By Eric Vandenbroeck

Bankrupting The Enemy

While previously we mentioned that Japanese textbooks generally referred to a U.S. financial siege of Japan "before" Pearl Harbor, US documents released in the context of the Holocaust Era Records Act between 8 and 10 years ago show among others that from 1937 to 1940 a dozen experts in U.S. financial agencies analyzed Japan's balance of payments, gold production and reserves, scrap gold collection, liquidation of foreign investments, and other financial data. They also predicted when Japan would be bankrupt and have to stop the war in China, always six to eighteen months in the future. It was a comforting thought to policy makers, but the analyses were wrong.  From 1938 to the summer of 1940 the Bank of Japan secretly accumulated $160 million in the New York agency of the Yokohama Specie Bank. It began with funds removed from London. It was a sum equal to three years' of oil purchases from the U.S. The YSB did not report the deposits, as required by law. Bank examiners discovered the fraud in August 1940. Japan raced to withdraw the money during the first half of 1941. The fraud accelerated thinking in Washington toward a dollar freeze, instead of commodity embargos, as the most deadly sanction. The freeze order was drafted in March 1941. As is well known, It was imposed on 26 July 1941 when Japan occupied southern Indochina. After the freeze, Japanese diplomats and agents proposed many ideas to unfreeze dollars in order to reopen trade. Dean Acheson, the effective manager of the freeze policy, rejected them all. In August 1941 the Japanese government, through Mitsui, made an extraordinary offer to barter $60 million of silk for $60 million of US commodities, mainly oil. Barter would not require unfreezing dollars, they thought. Strangely, they chose as spokesman a Roosevelt-hating lawyer named Raoul Desvernine. Acheson and Vice President Wallace rejected the scheme on 15 September, about the time the Japanese government was deciding for war. Furthermore features of the prewar situation from records that were not classified but that are omitted from other history books, thus there are a large number of vulnerability studies, of Japan's foreign trade written in April 1941 by committees of trade experts of U.S. agencies under direction of the Export Control Administration. Reviewing the oil and tanker situation in both Japan and the U.S. for example one will here find that FDR blamed an imaginary shortage of gasoline in America as a reason for the freeze of Japan. There was no shortage despite the loan of 20% of US tankers to Britain. Two-thirds of Japan's dollar earnings were due to exports of raw silk to America. (When war began in Europe all other currencies became blocked and inconvertible.) The Great Depression and rayon substitution destroyed the silk dress industry. After 1930 nearly all Japan's silk went for American women's stockings, which was a strong market despite the Depression. On 15 May 1939, however, DuPont introduced nylon stockings at the New York Worlds Fair. They were a great success. By 1941 nylons gained 30% of the market, and were on track to 100% in 1943 if no war. The market loss of $100 million per year would have been a disaster for Japan if it had not gone to war. Yet what the following case study furthermore shows is that Roosevelt's idea of a financial siege of Japan in fact backfired by exacerbating rather than defusing Japan's aggression. And for sure the attack on Pearl Harbor was not the result of a deliberate Roosevelt strategy (as right-wing conspiracy theorists claim), but a Roosevelt miscalculation.

 

U.S.Exports to Japan 1939 (in Millions of Dollars)

 

U.S.Exports to Japan 1940 (in Millions of Dollars)

 

U.S.Exports to Japan 1941 (in Millions of Dollars)

The American perception of Japan's economic and financial vulnerability dated back to a time thirty-five years before Pearl Harbor. President Theodore Roosevelt grew concerned after the victory over Russia in 1905 that Japan would seek to dominate China in contravention of the U.S. Open Door policy, which championed independence and free trade for China. Japan would perceive that policy, and U.S. bases in the Philippines and Hawaii, as barriers to building an empire. Roosevelt asked the U.S. Navy for a plan to fight Japan, if and when necessary. The result, War Plan Orange, was fundamentally an economic strategy in both origins and outcome. (Japan was code-named Orange, the United States Blue.) The godfathers of the plan, Admirals George Dewey and Alfred Thayer Mahan, had served as young officers enforcing the Union's Anaconda Plan against the Confederacy, an "island" vulnerable to economic blockade. They and later disciples in the War Plans Division of the Navy demonstrated a fierce mindset favoring vigorous action, a mindset echoed by civilian bureaucrats who advocated a nonviolent economic and financial "war" against Japan in the crisis years before Pearl Harbor.

