Foreign Relations of the United States, 1948, The Far East and Australasia, Volume VI

740.00119 PW/6–548

Memorandum by the Assistant Secretary of State for Occupied Areas (Saltzman) to the Secretary of State ¹

top secret

[Washington,] June 5, 1948.

Subject: Japanese Reparations: Conference Requested by Secretary of the Army.

Mr. Secretary: Discussions between State and Army on the question of Japanese reparations are now deadlocked around the question of the level of industry which should serve as the basis for the reparations program.

The Secretary of the Army has indicated in his letter to you of May 26² that he believes that this level of industry should be based upon the recommendations of the Overseas Consultants Incorporated and the Johnston Committee. He will probably present the following arguments.

1) The U.S. Government should not approve a reparations program for Japan which would hamper its attainment of economic self-support.

2) The Overseas Consultants Incorporated were employed by the Department of the Army at a cost of $650,000 and its recommendations represent conclusions based on the most recent and authoritative analysis of qualified experts. Those conclusions are supported by a group of outstanding businessmen, headed by Mr. Percy Johnston and including Mr. Paul Hoffman.³

3) This position is also supported by General MacArthur.

The Department, of course, is in full accord with the concept that reparations removals should not hamper Japan’s attainment of self-support. However, we believe that the Department of State should reject the Army’s views on the level of industry issue for the following reasons:

1) Economic grounds: We believe that the OCI has incorrectly described the extent of industrial capacity which can be made available for removal as reparations without damage to Japan’s economic recovery. As stated more fully in Tab A,⁴ the OCI report has overestimated Japan’s import needs to attain a reasonable peace-time standard of living and has provided for retention of capacity which, in view of lack of sources of raw materials or available markets, cannot be of benefit to the Japanese economy unless supported by greatly increased U.S. appropriations.

2) Political grounds: The Army’s position would be so unacceptable and antagonizing to FEC member nations as to result in long-term disadvantages to the United States.

a) The U. S. Government has taken the lead in bringing about international agreements on reparations embodied in the Potsdam Declaration and in FEC policy decisions; the United States approved of each of these agreements and they are considered by other countries to be commitments of our Government.

b) We believe that for the U. S. Government to make the level of industry recommended by the Army Department the basis for a Japanese reparations program would be regarded by other FEC countries as a unilateral, arbitrary and unfair action. FEC countries might not accept the economic grounds (Tab A) upon which the OCI level would have to be defended. Therefore, acceptance of the Army’s reparations program, which includes in its terms the requirement for a positive FEC decision, would probably result in no reparations at all during the period of the occupation and would leave a most troublesome issue for the Peace Conference. The FEC countries would feel that even if the U. S. should provide for some reparations based on the OCI level by use of unilateral action they would continue to have valid and unsatisfied reparations claims against Japan.

3) An examination of cables from SCAP does not convince us that he considers the OCI position is the minimum level necessary for economic recovery and Japan’s achievement of self-support.

The State Department’s program for a final settlement of the reparations problem is set forth in Tab B.⁵ This program is based upon a level of industry which modifies previously adopted FEC policies, in the light of the OCI recommendations, but is considerably lower in major industries such as steel than are the recommendations of the OCI. (See Tab C for comparison of the various positions on level of industry.⁶)

Further, our program provides the following four safeguards:

First, and most important, SCAP, by virtue of authority already granted to him in FEC policy, may retain any industrial plant needed for the purposes of the occupation, that is, any facilities needed for achieving Japanese economic self-support;

Second, claimant countries are required to pay the costs of transportation;

Third, claimant countries must complete removals within two years;

Fourth, claimant countries must provide evidence that removed facilities are capable of practical use in their countries.

Finally, we feel that this program, though it may disappoint many FEC countries, is one behind which substantial support may be marshalled and which should provide a prompt and final solution.

If the Secretary of the Army cannot agree at this time to the program proposed by the Department of State, we recommend that he be informed that we desire the attached cable (Tab D) to be despatched by the National Security Council to General MacArthur.⁷ In this cable General MacArthur’s views are requested on certain points, particularly with respect to whether, as alleged by the Army, he considers that the OCI level is indispensable to Japanese self-support, or whether the level advanced by the State Department is adequate when considered with its accompanying safeguards. This cable sets forth dispassionately the various considerations which have been presented on the reparations issue without reference to the positions taken by the two Departments.

Mr. Thorp and Mr. Butterworth concur.

Charles E. Saltzman

[Annex]

“Tab B”

top secret

[Washington,] June 2, 1948.

