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CHAPTER 2

The American Council on Japan

When General MacArthur arrived in Japan on August 30, 1945, there was little disagreement—audible, at least—about the tasks assigned to the Occupation force he headed. According to instructions from President Truman, SCAP was to take control of the defeated nation, which was to be disarmed and demilitarized forthwith. Japan's overseas empire was to be liquidated. Its authoritarian establishment, dominated by interlocking military, financial and bureaucratic cliques, was to be supplanted by a democratic society. The new Japan was to be sustained by a free economy adequate for a peaceful existence, and within weeks the U.S. president ordered MacArthur, his proconsul, to prepare the ground for such an economy. "To this end, it shall be the policy of the Supreme Commander... to favor a program for the dissolution of the large industrial and banking combinations which have exercised control of a great part of Japan's trade and industry."¹

By the time the Occupation was six weeks old, SCAP had suspended all laws restricting freedom of speech, press, and assembly. Among them was the draconian Peace Preservation Law, which had been revised in 1941 to impose penalties as severe as death or life imprisonment for participating in any group opposing capitalism or the emperor system. The military police, national police, and thought-control police were disbanded. Thousands of political prisoners were released, who then proceeded to democratize the country in their own ways. But other individuals, arrested on suspicion of war crimes, took their places in prison to await trial by an international military tribunal. Indeed, there was strong pressure from some Allied quarters to put the emperor himself on trial.

Before the year was out, female suffrage was granted, labor unions and radical political parties were rapidly gathering support; while land reform, a democratic system of education, and the new constitution renouncing war were in gestation. To protect these fledgling freedoms, the Japanese government was ordered by SCAP to purge from public life those militarists and nationalists who were considered a threat to peace and democracy.

The Occupation program was formulated and executed largely by the American military and civilian authorities in accordance with war aims overwhelmingly supported by the American people. General MacArthur, in spite of his title Supreme Commander for the Allied Powers, made no pretense of sharing his authority with the other victorious nations, whose representation on the Allied Council for Japan in Tokyo and the Far East Commission in Washington conferred no real authority. Nevertheless, the Allied governments and their peoples fully supported the initial objectives of SCAP.

Douglas MacArthur was no social reformer, nor was he prejudiced against wealth per se. His first wife was the stepdaughter of Edward T. Stotesbury, the Philadelphia senior partner in J. P. Morgan & Co., headquarters of the foremost zaibatsu of the Western world.² But his associations with the super-rich had not disposed MacArthur favorably toward the Japanese zaibatsu chieftains whom he condemned for their role in fostering military aggression, economic exploitation, and political tyranny. Carrying out the commander in chief's orders to liquidate Japan's financial combines, MacArthur's Economic and Scientific Section ordered the four largest family holding companies—Mitsui, Mitsubishi, Sumitomo, and Yasuda—to draw up plans immediately for their own dissolution. By November, the big four holding companies existed only as caretakers to wind up their affairs, and plans were afoot to dissolve remaining monopolistic business, as well as to enact antimonopoly laws under which a more democratic economy could be molded.

To prevent a resurgence of the old guard, zaibatsu family members were forced to resign from all positions with companies they formerly controlled, and to turn over all their shares in such companies to the Holding Company Liquidation Commission (HCLC) in exchange for ten-year bonds. Even more drastic was an order from Washington that all those who had actively supported militarism and aggression be purged from business positions. Among those suspended indefinitely were many of Japan's most important business leaders, and there was no assurance that some of the "feudal overlords," as MacArthur called the zaibatsu chieftains, would not be indicted as war criminals.³

This brings us to one of the major contradictions of modern history. After a vigorous and unified start, strengthened by a number of outstanding achievements already made, the campaign to democratize the Japanese economy came under relentless attack in the American press. Thereafter it fell into disarray, and soon it was decisively reversed. Eventually, the former zaibatsu enterprises, in ever-closer alliance with American and multinational corporations, not only re-established their pre-war strength but actually augmented their shares of both the national and international economies. The benefits that the vanquished nation gained from this turn of events were far greater than those that could reasonably have been expected from victory. For Japan was later granted a free hand, economically, in large portions of the Greater East Asia Co-Prosperity Sphere it had conquered and lost before and during World War II, while enjoying unhindered access to the American market as well as to raw materials in most of the noncommunist world.

Why did the government of the United States take this "reverse course"—a set of decisions that caused suspicion and animosity among friends and adversaries alike and polarized the newly liberated countries of Asia into warring camps in the name of peace and stability in the Far East? And whose decision was it to resurrect defeated Japan, a nation that so recently had wrought economic and military havoc on the world?