While U.S. military planners assumed Japan's war aims would be limited --a surprise attack, victory in naval battle, and a negotiated peace ceding dominance of East Asia--their aim was a crushing defeat of the enemy, an aim demanded by an aroused public. They understood that Japan, an island nation poor in natural resources, depended on overseas trade for the sinews of war and its very economic life. The Japanese Empire produced food enough, but industrialization and conquests led to voracious needs of metals and fuels. The planners designed a strategy of siege. After initial losses, Blue forces would fight back island by island, sink the enemy fleet, seize bases near Japan, starve it of vital imports, and ultimately force it to capitulate. Japan's financial destitution would be ensured by "coercive pressure" on world lenders to deny funds such as Wall Street provided during the Russo-Japanese War. Plans rang with confidence that the United States could enforce "final and complete commercial isolation" (1906), leading to "eventual impoverishment and exhaustion" (1911) and "in the end ... economic ruin" (1920). As air power came of age, bombing of industry and transportation intensified the siege plan. In 1941 Plan Orange morphed into global Plan Rainbow Five, and in 1942-45 it was executed in most major respects. The Pacific war culminated in unconditional surrender after devastation of Japan's economy, including, at the end, the deployment of atomic bombs.

In the 1930s peaceable internationalist governments in Tokyo gave way to military-dominated regimes. The anticipated violations of the Open Door unfolded in the invasion of China and designs against colonies of the Western powers. The helplessness of Japan, if isolated economically and financially, evolved into an axiom at a time when the U.S. government was averse to fighting a war. When national policy to deter Japanese aggression took root, the United States gradually deployed its vast economic and financial powers to strangle Japan by means other than ships and bombs. It was a Plan Orange strategy in peacetime. The story now turns to the U.S. strategy of achieving the nation's foreign policy aims, without combat, by bankrupting Japan.

When Japan invaded China on 7 July 1937, U.S. government financial experts reckoned the aggressor could not wage a long war because it lacked hard currency to purchase essential commodities abroad. As Herbert Feis, the economic adviser of the State Department, wrote, "Warfare requires many vital raw materials which Japan does not possess at all or in sufficient quantities, and which must by purchased with foreign exchange." Therefore, the "ability of Japan to carry on a protracted war depends ultimately upon her actual and potential foreign exchange resources." 1

And as early as 1935, it sought to regulate its position as the world's most important supplier of materials for war, it was in the summer of 1941 the United States decided to deploy its most powerful economic sanction against Japan, dollar freezing. The first steps, taken at a time when Japan was not yet an aggressor in China, were aimed at keeping the United States from being drawn into another foreign war. Later steps were taken by so-called voluntary means and by executive orders to ensure that the nation's exports did not support Japanese aggression in China. In fact sanctioning to impose a nation's will on others in peacetime was also, not a novel concept, as it was based on international law governing trade relations among sovereign states laid down by the European jurists Hugo Grotius and Emeric de Vattel in the seventeenth and eighteenth centuries.

Thus in the autumn of 1937 Franklin Delano Roosevelt brooded about deterring foreign military dictatorships from attacking peaceful nations. On 5 October, thirteen weeks after Japan invaded China, the president delivered his famous "quarantine" speech. Likening the spreading aggressions to an epidemic disease, he suggested that law-abiding countries ought to quarantine the aggressors. When pressed by reporters, he denied that he meant economic sanctions, calling sanctions "a terrible word to use." "There are," he said, "a lot of methods in the world that have never been tried yet."! Roosevelt was not sure what he meant until December, after Japanese bombers sank a U.S. gunboat in China. He turned to his energetic secretary of the treasury, Henry Morgenthau Jr., for a "modern" weapon to wield against Japan. Treasury experts unearthed the perfect device: a relic of the First World War known as Section 5(b) of the Trading with the Enemy Act (TWEA), a single paragraph that empowered the president to paralyze dollars owned by foreign countries, whether enemy or not. Denial of U.S. dollars, a key reserve currency of the world and indispensable to Japan for waging war, could dissuade Japan from belligerence. That surviving section of the act had arisen from an obscure spat in 1917 between government agencies that foreshadowed the bureaucratic grasping for power in Washington during 1937-41 as the United States groped toward invoking its great financial powers to render Japan effectively bankrupt in the world.

And finally the first months of 1941 then, marked a turning point in the will of the United States to advance from a patchwork of export restrictions to full-blooded financial warfare against Japan. A spurt of work from January through March established the nature of the financial punishment it would mete out when the time came. Above all, that the levers of control would be manipulated not by learned economists and banking technicians, nor by moderate diplomats seeking bargaining leverage, but by truculent lawyers determined to show Japan no mercy.

In common English usage, "bankruptcy" is a synonym for "impoverishment." Japan was cast into international bankruptcy, a condition of absolute illiquidity, by the U.S. financial weapon. The choke hold of the relentless freeze rendered its dollars and gold worthless for national survival. It was a strange sort of bankruptcy. Japan's reserve of gold and dollars exceeded $200 million in late 1941, enough to buy, for example, four years of U.S. oil at pre-freeze shipment rates, yet it was rendered useless. Thereafter Japan piled $60 million of new gold and $15 million of silver into the useless reserve every year until it suspended mining of precious metals in 1944. Japan had invested in gold mines, collected gold ornaments, and nurtured dollar-earning exports.1 It had husbanded its reserve for future purchases of resources for its war economy, inflicting "the curse of gold" on its people by a "wholesale attack on the standard of living." At the end of the war, although the economy was in a shambles, the government of Japan was awash in gold amounting to twice its hoard in 1941. After the surrender the gold and silver in the Bank of Japan and other government vaults was sequestered by MacArthur's occupation forces. As to Japan's frozen dollars, they were never returned.2

