Kennan’s report to Marshall and the National Security Council became the basis for the formal policy statement NSC 13/2, on October 7, 1948, addressing the change of emphasis from political and social reform to economic revitalization. But the reforms did not die. The constitution stayed in place, women strengthened their newfound rights, the push to promote democracy and demilitarization continued as before. The emperor’s status as symbolic ruler remained the same.
But here we run into one of the oddities of history, where a particular phrase takes on a life of its own, gets picked up by numerous historians, and contributes to a misleading and oversimplistic impression of what actually happened. That phrase—“reverse course”—is now so commonly used it has become a cliché. Yet it would have puzzled George Kennan, Kenneth Royall, and William Draper.
The term never appeared during the time of the occupation. Search all the government documents and memorandums of the MacArthur era; it doesn’t exist. It was invented by Japanese scholars in the mid-1950s as a means of denigrating the occupation and asserting Japan’s independence. Subsequently, in the late 1960s and early 1970s, the phrase got picked up by revisionist American historians critical of U.S. foreign policy in Asia.
Just because a phrase is pithy does not mean it’s correct. In his choice of words in trying to change the focus of SCAP’s efforts, Kennan was extremely precise: He called it a “shift.” He did this numerous times verbally and twice in writing, first in his draft paper, “U.S. Policy Toward a Peace Settlement with Japan” talking about “a major shift in U.S. policy,” and again in his report to the secretary of state: “The emphasis should shift from reform to economic recovery.” The same for William Draper: when he sent MacArthur a directive announcing economic recovery as a primary objective of the United States, he called it an “immediate shift in emphasis.” Likewise for the Department of the Army in its November 1947 “Statement of U.S. Policy,” which spoke of an “appropriate shift of emphasis so as to facilitate the early revival of the Japanese economy.” Even softer was Draper’s substitution of “more emphasis” for “shift of emphasis” in the January 21, 1948, statement given by the U.S. representative to the FEC. Last and most explicit of all was the NSC 13/2 directive of October 1948, signed off by President Truman: “SCAP was to shift responsibilities to the Japanese.”
That it was a shift rather than a reverse course was stated as such by Kennan: “The effect of the decisions in Japan was probably a gradual and to many an almost imperceptible one.” There was no car screeching down the road, slamming on the brakes, and backing up, as a reverse course would imply: the change in policy was more like a car veering off to the right at a fork in the road.
Kennan had made seven specific recommendations: Revive the economy, stop reform legislation, reduce the number of purges, reduce occupation costs, halt the reparations, cease seeking a peace treaty, and strengthen Japan’s police force. In agreeing with all but the last of these recommendations, the supreme commander surprised even his adversaries. In his subsequent New Year’s message, he stressed the need for occupation “control of the Japanese economy.” The disagreement with Washington, such as it was, was not about goals, it was about means.
21
A Shift in Emphasis
ARRIVING IN JAPAN twenty days after Kennan, in March 1948, was the second of a one-two punch, Kennan’s strong ally, Undersecretary of the Army William Draper. A Wall Street investment banker who had served as economics advisor to Gen. Lucius Clay in Germany, Draper was now the army’s economics advisor for Japan. The hope was that a way could be found to make Japan self-sufficient without incurring the expense of an Asian “Marshall Plan.” This was Draper’s second visit to Japan—a country he admitted he knew nothing about. On his first visit the previous autumn, he had become alarmed at the stagnation of the Japanese economy and the power of the labor unions. Upon returning to Washington he instructed his staff to draw up a position paper, “The Economic Recovery of Japan,” calling for “the necessary shift of emphasis to accomplish economic recovery.” He also ordered MacArthur to take it easy in his efforts to dissolve the zaibatsu. MacArthur, in his second act of insubordination as supreme commander (after banning photographers from war crimes executions), flatly refused. Instead of responding gracefully he caused a tempest by sending Draper a ten-page radiogram accusing the zaibatsu of advocating “socialism in private hands.”