Commonly, the 180-degree turnabout has been explained as resulting from the Cold War. This is an evasion, and it ignores the probability that the American rehabilitation of the monopolistic economies of West Germany and Japan, largely under pre-war leadership, was a cause, not a result, of the Cold War. Their rehabilitation was a vital part of American capitalism's strategy in its all-out vendetta against communism.

In rejecting the conventional rationale of the reverse course, we shall put forward a hypothesis that is less grandiose, even a bit grubby, but more susceptible to factual elucidation. The information available to us indicates clearly that the reversal of Allied economic policy—executed unilaterally by the United States— represents the use of inordinate political power by a small faction within the American establishment. Without formal mandate, this faction was able to refute the national consensus, to manipulate a supposedly democratic government, and finally to impose its private will upon that government and win its acceptance as official, long-range policy.

In the case of occupied Japan, the first step was to overrule the supreme commander and his partisans, who clung obstinately to outmoded wartime ideals, while either winning over or isolating those in authority who obstructed the integration of Japan into the cold war structure. In so doing, the anti-reform faction changed the course of history, abruptly and with consequences yet to be fully evaluated.

The Japan Lobby

The existence of such a pressure group has been scarcely touched upon by orthodox Japanologists, who tend to be uncomfortable discussing the political machinations of real, identifiable people, especially prominent ones who display the baser human motivations. A few less squeamish American and Japanese scholars, using previously unknown or unavailable documents, have been clearing up baffling mysteries or misrepresentations in the history of the Occupation and have pieced together the astonishing story of a cohesive and puissant organization known to some as The Japan Lobby.⁴

While this grouping sympathized with the aims of the China Lobby in its efforts to advance the interests of the Nationalist government on Taiwan, there was a significant difference. The China Lobby, which had profound influence on American politics during the 1950s, was mainly a Kuomintang (KMT; the anti-communist party formed by Sun Yet-sen and led from 1925 to 1975 by Chiang Kai-shek) operation backed by Chinese as well as American money. The Japan Lobby, in financing and membership, was almost entirely American at its inception; and while it had strategic aims, it was concerned mainly with pushing private American interests in Japan.

The core of the Japan Lobby emerged as the ACJ, which represented views that Joseph C. Grew and his associates had promoted tirelessly for many years. During his mission to Japan, Grew had done everything in his power to lubricate U.S.-Japan relations, tacitly condoning Japanese military fascism and urging patience with its excesses in order to avoid war.

Grew's background, associations, and conduct suggest that he considered the encouragement of American trade and investments to be the primary task of an American diplomat. The scion of a pre-revolutionary New England family, Grew was brought up among the very wealthy. His cousin, John Pierpont Morgan, controlled banks and industrial firms that had strong financial interests in many countries, including Japan. General Electric, for example, in the Morgan sphere of interest, was the largest foreign investor in Japan. Perhaps it is no coincidence that Grew's predecessor, Ambassador W. Cameron Forbes, had been a director of the Morgan-controlled American Telephone and Telegraph (AT&T).⁵

Grew gravitated toward his own kind in Japan and was on cordial terms with leading members of the zaibatsu families, who in turn were linked up financially with America's family-controlled combines. One cannot assume on that basis alone that Grew allowed such connections to influence his conduct as a diplomat. Nonetheless, Grew made a sharp distinction between the militarists, who were rampaging in China, and the "moderate elements," including the zaibatsu chieftains, the prime beneficiaries of imperialism, with whom he thought Americans could get along well if the militarists were not antagonized. Concerned about economic relations above all, he warned that proposed economic sanctions against Japanese aggression would provoke further aggression and increase the danger of war.⁶

During the 1930s and 1940s, two distinct groups of Asian experts vied for supremacy in the State Department. The so-called appeasers, whose attitude toward Japan was consistently permissive, were known as the "Japan Crowd" or the "Grew Clique." Opposing them was the China Crowd, whose supporters had advocated forceful measures to halt Japanese aggression before Pearl Harbor and stern policy toward Japan after its defeat. As we shall see, the Japan Crowd not only won the adoption of its policies, which were consonant with American Cold War objectives, but succeeded in obliterating the influence of the China Crowd.