A contemporary journalist summed it up. He could not have known that for four years, U.S. Treasury and Federal Reserve analysts had predicted Japan would soon exhaust its assets and necessarily abandon its aggressive policies. However, he wrote, "Japanese leaders exerted every possible effort to avoid this outcome. They succeeded .... Gold production was stimulated A vast foreign exchange reserve was maintained." Although U.S. forecasts of empty vaults proved false, Japan was plunged into the international bankruptcy they predicted because of a stroke of a pen in Washington.3 Two views, one American and one Japanese, illustrate the attitudes about Japan's bankruptcy on the eve of war.

When Dean Acheson arrived at the State Department in January 1941 he rediscovered the prodigious powers of Section 5(b) of the 1917 Trading with the Enemy Act. He and colleagues of like mind promoted its deployment against Japan, then twisted a cautious squeeze designed "to bring Japan to its senses, not its knees" into strangulation. Acheson, an officer of the department charged with peaceful solutions through diplomacy, boasted to Cordell Hull on 22 November 1941 that financial crippling had proven far more devastating to Japan than embargoes. The freeze administrators thwarted Japan from removing its dollars from U.S. control as it had been doing for a year. Their actions slashed U.S. exports to zero despite Japan's valid export licenses for oil, and other licenses it would have been entitled to for cotton, lumber, and foodstuffs. Nor could Japan pay the mineral-rich nations of North and South America or the Dutch Indies, which demanded dollars, while the sterling bloc joined in the freeze. U.S. markets abruptly closed to Japan. Washington refused to allow Japanese trading companies to receive dollars, even if paid into their blocked accounts, hastening the ascendancy of nylon, which devastated silk farmers and demolished Japan's largest renewable flow of dollars.4

 

U.S.Forecasts of Japan’s International “Bankrupty,” 1937-1941

 

In Japanese eyes the bankruptcy was a lethal threat, an assault on the nation’s very existence. After the war, Koichi Kido, lord keeper of the privy seal and adviser to Emperor Hirohito, delivered an eloquent statement through his American defense counsel, William Logan Jr., before the International Military Tribunal for the Far East. (Kido was found guilty of war crimes and sentenced to life imprisonment but was released in 1955.) Kido styled his defense “Japan Was Provoked into a War of Self-Defense.” Allied charges of war crimes defined aggression as “a first or unprovoked attack or act of hostility.” Kido argued that strangling an island nation dependent on foreign resources was a method of warfare more drastic than physical force because it aimed at undermining national morale and the well-being of the entire population through starvation. A nation, he concluded, had the right to decide when economic and financial blockade was an act of war that placed its survival in jeopardy. Kido thereby harked back to the dawn of international law three centuries earlier when jurists held that refusal to sell to another nation might well be a valid casus belli under extraordinary circumstances such as starvation.The defense added, “We know of no parallel case in history where an eco nomic blockade … was enforced on such a vast scale with such deliberate, premeditated, and coordinated precision …. Responsible leaders at that time sincerely and honestly believe[d] that Japan’s national existence was at stake.” Because sanctions “threatened Japan’s very existence and if continued would have destroyed her,” the “first blow was not struck at Pearl Harbor.” Indeed, Lojan continued, the “Pacific War was not a war of aggression by Japan. It was a war of self defense and self preservation.”5

 

The OSS Document

Unfortunately for Japan, its leaders chose a war that brought upon it far more economic devastation than any sanctions, along with great loss of life and untold misery. Although struggling along under bankruptcy without going to war was a dreary prospect, a third course was open to Japan: renouncing imperial aggression in return for thawing of the freeze. One may wonder, what if Japan had endured the freeze long enough to ascertain that Germany could not win and had then abandoned the Axis, perhaps even joined the Allied side as it had in 1914? It would have prospered mightily by selling ships, machinery, and other goods to the Allies. It would have emerged after the war as the strongest regional power, with a world-class navy, an overflowing treasury, and a zeal for industrial modernization, just as colonial empires in Asia were crumbling. It might have shored up China against communism. A cooperative Japanese commercial "empire" in East Asia, economically buoyant and trading internationally on a grand scale a generation sooner, could have changed the course of history in the twentieth century and beyond.

