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

740.00119 PW/7–2848: Telegram

General of the Army Douglas MacArthur to the Department of the Army ¹

top secret
priority

Tokyo, July 25, 1948.

C 62519. Reurad W [War] 84232, 20th [18th] June 48.² Subject is comments on proposals for settlement of Japanese reparations problem. This radio is in 4 parts. Part A contains statement of general views on reparations policies. Part B contains statement on levels as viewed by SCAP as necessary to approach level of industry to reach objectives of recovery program. Part C contains discussion of allocation procedures. Part D contains discussions on safeguards as given in urad.

Part A.

1. The position of the National Security Council to effect a solution which will dispose of the problem finally and in the minimum time possible is consonant with my viewpoint frequently expressed in radios to Washington. There is no fine line that can be drawn which will equitably and justifiably leave the specific plants which will afford the maximum contribution to the recovery program and which at the same time will satisfy all claimant nations. However, as I have stated previously, time is of the essence and a definite policy definition of the final reparations program will prove more beneficial in promoting early economic recovery than continuing efforts to arrive at a perfect solution.

2. In my radio C 50832 of 13th March 47 on the subject I recommended that in the interest of early and healthful settlement of the program that the interim level of items for reparation be made the basis for setting the final level. This interim program is the only one on which there has been FEC general agreement and its use as a foundation for a final program, subject to revision as circumstances require, was considered to be sound. The removal of the uncertainty attendant on the failure to arrive at a final settlement of the reparations question would have at that time outweighed the advantages gained by having more time to refine further the estimates of capacity needed in certain industries for the maintenance of a peacetime level. Inasmuch as a final settlement was not achieved then, more time has been made available and a multiplicity of further surveys have been conducted. The various specialist groups which visited Japan have made their reports and I have commented on them.

Part B.

1. After careful consideration of the factors noted below and others brought forward by staff analysis and the recommendations of the various survey groups, it is concluded that the capacity to be retained in Japan would approach more realistically the recommendations of the Secretary of the Army’s committee to inquire into economic problems of Japan and Korea as stated in part 1 of urad. Using part 1 recommendations as a basis, a list of actual plants and facilities could be prepared which would represent the total of reparations removals. Claims could be accepted up to this total in accordance with percentages determined equitable. This would furnish a positive and permanent settlement of the reparations removal problem and economic disarmament factors could be handled separately after the economy has been reasonably revived.

2. The level of industry needed to support a peacetime Japanese industry must be distinguished from the capacity needed to be retained in order to support that level of industry. I consider the level of industry concept to refer to the amount of materials actually produced and flowing into the Japanese economy in a given year. The capacity needed to support the level of industry would be a much higher figure. How much higher it should be is in part a technical question in each industry and, in part, a matter of opinion. For example, indications now are that Japanese export trade of the future will have a substantially different pattern than prewar. With the rapid expansion of the cotton textile industry in other countries in the Far East and with the desire of these countries to industrialize as rapidly as possible, it is indicated that future Japanese exports will consist much more of machinery, other capital goods and chemicals, and much less proportionately of textile products than prewar. This changed pattern of export trade will require a larger steel and machinery capacity to support export industries with no change involved in the internal domestic standard of living.

3. Another factor in the difference between the level of industry estimates and the capacity estimates is the greater dispersion of production required. Japanese plants were generally built without giving full consideration to ready access of raw material supplies, fuel, electric power (usually seasonal in nature), and transportation. Maintenance, power failures, and national and local calamities to which Japan is subject must be taken into consideration. Typical examples of this are the typhoon and floods in 1947 and the earthquakes in 1946 and 1948.

4. A factor to be considered in arriving at a decision concerning reparation removals, in addition to the level of industry desired, is the drain on the Japanese economy caused by the physical removal of the facilities. Dismantling, packing and shipping to port of a substantial volume of material and equipment would cost considerable in terms not only of yen but, more important, of lubricating and preserving materials, which must be imported, and lumber and other packaging material. The Japanese budget has been balanced only after long effort and only by adopting regressive taxation measures to a much greater degree than is considered normally desirable. A large reparations removal program would cost very substantial sums in yen and would contribute to inflation in numerous ways. The rail transportation system of Japan is now strained with a priority system already in operation. The movement to port of a large reparations removal program would be superimposed on an already overburdened transportation system.

