Foreign Relations of the United States, 1949, The Far East and Australasia, Volume VII, Part 2

740.00119 PW/1–2749

Memorandum by the Director of the Office of Far Eastern Affairs (Butterworth)¹ to the Secretary of State

top secret

[Washington,] January 27, 1949.

Problem

To determine United States policy with respect to Japanese reparations.

Discussion

The Japanese reparations problem has a long history, the essential elements of which are:

(1) U.S. concurrence during the latter half of 1946 in a series of Interim Reparations Removals policy decisions of the Far Eastern Commission making available for reparations claim designated quantities of industrial facilities considered at that time to be clearly surplus to Japan’s peaceful needs;²

(2) Issuance by the United States in April 1947 of a unilateral interim directive to General MacArthur³ instructing him to effect immediate delivery to China, the Philippines, the Netherlands and the United Kingdom of 30% of the facilities made available by the Interim Removals decisions. Some 14,000 machine tools and a few other miscellaneous items have been delivered under the directive;

(3) Submission by the United States, also in April 1947, to the Far Eastern Commission of a proposal that there be made available for claim in satisfaction of Japan’s final industrial reparations obligations all facilities in excess of certain stated “levels of industry”.⁴ These levels have achieved a large measure of acceptance within the Commission;

(4) Submission by the United States in November 1947 of a proposal designed to break the stalemate of a year’s duration on reparation shares so that a final reparations program might be instituted without further delay,⁵ such proposal including division of the bulk of the United States share among those nations which would accept its proposed schedule. This proposal has not yet been accepted by France, India and the Netherlands and has been flatly rejected by the Soviets, effectively preventing the institution of a final reparations program on the basis of FEC agreement even if the levels question were agreed;

(5) Submission in March 1948 of a report by Overseas Consultants, Incorporated,⁶ a group of United States engineers sent to Japan by the Army, in which it was maintained that Japan could provide far smaller quantities of capital reparations without impairment of its essential peace time capacity than had previously been thought; and

(6) Submission in May 1948 of the Johnston-Hoffman report taking an even more limited view of Japan’s reparations paying capacity.

Since submission of the Johnston–Hoffman report, the United States Government has been unable to reply to repeated inquiries by FEC countries as to the position of the United States on the reparations problem. Extended discussions have been held during this period between the State and Army Departments in an effort to determine a final United States position. These discussions failed to produce agreement, with the result that an Army proposal based on the very limited Johnston-Hoffman reparations program, and a State proposal providing for a somewhat more generous reparations program, were sent to General MacArthur by the National Security Council in June, 1948, for comment.⁷ General MacArthur preferred the Army proposal. The State Department subsequently modified its position in the direction desired by the Army, and a new tentatively agreed State–Army proposal was sent to General MacArthur in November 1948, for comment. General MacArthur’s reply, received in mid-December, was that his recently received interim directive from the United States Government calling for the institution of a comprehensive stabilization program rendered impracticable and undesirable the removal of any further reparations from Japan. He has strongly reaffirmed that position in a wire received January 22.

The Economic Offices of the Department and the Office of Far Eastern Affairs have, during the past three weeks, been considering two principal alternative proposals in light of General MacArthur’s position:

(1) That we terminate the present Advance Transfer program and institute another smaller program restricted to the removal of primary war facilities but upon which all FEC countries except the USSR could draw, at the same time announcing our opposition to any further industrial reparations from Japan.

(2) That we accept General MacArthur’s proposal that we terminate the Advance Transfer program and permit no further reparations whatsoever.

The following arguments are advanced by E in support of the first proposal, for a program of industrial removals limited to primary war facilities:

(1) It would meet our commitments in the Far Eastern Commission that Japanese primary war facilities should be made available for reparations.

(2) It would provide claimant countries with significant quantities of the most desirable types of industrial facilities, mainly machine tools, and for that reason would be a much more acceptable proposal to other claimant countries than denial of any further reparations at all.

(3) It would constitute an easily implemented program since inventorying of primary war facilities is substantially complete.

(4) It would not involve the removal of facilities valuable for Japanese recovery because SCAP would have power, already recognized by the FEC, to except from removal, upon notification to the Allied Council, for the period of the occupation (in fact probably indefinitely) all facilities needed for purposes of the occupation, which purposes prominently include economic revival.

(5) It would not on the basis of studies carried out in the Department, and supported by earlier estimates of SCAP himself, jeopardize or seriously affect the current stabilization program in Japan. According to these studies the cost of dismantling, packing and transa porting to dockside of primary war facilities would add approximately 1 percent to the Japanese budget, the burden on Japan’s rail system would be increased 8 percent, and between 4 and 5 percent of Japan’s lumber production would be diverted to reparations uses during the 18 months period of the reparations program. These figures are based on 100 percent removals of available facilities, which would not be likely to occur.