Arthur B. Hersey titled his study for the Office of Strategic Services and the Department of State "The Place of Foreign Trade in the Japanese Economy; an analysis of the external trade of Japan proper between 1930 and 1943 focusing on possible or probable postwar development." He comprehensively analyzed Japan's external trade with both the yen bloc and the rest of the world in three representative prewar years: 1930, 1936, and, to a lesser extent, 1938.6 His goal was to outline a possible range of conditions of Japan's economy about five years after the end of World War II to assist U.S. planners contemplating post-surrender and occupation policies. The methodology was complex. To link actual past to hypothetical future years Hersey converted physical units (pounds, bales, square yards, calories, etc.) to a common denominator of "constant yen," a proxy for physical units that also allowed him to adjust erratic prices of internationally traded goods into more comparable units.7

During the war many economists expected a return of the global Depression after a brief postwar boom. Hersey believed Japan's future in international trade to be especially bleak. Its appetite for imports of minerals, industrial crops, machinery, and even foodstuffs was almost unbounded. But its capacity to import would be limited to the hard currency it could earn from exporting goods and services and from gold mining. (He considered foreign loans unlikely.) In the 1930s Japanese exports had expanded rapidly, but the benefits to the people had been circumscribed for several reasons. A rising share of exports went to the yen bloc, which could neither pay in hard currency nor deliver the most needed commodities. While foreign countries erected barriers against Japanese goods, the terms of trade (relative world prices) worsened after 1930. No foreign loans were available due to disorganized financial markets in America and Europe and active discouragement of lenders by those governments because of Japan's aggressions.

"The core of the analysis," Hersey wrote, was a classification of Japan's imports (typically 90 percent raw and semiprocessed materials and foods and 10 percent manufactures) into two categories: commodities required by factories that manufactured products for export and commodities for final consumption within Japan. The latter, labeled "retained imports," comprising 59 to 68 percent of all imports in the 1930s, contributed directly to the standard of living. Another 25 percent of imports were materials for processing and resale abroad, primarily raw cotton for textiles, wood pulp and salt for rayon, and metals, chemicals, and fuels for other manufactures. A final 8 percent of imports were offsets to exports of a similar nature, swapped, in effect, because Japan both bought and sold in various grades and processed forms, wheat, sugar, fish, coal, and fertilizer.8 Japan's greatest dilemma in the 1930s, Hersey believed, had been deterioration of the "barter terms of trade," that is, weak export prices and high import prices. Japan had to run harder to stay in the same place internationally. For consistency he recast the data into indexes of "constant yen" at 1930 terms of trade. (He also calculated 1936 and 1938 terms of trade although they were of less relevance to his conclusions.) Hersey selected 1930 as a "best case" year, similar to the relatively prosperous 1920s, and the last equilibrium year of Japan's international trade before the turmoil of world depression, yen devaluation, the Manchurian adventure, and foreign trade discrimination. In 1930 Japan's upscale products enjoyed high prices abroad, notably raw silk and silk fabrics, premium seafoods, fine pottery, and other consumer luxuries, while prices of raw cotton and most other imported agricultural and forestry products were low. (Japan did not yet import oil, metals, or minerals on a large scale in 1930, and not much machinery).9

A terms-of-trade index is not the same as the familiar domestic price index. It is a ratio of relative prices, that is, an export price index divided by an import price index. Hersey calculated data for twenty internationally traded product classes that he aggregated into eight groups: food; fertilizer and fodder; coal and petroleum; metals and minerals; cotton, wool, and pulp for rayon; lumber and paper pulp; and manufactured goods. He assigned to the terms of trade in 1930 an arbitrary index number of 100. The index for any other year, actual or predicted, was that year's export price index divided by its import price index. A resulting index above 100 meant a favorable trend for Japan, and vice versa for numbers below 100. Although any prediction was "pure guesswork," Hersey admitted, a postwar Japan enjoying 1930 terms of trade could fare adequately in the world, though not richly. "It is doubtful," he opined, "whether Japan's terms of trade will under any circumstances be more favorable than they were in the 1920s and 1930."

Hersey examined the improvements of the Japanese standard of living before the war. Economists had been awed by a surge of retained imports-79 percent higher in 1936 and 86 percent higher in 1938 compared with 1930but the benefit to ordinary Japanese families was somewhat illusory. Yen devaluation, worsening terms of trade, and a massive switch to importing and stockpiling of industrial and strategic goods left the rise of retained imports for the benefit of the public at only 14 percent, barely more than population growth of 9 and 12 percent respectively since 1930. Yet the Japanese standard of living had undeniably improved, by about 10 percent per capita. Food consumption per capita was thought to be unchanged; the rising population was fed from rising domestic farm output through intensive fertilization. Gains in nonfood goods and services ranged from 20 percent to more than 30 percent per capita. As with food, the gains were mostly achieved by surges in production from domestic resources, notably chemicals, electrical energy, and paper, and by the effect of rayon pulp (10 percent of textiles cost) substituting for raw cotton (50 percent of textile cost). The experience implied that if postwar Japan could import consumer needs for its populace at the 1930 rate in real terms per capita, reduction of the standard of living would be tolerable, although disappointing for a population used to improving conditions.10

