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

740.00119 PW/1–749

Memorandum by Mr. Paul H. Nitze, Deputy to the Assistant Secretary of State for Economic Affairs (Thorp)¹

top secret

[Washington,] 7 January 1949.

1. Progress towards solution of the Japanese reparations problem² has reached another impasse in Washington largely due, this time, to SCAP’s unfavorable reaction to the most recent State–Army proposals sent to him for his comment, but also due to the following factors. There is serious question whether a China, under or imminently under Communist domination, should now be awarded the hitherto proposed 30–40% share of reparations. There is a question whether the U.S. Congress and public would, at this hour, let pass without sharp challenge the award of any reparations whatever from Japan to the U.S.S.R. There is the more fundamental question of whether a defensible case, legally or politically, can be made for considering any reparations program as a “final settlement” unless that program be erected upon the basis of formal FEC action.

2. I am conscious that a review of our “legal” obligations, under Potsdam and previous U.S. commitments in the FEC, has been made in order to establish the framework within which a satisfactory reparations program might be worked out. I understand that there are a variety of possible programs under study ranging from asserting the U.S. “first charge” claim against all surplus capital in Japan, both fixed and liquid, and thereby washing out reparations for other claimants to working out some procedure for making available reparations from current production along lines developed in the Italian Peace Treaty. To my knowledge, all of the proposals seem to suffer two weaknesses. They are intended to be but cannot be “final.” Those that contemplate removals at all thus far provide no method for preventing deliveries to Communist recipients.

3. E has reached conclusions which it wishes to embody in the form of a positive recommendation. Prior to setting forth that recommendation I wish to make the following general observations.

We do not attach great importance to the security objective of industrial disarmament but we dislike having in Japan a large volume of industrial facilities heretofore used exclusively for military production, now idle, and unlikely to be put into economic operation. The possibility cannot be ruled out that they could become an embarrassment if not a security threat to U.S. interests in Asia. Under present circumstances and partly by reason of this “security” factor, reparations from Japan is primarily a political rather than an economic problem. From the economic standpoint it is obvious that paying any reparations imposes a greater economic burden on Japan than paying no reparations. From a political standpoint, it is clear that we could not now support any reparations proposal which would fully satisfy the just and proper claims of our Allies against Japan for the damage, destruction, disruption and suffering brought about by Japan’s military aggression. These axioms, simply understood, could be used to support a U.S. case for no reparations at all. However, political and economic considerations overlap if the position of the U.S. on reparations should provoke international reactions so hostile as to embarrass Japan’s trade prospects in the Far East.

The United States Government should, I believe, be guided by the following principles. It should support a reparations program:

a. Generally regarded by claimants as not being grossly in conflict with existing international agreements;

b. Which will minimize the dislocation of the Japanese economy;

c. Be simple to implement administratively; and

d. Provide some real economic benefit to claimant countries.

The criterion (a) above can be met, in my view, only by announcing that the program, authorized by the U.S. Government, is an interim program—a second stage in the Advance Transfer Program—and that, although the U.S. will oppose any other reparations in any form during the period of the occupation, the final settlement of Japan’s obligations, including reparations, will be worked out at the Japanese Peace Conference and not before. In view of the present feeling of utter hopelessness prevailing in the FEC over prospects of securing formal FEC action on any aspect of the Japanese reparations problem, announcement of such a program, as an interim measure, would be greeted with relief and gratitude. If presented with pretensions of finality, such an announcement would invite the severest condemnation of both U.S. motives and U.S. manners.

4. Having made these observations the E recommendation follows: After appropriate diplomatic consultations with all friendly FEC countries and discussion in the FEC, an interim directive should be issued to SCAP by the U.S. Government providing that:

a. All primary war facilities as defined in the Report of the Overseas Consultants Incorporated³ should be made available immediately for claim as reparations;

b. The procedure to govern SCAP’s administration of the removals program of assets in (a) above should be those set forth in Part B of JCS Directive No. 75;⁴

(Note: SCAP has declared his approval of these procedures. Advance Transfer claimant countries accept them. They provide for a two year cut off date for the removals program after allocations are completed.)

c. Part A of JCS Directive No. 75 should be rescinded at the time this directive is issued;

d. The following percentages should govern SCAP reparations allocations to FEC countries:

Australia	(8)	10½%
Canada	(1)	2½
China	(30)	15
France	(2)	2
India	(4)	6½
Netherlands	(4)	4
New Zealand	(1)	2½
Philippines	(8)	10½
U.K.	(10)	16½
U.S.S.R.	(4)	0
U.S.	(28)	30

(Note: The figures in parentheses are the awards made by the U.S. in its previous offer to the FEC. They are supplied for information only and would not, of course, be made a part of the directive to SCAP.)

The above percentage shares may, from time to time, be augmented, out of its 30% share, by subsequent direction of the U.S. Government which, on its part, will remove no reparations whatever to the continental United States. It is contemplated, further, that on authority of a subsequent directive SCAP should destroy all primary war facilities which remain unclaimed under this program or which have not been temporarily designated for retention⁵ under the authority granted SCAP in paragraph 10 of FEC–084/21.

5. We believe that the program recommended above will be regarded by SCAP as more acceptable than any hitherto submitted to him for his comment because:

a. The pool of assets available for removal is clearly and simply defined and by and large already inventoried and in custody. Hence, removals could commence at once.

b. The principle that machine tools in some primary war facilities should be substituted for machine tools in others has been deleted, thereby removing what SCAP has stated was an intolerable administrative complication and political embarrassment.

c. Individual assets in this pool are capable, by and large, of more simple handling, packaging, and transporting than any other category of industry previously considered for reparations removal.

d. On the basis of his knowledge, SCAP does not believe that more than 65–75% of the pool would actually be claimed, thereby enabling him to retain, without embarrassment, such facilities as are now in operation for occupation purposes.