Thus the two sides engaged in a mud fight: Washington was accusing SCAP reformers of promoting political socialism, and MacArthur accused Washington of promoting big-business socialism. Each side accused the other of tampering with the development of so-called free enterprise.
The zaibatsu were huge business combines that controlled hundreds of companies through holdings of stock, somewhat like the conglomerates of the 1970s in the United States. The major difference was that the zaibatsu owners were families. The ten top zaibatsu controlled nearly three-fourths of Japan’s industrial, commercial, and financial resources. The two largest, Mitsui and Mitsubishi, had almost four million employees. SCAP’s specialist on the zaibatsu, Eleanor M. Hadley, compared a zaibatsu enterprise to a hypothetical company in the United States that owned General Motors, United States Steel, Allis Chalmers, Western Electric, AT&T, RCA, U.S. Rubber, Douglas Aircraft, Dole Pineapple, the United States Lines, Grace Lines, the Woolworth stores, the Statler hotel chain, Westinghouse, National City Bank (now Citibank), Alcoa, DuPont, and Metropolitan Life.
Any company this size in America would violate every principle of American antitrust law and free trade. Particularly insidious was the close interaction between the zaibatsu and the Japanese government. In 1946 President Truman had sent Edwin W. Pauley to Japan to help MacArthur with the issue of reparations. Pauley, a former treasurer of the Democratic National Committee, knew the zaibatsu from firsthand experience, having sold oil to Japan while amassing a fortune in the 1930s as head of an oil company. He had strong words for the supreme commander: “Not only were the zaibatsu as responsible for Japan’s militarism as the militarists themselves, but they profited immensely by it.”
In response to the Kauffman article in Newsweek accusing him of causing the “virtual destruction of Japanese business,” MacArthur came out firing his big guns: The Japanese system “permitted the family groups . . . to control, directly or indirectly, every phase of commerce and industry; all media of transportation, both internal and external; all domestic raw materials; and all coal and other power resources. . . . The record is thus one of economic oppression and exploitation at home, aggression and spoliation abroad.”
MacArthur’s views on the zaibatsu were based largely on the 1945 “U.S. Initial Post-Surrender Policy for Japan,” which directed him to start dissolving them, and reinforced by the lengthy study prepared by Professor Corwin Edwards urging that several of them be broken up. But he couldn’t execute Edwards’s recommendations without Japanese cooperation: The zaibatsu were simply too big and complex. Here the Japanese used the time-honored technique of resistance: Admit the need to make changes, appoint a committee to study the problem and recommend cosmetic changes, and stall it to death, just as they had tried to do with the constitution.
By early 1948 the economy was still in the doldrums, and inflation was rampant. Something had to be done, even though MacArthur’s original directive from the Joint Chiefs had stated very emphatically that the supreme commander would “not assume any responsibility for the economic rehabilitation of Japan or for the strengthening of the Japanese economy.” MacArthur was not happy to see Draper, the Wall Street investment banker who had an accommodating view of huge corporate enterprises. But he knew he had no choice. He had managed to get along fine with Kennan; at least they both were intellectuals. Draper, on the other hand, was not given to big ideas; he was a nuts-and-bolts doer, and very opinionated and forceful. Being the point man for the army in making funding requests to Congress, he also had a lot of power.
