chinese currency without collateral up to a maximum stated amount, perhaps as much as fifty million dollars, would probably make it possible to furnish the support which the Chinese currency needs.

As a matter of procedure it is suggested that the Secretary of State inform the Secretary of the Treasury either by letter or orally of his interest in the matter of extending support to the Chinese currency, that he say to the Secretary of the Treasury that it is the desire of this Department to support a legislative act giving the Secretary of the Treasury the authority needed to extend aid to China’s currency, and that he ask the Secretary of the Treasury’s advice in regard to the whole matter and particularly in regard to the type of legislation which might under the circumstances be most desirable and practicable toward accomplishing the end desired.

3. A Congressional appropriation for the relief of civilians in China.

On a number of occasions the Congress of the United States has made appropriations for the relief of civilians in foreign countries. There are listed below seven such acts of Congress:

1. An Act for the relief of the citizens of Venezuela, May 8, 1812,⁴¹ appropriated $50,000.

2. An Act for the relief of citizens of the French West Indies, May 13, 1902,⁴² appropriated $200,000.

3. An Act for the relief of citizens of Italy, January 5, 1909,⁴³ appropriated $800,000.

4. An Act providing for the relief of such populations in Europe, and countries contiguous thereto, outside of Germany, German-Austria, Hungary, Bulgaria, and Turkey, as may be determined upon by the President as necessary, February 25, 1919,⁴⁴ appropriated $100,000,000.

5. An Act for the relief of the distressed and starving people of Russia, December 22, 1921,⁴⁵ appropriated $20,000,000.

6. An Act to authorize the President to transfer certain medical supplies for the relief of the distressed and famine stricken people of Russia, January 20, 1922,⁴⁶ appropriated $4,000,000.

7. An Act for the relief of sufferers from earthquake in Japan, February 24, 1925,⁴⁷ appropriated $6,017,069.03.

A bill (H. R. 9150) looking toward the appropriation of five million dollars for the relief of the civilian population of China was introduced into the last session of Congress by Representative Culkin of New York.⁴⁸

It is suggested that the Department lend its support to the passage through Congress of a bill appropriating a substantial sum of money for relief of civilians in China. As a matter of procedure it is suggested that the Secretary of State authorize initiation of immediate conversations with the American Red Cross in regard to the amount needed for relief in China, administration of relief in China, and the wording of a bill providing for such relief.

4. Direct loan to the National Government of China.

There seems to be an increasing public sentiment in favor of a loan, through Congressional action, by the Government of the United States to Finland. This raises the question whether a direct loan to China might be authorized by Congress. Both China and Finland are victims of military aggression and neither country has been classified as a defaulting nation under the terms of the Johnson Act.⁴⁹

II. The Taking of Restrictive Measures Against Japan by Executive Action and on the Basis of Existing Law

1. Continuance (and possible strengthening) of present policy of discouraging extension of credits to Japan.

For some time the Department and the Government as a whole have been informally discouraging the extension of credits to Japan. It is believed that this policy has been in general successful in accomplishing the end desired and that it should be continued and, if need be, strengthened by public announcement.

2. Continuance (and possible extension) of existing moral embargo on export to Japan of airplanes, aeronautical equipment, material for the manufacture of airplanes, and technical processes for the manufacture of aviation gasoline.

The moral embargo which has been placed on the export to Japan of airplanes and aeronautical equipment and technical processes for the manufacture of aviation gasoline is believed to have the hearty support of the American people. While it is realized that the placing of embargoes on moral grounds (without basis in law) is open to certain objections, especially if the basis for the placing of the embargo should be on other than generally accepted humanitarian principles, it is suggested that consideration might be given, should circumstances seem to make such action advisable, to extending the existing moral embargo on certain exports to Japan to include other commodities, such as petroleum, scrap iron and steel, et cetera.

3. Denial of trade agreement rates to Japan: “blacklisting”.

The Trade Agreements Act provides that the President may suspend the application of the duties reduced in trade agreements to the products of any country because of discrimination by such country against American commerce or because of other acts or policies which in his opinion tend to defeat the purposes set forth in the Act. The question whether the acts and policies of Japan in China have been such as to defeat the purpose of the Trade Agreements Act, namely, the expansion of foreign markets for the products of the United States, has been studied carefully in the Department and it is believed that, were it deemed desirable to do so, Japan might lawfully and with warrant be put on the “blacklist”.