6. This program, in addition to being generally acceptable to SCAP, would be more acceptable to claimants than any other that State–Army–SCAP could agree upon as basis for unilateral action for the following reasons:

a. (Same as 5(a) above.)

b. (Same as 5(c) above.)

c. FEC countries, partly under the prompting of the U.S.S.R. proposals in FEC–320, but mainly under the influence of U.S. arguments against any restriction on Japanese peace industry might now be, more or less, willing to accept, as an interim occupation program, a reparations removals restricted to clearly defined war capacity. However, availability for removal of anything less than all of Japan’s already defined and identified primary war facilities would produce alarm and sharp political opposition throughout the Far East.

7. The program set forth above has the virtue of being made up of components each of which is familiar to all FEC Delegations and their governments. However, this very fact will require justification, both in the course of the diplomatic talks and in FEC discussion, for the drastic changes which have been made in some of the percentage awards in paragraph 4(d) above. There follows an explanation of the changes made.

Because the U.K., Australia, Philippines, Canada, New Zealand, and India have indicated approval of the U.S. percentage share proposal, their percentages are adjusted upward as though they had participated on a pro rata basis in the previously proposed plan for re-allocation from the U.S.-Australian pool.

The French and Netherlands shares remain what they were in the original U.S. proposal. Neither country accepted our offer. Both present serious policy problems to the U.S. in the Far East.

The U.S.S.R. share has been reduced from 4% to 0% and the Chinese from 30% to 15% on the grounds (1) that it would be politically anomolous, at the present time, for the U.S. Government to take unilateral action on the reparations question in order to set in motion a program benefiting, in one case, a communist country, and in the other, a country about to fall within the Communist sphere; and, (2) that there is ample moral and practical justification for this treatment, since both of these countries are in possession of substantial amounts of Japanese external assets which were not taken into account fully in our previous proposal.

In the case of the U.S.S.R. the value of the war booty which it removed from Manchuria is clearly more than any conceivable Russian claim for reparations would justify. In the case of China, it is also in possession of large amounts of Japanese external assets but we believe the U.S. could not reasonably reduce China’s share below 15% since world public opinion has come to believe that, on the basis of their war devastation and suffering, the Chinese “people” should properly be the principal recipient of reparations from Japan. Thus, we believe that the U.S. should not reduce its own previous 15% award to China under the U.S. advance transfer directive. (It might be pointed out here that even if some machine tools were to fall into Chinese Communist hands the security risk would be negligible. Not more than 1% of the total pool of Japanese machine tools available for reparations are of the sort which, in Europe, are included in our 1A list under the R procedure for East-West trade. Preclusive bidding by the U.S. or other friendly nations, plus SCAP’s discretion in allocation could further reduce the number of such tools going to China.)

Other countries have received as reparations in the form of Japanese external assets nothing like the values already received by Russia and China. These factors were not taken into full account in our previous proposal on shares but now can be cited to justify the modifications made in the U.S. percentage schedule.

8. The U.S. record in attempting to facilitate achievement of international agreement on a final reparations settlement is good. In 1946 for “broad political” reasons which seemed valid at the time, the U.S. indicated willingness to spare Soviet feelings on the war booty and external assets issues, if so doing would help to achieve international agreement on reparations. However, the U.S.S.R., and only slightly less clearly, the Chinese, and several other countries, have obstructed attainment of the final and comprehensive international agreements which were hoped for.

Thus due to FEC failure a U.S. program will be put into effect unilaterally. It cannot have other than an interim character. The final settlement of Japan’s obligations to the Allies must await the Peace Conference and at that time the extent to which Japan’s external assets in possession of the Allies contribute towards satisfying such obligations will necessarily be reviewed.

All primary war facilities received in the meantime, whether under individual country shares or out of the U.S. share, would be duly recorded by SCAP and would be credited to Japan as contributing towards the final settlement of all claims against Japan.

9. The reduction in the Chinese share increases the proportionate share which the U.S. will award itself. The undesirable implications of greed or self-interest which could and doubtless would be drawn from this fact, both domestically and abroad, can be mitigated if not entirely eliminated if it be announced clearly that none of the U.S. share will be delivered to continental U.S. That principle has been incorporated in the directive itself. The U.S. Government should, however, state, further, to FEC countries, in diplomatic talks, that its share is not being held for the Japanese economy but will be re-allocated, on instruction of the State Department to SCAP, to claimant countries which cannot satisfy their needs within their own authorized shares and can provide evidence that delivery of additional amounts would contribute to economic development of their countries and economic relief and rehabilitation throughout the Far East as a whole.

1. Addressed to George F. Kennan, Director, Policy Planning Staff; General Saltzman; Mr. Butterworth; and the Legal Adviser (Gross).
2. For previous documentation on this subject, see Foreign Relations, 1948, vol. vi, pp. 943 ff.
3. See OCI letter of April 30, 1948, Foreign Relations, 1948, vol. vi, p. 970.
4. April 4, 1947, ibid., 1947, vol. vi, p. 376.
5. See FEC–091/7, May 22, 1947, Department of State publication 2888, Activities of the Far Eastern Commission, February 26, 1946–July 10, 1947, p. 77.