(6) It would accomplish the removal of presently idle capacity in primary war industries in Japan, capacity which is a special cause of concern to neighboring countries which fear it may ultimately be put to military use by the Japanese with foreign aid.

(7) Distribution of Japanese industrial facilities to Far Eastern claimant countries would contribute to the U.S. policy objective of rebuilding the productive capacity and trade of the Far East.

The following arguments, on the other hand, are advanced by FE in support of the second proposal, that we terminate the Advance Transfer program and permit no further reparations whatsoever:

(1) The Japanese economy is, and according to all indications will for some time remain, a deficit economy. With the loss of its empire, and with a population 10 million greater than in 1941 and still growing rapidly, it seems clear that Japan will have need of all its present resources and more to attain a self-supporting status at decent standards of living.

(2) The United States taxpayer has for nearly four years been making up the heavy deficits in the Japanese economy, and is continuing to do so. Any reparations program, even one limited to primary war facilities, would necessitate diversion of Japanese lumber and transportation from productive purposes to the unproductive and inflationary tasks of packing and moving the reparations facilities, and would by that degree interfere with the recently directed Japanese stabilization program through which the United States hopes to reduce and finally eliminate this drain on its resources. In these circumstances the cost of removal of any further reparations would in the last analysis be borne in major part directly or indirectly by the United States.

(3) Regarding the legal aspects of the problem, all actions taken by the United States on Japanese reparations have been based on the general assumptions that reparations would be taken only from facilities in excess of Japan’s own peaceful needs, and that there would be an agreed schedule of shares according to which reparations would be divided among the various claimants. It seems clear that in the absence of an agreed shares schedule, or United States unilateral action providing SCAP with such a schedule, the FEC Interim Removals policy decisions of late 1946 are meaningless and impossible to implement, and that with the failure of the FEC to adopt an agreed schedule after two years’ negotiations, the United States and other FEC countries need no longer consider themselves bound by these decisions. Any other interpretation could find us still bound by these decisions ten years hence if the FEC had not yet adopted an agreed schedule. Although the commitment to remove primary war facilities for reparations is unqualified by reference to Japanese peaceful needs, it too depends for its effectiveness on SCAP’s being provided with a directive embodying a shares schedule. The United States would therefore seem entirely within its legal rights in determining at this time in the light of the best technical information available that Japan cannot spare, and should not be required to pay, any further industrial reparations, and in consequence could refuse to participate in any action on shares.

(4) Japanese primary war facilities include some 225,000 out of a total of 700,000 machine tools in Japan. The Johnston–Hoffman mission emphasized that among all its existing industrial facilities Japan in future will most need its machine tools and machine tool manufacturing capacity. While SCAP would be able under the E proposal to exempt from removal many or all of the 22% of the 225,000 machine tools and other primary war facilities now in productive use in Japan, or the 44% which SCAP estimates will be in production by 1953, such sweeping use of his authority would place him in an embarrassing position before the claimant countries and would rob the proposal of whatever attractiveness it possessed for those countries.

(5) It would be difficult to explain, to Congress for example, why we should be supporting the removal of “primary war facilities” from Japan for delivery to the Chinese Communists (even though those facilities are in fact of no more military value than any other heavy industrial facilities).

(6) In the event of war with the Soviet Union we might have cause to regret the removal of these facilities from Japan. Present military thinking is that we can and must hold Japan in case of war with the Soviets, and that Japanese industrial facilities would consequently be of value to us rather than to the Soviets in such a war.

(7) It is believed that, due to developments in China, the NEI and elsewhere in the Far East, the United States need feel far less concern whether the reparations claims of other FEC nations are satisfied than was the case some months ago. China is no longer an effective claimant, and our interest in affording it reparations has largely disappeared. The same applies in large degree to Burma and French indochina. The Netherlands has just disregarded United States views in the NEI and is in no position to protest our reparations decisions. We do not wish the Soviets to have any further reparations. Australia, New Zealand, Canada and India have never evidenced particular interest in the subject. This leaves, substantially, the remaining British Colonies and the Philippines, and the British have made it clear that their interests lie much less in reparations than in restricting the capacity levels of certain Japanese industries to reduce future Japanese commercial competition.

An important factor in assessing the two proposals is the essentially political-psychological question of which proposal would be least unacceptable to the claimant countries and hence likely to arouse the least resentment, to the possible injury of Japanese trade. It is the Economic Offices’ view that the claimant nations would resent a program limited to removal of primary war facilities less than they would the denial of any further reparations whatsoever. It is FE’s view, however, that a U.S. position based on the simple principle that Japan will require all its existing industrial resources and more for its future peaceful needs, and that the cost of removal of any further reparations from Japan would in the last analysis be borne by the United States, would be more convincing and would therefore arouse less resentment than a program under which we attempted to maintain that Japan could spare X amount of equipment but no more.