5. The first proposed program is the only one suggested capable of execution in a reasonable time. The apprehensions regarding its international repercussions discussed in part 2 urad have been noted, but any decision made by the US on this subject will inevitably be argued at the peace conference. Interested governments will probably argue reparations as long as there is any basis for argument. Since US proposals in the FEC were based on the earlier inaccurate estimates of Japanese conditions and without regard to US financial commitments as known today, it can hardly be assumed that a decision for the first proposed program is done in bad faith. It is not understood why there should be any serious difficulty in convincing those European Governments with Asiatic possessions which are receiving billions of American dollars for recovery purposes. Small quota countries, such as Australia, Canada, New Zealand and India, have displayed little interest in receiving important industrial reparations. On the whole, their attitude should be reasonable. It can be expected that for reasons not related to reparations the Soviet Government will disagree with any US decision. It can also be expected that China will oppose any reduction of the program in any form and will use whatever means it can to insist on a large reparations program. The instability of the Chinese Government and of all Chinese affairs is obvious. It is not believed that the Chinese Government can make good use of any large amount of equipment in the near future. By the time equipment might be sent to China, there may be a government there hostile to the US. The Philippine reparations delegations [sic] is second priority, with a definite tendency to seek the purchase of new equipment in the US rather than take second hand equipment from Japan. It is not considered probable that under the first plan FEC members would refuse to accept reparations thus allowing some other country to get the best equipment without opposition.

Part C.

1. The time allowed for execution of the first proposed program should be 18 months rather than one year. Some time will be required for preparation of inventories of any plants which were not on the original custody lists and which may be made available. Time must be allowed for reasonable inspection of plants by delegations and for allocations. To allow flexibility, SCAP, not the directive, should fix the final date for submission of claims.

2. The second proposed program, offering large reparations while allowing insufficient time for the execution of the program, seems impracticable. Instead of abiding by allocation procedures, under study in the FEC and which apply in advance transfer directive, which allow 6 months for inspection and claim and 2 years for actual removal after allocation, the proposed allocation procedures allow a total of 2 years from date of directive for distribution of inventories, full opportunity for inspection of plants, submission of claim (which invariably involves reference to the home government), allocations, disputes over allocations, dismantling of facilities and shipment. With the large program envisaged by the second plan, plants in certain industries, such as nitric acid, would have to be inventoried completely because they were not taken into custody pending basic decisions on reparations. Inventories based on original custody lists will have to be duplicated. In order to follow the recommendations of the OCI as to specific plants to be made available in war supporting industries, new inventories would have to be made of many plants since OCI selections vary in many cases from those in the original custody lists. Experience in the advance transfer program indicates that claims will not be made on the basis of inventories and evaluations alone, but will follow careful inspections and reference of recommendations to the home government for decision. To prevent claimants arbitrarily from doing this will give them a justifiable argument against the program. Since no facility can be allocated prior to certainty that only one country desires it, most of the allocations must be made after all claims are submitted. It is not considered feasible to complete allocations simultaneously with the final date for submission of claims, as indicated by pars 6 and 8 of part 4, appendix, urad.

3. The requirement that claimant must submit adequate evidence of capability of useful employment of claimed facilities (par 7, part 4) is not a safeguard, as stated. SCAP has no way of investigating or verifying such evidence. It must be accepted at its face value. There is no limit to the amount and kind of evidence that can be submitted under such conditions.

4. Experience here demonstrates that shipping schedules submitted by claimants prior to allocation (par 7, part 4) will be pure fiction. SCAP has no way of verifying them, even though morally certain that they will not be followed. SCAP would have to accept these at face value for allocation purposes or assume the responsibility of denying the official statement of a sovereign government.

