Japan from the inside out

Did FDR bankrupt Japan?

Posted by ampontan on Thursday, October 11, 2007

NOW HERE’S A SERENDIPITOUS FIND—while searching for something else on the site of an Internet merchant, I discovered a recently-published book that looks intriguing. It’s called Bankrupting the Enemy: The U.S. Financial Siege of Japan Before Pearl Harbor.

According to the publisher’s blurb, the main points are as follows.

  1. American government experts thought the war in China would bankrupt Japan, but didn’t realize that Japan had a supply of dollars hidden in New York.
  2. When the Americans found out about the money, Japan tried to repatriate it. President Roosevelt moved to block them by using the 1917 Trading with the Enemy Act to freeze the assets and forbid the sale of Japanese gold to the U.S. Treasury (the only open gold market at the time).
  3. Some Washington bureaucrats “thwarted” the plan, however. (The blurb does not say how.) Dean Acheson, the man Roosevelt selected to implement this plan, managed to prevent Japan from getting the money.
  4. The author examines an OSS-State Department study of conditions in pre-war Japan that found the measure created economic hardships for Japan. Those hardships contributed to the country’s resolve to maintain the aggressive course that led to Pearl Harbor. Apparently, no one in the U.S. government had bothered to analyze the policy’s impact on the Japanese economy.

The publisher’s promotional copy is not well written and might lead a reader to think the OSS study was conducted before the war. As a poster on this History Channel discussion board notes, however, the OSS did not exist at the time. The book’s author, Edward S. Miller, responded to the note by stating that the OSS study was conducted in 1943 and was a retrospective look at Japanese economic conditions in the 1930s. He used this to extrapolate financial conditions in Japan had it not launched its attacks in 1941.

Mr. Miller is now retired, but has served as the chief financial officer at two companies, so he seems well qualified to understand financial operations of this sort. He is also the author of a book called War Plan Orange, which analyzes American war plans devised over the early part of the 20th century to deal with a potential Japan-U.S conflict. That book won five awards.

There is a long-held belief in some quarters that President Franklin Roosevelt baited Japan into attacking America to give him an excuse to enter the wider war. One quoted passage in the review, however, suggests it was his intention to “bring Japan to its senses, not its knees.”

That in turn suggests Roosevelt’s idea might have backfired by exacerbating rather than defusing Japan’s aggression. In other words, the attack on Pearl Harbor might not have been the result of a deliberate Roosevelt strategy, but a Roosevelt miscalculation.

But as Sherlock Holmes said, “It is a capital mistake to theorize before one has data,” and I just discovered the book’s existence this week.

Here’s the page on the publisher’s website.

21 Responses to “Did FDR bankrupt Japan?”

  1. J_ said

    Weekly magazine issued by the Cabinet Inteligence Office of Japan on August 6, 1941, shows a detailed analyses by the Ministry of Finance of Japane on the US Asset freeze.
    The reference code is A06031041400.
    You have to install “Djvu plug-in” to view the document.

    According to the magazine, by the time the US froze Japanese assets on July 26, 1941, the US had frozen the assets of Norway, Denmark, Netherlands, Belgium, Luxembourg, France, Gremany, Italy and 8 more European states in 1940 and 1941.

    “A long-forgotten clause”? I doubt such an argument.

  2. ampontan said

    J: I am continually surprised by the knowledge of the people who make comments here. I should stop being surprised!

    Can you briefly summarize what the MOF had to say? I’m in the middle of a long translation and don’t have much time to read it right now.

  3. tomojiro said

    I really don’t understand what is the big fuzz here. That what Edward Miller writes as “The U.S. Financial Siege of Japan Before Pearl Harbor” is basically written in all Japanese textbooks as 在米日本資産の凍結、日本への石油輸出の全面禁止,or am I wrong? And the fear that US will actually do “Financial Siege” and economic sanction was regarded one of the main reason why the IJN pushed the government to go to French Indochina (which was the direct reason of the US governments decision about the economic sanctions against Imperial Japan).

    Mr. Miller seems to have written a book WITHOUT having even basic knowledge about the Pacific war.

    Or am I missing something here?

