740.00119 EW/2–1448

Memorandum by the Special Adviser on Reparations (Pauley) to the Secretary of State 1

Subject: Final Comments on Separations Program and Policy, Japan and Germany

At the recent London Conference of Foreign Ministers, the United States officially restated its position as being unalterably opposed to German reparations out of current production. We have re-examined our reparation views, first formulated in 1944 and 1945, and have again determined that the most practicable form of reparation is capital equipment—in a quantity that will not interfere with the progressive rehabilitation of the German economy nor with the attainment by Germany of a self-supporting economy at the earliest possible date.

Our original insistence on a capital removals program was based upon the conviction that such reparations were the most practicable kind, contributing to German industrial disarmament and aiding the victims of aggression, but without constituting an insupportable burden on Germany. Moreover, capital removals would not require that in the end the Allies pay for the reparations, as was the case after the last war. In the case of facility and equipment for the exclusive production of war material, it was generally agreed that these should be either removed as reparations or destroyed. There could be no justification for retaining them in Germany.

In view of our original advocacy of this program, the United States bears a large degree of responsibility for it. Inasmuch as we have aspired to the role of advocate for the nations of Western Europe, we cannot disregard their interests in the capital removals program. Any reduction in this program below the present levels would inevitably result in demands for reparations compensation in some other manner. We are, in any event, committed to a capital removals program by international agreement (Paris Agreement of 1946). It is demonstrable that the removal of capital equipment in excess of the agreed level of industry will not actually weaken the German economy, since there is neither the need nor the resources for full utilization of existing industrial capacity in Germany. Between 1935 and 1944, there occurred in Germany a vast overexpansion of plant capacity, to a degree possible [Page 723] only in a nation making war preparations and seeking to achieve economic autarchy in anticipation of military requirements. The removal for reparations of some of this excess capacity will in many cases eliminate the drain on the economy resulting from the use of raw materials, transport and power in relatively uneconomic production.

In view of the commitment of the United States to occupy Germany for an indefinite period of time, every effort must be made to establish the German economy on as practical a footing as possible on a long-range basis. Over a 20-year period, German economic recovery will probably have better prospects of substantial success if excesses of uneconomic plant capacity are removed than otherwise.

The economic potential of all Western Europe will be increased by the transfer of some German capacity to areas where the equipment could be more fully utilized in relation to raw materials, power and transport. Such utilization, moreover, could begin immediately upon emplacement of the equipment in new locations. The Western European nations, because of the progressive expansion of their production, their more stable monetary and administrative organizations, their equal and in some cases superior access to raw material and transport, and their greater power resources, are in a position to use this equipment now. It would have the immediate effect of further increasing their economic strength. This is a vital objective of both our economic and political policy in Europe.

While it is true that a portion of the German capital removals is scheduled for Albania, Czechoslovakia and Yugoslavia, the three nations of eastern Europe covered under the IARA agreement, their share is only 10.5% of the total removals. The benefits to the Soviet dominated nations, and inferentially to the Soviet Union, of this amount of equipment will not weigh in the balance against the advantages to the western nations of the much greater removals scheduled for their benefit. As already stated, reparations deliveries to the, Eastern European nations are a commitment under the terms of the IARA agreement. There might well be moral, legal or diplomatic reasons for abrogating these commitments to the Eastern European nations, however, the Western European nations should not be penalized by such action.

Moreover, it should be noted that the chief recipient of removals to date has been the USSR. This has been due to the time element involved in sub-allocations to the other European nations through IARA. The most recently available data (as of November 1, 1947) indicate that some 70% of the tonnage and 50% of the reichsmark value of shipments from the US Zone have been delivered to Russia. To penalize the western nations for the administrative difficulties [Page 724] inherent in reallocations by IARA would not only be unethical but prejudicial to our interests in promoting European recovery.

In regard to Japan,2 the case for immediate action in carrying out the reparations program is even more urgent than in the case of Germany. Our international commitments on reparations deliveries from Japan are unconditional. We have agreed, without reservation, to the removal from Japan of capital equipment in war-supporting industries excess to Japan’s peacetime needs. We have directed, through SCAP, the interim removal of certain percentages of equipment in various industrial categories, and have directed the distribution of this equipment to the nations which suffered most from Japanese aggression. We have agreed, in the Far Eastern Commission, to certain classifications of prohibited and restricted industries. Other agreements have been reached in the FEC establishing the immediate availability as reparations of capital equipment in various industrial categories.