4. Imposition of additional duties on imports from Japan under Section 338 (e) of the Tariff Act of 1930.

Under Section 338 (e) of the Tariff Act of 1930 the President is empowered to impose new or additional duties up to fifty percent ad valorem on the products of industries in a country which benefit by discriminations maintained in a third country against American commerce. The question whether the discriminations maintained in China and Manchuria are such as to justify action under Section 338 (e) has been the subject of extensive study in the Department and the conclusion has been reached, and is concurred in by the General Counsel of the Tariff Commission and by the Department of Justice, that discrimination is occurring within the meaning of Section 338 (e) and that action against Japanese commerce may be taken under that Section. The industries in Japan which benefit from the discriminations for which the Japanese Government is responsible in China, including Manchuria, are so numerous that this form of retaliatory action may be applied, should this Government so desire, to practically all of Japan’s exports to the United States.

Considerations Contra an Enactment of Embargo Legislation

It is believed that, as between enactment of legislation authorizing the executive to place embargoes upon export trade to Japan and procedure in accordance with the suggestions made above, the former would create more difficulties for the administration than would the latter and, if embargoes were applied, would create greater risk of provoking Japanese authorities to acts inimical to maintenance of peaceful relations between Japan and this country. It is believed that action on the part of this Government the effect of which would be to strengthen China would give less ground for and be less likely to arouse hostility on the part of the Japanese, which might easily be given expression in acts of retaliation and reprisal, than would measures the direct effects of which would be to weaken Japan. The Chinese Government has been and presumably will be maintaining a substantial organized resistance to the Japanese invasion. It is to the interest of the United States that China survive as an independent and sovereign country. It would seem to be a sound strategy for this country to take action calculated to contribute toward survival of the Chinese Government and of China’s sovereignty. The first four suggestions made above envisage and involve support of the Chinese Government and of China’s efforts at self-defense. The last four of the items envisage and involve action against Japan, but action of a type which can be based on executive decision under the authority of legislation which already exists and which has been in effect for many years: they fall within the framework of our established commercial policy and require neither new legislation nor new machinery for execution. By procedure along that line, the political aspects of our action in exertion of pressure could be minimized and dangerously great provocation of Japan, to the extent of causing the Japanese Government to take retaliatory action, might be avoided. The concept of embargo legislation has become associated with the idea of economic sanctions; further it is associated with popular emotion and with national antagonisms: enactment of embargo legislation would tend to feature a quality of hostility in this country’s attitude toward Japan and cause the Japanese to regard this country as a political enemy, whether or not the President proceeded to make use of the authority granted him in such legislation. Japanese resentment might easily express itself in acts on the part of Japanese authorities which would in turn push this country toward the placing of or the increasing of embargoes, and the conflict in the relations between Japan and this country would become increasingly acute. Pressure groups in this country would become increasingly vociferous in their demands upon the President and the Department of State. The question of this country’s Far Eastern policy might then, and readily, become a football of “politics”.

34. Drafted by the Division of Far Eastern Affairs and the Adviser on Political Relations (Hornbeck); transmitted to the Secretary of State on January 3, 1940.
35. S. J. Res. 123, introduced on April 27 by Senator Key Pittman, Chairman of the Senate Committee on Foreign Relations; Congressional Record, vol. 84, pt. 5, p. 4821.
36. Approved June 12, 1934; 48 Stat. 943.
38. See also pp. 636 ff.
39. Administrator of the Federal Loan Agency and member of the Executive Committee of the Export-Import Bank of Washington.
40. See also pp. 348 ff., passim.
41. 2 Stat. 730.
42. 32 Stat. 198.
43. 35 Stat. 584.
44. 40 Stat. 1161.
45. 42 Stat. 351.
46. 42 Stat. 357.
47. 43 Stat. 963.
48. Congressional Record, vol. 83, pt. 1, p. 1093.
49. Approved April 13, 1934; 48 Stat 574.