  4. ampontan said

    Don’t know, Tomojiro, the book just came out. Perhaps the actual process and transactions haven’t been analyzed in English much. He also seems to have a projection about the Japanese economy based on no invasion of Hawaii and probably the South Pacific.

    Why don’t you send him an e-mail at that History Channel address and ask?

    WAIT: Scratch that. I sent him an e-mail myself.

  5. The Japanese government approved a “strike south” policy at an imperial conference held at the beginning of July 1941. Tojo, the leading advocate of the policy, was appointed war minister soon afterwards, so there was no reversing the decision. The strike south policy was to keep advancing south into Indochina and Indonesia regardless of what America or anyone else thought. In other words, the Japanese government had effectively decided to go to war before the U.S. adopted any financial sanctions. (No one has mentioned the oil embargo yet. This was probably the most important sanction. It was supervised by Soviet spy Alger Hiss, who implemented it far more strictly than FDR intended.)

    What prompted Japan to adopt the strike south policy? When the Soviets pulled their forces out of Siberia to fight Hitler, the Japanese army in Manchuria was left without a mission. Since the military was running things, they certainly weren’t going to demobilize, hence a need to attack somebody.

  6. ampontan said

    Peter Kauffner: Thanks for your enlightening post. Just one quick remark–Tomojiro briefly referred to the oil embargo (in Japanese) in post #3.

  7. tomojiro said

    ” The strike south policy was to keep advancing south into Indochina and Indonesia regardless of what America or anyone else thought. In other words, the Japanese government had effectively decided to go to war before the U.S. adopted any financial sanctions.”

    No,no. There was actually no coherent war plan in Imperial Japan and that was a great problem. Even until the last moment, it was not clear whether Japan should choose “Strike south” or “Strike north”. As basically the politics in the early 1940ies lied in the hand of the IJA, and because Nazi Germany seemed to be so successful, “Strike north” politics had still a strong voice (although seriously damaged after the defeat of the battle of Nomonhan or Battle of Khalkhin Gol). The problem was that actually Japanese economy both in import and export still relied heavily on US markets.

    The US government threatened if the Japanese invasion in China continued that they will do financial and economic sanctions against Imperial Japan.

    Oil Embargo would be especially lethal for the IJN, because the stock for oil which Japan had at that time and which could keep floating the navy were estimated only for several months.

    It was under those conditions that the IJN tried to persuade the Imperial Japanese Government to advance to French Indochina (which became territory of Vichy France after the surrender of the French against Nazi Germany, and had oil fields).

    IJA was unhappy with the decision of the advance to French Indochina. To demonstrate that they were still capable to fight against the Soviets (Strike north policy) and it is said that they actually tried to provoke the Soviets, the Kwantung army carried out a huge military exercise on July 7th, 1941 which is known in Japanese history under the name of “Kan-Toku-En” (関特演: Special military exercise of the Kwantung Army), involving over 700,000 soldiers (and which was actually a kind of protest against the “Strike south” policy).

    Things at that time was far more complicated than following an coherent war plan or than saying that they reacted to some kind of hidden policy of the US government.

  8. Foreign Minister Matsuoka, the leading member of the “strike north” faction, was dismissed in mid-July soon after the imperial conference I mentioned above. So I think the north vs. south issue can be considered settled after that point. (I was mistaken about Tojo — he had already become war minister in 1940.) The army high command had reasserted control during the 1936 coup, so the war minister and the army chief of staff were setting policy, not the Kwantung Army or the navy. The oil fields were in the Dutch East Indies (Indonesia), not Indochina.

  9. tomojiro said

    “The army high command had reasserted control during the 1936 coup, so the war minister and the army chief of staff were setting policy, not the Kwantung Army or the navy.”

    It was my fault that my explanation was very simplistic in saying that “the politics in 1040ies lied in the hand of the IJA”. I should say that IJA had a deep influence on Japanese politics and diplomacy (as well as the IJN), from the 1930ies. And there were friction inside both the IJN and the IJA, who hated each other that sometimes they killed each other (like during the military coup in 1936, or the assassination of Lieutenant general Nagata Tetsuzan by Major Aizawa, in 1935).

