740.00119 PW/1–947

Memorandum by the Chief of the Division of Japanese and Korean Economic Affairs (Martin) to Mr. Ernest A. Gross, Special Assistant to the Assistant Secretary of State for Occupied Areas (Hilldring)

Subject: Reparations Program for Japan.

Now that the way has been cleared, subject to approval by the Secretary, for employing the interim directive procedure for handling the advance transfer paper and its essential concomitant, the procedures paper, JK has been reconsidering next steps.

I should like to propose a program somewhat along the following lines. I may say that this program attempts to reconcile, as best we can, the need for speed of action with the attainment of responsible international support and agreement from all the FEC countries for what we do. I need not remind you how concerned we have been on this point since the interim directive proposal was first broached by General McCoy.24 It has seemed to us that in particular the interim directive procedure would tend to focus on the U.S. all possible objections to reparations decisions embodied in the U.S. directives.

The FEC has been for some weeks engaged in final level of industry discussions in the sub-committee of the Economic Committee on recommendations regarding a number of industries. They may be presented this week. It is awkward, to say the least, to have no U.S. position on these recommendations. The recent radio from SCAP commenting on and in general concurring in SFE 162/15 makes it possible to proceed to secure SWNCC approval without serious further delay. At present this paper is on the shelf at our request pending completion of our review of the reparations from current production problem. I should like to recommend, now, that SFE 162/15 be put back on the agenda. I want, moreover, to reverse its emphasis so as to make the level of industry figures contained therein represent “assured retention levels” rather than levels down to which reparations removals should be made. In effect, we would be saying that the FEC must assure Japan that it will be allowed to keep at least this much. On this basis reconciliation of what differences we have with SCAP [Page 348] should be easy and on this basis there is no danger of conflict between this paper and any conclusions we may ultimately reach with respect to reparations from current production. The only effect of reparations from current production would be to increase the industrial capacity to be left in Japan for this purpose. On the other hand, action on this paper will get U.S. position established on an important issue promptly and permit us to satisfy the FEC desire to make level of industry decisions to the fullest extent possible, and, if approved by the FEC, will facilitate the task of SCAP in rehabilitating Japanese industry, with the resultant reduction of U.S. Treasury financial liability.
I further recommend that as the next step in the interim directive program the U.S., as soon as State Department approves the proposed national percentage distribution of reparations shares, initiate negotiations on national percentage shares in preparation for its issuance as an interim directive, if immediate FEC ratification seems unlikely. These negotiations should be on a bi-lateral basis. I think that we could secure considerable support for going ahead with an interim directive on this subject, if FEC ratification did not materialize at once, because of the pressing desire which the seven countries not authorized to secure reparations under the advance transfer directive will have to get a percentage distribution established which can be promptly applied to the remainder of the facilities made available under the interim removals program.
I propose that the consultations be bi-lateral for two reasons. In the first place, on a bi-lateral basis it may be possible to avoid, or at least minimize, discussions of the justifications for the recommended percentage distribution of assets from Japan. Such discussions would be embarrassing to the Soviet Union, and fear of such discussion might cause the Soviets to refuse to participate in multilateral negotiation. Our own relations have been friendly and I think that on the bi-lateral basis we could perhaps secure their cooperation. The second reason is to permit, when desirable, the use of higher level personnel where we expect serious difficulties such as with the Soviets. Such personnel cannot be expected to conduct the negotiations as a whole. For example, the discussion on the Soviet share should, I think, be handled at Acheson’s25 level, perhaps at Marshall’s.26 I recognize the serious disadvantage in this procedure in that it focuses all complaints against the U.S. representative and leaves us no chance to play oft effectively the claims of one country against the other. However, I [Page 349] think the gains that could be secured in terms of possible Soviet collaboration are worth this additional burden.
On the completion of these consultations I recommend that the U.S. submit its recommendations to FEC for ratification. If ratification is delayed an interim directive on the percentage distribution of Japanese assets from within Japan should be issued. This percentage distribution should apply immediately to all or part of the facilities made available under the interim program and not allocated under the advance transfer program.
I recommend that before the first of February the U.S. representative in the FEC be authorized to say to the FEC that in view of the reluctance shared by all, including the U.S., to see important decisions affecting Japan made without the full participation and endorsement of the members of the FEC and in view of the expressions made personally by many members of the FEC, in which we agree, that level of industry for Japan was a vital decision of that sort, the U.S. proposes that the FEC, as a matter of urgency, make special arrangements for reaching a prompt agreement within the FEC as to the level of industry in Japan, a decision which will, of necessity, determine the Japanese assets to be made available for reparations removal. It is assumed that this decision will also govern the question of reparations from current production. This proposal should also be accompanied with a statement that the urgency of having a decision reached on this point increases with each week and therefore the U.S. will feel itself obliged to resort to the interim directive procedure if agreement has not been reached in the FEC on a program by April first.
There are a number of peripheral problems such as Japanese assets in neutral countries, Japanese diplomatic property and what action is necessary to permit title to Japanese assets in Allied countries which need further consideration, but with respect to which I would recommend that the burden of proof must be on those who propose interim directives immediately rather than including these problems in the issues on which the FEC is to be given until April 1st to reach a decision.
I would assume that the question of priority claims and the basis for distributing merchant shipping and any other special categories of assets would be handled as a part of the percentage distribution in interim directives. On the other hand, I would assume what categories of assets were available if such special distributions would be among the matters on which the FEC would be permitted a limited time to reach agreement. This will be awkward, but the general advantages of the scheme seem to me to outweigh the disadvantages.
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I think it highly important that the State Department lay out for itself a program along these lines. This proposal may need to be modified but we need to know promptly where we are going.

  1. Maj. Gen. Frank R. McCoy (ret.), U.S. Member of the Far Eastern Commission, and its Chairman.
  2. Dean G. Acheson, Under Secretary of State.
  3. General of the Army George C. Marshall, appointed Secretary of State; his nomination was confirmed by the Senate on January 8, 1947, and he took the oath of office on January 21.