For his "highly tentative" postwar models of trade and living standards Hersey adopted the hypothetical year" 1950" to represent a date a few years after the war when physical reconstruction would be largely completed, production of most domestic-sourced goods recovered, and crop yields normal. Population growth was a crucial assumption. Japan's population had risen steadily at about 1 million per year, from 64.4 million in 1930 to 72 million in 1938. Expecting continuation of that rate, Hersey expected a population increase to 81 or 82 million in "1950," after adjusting for war casualties and repatriation of Japanese émigrés from Asia.11 For a country that historically found difficulty in feeding itself, millions of extra mouths would intensify the dilemma of maintaining living standards in the face of weakened exports. Three adjustments have been made here to adapt Hersey's data from "1950" to represent Japan in, say, 1942, under a freeze but not at war with the Allies. First, the population differences between the periods of seven to eight million people are neutralized by converting trade to per capita values. Second, yen are converted to dollars at appropriate exchange rates. Third, his eight commodity groups are simplified into two: consumer commodities and other.

Japan's postwar future was clouded by an anticipated vicious cycle of trade: uncertain markets, adverse prices, and technological changes (notably the substitution of nylon, reducing raw silk exports by an assumed 50 percent)12 resulting in a shortage of hard currency to buy raw materials for factories that produced for export. The uncertainties were profound. Rather than guess at world appetite for Japan's specialized goods, Hersey found it easier and surer to calculate imports essential for survival of an impoverished populace. He therefore set imports as the independent variable and assumed two levels of "retained" and other imports. He then "reverse engineered" his models to determine the exports necessary to fund the purchasing abroad. Japan's exporting capability became the dependent variable. Hersey developed two scenarios of the Japanese standard of living in "1950" by arbitrarily assuming two levels of nutrition, expressed as daily calories per person, which set an upper limit on non-food imports. Case A assumed the 2,250 calories prevailing in 1930, which had not increased much if any in the following ten years. Assuming, however, that Japan's capacity to harvest crops and fish had topped out by 1941, a larger share of its limited postwar earnings would necessarily have to pay for imported food, fertilizer, and fishing boat fuel. Imports of materials for clothing, shelter, and infrastructure would have to be severely constrained by government priority rules, leaving little or nothing for other consumer goods such as foodstuff varieties. The procedure resulted in reduced postwar living standards of 25 to 33 percent depending on the details assumed.13

Case B envisioned a horrendous outcome for the Japanese people because of an exporting capacity so enfeebled that not even basic nourishment and health could be maintained. Hersey arbitrarily assumed a 20 percent reduction in nutrition below Case A, to 1,800 calories per person per day. Food and fertilizer needs would overwhelm other import priorities. Only minor imports could be financed for other consumer needs and urgent infrastructure. Retained imports per capita would slump 67 percent below 1930.14 Hersey also calculated terms of trade for 1936, the last peacetime year and a "worst case" year for Japan. Raw silk prices had fallen disastrously. Textiles and other wares were restricted by U.S. tariffs and quotas and by British imperial preference. Although exports of chemicals and mechanical products-bicycles, sewing machines, industrial machinery-held up better, Japan mostly sold them to the empire for yen.

Meanwhile, prices of imported commodities were propped up by dominant suppliers such as U.S. government supports of cotton. (Strategic metals and fuels remained relatively cheap but were minor items of import before the war in China.) Relative to a 1930 index of 100, export prices in 1936 dropped to 95 whereas import prices soared to 129. Japan then had to sell 33 percent more goods to buy the same basket of imports. Because Hersey assumed the value of other imports as equal to Japan's residual buying power after meeting food and fertilizer needs, the large difference between 1930 and 1936 terms of trade dictated a necessity of much larger exports, but did not alter his Case A and B models of "1950." For example, Case A, calibrated to the 1936 terms of trade, required 55 percent more exports versus the 1930 terms of trade model, $1.62 billion versus $1.05 billion, to achieve the same standard of living established by Hersey's assumptions. (Hersey did not itemize exports in detail as he did for imports because of extreme uncertainty over the products Japan could sell, and to which countries, after the war.) Despite Japanese censorship of data from 1936 onward, Hersey calculated a somewhat improved 1938 terms of trade index but did not rely on it because distortions caused by the war in China, commodity stockpiling, and a renewed U.S. depression that lowered the cost of Japanese imports rendered it irrelevant to his vision of "1950."15

As indicated above, Japan's de facto bankruptcy proved a crucial factor in the failure of negotiations for a peaceful settlement with the United States. The diplomatic maneuverings of 1940-41 have been exhaustively described in documents, memoirs, diaries, interviews, postwar investigations, and war crimes trials.16 Thus we briefly summarize the events, focusing on the significance of the dollar freeze. U.S. resentment against Japanese aggressions began with the seizure of Manchuria in 1931 and accelerated when Japan assaulted China in 1937. The' country initially reacted with diplomatic scolding’s, aid to China, and embargoing exports of a few arms-related products. In 1940 tensions grew acute when Japan signed the Tripartite Pact with Germany and Italy whereby the three powers pledged to assist each other in wars, under certain circumstances. The United States, inching toward war in the Atlantic through pro-British policies, grew concerned that it might have to fight Japan as well. Negotiations for a settlement of tensions began in earnest in April 1941. All discussions were conducted in Washington between Ambassador Kichisaburo Nomura (assisted after 15 November by special envoy Saburo Kurusu) and Secretary of State Cordell Hull. The Japanese diplomats also met directly with President Roosevelt, and occasionally with civilian and naval officials Nomura new personally.