Kennan stayed over in Japan to join Drape
r for his meeting with the supreme commander. MacArthur, one step ahead of Washington in his thinking, told them flat out that reparations had to go. A thousand industrial factories had been earmarked for removal to Asia, he said, and only twenty such transfers had begun, due to the difficulty of disassembly, the lack of ships, and lack of proper personnel, spare parts, and infrastructure at the receiving end. It would take twenty years to complete the process, and in the meantime metal parts were rusting and cement was hardening just sitting on the dock exposed to the elements. “Decision should be made now to abandon entirely the thought of future reparations,” he urged. In keeping with what he had told the Chinese three months earlier, he justified this drastic move as a correction of an original policy gone awry: Reparations now had become “merely a camouflage method of subsidizing other nations from the U.S.” Whatever was going out of Japan was being made up only by the largesse of the American taxpayer—clearly not the intent of the program.*
The Japanese economy was a more contentious issue. The dilemma facing both MacArthur and the Washington policy makers was that the industries most likely to lead the resurrection of Japan’s economy were militarist related and controlled by the zaibatsu: steel, shipbuilding, construction, and heavy manufacturing. No matter, said Secretary of the Army Royall. The “conflict between the original concept of broad demilitarization and the new purpose of building a self-supporting nation” was “inevitable.” Japan could not support itself as a nation of shopkeepers, craftsmen, and small artisans any more than it could as an agricultural nation. Added Gen. Frank McCoy, the U.S. representative to the FEC and a close friend of the supreme commander: New conditions required that “more emphasis be placed on such a program . . . to bring about the early revival of the Japanese economy.” No matter what happened, something had to be done. Even George Marshall got involved: “Japan is costing us a great deal of money; that cannot go on indefinitely . . . what we have to be on our guard against is that we don’t weaken ourselves economically so that the whole structure collapses.”
On April 28, 1948, the day after he got Draper’s formal report on reparations, MacArthur reacted quickly. Once again demonstrating his “flealike agility,” he announced that the War Department—at his request (naturally)—had appointed a board of five Americans to oversee application of the report’s recommendations. Since several congressmen were complaining about occupation costs and the drain on the U.S. Treasury, MacArthur had to cooperate, especially after the Wisconsin presidential primary earlier that month where his hopes of becoming a Republican candidate were dashed. His enemies rejoiced at his humiliation, and wondered if there might be an opportunity to drive a stake through his heart.
The Harvard Club of New York City is hardly a place where conspiracies are hatched, but June 28, 1948, was an exception. On that hot summer day several men met in the lobby and proceeded to make themselves comfortable in the magnificent Harvard Hall on the north side of the clubhouse. They lit their cigars and exchanged pleasantries while waiting for the rest of the group to arrive. Within a half hour all eighteen men were present, and the meeting was called to order. Assembled by Harry Kern, Newsweek’s foreign affairs editor, the group consisted of leading diplomats, journalists, investment bankers, and corporate CEOs unhappy with the perceived liberalism of Douglas MacArthur. Prominent members included Kenneth Royall, William Draper, James Lee Kauffman, and Joseph Grew, the ex-ambassador who had told President Truman in May 1945, “Democracy in Japan will never work.” With democracy on the march under MacArthur, Grew missed the old Japan he used to know, and welcomed this new association of like-minded individuals. As their cigar smoke wafted up to the ceiling forty feet above, and basking in the stern gaze of trustbuster Theodore Roosevelt’s portrait at the other end of the huge room, the men plotted how to minimize the power and influence of MacArthur and start making some serious money. Kauffman, who before the war had counted every major American corporation in Japan as a legal client, wanted back in on all the action. Draper, once again at Dillon Read (the former Wall Street firm of Royall and Secretary of Defense Forrestal), would soon return to Japan hunting for Japanese utilities in need of bond financing. Conspicuously absent was the world’s leading authority on the zaibatsu, SCAP’s Eleanor M. Hadley, whose lengthy article “Trust Busting in Japan” would appear in the July 1948 issue of the Harvard Business Review. Hadley had returned to Radcliffe to get her doctorate, aided by the support of Douglas MacArthur and Courtney Whitney, who had personally petitioned Harvard/Radcliffe to give her an extension so she could stay longer in Japan and continue working for them during 1947.*
All the men could speak freely: The room was so big no one could possibly overhear them. They would name their association the American Council on Japan, a lobbying group. There is no transcript of the meeting, but one can safely assume they readily agreed on their first mode of attack: a feature story in Fortune. “Two Billion Dollar Failure in Japan” would appear in April of the following year, at a time when two billion dollars wasted by the federal government was a lot of money.
Strikingly enough, just months earlier at the MacArthur-Kennan dinner in Tokyo, MacArthur had dropped an interesting phrase, little knowing how prescient it would be. In denouncing the zaibatsu executives he was purging, he called them “elderly incompetents,” very much like “the most effete New York club men.”
