Supreme Commander (26 page)

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.

Dodge's mission was to develop a plan to achieve economic self-sufficiency by promoting Japanese access to Asian markets. Even if it involved leaving the
zaibatsu
alone, placing strict curbs on labor unions, cutting the budget, and lowering the domestic standard of living, whatever it took to increase exports and tie Japan more closely with Asia, MacArthur would support. American aid now poured into industries previously restricted due to their military potential: steel, coal, iron, and ships. While this helped the big companies, the overall effect was to create a “stabilization depression,” whereby many small and medium-size enterprises went bankrupt.

Fortune
magazine, speaking for the newly formed American Council for Japan, came out with its “Two Billion Dollar Failure in Japan” article in April 1949. It claimed that the supreme commander was “an impressive gold-laced figurehead” living in an “Alice in Wonderland state,” presiding over economic reforms that had been “massive failures.” MacArthur responded two months later with a six-thousand-word reply. He began by stating he had been given strict directives to follow,
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and admitted that under his strict control Japan's restricted economy had become “in effect a large concentration camp.” His hands were tied, he said: “Until a peace treaty was consummated Japan would remain in more or less degree in the strait jacket of an economic blockade.”

And how had Japan fared under an economic blockade? The issue, argued MacArthur, had to do with more than just the economy: It had to do with reforming the most militaristic country on earth and turning it into a democracy. On that “big picture” basis, he argued, the occupation was a success, perhaps not in everything but certainly in achieving its overriding priorities.

Then he went into specifics, refuting
Fortune
's claims point by point. The two-billion-dollar figure was way off, he said, because much of it was for the pay and support of troops needed in a military occupation. That Japan depended “on the United States for better than three-fourths of its imports” was only to be expected since these imports were largely food and raw materials no longer available from Japan's neighbors, against whom it had waged war. Equally misleading was the claim that the Japanese bureaucracy numbered more than three million people. Not so, said MacArthur. Only 839,500 people worked in the government administration. Another 714,578 worked for the telephone companies, the railroads, the tobacco monopoly, and other government-owned enterprises that in America were privately held. The remaining jobs were make-work, in keeping with government policy to accommodate the oversupply of labor (due to millions of repatriates arriving from abroad) by dividing the work and keeping people off the dole. It was fine for
Fortune
to argue that “recovery comes first,” but for such recovery to persist there must be political and social reform to eradicate the horrible exploitation workers had endured in the past. With labor and capital now in proper balance due to SCAP reforms, it was incumbent on Japanese exporters to “find their markets on a more truly competitive basis.” The days when Japan could flood the world with cheap Japanese goods, based on woefully underpaid labor, were over. Japan now must strive to move up the value-added scale in international trade.

The supreme commander had a personal reason for his hostility to the
zaibatsu
: They had flagrantly disobeyed the Potsdam Declaration. William Draper may have had no problem with this, but a military commander like MacArthur certainly did. Only recently had the truth come out, a violation so egregious it challenged a fundamental premise of MacArthur's entire occupation: that the Japanese, despite their infamous attack on Pearl Harbor, could be trusted.

It was a scandal he had tried his best to downplay in his efforts to protect the emperor. He made no mention of it in his public rebuttal to
Fortune
—he could not—but the facts were explosive. When the war ended, the military had stashed away in caves and hidden warehouses huge amounts of military supplies of precious metals, light and heavy oils, blankets, clothing, storage batteries, aluminum, zinc, mercury, wire rope, alcohol, sugar, and paper. Also included were enormous quantities of diamonds and family jewelry donated for the war effort. Apparently what had been going on was that the War and Navy Ministries, under cabinet authorization, had secretly parceled out the goods to their friends in the police, local governments,
zaibatsu
, and gangster groups for their personal use and resale in the black market. When the “hoarded goods” scandal came to light in late 1947, it was estimated by a Japanese House of Representatives special committee that the value of the stolen goods was three hundred billion yen—50 percent more than the entire government budget for that year. One witness testified that the moment the government order was given, “Trucks, wagons, railroad cars, carts, bicycles and porters swarmed into the arsenals; documents were forged, altered or destroyed. Thousands of tons of finished products, food, textiles, raw materials and machinery were hauled away.” Observed
World Report
(later
U.S. News & World Report
): “Japan's war stockpiles have been looted of raw materials worth billions of dollars.
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. . . There are indications that these stockpiles held enough iron, steel, and aluminum to supply Japan's peacetime economy for four years. Much of this has vanished. The
zaibatsu
companies, Japan's family monopolies, obtained the largest share of the spoils.” The Japanese finance minister had the gall to admit: “Nobody knows where 100 billion yen worth of stuff has gone to.”

Stuff!

That was not all. Also deceiving the Americans was the Japanese Central Bank. In the two weeks between the August 15, 1945, decision to surrender and the August 31 date when the occupation forces landed and took over the country, the government had flooded the country with yen, mostly to pay debts to the
zaibatsu
. Whereas on August 15 the volume of yen was 30 billion, on August 31 it was suddenly 42 billion—a 40 percent increase in two weeks. Such sleight-of-hand maneuvering by the government to help its friends was improper, undemocratic, and helped trigger the hyperinflation of the early years of the occupation.