5. It is not understood how there can be eight quarterly periods of industrial shipments (par 7, part 4) since nothing can be removed until allocated, dismantled, packed and shipped to the port. The first 2 and ½ quarters are shown in the plan as being available for distribution of inventories, inspections, claims and allocations. Time must be allowed for dismantling, packaging and movement to port. Dismantling cannot start prior to inspection and claim at the earliest.

6. On the supposition that deliveries may be extended by later international agreement beyond the prescribed 2 years from date of directive, and to be consistent with previous claims for large reparations, it can be expected that some countries, particularly China, will claim everything to which entitled under their quota. To carry out its portion of the program in good faith and assuming good faith on the part of others, SCAP would have to begin dismantling every plant as soon as located. With such a large program as that in the second plan, the end of the 2 year period would find a great amount of dismantled equipment, packaged—some located at the port, some at its original site. This dismantling and packaging will have cost millions of yen, and used materials, transportation and labor. The dismantling process will result in the destruction or damage of much equipment and installations not removable as reparations. A situation of this kind would be highly discreditable and would furthermore give the claimant nations a perfect argument for extending the period of the program.

7. The criteria contained in pars 8B and C, part 4, are useless, time consuming and sources of argument since SCAP has no way of verifying any of them and must officially accept them at face value. They would merely complicate allocations.

8. Review of valuations (12C, part 4) will be time consuming but no time is allowed for it under the program.

9. Industrial facilities made available for reparations but not claimed or allocated (par 15, part 4) should be turned back to the Japanese Government in order to avoid continued expense for an indefinite period for custody and maintenance. The chance that such equipment would ever be removed for reparations is practically nil. Yet the maintenance of it as required by the plan is exceedingly expensive. It could be put to good use in some fashion in Japan or abandoned.

10. Industrial reparations should be limited to machinery and equipment and should exclude buildings and accessory equipment. Some claimants seek buildings, but as these are needed in Japan, their removal would affect industrial recovery.

11. Repeal of interim directive indicated in par 1, part 1, and par A (1), part 2 urad, should not apply to allocations already processed under the interim directive.

Part D.

Comment on safeguards as given in urad.

1. Safeguards as given in part 2A (2) are in fact inadequate to insure Japan being able to retain sufficient capacity for a minimum economy. Comments have already been made on the proposed safeguards of time for completion of removals, percentage shares of levels, and the requirements for the claimant nation to justify effective use. Comments on interpretation of par 10 FEC 084/21 are given below:

A. This provision authorized only temporary retention, and in the majority of cases, the facilities are actually necessary for the self support of the Japanese economy and would therefore be required after the end of the occupation.

B. Interpretation will probably be made by the claimants that “needs of the occupation” means “direct occupation use”. In many cases the use is actually for the Japanese economy and cannot therefore be justified as being only for occupation use.

C. The requirement that SCAP must justify to the Allied Council for Japan all facilities retained under this directive should be definitely superseded by a statement substantially as in 2B of urad that “SCAP possesses an overriding authority to retain particular plants in Japan whether or not they are on reparations removals lists, if he considers their retention essential for purposes of occupation.”

D. The requirement that SCAP give the estimated date of removal or destruction would be extremely difficult to accomplish. Some facilities would be needed for a short time only; others would be needed for the duration of the occupation; while still others now converted into peaceful and essential industries would probably be required for retention in the domestic economy.

E. Because of the great number of facilities presently considered necessary for retention, individual justification to the claimants would be practically impossible.

[MacArthur]

1. Copy transmitted to the Department by the Secretary of the Army (Royall) in his letter of July 28. Mr. Royall suggested that he should meet again with the Secretary of State “to see whether or not we can come to agreement on this reparations question particularly as I understand that our two Departments, at least on the NSC consultant level, have now agreed on all other phases of the proposed Japanese policy now before the National Security Council.”
2. See footnote 2, to memorandum of June 18, p. 978.