    Various frictions inside the IJA and the IJN tried to influence the policy at that time. So to say that the war minister and the army chief staff were setting policy is also a very simplistic and misleading explanation as much as that of mine.

    If the army chief staff had actually that much power, Nanjing massacre would have never happened. They strongly opposed to enlarge the front in China shortly after the Marco Polo Bridge incident, did every thing to prevent the spread of the war in China, even trying settle a peace pact by the intermediation of Nazi Germany (Trautman negotiatons : トラウトマン工作).

    Ironically it was the politicians and the mass media who got exited at the initial war results and pushed for more war effort of the army. Kanji Ishihara, major person of the Army chief staff had to resign his post after he failed to prevent the escalation of the war.

    Ironically many leaders of the IJA WERE against the war in China. Again, things were pretty much complicated in these days.

  10. bender said

    In other words, the Japanese government had effectively decided to go to war before the U.S. adopted any financial sanctions

    What war? Indochina was a French colony, and France had already surrendered in Europe. I would think that this is the direct motive for occupying that area.

    Deciding to go to war with the United States is quite a different story. Don’t you think that arguing Japan had “already decided to go to war” kind of rough?

  11. The policy was “strike south,” not “strike Indochina.” Japan’s only interest in Indochina was to use it as a staging area for attacks further afield. After Indochina, the Dutch East Indies would have been next on the menu. The oil fields in DEI were a vital war resource — surely fighting was anticipated. France had surrendered a full year earlier, so the German invasion of Russia was a more immediate motive for the policy.

  12. bender said


    Everyone in Japan who has some knowledge of Japanese history knows that. It’s called “Nanshin-ron”. Was this before the oil embargo by the US? I remember the oil embargo as one of the motives to take SE Asia- it was meant to grab oil to sustain the Japanese Empire (more like the Imperial Japanese Navy and Army, I suppose, since they were probably the foremost ones gobbling up oil).

  13. As far as the decision to attack China in 1937 goes, there was no pressure for this from the Japanese public. I think perhaps you are confused with the Mukden episode in 1931. There was a rapid buildup and expansion of the military budget following the 1936 coup. The army leaders, especially War Minister Sugiyama, pushed an expansionist policy as a way to justify this use of resources. Russia was Japan’s most dangerous adversary at this time, so geopolitical principles would suggest an alliance with China. Yet narrowly army interests were allowed to override national concerns.

  14. Bender,

    The “strike south” concept was developed by the Japanese army in response to the defeat at Nomanhan(1939). Since Russia proved to be too tough a nut to crack, Japan sought other targets. As the old saying goes, “If you can’t beat them, join them.” The concept was a pet project of Togo. Togo became war minister in July 1940, a full year before any sanctions were applied. The U.S. oil embargo did turn opinion around at navy department, but the navy leaders weren’t setting the overall strategy.

  15. Aceface said

    “Togo became war minister in July 1940”

    You mean Tojo,No?

  16. ampontan said

    The author of the book, Mr. Miller, has been kind enough to answer an e-mail I sent him. He has given me permission to use as much of it as I like, so I’ll use the parts pertinent to the discussion. He responds to comments from most of the posters.
    It starts below the line. (Note: it’s long.)
    I think none of the commentators have read the book yet. Some of their criticisms of the promotional copy are correct but others are not. Tomojiro suggests I have written a book “WITHOUT having even basic knowledge of the Pacific War.” In fact, I have researched the Pacific War since I was a child. (I am old enough to remember 7 December 1941!) My previous book, “War Plan Orange: The U.S. Strategy to defeat Japan, 1897-1945” (Annapolis: Naval Institute, 1991), won five distinguished history prizes including the Franklin and Theodore Roosevelt Prize. It’s cover has praise from General Colin Powell, Secretary of the Navy John Lehman, Chairman of the Joint Chiefs of Staff William Crowe, authors Walter Lord and Ronald Spector, and many others. It is used as a textbook at the U.S. Naval War College. It was republished in paperback this year. I have lectured on the war at the National Defense University, Naval War College, the Pentagon, and other venues. The book was published in Japanese as “Orenji Keikaku” by Shinchosha Ltd., a major Tokyo publisher, and sold well there.