FE is also inclined to take a less serious view than is E of the consequences for Japan’s export trade of Allied resentment over our reparations policies, believing that the trade of Far Eastern countries with Japan will continue to be determined essentially by commercial factors. It is FE’s view, also, that most claimant nations have already come to expect a drastic revision of United States reparations policies, and that announcement that we oppose any further reparations would occasion less surprise and indignation than has been commonly supposed.

E’s concern over the FE proposal, on the other hand, derives essentially from the three following disadvantages to which it is believed by E to be subject:

(a) It is believed that world opinion would interpret the retention in Japan of primary war facilities as confirmation of the widely held fear that the United States intends to develop Japan as a military base;

(FE doubts whether such retention would materially augment the fears which already exist on this score. It can be effectively demonstrated that all special purpose equipment functionally limited to the production of combat end-products has been destroyed, and that, as earlier stated, the so-called “primary war facilities” are of no greater military significance than any other industrial equipment.)

(b) World public opinion would conclude that the United States does not intend to make good on its declared intention to assist in the technological and industrial development of under-developed areas of the world, since this purpose would be well served by the removal to Far Eastern countries of Japanese primary war facilities;

(FE doubts whether world expectations aroused by the President’s statement on this point have yet reached the point where this factor need be accorded particular weight as regards Jap. rep.)

(c) FEC countries would fear that a United States announcement that it will oppose further industrial reparations from Japan despite United States approval of previous international agreements on this subject might foreshadow repudiation of other and more serious international agreements, thus shaking their confidence in the integrity of the United States Government.

(FE does not consider its proposed position in violation of existing United States commitments, due to the inability of the FEC to agree on a shares schedule giving these commitments meaning and practical effect. FE also believes that we must to the limit of our legal rights effect the changes in the occupation necessitated by the prolongation of the occupation following the indefinite postponement of a peace settlement.)

E recognizes; of course, that removal of further industrial reparations from Japan would impose a greater burden upon Japan than the removal of no further industrial reparations. It believes, however, that the magnitude of that burden has been greatly exaggerated, particularly when converted into terms of U.S. dollars. It considers it improbable that the direct cost to the United States of its proposed program would in fact exceed 4 to 5 million dollars, or that the indirect costs due to the effects of the program on the Japanese stabilization program would total more than 30 million dollars. FE believes, as mentioned before, that all resources within Japan are demonstrably necessary for Japan’s peaceful economy and that any action tending to delay the execution of, or otherwise interfere with, the Japanese stabilization and recovery programs would be directly in conflict with United States policy and interests.

The question of which of the two proposals should be preferred is essentially a question of political judgment, in which numerous questions of United States interest—the consequences for the newly instituted Japanese stabilization program, the reactions of other FEC nations, the conflicting demands on United States resources, security, etc.—must be evaluated and weighed against each other. Since pro-Longed consideration of the relevant factors leads E and FE on balance to differing conclusions, it is necessary to refer the matter to you for decision.

There is attached at Tab A⁸ a proposed statement on Japanese reparations to be made by the United States Member of the Far Eastern Commission prepared by E and embodying the E position. Enclosed with this statement is a “United States Policy Proposal Regarding Japanese Reparations from Industrial Facilities in Japan” which would be presented to the Commission and which would subsequently form the basis of an FEC or United States interim directive to SCAP. Attached at Tab B is a proposed statement for reading by General McCoy to the Far Eastern Commission prepared by FE and embodying the FE position. Enclosed with this statement is the text of a proposed United States interim directive to SCAP which would be issued immediately following reading of the statement to the FEC. It is contemplated under both proposals that the United States position, would be discussed with friendly FEC governments before presentation to the FEC. Whichever statement is read to the FEC would upon delivery by General McCoy be released to the press.

Attached at Tab C is a memorandum by the Office of the Legal Adviser expressing its views oil the legal aspects of the problem.⁹

Recommendation

It is recommended that you approve either Tab A or Tab B as the position of the United States Government on the Japanese reparations, problem, and that you so advise Secretary Royall,¹⁰ if possible before his departure for Japan tomorrow.

W. W[alton] B[utterworth

1. Together with Paul H. Nitze, Deputy to Assistant Secretary of State for Economic Affairs Thorp.
2. See Department of State, Activities of the Far Eastern Series, pp. 68–76.
3. JCS ser. 75, April 4, 1947, Foreign Relations, 1947, vol. vi, p. 376.
4. See memorandum of April 7, 1947, ibid., p. 382.
5. See memorandum of October 29, ibid., p. 556, and subsequent documents.
6. See letter of April 30, 1948, Foreign Relations, 1948, vol. vi, p. 970.
7. See letter of June 18, 1948, ibid., p. 978.
8. Annexes not attached to file copy.
9. January 27, p. 631.
10. Kenneth C. Royall, Secretary of the Army.