Power of the Media

For the development of a full-fledged Japan Lobby, the part played by the press was vital. Correspondents for the New York Times, the Chicago Tribune, and Henry Luce's publications, such as Time magazine, soon became devout apostles of the still-anonymous lobby and its aims.⁷ Newsweek's foreign editor, Harry F. Kern, knew little about Japan when the war ended. His interest was aroused by Pakenham's knowledge and feel for the country, and by its importance in the eyes of American investors with whom he associated. Kern and Pakenham, both uncompromising conservatives, were in tune with the big banks and corporations, whose purpose was to rehabilitate the Japanese and German economies as rapidly as possible at the least cost to the American taxpayer. Allied with the Grew clique, these journalists were to become extremely active in the controversy arising over the restrictive economic policy being pursued by SCAP Headquarters.⁸

Like Pakenham, the lawyer James Lee Kauffman was an old-timer. He had been one of only a few foreign attorneys practicing in Japan before the war, and had served as president of the influential American Association of Japan.⁹ A graduate cum laude of Harvard Law School and former editor of the Harvard Law Review, he had been a partner in a Tokyo law firm, Mclvor, Kauffman, Smith & Yamamoto, from 1914 to 1938, and he served on the law faculty at Tokyo Imperial University, now called Tokyo University, for five years. Kauffman had been of great assistance to American bankers in floating bond issues in Japan, and his firm represented "practically all of the American business interests there," he wrote.¹⁰ In 1938 however, the increasingly anti-foreign government passed a law under which most foreign lawyers, including Kauffman, were barred from practicing in Japan.

Kauffman surfaces again in 1946, when he wrote a letter to Joseph Ballantine, special assistant to the secretary of state. Kauffman, addressing his old friend as "Dear Joe," discusses the pre-war "Lawyer's Law" barring foreign attorneys from practicing in Japan, and recommends that it be "repealed or stricken from the books—whatever an occupying force does with laws they do not like." He hopes to open an office in Tokyo, and having heard that Walton Butterworth plans to visit Japan that summer, hints that he "would like to go there for two or three weeks and have a look around and see exactly what has happened."¹¹ Ballantine soon became a key figure in the Japan Lobby.

Although not known yet as the ACJ by the beginning of 1947, the clique was ready to start its offensive against SCAR It is evident from correspondence that Grew, in retirement, was lobbying the State Department, where he had the most influence. It was at about this time that General George C. Marshall became secretary of state, and he soon became a bulwark of the Japan Lobby, along with Secretary of the Army Kenneth C. Royall, Secretary of Defense James V. Forrestal, his assistant defense secretary, William H. Draper, and Undersecretary of State Robert A. Lovett. These leaders were in correspondence with key men in the Japan Lobby during the 1947-49 period, if not earlier. In June of 1947, Harry Kern, through his close associate retired admiral William V. Pratt, succeeded in meeting ex-president Herbert Hoover, who agreed with Kern's ideas and encouraged Newsweek's campaign, even leaking confidential documents for Kern's articles.¹²

Kern's opening broadside was an article in the January 27, 1947 issue of Newsweek, entitled "Behind the Japanese Purge—American Military Rivalry." The purged businessmen were touted as "the most active, efficient, cultured, and cosmopolitan group in Japan," and those most willing to help the United States meet the communist threat. "Such persecution could help only the extreme leftists in Japan and the ever watchful Russians, the advocates of severe purges," Kern wrote.

The quality of journalism in his article, based on Pakenham's reporting, is typical of the McCarthy era. Kern stated that "some 25,000 to 30,000" Japanese business executives would be deprived of their jobs. The designated executives actually numbered about 1,900, less than one percent of the high-level executives of sizable Japanese companies. Kern further misled Newsweek's readers by asserting that the purge had been forced upon MacArthur by the "military government." This was Kern's propagandistic misnomer for SCAP's Government Section, which he accused of undermining "American capitalist principles."

In truth, the Government Section was actively promoting a free, competitive, private enterprise system in Japan, whose economy had been dominated by what MacArthur called the "private collectivism" of the zaibatsu. Kern insinuated that the purge had been undertaken on orders from the eleven-nation Far East Commission in Washington, where "the Russians had put something over." Actually, MacArthur carried out the purge on direct orders from the U.S. Joint Chiefs of Staff.

In an eloquent rebuttal, MacArthur quoted and explained those orders; they were aimed, he said, at removing from positions of economic influence ".... all persons who have been active exponents of military nationalism or aggression..." He said he had pursued that objective vigorously "... because any other course would be to ignore those very causes which led the world into war, and by so doing to invite the recurrence of future war." But, of course, Newsweek had the last word.¹³