    Turning to my new book, “Bankrupting the Enemy”, your commentators correctly identify many prewar issues such as oil sanctions, the strike north and strike south strategies, occupation of Indochina, and battles with the Russians in Manchuria. They are knowledgeable about history. I do not disagree with their points. However, my book is narrowly focused on the origins and implementation of the dollar freeze. I do not claim that it was the only issue that affected Japan, or the issue that caused the war.

    Of the many books about the run-up to the war (mostly written by diplomatic historians) I know of only two or three (in English) that give significant details about economic sanctions. None have much detail about financial sanctions.

    Tomojiro also says that what I write is in all the Japanese textbooks. I doubt it because I discovered many files of information not previously published. The international records of the Treasury Department and the Federal Reserve were opened to researchers only eight or ten years ago, under the Holocaust Era Records Act. I believe I am the first researcher to use them extensively. Here are some examples of my discoveries:

    (1) 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 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. I explain why.

    (2) 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’ 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 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.

    (3) 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 reaching a decision for war.

    I also report features of the prewar situation from records that were not classified but that are omitted from other history books. I studied thirty-seven “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. I reviewed the oil and tanker situation in both Japan and the U.S.; 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. I explain why. I reviewed Japan’s trade with America. 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.

    There is confusion among your commentators about my position that neither Japan nor the United States made a complete evaluation of the total economic effect of the dollar freeze on the civilian economy. I considered the situation if war had not begun in 1941 and the freeze had continued into 1942 and 1943. I noted three kinds of observations by both governments:
    estimates of when Japanese stockpiles would run out, calculations for a few industries (oil, steel, shipping), and general statements about “impoverishment” and other platitudes. However, I did not find that either country statistically assessed the impact on the standard of living of the Japanese people. I wanted to estimate the impact. I relied on a little-known 500-page study of Japan’s foreign trade during 1930-1938 and the dismal effect on Japan of loss of trade. The study was written by the OSS and State Department DURING the war for postwar occupation use. I adapted the study to estimate Japan’s standard of living after two or three years of dollar freeze if it had not gone to war. The collapse of trade in both hypothetical eras–a frozen Japan in 1942-43 or postwar defeated Japan–had many similarities. My conclusion was that an economic disaster faced the Japanese people under a prolonged dollar freeze. The standard of living might have been reduced to that of India or China. My procedure is certainly open to challenge. However, I felt that I ought to make a shot at evaluating the effect of a hypothetical freeze of several years.

    The bloggers made a few errors. Peter Kauffner thinks Alger Hiss supervised the dollar sanctions. Hiss was not involved. He is probably thinking of Harry Dexter White, Morgenthau’s aide in the Treasury. White strongly recommended the dollar freeze but he had no role in administering it. The Treasury representative on Acheson’s three-man administrative committee was Edward H. Foley, Jr., general counsel of the Treasury. White may have assisted the Soviets in other ways. I discuss him in the book.

    J_ questioned the term “a long forgotten clause”. He is referring to paragraph 5(b) of the Trading with the Enemy Act of 1917 which he points out, correctly, was invoked to freeze the assets of the conquered countries of Europe and Germany and Italy (and briefly the USSR) in 1940-41 before it was used to freeze Japan. The advertisement of my book calls it “mysterious” because of its history. Paragraph 5(b) empowered a president to freeze the assets of any country, whether enemy “or otherwise”. Those two extra words kept 5(b) alive after other sections of the act, which applied only to enemies, lapsed with the peace treaties that ended World War I. The U.S. then had no enemies.

    But 5(b) remained a powerful tool for future presidents. The mystery is why congress inserted those two words into the act in 1917. A senate investigation in the 1970s could not determine why, even though presidents had invoked its powers four hundred times. I attribute it a zealous Federal Reserve lawyer during a dog-fight between the Commerce Department and Treasury Department in 1917 as to who would administer the TWEA. FDR forgot about it, even though he invoked it in 1933 to close the U.S. banking system and in 1934 to devalue gold.

    When FDR was first briefed on dollar sanctions against Japan in 1937, he said, “My God, I had forgotten all about it.” The two “mysterious” words were crucial because FDR did not have to ask congress for powers to freeze the assets of non-enemies including Japan. (The act is still in effect, renamed the War Powers Act.)