Other U.S. officials played relatively minor roles.17 Hull advanced four "principles" for Asia: respect for the territory and sovereignty of all nations, noninterference in their internal affairs, equal commercial opportunity, and maintenance of the status quo in the Pacific-the principles established by the Nine Power Treaty of 1922. For Japan the main stumbling block was surrendering its decade of conquests by withdrawing from Indochina and China, perhaps even from Manchuria. In Japanese eyes a retreat would mean giving up any possibility of gain from a war that had cost two hundred thousand dead soldiers, required huge outlays of national treasure, and caused economic hardships for its people. The United States further demanded assurances that Japan would renounce the Tripartite Pact, or at least refrain from fighting it as an ally of Hitler. To prod Japan, Washington embarked on three programs: arms and financial aid to China, a buildup of forces at Pearl Harbor and in the Philippines, and barring exports of commodities needed for its own defense.

The Japanese position was, simply, resistance to Hull's proposals: no U.S. interference in China-Japan affairs, no military withdrawals from occupied territories, maintaining ties with Germany, and continuing trade with the United States. In 1941 events in Europe emboldened Japanese leaders. Hitler's attack on Russia on 22 June quelled the army's fears of a Soviet attack on the empire, and it joined the navy in favoring a war to seize the resources of western colonies in Asia. On 24 July, Japan, having coerced Vichy France, occupied southern Indochina, triggering the U.S. freezing orders two days later and those of the Allies soon after. After 26 July 1941 Japan's priority shifted to demanding an end of the dollar freeze, or at least an easing so that deliveries of oil and perhaps other strategic commodities might resume. At first Tokyo phrased the aim in generalities while its representatives in the United States searched for loopholes. In August banking and consular officials petitioned for financial licenses to pay for two shiploads of oil and probed the possibilities of paying with dollars or gold held outside the frozen accounts. They were rebuffed at every turn by the Foreign Funds Control Committee dominated by Dean Acheson.

Early in August Prime Minister Prince Fumimaro Konoe launched an initiative to meet with President Roosevelt personally, perhaps in Hawaii or Alaska, in what later generations would call a summit meeting. To placate the generals and admirals, Foreign Minister Teijiro Toyoda drafted demands that the United States halt reinforcement of the Southwest Pacific, mediate a peace settlement in China (a euphemism for abandoning aid to Chiang Kai-Shek), and restore normal commercial relations (a euphemism for ending the freeze). In return Japan offered not to advance beyond Indochina and to withdraw troops from China when the war ended at some vague future date. FDR was intrigued but the State Department deemed the tradeoffs unacceptable, especially because Japan refused to start evacuating promptly. The United States declined the summit offer.

Japanese military and naval leaders moved forward with plans to launch a war before the year was out. On 6 September 1941 an imperial conference agreed to make a decision during the first ten days of October about war against the United States, Britain, and the Dutch Indies (a deadline gradually moved back to 29 November) unless Japan's demands were met.3 On 18 September Acheson disclosed that the United States had rejected Japan's last ditch barter scheme of oil for silk. Mobilizing for an attack began in earnest in Tokyo in the second half of the month. Nevertheless, Toyoda wished to test other avenues of negotiation. The deadlock between the war hawks on one hand and Konoe and Toyoda, who favored some troop withdrawals, on the other hand, led to the fall of Konoe and his replacement as prime minister by General Tōjō Hideki on 17 October. Last-chance diplomacy passed to a new foreign minister, Shigenori Togo.

Japanese agents had continued to poke about desultorily for token financial licenses for oil or minor freeze-evading transactions, without success. On 24 October, however, Acheson told Counselor Tsutomo Nishiyama that the looming insolvency of the Yokohama Specie Bank in New York, where Japan had mobilized its dollars-a bank failure engineered by the U.S. government's barring the bank from collecting money for silk delivered to the United States before the freeze-would permanently lock up Japan's main holding of blocked dollars. It was clear that oil cargoes would never sail. This casting away of hope immediately preceded Tokyo's decision to demand financial relief, explicit in time and very substantial in amount, countered by American musings of barter concessions much below Japanese needs.