Yet, in fact for one reason or another, the directives issued to SCAP have not been carried out. A few small reparations deliveries have been made in recent weeks. The recent deliveries have been the first in more than two years of occupation. Proposals have been received and entertained in some branches of the government to abandon entirely the reparations program or to modify it drastically. It has been suggested that FEC directives be disregarded, and that the occupation authorities be given new unilateral directives designed to abandon all reparations. Those who have studied most thoroughly the problem know there can be no justification for such a course of action. It should be resisted and rejected.

The charges may one day be made that the United States has not lived up to its obligations as the occupying power, and has used its position to further selfish ends. That is exactly the charge we have made against Soviet Russia in Germany. The only justifications for abandoning or drastically reducing the reparations removals program are to promote the economic recovery of Japan and to minimize the occupation costs to the United States. In fact, neither of these economic justifications are factually supportable. Furthermore it would be unacceptable in view of our previous commitments to our Allies.

None of the principal reparations claimants can be held responsible for the present economic conditions in Japan; hence penalizing those nations for the slowness of Japanese economic recovery would subject us to justifiable attack. Only Soviet Russia, with her unilateral removals from Manchuria, can be said to have received capital equipment benefits from the war, and those at the expense of China. The [Page 725] Soviet Union if at all would be only a very minor recipient of capital removals from Japan proper under the currently pending program. In other words, abandonment of the reparations program would visit the greatest penalty on these countries we desire most to help.

Unless the capital removals program in Japan is immediately implemented and carried through, the demands of China and other countries for reparations out of current production … a claim which has not been extinguished by agreement as it has in Germany … will be pressed with great vigor either immediately in the Far Eastern Commission or at a later time at the Peace Conference. These claims would be a source of political embarrassment to the United States and would handicap our efforts to promote economic and political stability in the Orient. For this reason we have consistently pointed to the economic logic and benefits of the capital removals program.

In Japan, even more than in Germany, a considerable portion of the plant capacity was operable in the war period only on the basis of government subsidies, export devices, and monopolistic support. Before 1945, Japan obtained a major portion of her vital imports including soy beans, coking coal and iron ore from Manchuria, These supplies were obtained by political penetration of the area in question. These sources are lost to Japan. A considerable part of Japanese plant capacity is thus surplus to Japan’s economic requirements and powers of utilization. This equipment could very well be used in other parts of Asia to help rehabilitate them and thus to add to the economic potential of the Par East. This, in turn, will reduce demands for assistance from the United States.

On the other hand, current Japanese efforts to operate surplus equipment in order to justify its retention in Japan has and is resulting in inefficient production, dissipation of vital resources, labor shortages in essential industries, excessive production costs and increased inflationary pressures. The economies of neighboring states are so retarded industrially that some Japanese equipment can be used by them to fill immediate needs. Thermal power units, foundries, machine tools, and some steel equipment are urgently desired by China, the Philippines, and others. Some of these countries have long been making their economic plans on the basis of future reparations deliveries of capital equipment. Conversely an undertaking by the United States to rebuild Japan as the workshop of the Far East without facilitating the economic rehabilitation of neighboring countries which were victims of Japanese aggression would be a futile effort. Japan’s export markets are in the Orient. Unless the countries adjacent to Japan can buy, Japan cannot sell. Reparations in the form of capital equipment could be of major assistance in expanding the productive and hence the purchasing power of these Far Eastern countries.

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The reparations program can and should be used to supplement other efforts by the United States. Failure to utilize the reparations program to the maximum practical extent for these purposes will increase the burdens of American taxpayers.

In view of the anticipated tenure of American occupation in Germany, serious consideration should be given to minimizing uneconomic production and of concentrating on such production as will compete profitably in export markets on a long term basis.

The “revised” capital removals program of reparations, in its current form and magnitude, should be carried to completion as rapidly as possible in both Germany and Japan. This will forestall pressure for reparations out of current production from Japan and Germany.

E[dwin] W. P[auley]
  1. Pauley submitted his resignation as Special Adviser on January 14, 1948 to become effective one month later. In a memorandum to Assistant Secretary of State Saltzman, dated February 14, 1948, Julius C. C. Edelstein, former deputy to Pauley and currently assigned to the Foreign Service Administration Division, explained that Pauley’s Final Report had been reviewed by competent officers in the Division of Occupied Areas Affairs and could be said to represent the views of the Department. There is no indication that this Report was seen by the Secretary of State.
  2. Additional documentation regarding United States policy with respect to reparations from Japan, is included in volume v .