    I hope this has been useful to you and your commentators.
    I’m certain it has, Mr. Miller! Thank you very much.

    Only one brief comment: I think Peter Kauffner’s reference to Algier Hiss was in regard to oil sanctions and not dollar sanctions.

  17. bender said

    One thing I think about history is that it’s easy to discuss in retrospect, but one has to also look into the perceptions of those actually experiencing it. Ampontan, do you read the Nikkei Shimbun? A few years ago, former PM Miyazawa was writing for the Nikkei’s “watashi no rirekisho” (my personal diary). He wrote about being in the US in an exchange program right before the Pacific War, but when he learned of the attack on the US (he was back in Japan), he thought “relieved”, a thought shared by many in Japan. Be it real or not, Japan was really feeling pressure of the US.

    I’m not countering anyone’s comment here, BTW.

  18. ampontan said

    Bender: I used to read the Nikkei, but haven’t for a few years. That’s interesting about Miyazawa.

    I’m pretty sure I read somewhere that Miyazawa served for a time in Japan’s colonial administation in The Philippines. He remarked about the idealism of some Japanese in those days regarding the Greater East Asia Co-Prosperity Sphere.

    He, along with pretty much everyone else who was alive at the time and lived for a long time afterwards, said, “I know it seems hard to believe now, but that’s how people thought then.”

  19. lyrt said

    My personal thanks to Mr Miller for his comprehensive answer. I’ll definitely order his book.

  20. tomojiro said

    I also thank Mr.Miller for his answer.

    “Tomojiro suggests I have written a book “WITHOUT having even basic knowledge of the Pacific War.””

    Well without reading his book and ignoring the fact that he had previously written a book about the Japan-American military strategies, to say that he had written a book without knowing the basic facts and knowledge was to harsh and inappropriate.

    “Tomojiro also says that what I write is in all the Japanese textbooks. I doubt it because I discovered many files of information not previously published.
    I was referring to the fact that the “economic sanctions” of the US government (dollar freeze「在米日本資産の凍結」included) is a very well known fact in Japan contrary to US, and it is virtually written in every text book. I was told about that in school, and I just can imagine any book which doesn’t refer to these facts as one of the reasons of the Pacific war.

    His analyses about the Yokohama Specie Bank (横浜正金銀行, later the Tokyo bank, now The Bank of Tokyo-Mitsubishi UFJ)and the relation of the “dollar freeze” and the situation of commerce between US and Japan seems to be very interesting.

    I have no ability to decide whether his new found information and analysis will have a striking effect in changing interpretations about the cause and effect of economic sanctions of the US government, nonetheless seems to be a interesting read.

    I have further doubts and questions, (for example as the economic sanctions and dollar freeze was foreseen by the Japanese government at that time that they had alternative plan to construct a financial autarchy

    Click to access 79_1.pdf

    ) but I have to read his book first.

    I thank Mr. Miller again for his answer.

  21. tomojiro said


    Sorry I failed to recognize that your post was directed at me.

    “As far as the decision to attack China in 1937 goes, there was no pressure for this from the Japanese public. I think perhaps you are confused with the Mukden episode in 1931.”

    Well in both cases there were no pressures from the general public to commence such kind of military activity, but in both cases after things started, media got excited, and politicians (and military leaders) were influenced by (or used) this excitement.

    In 1937, after the Marco Polo Bridge Incident, although army chief staff and various leaders in the IJA tried to prevent the escalation, it didn’t work for two reasons. That there were many IJA officers and generals who wanted to escalate the incident to war, and especially after the fall of Shanghai, that media and politicians also became excited and wanted to give a “final strike” to Chang Kai-shek.

    I think it was in the diary of the diplomat Ishii Itaro (after the fall of Shanghai in August 1937) in which he reported that after a meeting with the staff of the IJA chief staff and Prime minister Konoe, IJA chief staff came out of the room with angry faces complaining that politicians don’t understand warfare.

    The IJA chief staff seemed to have suggested that this (fall of Shanghai) was the perfect timing to begin negotiation with Chang Kai-shek about Armistice, but Konoe and other members of his diet rejected this suggestion saying that it is sheer madness to stop a winning war.

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