While the New York clubmen licked their chops contemplating his demise, the supreme commander regained his footing. Having lost much of his political aura and heft, he had no choice but to heed the new political winds. But he would do so gradually. Like FDR, who once said his policy was to have no policy, MacArthur operated on the premise that “major shifts in policy should be undertaken with the greatest caution.” The original dissolution plan called for 325 companies to be liquidated. Edward Walsh, chief of the SCAP Anti-Trust and Cartels Division, recommended dropping 33 companies from the list developed by Eleanor Hadley. Gen. William Marquat, acting on MacArthur’s orders, jacked up the exclusions to 300, leaving only 25 to be dissolved. By late 1948 the supreme commander had dissolved only 11, making sure to put a good face on the whole episode. He announced a victory: “It has always been my firm intention to implement the deconcentration program in such manner as will preclude any disruption of Japan’s going economy and will insure rigorous limitation of the number of companies required to be subject to reorganization.” In more ways than one the supreme commander was a man who rarely—if ever—knew defeat. He would simply announce a victory.
Meanwhile the American Council for Japan landed a big fish: Robert Eichelberger. On the “outs” with MacArthur, General Eichelberger had quickly found himself a new home as Draper’s assistant, thus proving the adage that a leader need not fear his enemies but rather his closest friends. Eichelberger, using his military connections, would prove to be a most useful conduit of information and scuttlebutt about what was going on inside MacArthur’s impenetrable GHQ.
In December 1948 the National Security Council issued NSC 13/2, announcing once and for all a shift in U.S. occupation policy from social reform to economic reconstruction. The supreme commander forwarded instructions from Washington to Prime Minister Yoshida: “Stop inflation, balance your budget, halt tax evasion, limit your credit facilities, stabilize wages and prices, and tighten your foreign exchange control.” In early 1949 President Truman, rejecting a “Marshall Plan” for Japan, sent the banker Joseph Dodge to Japan, giving him ambassadorial rank so he could have direct access to MacArthur. Dodge, a self-made man from the Midwest who never went to college, was an enormously successful entrepreneur who had taken over a bank and grown it tenfold in twelve years. A former president of the American Banking Association and chairman of the U.S. War Contracts Board, he had acquired such a reputation that when the German monetary system collapsed after the war, General Eisenhower ordered: “Get Dodge to Germany fast!” Now President Truman was sending Dodge to Japan to pull off a second miracle.
Accompanying
Dodge were Gen. Albert Wedemeyer and Army Secretary Kenneth Royall, the man who had such withering words about MacArthur and the Japanese economy. Here Royall got an object lesson on how not to conduct international diplomacy. In an unofficial press conference, he announced that America’s major interest lay in Europe and the United States was fully prepared to withdraw its line of defense to the West Coast of the United States. This immediately sent shock waves throughout Japan, and made many Japanese, fearful they could not depend on the United States, wonder if it might not be wise to start exploring an amicable deal with the Russians. The Russians couldn’t believe their good luck.
MacArthur, of course, was outraged but chose to keep his mouth shut. He was still the supreme commander; he would outfox his enemies by being sly and not giving the Russians a break. First, however, he had to deal with Joseph Dodge. Fortunately he and Dodge got along very well, both of them being conservative Republicans who believed in austerity and balanced budgets. Several days after they met and Dodge had taken a quick look around, Dodge brazenly announced that the Japanese economy was like a person “walking on stilts,” about to collapse at any moment. MacArthur did not disagree. He liked the blunt-speaking banker even better when he had the temerity to admit, “I’m no colonel bucking to a brigadier—I can be objective, because the most I’ll get out of this is a kick in the pants.” A kick in the pants—so long as the speaker seemed to know what he was talking about—was the kind of language MacArthur could appreciate. Kennan, being so smart and savvy, MacArthur could respect and get along with. Draper, he could not. The dapper, smooth-talking Draper, in MacArthur’s view, was a Wall Street hack.
Supreme Commander Page 26
