740.00119 PW/2–1549

Memorandum Prepared 1 for the Secretary of State

top secret

We have studied your memorandum of February 1 on the Japanese reparations problem in accordance with your request. Our respective views are set forth below.

I

Your summing up of the problem is believed to be correct, although it may not have been made clear that the beneficiaries of the Advance [Page 651]Transfer Program are limited to China, the Philippines, the Netherlands and the United Kingdom. There have been no reparations deliveries from Japanese internal resources to other FEC nations. There is attached2 (Tab A) a supplementary memorandum dated February 4 by the Legal Adviser, annexing a complete summary dated December 27, 1948 of the various EEC agreements, and setting forth the terms under which SCAP may retain equipment for needs of the occupation.

Since you last considered this matter, cables have been received from Mr. Dodge, Financial Adviser to General MacArthur (Tab B), and from Mr. Royall (Tab C), emphasizing the need for a speedy decision in the interest of Japanese recovery.

In reply to your question, there is attached a memorandum (Tab D) on the relation of the German and Japanese reparations policies. Both policies have had the same basic approach—to remove capital equipment constituting war potential in excess of peace-time needs—and our evaluation of the peace-time needs of both countries has undergone change. The German program was undertaken much earlier in the occupation than the Japanese, and we have less freedom of action in Germany because the occupation is shared with the United Kingdom and France. These differences are such that the two policies are believed to have little appreciable effect on one another, although it should be noted that we propose to carry out the bulk of the removals which had been agreed for Germany, that review of the German program has been in the interest of European recovery, that we have not suggested the retention of any primary war facilities in Germany, and that we acknowledge that revision of the program requires British and French agreement.

II

FE’s comments on your suggested course are as follows:

The advantage of your proposal over that previously advanced by FE is that its legality cannot be questioned. On the other hand it would have the disadvantage of failing to afford Japanese businessmen as complete assurance as the FE proposal might do that no further reparations removals will ever take place, and that therefore they may safely proceed with the rehabilitation of their plants. Such assurance, it is believed, is vitally necessary if the Japanese are to get back into production on a scale sufficient to bring about the desired ends of the recently inaugurated economic stabilization program. This point is strongly emphasized by Mr. Joseph Dodge in the second paragraph of his attached telegram received on February 7 (Tab B). No proposal can fully meet all desiderata, however, and it may be that the implications of our actions under your proposal would be almost as effective [Page 652]in providing the necessary assurance as would the more categorical statements iffidferthe FE proposal.

It should be pointed out that the only basis for not proceeding with implementation of the previously adopted series of FEC reparations directives is that the FEC has not been able to agree to a division of reparations shares. Once a shares directive has been issued by this Government or by the FEC applicable to any portion of previous reparations directives, it would, in the opinion of FE, be difficult logically to refuse to apply such shares directive to all previous reparations directives. Because of this FE is opposed to the E proposal outlined below advocating the issuance of a shares directive applicable to primary war facilities.

FE wishes to concur in your general conclusions as providing, all things considered, the most practical means of dealing with this problem. It wishes to suggest two amendments to your proposal, however, as follows:

1.
It is recommended that before we rescind the Advance Transfer directive and withdraw our shares proposal an officer of the Department call in the representatives of the friendly FEC countries and explain to them the reasons behind this step in the light of our overall Japan policies for the coming period, set forth in NSC 13/2.3 It is believed that chances of the FEC Governments accepting our position with reasonably good grace would be markedly improved if prior discussions of this type are held.
2.
It is suggested, secondly, that instead of proposing that the reparations problem be considered at a later date when the full needs of the occupation can be more accurately assessed, we simply state when we rescind the Advance Transfer directive that we do not propose to take any further unilateral action to solve the reparations problem. We would by this procedure, it is believed, stand a better chance of permanently laying the reparations issue to rest.

III

E concurs with the above proposal that before we rescind the Advance Transfer directive discussions take place with representatives of the friendly FEC countries. We believe that, however, in such discussions we should indicate that if, in the light of the serious economic conditions with which Japan is now faced, they would be willing to state in good faith that they regard the distribution of primary war facilities as being a substantial fulfillment of Japan’s obligations for reparations payments in the form of capital equipment we would be prepared to break the shares stalemate by issuing an Interim directives.