As resource stockpiles dwindled, and with the military's reluctant consent, Shigenori Togo proposed "Plan A," an offer reciting kinder words about free trade in China but standing firm on the Axis pact and rejecting troop withdrawals for twenty-five years. As expected, Hull rebuffed it. Togo followed with "Plan an interim truce. Japan would evacuate Indochina if the United States kept its nose out of China, resumed trade promptly at pre-freeze levels, supplied oil in abundance, and prodded the Dutch to supply more.19 The army insisted on amending Plan B so that "the United States will promise to supply Japan with the petroleum it needs." On 14 November the generals defined their terms:

The United States must sell a tonnage of oil equivalent to 42 million barrels per year (converted here at 7 barrels per metric ton), including 10.5 million barrels of avgas, and ensure another 14 million barrels from the East Indies. If the Dutch did not agree, Japan would occupy the Indies. If the United States did not comply one week after signing an agreement, war would begin. Shigenori Togo and General Tōjō Hideki scaled down the extravagant demands to 28 million barrels of U.S. oil, still a wildly improbable figure 34 percent greater than the annual rate of U.S. sales in January-July 1941. The amount was 259 percent greater than the 7.8 million barrel annual quota based on 1935-36 that Washington had contemplated in August for possible trade resumption. Avgas had been effectively embargoed since December 1939. Nomura did not present the exorbitant demand because Hull's response to Togo's first plan intervened.20

In November special ambassador Saburo Kurusu arrived to assist Nomura, whose English was not the best. As presented to Hull on 20 November, Plan B proposed evacuation of Indochina, American noninterference in China matters, restoring pre-freeze trade, including an undefined volume of oil, and helping obtain Indies resources. Considering the plan "preposterous," Hull pondered a response, urged by the military services to buy time for defense preparations and by China and England not to go soft.6 On 18 October Hull had mused to Lord Halifax, the British ambassador, about a minor swap of silk for cotton-not oil-in exchange for a promise of a status quo in the Pacific. Anxious to avoid a rupture, the Japanese envoys suggested another humble accommodation: small quantities of U.S. rice and oil for Japan, far less than its full requirements, with guarantees that none would go to its armed forces. Hull was willing to think about it. Roosevelt informed Winston Churchill that the United States might thaw the freeze slightly on quasi-barter terms, strictly for civilian goods, for a three-month trial. The United States would license exports of food products, ships' bunker fuel, pharmaceuticals, raw cotton worth up to six hundred thousand dollars per month, and some petroleum for civilian needs while encouraging the Dutch to supply more. Yet the United States would not unfreeze Japan's dollars. Instead, it would buy Japanese products, two-thirds of which was to be raw silk-about 5 percent of the pre-freeze rate of silk purchases-just sufficient to finance the U.S. exports and to service Japanese bonds owned by Americans.7 But the gesture, overtaken by the onrushing crisis, was never offered to Japan. For six crucial days in November Hull played with notions of a modus vivendi ("manner of living"), a standstill of three months during which Japan would abandon southern Indochina, limit forces in the north, and commence peace discussions with China. In return the United States would unfreeze some Japanese dollars and resume some exports, although export controls in effect "for reasons of national defense" would remain. It would encourage the British and Dutch to act similarly. Between 20 and 26 November, Hull reviewed a slew of proposals and modifications from administration officials that watered down his proposal. Acheson's boastful report of the excellent results of the financial freeze arrived on his desk. By 24 November Hull's draft conceded a barter-type exchange of raw silk for oil and other goods, amounts not specified, but no release of blocked dollars.

The eviscerated modus vivendi was never offered to the Japanese. Allied scouting planes spotted a troop convoy heading for Thailand and Malaya. Landings there were sure to provoke war. On 26 November Hull's definitive response, approved by FDR, retreated all the way back to stiff-necked demands for the four principles and unlinking from Germany. General Tōjō Hideki deemed deemed it an ultimatum.23 When six Japanese aircraft carriers sorties from the Kurile Islands, Washington sent a war warning to Pearl Harbor and other bases. An imperial conference of 1 December gave up on negotiations and decided irretrievably that the empire would attack. On 4 December the southern invasion force sailed for Malaya from Hainan Island. On the sixth Roosevelt made a futile personal appeal for peace to Emperor Hirohito. On 7 December Japan attacked Pearl Harbor. The two nations were at war.

 

Japan Sources of Dollars, Actual, 1939-1940, and Projected, 1941-1943

 

Japan: Retained Imports per Capita, 1930s and “1950” Projections

 

Sources Including For Further Research

The focus of this case study is the United States' financial and economic sanctions against Japan before Pearl Harbor, reconstructed primarily from official U.S. sources. Many histories have been written about the run-up to the Pacific war, largely by diplomatic historians, understandably in view of the centrality of the Department of State in U.S.-Japanese negotiations and that department's voluminous, well-organized files, which were declassified long ago, some as early as 1943, supplemented by forty volumes of congressional hearings of 1946 about Pearl Harbor and precursor events.35