State Department’s Proposed Separations Program for Japan

To the end of reaching a definite, speedy and final settlement of the reparations problem in a manner consonant with existing U.S. international obligations and contributing to our broad international interests in the Far East, and having in mind that reparations is primarily an international political problem, the reparations impasse should be resolved in accordance with the following principles and procedures. Diplomatic approaches should be made at a high level to friendly FEC Governments to secure their support for these principles and procedures in the context of our overall policies for Japan.

(1) The U.S. Government should rescind the Advance Transfer and Allocation Procedures Interim Directive.⁸ The U.S. Government should announce its position to be that Japanese external assets located in the territories of countries at war with Japan should be retained by such countries as reparations.

(2) The U.S. Government should use its authority to issue an interim directive on reparations shares as the legal basis for setting in motion a definite reparations program. In addition to establishing national percentage shares this directive would provide for such administrative limitations upon actual removals as would minimize the adverse effect removals might otherwise have upon prompt and effective economic recovery in Japan and Japan’s attainment of self-support. To this end, the directive would stipulate that, for the purposes of this program:

(a) National percentage shares should apply only to industrial facilities in excess of the levels of industry embodied in Subsection C and only such facilities should be inventoried for actual removal under this program;

(b) The authority already granted expressly by the Far Eastern Commission policy decision (para 10,⁹ FEC 084/21), to retain any particular industrial facilities in Japan, whether or not inventoried for removal, should be exercised by the SCAP on a showing that he considers retention of any such facility necessary for the purpose of Japanese self-support, or, in other words, necessary to meet the needs of the occupation.

(c) Removals should be completed, under this program, within two years.

(d) Claimant countries should be required to provide evidence that the useful employment of requested facilities is practicable.

(3) Before the above steps are taken, the U.S. Government should endeavor to obtain maximum international support through diplomatic channels for the industrial levels embodied in Subsection C. When, in due course, favorable FEC action has been taken on any of those levels, appropriate directives should be sent to SCAP.

(4) In the meantime, the terms of the interim directive setting in motion the removals program will make clear to both SCAP and the FEC countries that it is the opinion of the U.S. Government that industrial capacity up to the proposed U.S. levels stated in Subsection C will be needed for purposes of the occupation and that those levels will be the basis for determining reparations availabilities. In addition the FEC countries would be reminded that SCAP possesses an over-riding authority to retain any particular plant in Japan, whether or not he has inventoried it as being in excess of the levels in Subsection C, on a showing that he considers its retention essential for the purposes of the occupation.

(5) Further, in the implementation of this reparations program, SCAP should adopt the procedures set forth in Appendix l.¹⁰ Those procedures are substantially the same as the procedures embodied in the U.S. interim directive, JCS Serial No. 75 of April, 1947, to which, in the meantime, the support of most FEC countries has been obtained. Several new provisions have been added. Those below are designed to expedite disposal of the reparations problem:

a. SCAP should publicly designate the specific facilities in excess of the levels in Subsection C as being available for reparations. He should likewise designate the facilities required to be retained in Japan for purposes of the occupation, and should inform the Japanese that these latter facilities and all other industrial facilities in Japan are to be immune from reparations removal during occupation;

b. Each of the claimant countries should submit to SCAP carefully scheduled reparation removal plans within 90 days of SCAP’s initiation of this program under which they guarantee to remove prescribed quantities of requested, available reparations facilities, within their respective reparations shares, each quarter during the two-year period in designated, demonstrably available bottoms for the stated purpose of re-establishing those facilities in their own countries;

c. SCAP should make the final allocation on the basis of these specific undertakings, and should inform the Japanese Government that all plants previously declared available but not included in the final allocations are to be immune from reparations removal during the occupation;

d. SCAP should ensure delivery at dockside of the allocated facilities in accordance with the removal schedules; and

e. If at any time a claimant country fails to remove facilities delivered at dockside in accordance with the removal schedule, the quantity of facilities made available to that country under the delivery contract should be correspondingly reduced by SCAP and the released facilities removed from the list of allocated facilities.

(6) The U.S. Government should, at an appropriate time following the 90 day period during which allocations to claimants are to be completed, publicly announce that the industrial facilities declared immune from reparations removal during the occupation (see para (5)a. and (5)c. above) should be, in the view of the U.S. Government, permanently immune from reparations removals.

1. Approved by the Secretary (General Saltzman’s memorandum of June 9).
2. Not printed.
3. Administrator of the Economic Cooperation Administration.
4. Not printed; it was entitled “Comparison of State Department and OCI Recommendations on assured levels of industrial capacity for Japan”.
5. Printed below.
6. Not attached to file copy.
7. For memorandum of June 18 to the National Security Council, see p. 977.
8. Serial 75, April 4, 1947, ( Foreign Relations, 1947, vol. vi, p. 376.
9. August 14, 1947, (The Far Eastern Commission, 2d report, pp. 25, 30.
10. Not found attached to file copy.