MacArthur took particular exception to
Fortune
's claim that “the zaibatsu, alone, of all major groups in Japan . . . were . . . against war with the U.S. . . . The U.S. Army and the young bureaucrats, ignorant of this history, got rid of two thousand managers.” Accusing MacArthur, a voracious reader of history, of not knowing his history was like waving a red cape before a bull. The supreme commander responded: “This statement is thoroughly refuted by the known facts, yet continues to crop up from one or another source, usually with a private ax to grind. There is a tendency to use the goal of economic recovery as a cover for special-interest pleading, sometimes insidiously persuasive to the uninformed.” Had not the
zaibatsu
executives “uncorked their champagne bottles and toasted the coming of a new ‘industrialists' era' ” the moment they learned the occupying power would be the United States, presumably offering leniency? Did not these men lack any guilt for all the airplanes, gunpowder, cannons, and battleships they had manufactured in the cause of war? What about all the money and stolen goods they had gotten after the fighting stopped?

Yet the purpose of the purge was not to punish, it was to bring in new leadership. “The purgees were not excluded from all economic activity”—just the companies they had headed (with disastrous results). Just as well to get rid of them.

The magazine and the general came down to the wire at the end, their differences unresolved. “All the great social reform measures of SCAP become empty words unless the economic problem is solved,” said
Fortune
. “Man still cannot live by reform alone; in Japan he must have rice too.” MacArthur found this simplistic. He responded by paraphrasing
Fortune
: “Even in Japan,” he said, “man cannot live by rice alone. He must have freedom.”

From 1946 to 1948 inflation was 1200 percent. Compared with the old 1930–34 level, Japanese industrial production was 32 percent in 1946, 41 percent in 1947, and 64 percent in 1948. The economy was improving, but still had a long ways to go. The Communists, seeing an opportunity to regain some of their lost power, jumped in and called the Dodge Plan the “road to fascism,” along with juicy language like “capitalist offensive . . . foreign monopolies . . . selling out of the country” and “semicolonial regime.” MacArthur backed Dodge 100 percent. To make sure the Communists got the message, in 1949–50 he instituted the so-called Red Purge, costing 20,997 alleged Communists and sympathizers their jobs. (This was on top of the 210,288 citizens who had already been purged for their ties to militarism.)

There wasn't a whole lot the supreme commander could do about the
zaibatsu
, but one thing he could do was make sure they paid their taxes. Many of them paid nothing, indicative of the cozy relationships that existed between impoverished municipal tax collectors and wealthy corporations. In the last quarter of 1947, tax receipts were a third of what was due. The supreme commander decreed this to be totally unacceptable. To add muscle to the tax collection efforts, MacArthur ordered the U.S. Eighth Army troops throughout the country to go out on visits with the thirty thousand tax collectors. This show of force worked: Tax revenues escalated dramatically and helped slow down the currency inflation, thus providing much-needed monetary stability.

As he had with reparations, MacArthur demonstrated foresight in addressing foreign trade, the most pressing ingredient for a Japanese economic recovery. Just two years after the surrender, he had been talking in public about the need for a “co-prosperity sphere” for the Far East, with Japanese factories processing the raw materials of the less developed Asian nations. Unlike Washington, MacArthur never put great hopes on, or had much interest in, China. While the impending collapse of the Chiang Kai-shek regime in China had Washington on tenterhooks, and President Truman was urging Joseph Dodge to assess “the economic situation in Japan and its relation to what has been happening in China,” MacArthur was relatively nonplussed, convinced that a Communist victory would have no bearing on Japanese Communism. “A nuisance factor,” he called the China takeover, a view that certainly raised eyebrows. Eventually both Dean Acheson and George Kennan would agree that MacArthur was right. The only way to have a peaceful Japan friendly to the United States, said Acheson, would be for Japan to develop strong economic relations with the non-Communist Far East. While it was hoped that Japan and the United States could develop a strong trading relationship, the prospects looked bleak: What could Japan export? Japanese productivity was so low that only the cheapest items could find a market. Said John Foster Dulles in a scornful tone: “The Japanese couldn't make anything Americans would buy” . . . except maybe “paper napkins.”

In the meantime Joseph Dodge continued his budget reforms. Unlike many economic advisors who advocate slashing expenditures or imposing high tax rates, Dodge stayed away from extremes and relied on basic fiscal discipline (pruning the budget, eliminating overambitious infrastructure projects, getting rid of surplus government workers, applying more effective collection of taxes, and paring down the national debt). The result was a near-miracle, where a government with lopsided financial outlays became fiscally responsible and transparent. For the fiscal year April 1949–April 1950, the budget finally generated a surplus. Borrowing MacArthur's flair for hyperbole, Dodge announced in his report to Congress, “In no other nation has so much been accomplished with so little.” On MacArthur's recommendation the Department of the Army in 1950 awarded Dodge the Exceptional Civilian Service Medal.

Following MacArthur's orders to boost international trade, SCAP concluded some twenty trade agreements with South American, European, African, and Middle Eastern countries. Efforts to obtain most-favored-nation treaties for Japan were unsuccessful, however, largely because of the shortage of hard currency. It would not be until the Korean War that the Japanese economy would get the shot in the arm it desperately needed. Just as World War II pulled the United States out of the Depression, what eventually got Japan's motor going was the massive inflow of U.S. military dollars into Japan during the Korean War: $2.3 billion. “A gift from the gods,” said Shigeru Yoshida.

With the loss of China, America's foreign policy came to rely on Japan as a strong ally. Regardless of what MacArthur's enemy Kenneth Royall said, MacArthur succeeded in extending the borders of America's defense perimeter to the other side of the Pacific. In January 1950 Secretary of State Dean Acheson, echoing MacArthur's 1946 words that Japan should be “the westernmost outpost of our defenses,” announced that the defense of the United States included Japan, Okinawa, and the Philippines. The Pacific had become an American lake, and Japan would now be, in MacArthur's words, America's “unsinkable aircraft carrier in the Far East.”