Not until 1996 did the National Archives, at the prompting of a U.S. interagency group on Nazi assets, declassify and make more readily available the worldwide papers of the Treasury Department's Office of the Assistant Secretary of International Affairs, established on 25 March 1938 and directed by Harry Dexter White.36 These records contain a trove of U.S. assessments of Japan's financial problems, and U.S. proposals to exploit them, that have not appeared in other histories. A similar wealth of information is in the records, first opened to the public in 1996-97, of the Division of International Finance of the Board of Governors of the Federal Reserve system, primarily from 1935 to 1955. The Federal Reserve Bank of New York voluntarily sent to the National Archives those of its records "that relate to the activity in accounts for foreign governments" in the same era.37 The files of the U.S. Alien Property Custodian, which include the 1880-1942 records of Japanese bank branches in the United States seized in 1941, were closed until fifty years after seizure to researchers lacking special permission and were inconveniently located until transferred to the National Archives II in 1995-96 and "bulk declassified." The records of the Tariff Commission (now the U.S. International Trade Commission), with a wealth of studies on specific Japanese products, were open but not properly described and arranged until 1992.4 The planning records of the Administrator of Export Control, the office that led the drive for sanctions against Japan during the crucial months of September 1940 to May 1941, were difficult for researchers to use until recently, when they were rearranged and a finding aid was prepared at the National Archives. That office was subsumed in September 1941 into the vast wartime bureaucracy of the Foreign Economic Administration, which in turn was reorganized three or four times during the war. Its boxed records extend 3,817 cubic feet and weigh seventy-five tons. A comprehensive catalogue of all international records of the era, which are mostly located at National Archives II in College Park, Maryland, was completed in 1999 under the direction of Greg Bradsher and is available online at http://www.archives.gov/research/ holocaust/finding-aid.

The main Japanese sources are the excellent historical data published in bilingual tables by the Japan Statistical Association, and Japanese commercial and diplomatic studies published in English. Most of Japan's official records of 1931 to 1945 were burned in the two-week interval between the surrender and the occupation in 1945 in anticipation of war crimes trials. However, economic information for the last prewar decade was reconstructed in detail and published by the U.S. Strategic Bombing Survey and by investigators of the Supreme Commander of the Allied Powers during the postwar occupation. Japanese financial and trade statistics are usually presented for fiscal years beginning I April, so that, for example, "1940" means the twelve months beginning 1 April 1940 and ending 31 March 1941. U.S. statistics are usually given for calendar years, making some comparisons awkward. Physical trade units are stated here in U.S. measures such as ounces, tons, or yards, or occasionally in metric measures. Some Japanese figures have been converted from metric units or the ancient weights and measures then used in trade.

Money figures are stated in U.S. dollars, the dominant world currency then and now. The 1935-41 dollar was worth about $10 in 2007 dollars if measured by an average of U.S. prices of goods, or about $25 if measured by average U.S. wages. In exchange markets the yen was worth 49 to 50 cents from 1899 until devalued on 14 December 1931. It dipped as low as 20 cents in 1932-33, then stabilized at 28.3 cents until 24 October 1939, when it was devalued to 23.4 cents. There was no organized exchange market after 25 July 1941; fragmentary trading in China suggests that in late 1941 the yen's gray market value was much lower, perhaps II or 12 cents.5 After a devastating wartime and postwar inflation, the yen was stabilized at 0.28 cents (360 per dollar). It subsequently has risen to almost I cent (l00 per dollar). The U.S. economy is roughly 150 times larger than in 1935-40 in unadjusted dollars and about 10 times larger adjusted for price inflation. The Japanese economy is about 500 times larger in unadjusted U.S. dollars and about 50 times larger adjusted for U.S. inflation. The prewar Japanese economy was about 8 percent the size of the American. In 2006 it was about 40 percent as large. Japanese foreign trade is now about seven hundred times greater in nominal value, $1.1 trillion versus $1.5 billion before the war, of which half was within the "yen bloc." (Both figures are unadjusted for inflation.) To grasp the relative significance in twenty-first century terms of $100 million in 1941, a very large fraction of Japan's international liquidity at the time, the reader may wish to multiply by a factor of one thousand.

As seen above, the United States forced Japan into international bankruptcy to deter its aggression after Washington experts confidently predicted that the war in China would bankrupt Japan. However, the United States did not know the Japanese government had a huge cache of dollars fraudulently hidden in New York. Once discovered, Japan scrambled to extract the money. But, in July 1941 President Roosevelt invoked a long-forgotten clause of the Trading with the Enemy Act of 1917 to freeze Japan s dollars and forbade it to sell its hoard of gold to the U.S. Treasury, the only open gold market after 1939. Roosevelt s temporary gambit to bring Japan to its senses, not its knees, was thwarted, however, by opportunistic bureaucrats. Dean Acheson, his handpicked administrator, slyly maneuvered to deny Japan the dollars needed to buy oil and other resources for war and for economic survival. So it is to the oil issue we now turn, continue...

 

1 Herbert Feis, Economic Adviser, "Japan's Ultimate Foreign Exchange Resources," 20 September 1937, Box 21, File Japan Foreign Exchange Position, OASIA.
 

 

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