Foreign Relations of the United States, 1947, The Far East, Volume VI

740.00119 P.W./9–2547

Memorandum by the Deputy Director of the Office of Far Eastern Affairs (Penfield) and the Acting Adviser of the Division of Occupied-Area Economic Affairs (Barnett) to the Assistant Secretary of State for Occupied Areas (Saltzman)³⁵

[Washington,] 25 September 1947.

Subject: Japanese Reparations Shares

1. FE, EUR, OE and General McCoy have reconsidered our earlier proposal for attempting to achieve FEC agreement on the division of Japanese reparations shares and have revised it, with the help of Mr. Bohlen,³⁶ in the light of views expressed by you and General Hilldring.

2. You will note that in the U.S. schedule the award to the U.S.S.R. has been reduced to 4% as compared to the 6% contained in our last proposal to you, and the awards to Canada and New Zealand have been reduced from 1%½ to 1%. The awards to the U.S. and China have been raised respectively to 28% and 30%.

3. Mr. Bohlen expressed the view that the 6% award to the U.S.S.R. previously contemplated was too high and, in any case, would not be regarded by the Soviets as final. He preferred to allow General McCoy discretion to bargain upwards from a starting 3% in bilateral talks with the Soviets to obtain their vote. Both EUR and General McCoy disliked that suggestion. Thus, since Mr. Bohlen did not share EUR’s fears that Soviet participation in the redistribution of a U.S. surplus would present serious political difficulties and since he agreed in the desirability in disposing, if possible, of the whole reparations shares problem outside of the framework of the Japanese Peace Conference, the attached proposal is being supported by the interested offices of the Department.

4. The attached proposal is the result of prolonged “political calculations” which have led us to believe that, though far from ideal, it is the most likely method for obtaining an FEC decision on the shares problem. The U.S. Government committed itself to a division of Japanese reparations along “broad political” lines only because protracted discussion in the FEC made it plain that the statistical approach which the U.S. had advocated would be wholly unacceptable to the three other veto powers, U.K., China, as well as the U.S.S.R. We agreed in the “broad political” approach since the U.S. had little, if any, interest in the actual values of Japanese surplus industrial facilities. Therefore, we could attach primary importance to adopting any reasonable method for securing a decision in the FEC which would enable SCAP to proceed with his reparations program.

5. The Policy Planning Staff and Mr. Bohlen agree with FE, EUR, OE and General McCoy that the problem of reparations shares should be disposed of, if possible, outside of the framework of the Japanese Peace Conference. We feel that the attached proposal, whatever its defects, provides the best method for attempting to attain a practical solution of the problem in the FEC.

[Annex]

Memorandum Prepared for the Secretary of State³⁷

Washington, 25 September, 1947.

1. I recommend that the United States Member of the Far Eastern Commission make the announcement in paragraph 2 as a next step in our attempt to dispose of the long-standing problem of Japanese reparations shares.

2. “The United States Member of the Far Eastern Commission has been authorized by his government to announce that if the Far Eastern Commission will adopt as a matter of policy the schedule herebelow, as embodying authorized percentage awards to be applicable to Japanese industrial facilities available for reparations,

Australia	8%
Canada	1
China	30
France	2
India	4
Netherlands	4
New Zealand	1
Philippines	8
U.S.S.R.	4
United Kingdom	10
United States	28

the United States Government, on its part, will hold 19 of its own 28% authorized share of industrial facilities for redistribution among the Far Eastern Commission countries which desire increments to amounts of industrial facilities they are entitled to receive under their authorized shares. It would be equally satisfactory to the United States Government if those countries decided, among themselves, to divide the 19% in accordance with their respective authorized percentages adjusted to 100%, or in accordance with some other principle such as need. The United States Government would not participate in that decision, but would redistribute its 19% upon the basis or any agreement reached by the interested countries.

Meanwhile, the Far Eastern Commission adoption of the U.S. percentage schedule would enable the Supreme Commander for the Allied Powers to make available to all eleven FEC countries their authorized shares of Japanese reparations in the form of industrial facilities.

The United States Government has been guided by broad political considerations in formulating this proposal now put before the Far Eastern Commission. If unacceptable to the Far Eastern Commission, the United States Government will, of course, consider itself at liberty to withdraw it.”

3. All of the Far Eastern Commission countries desire more than this U.S. schedule awards them. However, in the light of a desperate frustration which exists as a result of past FEC discussions on the subject of shares, they may approve the above proposal because it is a prompt and practical method to reach agreement and because each of them would hope for increments later out of the U.S. surplus.

All of the FEC countries, including the U.S.S.R., would be eligible to benefit from the proposed plan for sharing the U.S. surplus if the Far Eastern Commission could accept the U.S. schedule of percentage awards. To permit the Soviets to share in the U.S. 19% surplus is hard to reconcile with present tendencies of U.S. economic policy towards the U.S.S.R. in Europe. However, the disadvantage of that inconsistency has been weighed against the following considerations. The redistribution to the U.S.S.R. from the U.S. surplus would be made by the ten other FEC countries without direct U.S. participation. Soviet approval is needed for a formal FEC decision and the Soviets might concur in our proposal because of the hope of obtaining a substantial increment to their authorized share. We believe that hope to be unfounded, but whatever industrial facilities the Soviets might receive would be of inconsequential importance either economically or from a security point of view.

There is a better prospect for securing ten-country support (i.e. the FEC less the U.S.S.R.) for the U.S. schedule if the door is left open at this stage to Soviet sharing in our surplus than if that door is closed. If the Soviets alone opposed our proposal and its contents were sent as an interim directive on the basis of ten-country agreement, the Soviets would be, of course, excluded from sharing in our 19% surplus. Hence, this offer, which the Soviets might seriously consider accepting, would not be an exorbitant price for achieving a formal FEC decision which can remove an important factor of uncertainty embarrassing SCAP’s handling of Japan’s economic recovery and which can remove the problem of reparations shares from the agenda of the forthcoming Peace Conference.

Since the U.S. proposal is a quid pro quo, unfavorable reaction by a number of FEC countries would leave the U.S. at liberty to withdraw its offer with no commitment for the future.

4. This memorandum is concurred in by EUR, FE, OE, and General McCoy, U.S. Member of the Far Eastern Commission. We stress the importance of settling, if possible, the Japanese reparations shares problem outside of the framework of the Japanese Peace Conference.³⁸

35. Brig. Gen. Charles E. Saltzman had succeeded General Hilldring on September 2.
36. Charles E. Bohlen, Counselor of the Department.
37. A memorandum dated October 6 to Mr. Saltzman from a member of his staff stated that the memorandum from Edwin W. Pauley in regard to the proposal for division of reparations shares in the Far Eastern Commission had reached Under Secretary of State Lovett and added: “I think Mr. Pauley would be very pleased to have his recommendation on this forwarded to Mr. Lovett. In essence it is a concurrence with reservations which, I understand, probably is equivalent to your own viewpoint.” (740.00119 PW/9–2547)
38. For further discussion of the reparations shares proposal, see memorandum, of October 29 by Mr. Noel Hemmendinger, p. 435.