MacArthur Loses a War of Words

Kauffman, too, was on a collision course with MacArthur. In February, at the behest of the Department of Commerce (then headed by Newsweek's Averell Harriman), Kauffman was appointed to a proposed "economic cabinet" for advising SCAR "MacArthur's rejection of the proposed cabinet began the long and bitter conflict between the General and Kauffman," wrote Professor Schonberger.¹⁴ Kauffman, however, managed to get to Japan, despite the General's objections, as a member of a mission reviewing SCAP's reparations policy, under which Japan was being required to supply industrial equipment to countries that had suffered economic damage from Japanese aggression. Since most of the valuable machinery belonged to the zaibatsu, which had monopolized the spoils of war, the program seemed fair enough. But instead, the mission, headed by industrialist Clifford Strike, recommended cancellation of most of the reparations shipments and the rehabilitation of industries slated for dismantling. "In May, following the Strike Report, General MacArthur ordered all interim reparations removals stopped and tabled the whole issue until after the conclusion of a peace treaty with Japan."¹⁵

Ironically, Strike, president of Overseas Consultants Inc., was working hand in glove with Draper and Kauffman, both of whom had a vested interest in the reversal. So did Strike's firm, which was getting a fee of $750,000 for the survey and in the process secured a big contract with the Japanese government—financed by Draper's firm, Dillon, Read & Co.¹⁶ One compelling reason for the suspension of reparations was that much of the equipment slated for shipment abroad was claimed as collateral for bonds amounting to about $25 million issued before the war, mainly by Dillon & Read.¹⁷ Such mercenary motives seem to have weighed heavily in decisions that gave Japan, the defeated aggressor, an unbeatable head start over its Asian victims.

Although MacArthur held to his liberal position concerning the economy, he became increasingly concerned with the rising tide of militant unionism and political radicalism. Early in 1947, MacArthur outlawed a threatened general strike, and a crackdown on the Communist Party began. But in the April elections, the opposition parties gained a plurality in the lower house, and for the first time in Japan's history a socialist, Tetsu Katayama, became prime minister and formed a coalition cabinet in May 1947.

Harry Kern chose this critical time for a visit to Japan, said to be his first since the war. Through Pakenham he met a number of the purged Japanese for whom he had shown such sympathy. There is ample evidence, mainly from letters, that members of the Japan Lobby were actively cultivating anti-communist business, political, and diplomatic figures of pre-war prominence or notoriety. The latter, of course, were delighted at the opportunity to get themselves rehabilitated, for most of them had been purged and not a few were suspected of war crimes. From them, Kern got his fill of shocking and pitiful stories about the injustices inflicted by the purge, which he circulated among his acquaintances.¹⁸

Upon his return to New York, he worked up another sensational Newsweek story entitled "Trouble in Japan: How the Struggle to Win the Peace Now Threatens the Success of the American Occupation." His report (June 23,1947) was billed as "the first complete account of the critical and surprising situation that now faces General MacArthur and the American Occupation." While avoiding direct criticism of MacArthur, who had unwisely granted him a private interview, Kern painted an appalling picture. "The Japanese economic system is about to go into a tailspin... an economic crisis unparalleled in Japanese history... Unless really drastic measures are taken... the chances of making Japan into 'the workshop of the Far East as part of the American policy of rebuilding the world and containing communism will have gone glimmering..."

As the first step toward a solution, Kern called for a separate peace treaty with Japan "by this autumn" even if it meant "leaving out not only the Russians, but the Australians, the Chinese, the Filipinos, and the six other nations on the Far East Commission... That treaty should provide for the continuance of paramount American interests in the guidance and administration of Japan for a long period of time..."

Again Kern attacked the purge and saved his most withering disparagement for the Economic and Scientific Section in charge of the zaibatsu dissolution program. As a consequence of their incompetence, he wrote, "the United States... must now bear the entire burden of supporting impoverished Japan... Food stocks have run so low that... by the end of the summer the Japanese may be entirely dependent on imported food."

MacArthur, who prohibited even mild criticism of his policies by journalists in Japan on pain of expulsion, was infuriated by Newsweek's flagrant exaggerations. For example, Kern stated that the Japanese wanted the Americans to stay for as long as fifty years, and he supported his view by leaking information apparently confided to him by the general himself: "General MacArthur has already raised this question [the stationing of U.S. forces in Japan] with Emperor Hirohito, although the discussion has been denied formally."

By now, MacArthur was openly calling Pakenham a "fascist" and Kern a "reactionary or worse."¹⁹ Ignoring numerous signs that official sentiment in Washington was changing, SCAP continued to push its economic reforms. MacArthur seemed to be on solid ground, because the Economic Deconcentration Law, planned by the Far East Commission and just approved by the State-War-Navy Coordinating Committee, was now moving toward enactment by the Japanese government. As Japanese agencies in charge of zaibatsu deconcentration dragged their feet, apparently confident of a policy shift in the near future, the supreme commander resumed his attack. On July 3, without advance warning, he ordered the fragmentation of Japan's two largest trading firms, Mitsui Bussan and Mitsubishi Shoji.