E believes that this proposal possesses the following advantages: If accepted, (a) The Japanese community would be given greater security as to the present and future status of their industrial plant; [Page 653](b) having received significant reparations on this basis, claimant countries would have less grounds for asserting claims for reparations in the future from Japanese plant and equipment; (c) substantial amounts of industrial equipment in primary war facilities which E is certain will remain idle in Japan would be put to productive use outside Japan; (d) and, finally, the removing of primary war facilities from Japan could be made an effective argument to answer the contention of Far Eastern peoples that the U.S. intends to create a military base in Japan. If not accepted we would at least have avoided being put in the position with friendly governments of having brushed off their reparations claims without an indication of a willingness on our part to consider some sort of constructive action.

This action would require a prior decision on the part of the U.S. Government that if a majority of the friendly FEC countries do agree to the proposal a U.S. Interim Directive would be issued to SCAP.

If a majority of the FEC Governments do not give appropriate assurances the U.S. Government should withdraw its outstanding shares proposal and rescind its Advance Transfer Directive, but should not issue an Interim Directive. In that event, however, there should be released to the press a statement of our efforts to arrive at a mutually satisfactory reparations program, and our view that with the failure of these efforts no further industrial reparations should be required from Japan. We would thus at least obtain the advantages (a) of giving practical assurances to the Japanese people that the U.S. Government will, on its part, oppose further industrial removals as reparations, and (b) of demonstrating to Far Eastern peoples our desire to remove from Japan its primary war facilities.

There is attached for your information a memorandum (Tab E) containing data supporting E’s belief that SCAP has greatly exaggerated the impact of the removal of primary war facilities upon Japa nese economic recovery. These data indicate the very much lower level of retentions which we have heretofore considered adequate for Japan’s peace-time needs.

IV

O concurs generally with the E recommendation, but is of the opinion that, while it would be desirable before issuing a unilateral directive to seek assurances from friendly FEC countries that they will not insist on further capital removals and that they will accept our decision on shares as being in their interest, nevertheless we should issue the directive even if the assurances on further claims fall short of those desired, unless the objections to the proposed shares indicate a net loss of good will through the plan.

This conclusion is based upon the following reasoning. The U.S. is expressly committed by FEC agreement to the removal as reparations of all primary war facilities except equipment destroyed or retained [Page 654]temporarily for the needs of the occupation. (See memorandum of the Legal Adviser dated January 27, previously submitted, and Tab A hereto.) If the U.S. is to abide by this agreement, it must see that the equipment is either removed now, or held available for later removal. The latter course appears to be implied in your suggestion that we observe our commitments but simply defer action. To hold the equipment available indefinitely will not give the Japanese the assurances they require (Tab B) and will impose an unnecessarily heavy burden on the Japanese economy (Tab C). To make the full assurances we desire from FEC countries a condition of pur action would be regarded by them as requiring them to buy the same horse twice, namely, our agreement to remove this equipment. For these reasons, as well as for the sake of the general recovery of the Far Eastern countries and the good will of their peoples toward the United States and Japan, it appears better to make immediate removal possible by unilateral U.S. directive.

There is some logical—but not legal—difficulty in applying a shares decision to any quantity less than that covered by the interim decisions. It will be much easier, however, to persuade the FEC countries of the logic of this procedure, which makes available to them a substantial quantity of reparations, than to persuade them of the logic of making no equipment available because we cannot agree to make all available.

It is also recommended, in view of our repeated promise in the FEC to state our position on reparations removals, that our proposal should be formally submitted to the FEC before a unilateral directive is issued.

The Legal Adviser concurs in the legal conclusions stated in this section.

V

recommendation

That you adopt as the decision of this Government one of the following three courses of action:

1.
That after explaining to friendly FEC countries the reasons behind our position we (a) rescind the Advance Transfer directive, (b) withdraw our shares proposal, and (c) announce that the U.S. does not propose to take any further unilateral action to solve the reparations problem.
2.
Same as No. 1 through (b), but instead of (c), that we attempt by diplomatic means to secure from FEC countries assurances that if the U.S. Government breaks the shares stalemate by issuing an interim directive applicable to primary war facilities (Tab A Memorandum of January 27), they, on their part, will regard these reparations as being in substantial fulfillment of what Japan should be required to pay as reperations in the form of capital equipment.
3.
Same as No. 2, except that this Government issue the interim directive even if the assurances with respect to future reparations [Page 655]claims fall short of those desired, unless the objections to the proposed shares indicate a net loss of goodwill through the plan.

You may wish to obtain Mr. Royall’s views and through him Mr. Dodge’s, arrived at in light of their examinations on the ground, before reaching your final decision on this matter.

  1. Initialed by Messrs. Saltzman (O), Nitze (E), and Butterworth (FE).
  2. Annexes not attached to file copy.
  3. October 7, 1948, Foreign Relations, 1948, vol. vi, p. 858.