Arthur B. Hersey titled his study for the Office of Strategic Services and the Department of State “The Place of Foreign Trade in the Japanese Economy; an analysis of the external trade of Japan proper between 1930 and 1943 focusing on possible or probable postwar development.” He comprehensively analyzed Japan’s external trade with both the yen bloc and the rest of the world in three representative prewar years: 1930, 1936, and, to a lesser extent, 1938.1 His goal was to outline a possible range of conditions of Japan’s economy about five years after the end of World War II to assist U.S. planners contemplating postsurrender and occupation policies. The methodology was complex. To link actual past to hypothetical future years Hersey converted physical units (pounds, bales, square yards, calories, etc.) to a common denominator of “constant yen,” a proxy for physical units that also allowed him to adjust erratic prices of internationally traded goods into more comparable units.2
During the war many economists expected a return of the global Depression after a brief postwar boom. Hersey believed Japan’s future in international trade to be especially bleak. Its appetite for imports of minerals, industrial crops, machinery, and even foodstuffs was almost unbounded. But its capacity to import would be limited to the hard currency it could earn from exporting goods and services and from gold mining. (He considered foreign loans unlikely.) In the 1930s Japanese exports had expanded rapidly, but the benefits to the people had been circumscribed for several reasons. A rising share of exports went to the yen bloc, which could neither pay in hard currency nor deliver the most needed commodities. While foreign countries erected barriers against Japanese goods, the terms of trade (relative world prices) worsened after 1930. No foreign loans were available due to disorganized financial markets in America and Europe and active discouragement of lenders by those governments because of Japan’s aggressions.
“The core of the analysis,” Hersey wrote, was a classification of Japan’s imports (typically 90 percent raw and semiprocessed materials and foods and 10 percent manufactures) into two categories: commodities required by factories that manufactured products for export and commodities for final consumption within Japan. The latter, labeled “retained imports,” comprising 59 to 68 percent of all imports in the 1930s, contributed directly to the standard of living. Another 25 percent of imports were materials for processing and resale abroad, primarily raw cotton for textiles, wood pulp and salt for rayon, and metals, chemicals, and fuels for other manufactures. A final 8 percent of imports were offsets to exports of a similar nature, swapped, in effect, because Japan both bought and sold in various grades and processed forms, wheat, sugar, fish, coal, and fertilizer.3
Japan’s greatest dilemma in the 1930s, Hersey believed, had been deterioration of the “barter terms of trade,” that is, weak export prices and high import prices. Japan had to run harder to stay in the same place internationally. For consistency he recast the data into indexes of “constant yen” at 1930 terms of trade. (He also calculated 1936 and 1938 terms of trade although they were of less relevance to his conclusions.) Hersey selected 1930 as a “best case” year, similar to the relatively prosperous 1920s, and the last equilibrium year of Japan’s international trade before the turmoil of world depression, yen devaluation, the Manchurian adventure, and foreign trade discrimination. In 1930 Japan’s upscale products enjoyed high prices abroad, notably raw silk and silk fabrics, premium seafoods, fine pottery, and other consumer luxuries, while prices of raw cotton and most other imported agricultural and forestry products were low. (Japan did not yet import oil, metals, or minerals on a large scale in 1930, and not much machinery.)4
A terms-of-trade index is not the same as the familiar domestic price index. It is a ratio of relative prices, that is, an export price index divided by an import price index. Hersey calculated data for twenty internationally traded product classes that he aggregated into eight groups: food; fertilizer and fodder; coal and petroleum; metals and minerals; cotton, wool, and pulp for rayon; lumber and paper pulp; and manufactured goods. He assigned to the terms of trade in 1930 an arbitrary index number of 100. The index for any other year, actual or predicted, was that year’s export price index divided by its import price index. A resulting index above 100 meant a favorable trend for Japan, and vice versa for numbers below 100. Although any prediction was “pure guesswork,” Hersey admitted, a postwar Japan enjoying 1930 terms of trade could fare adequately in the world, though not richly. “It is doubtful,” he opined, “whether Japan’s terms of trade will under any circumstances be more favorable than they were in the 1920s and 1930.”
Hersey examined the improvements of the Japanese standard of living before the war. Economists had been awed by a surge of retained imports—79 percent higher in 1936 and 86 percent higher in 1938 compared with 1930—but the benefit to ordinary Japanese families was somewhat illusory. Yen devaluation, worsening terms of trade, and a massive switch to importing and stockpiling of industrial and strategic goods left the rise of retained imports for the benefit of the public at only 14 percent, barely more than population growth of 9 and 12 percent respectively since 1930. Yet the Japanese standard of living had undeniably improved, by about 10 percent per capita. Food consumption per capita was thought to be unchanged; the rising population was fed from rising domestic farm output through intensive fertilization. Gains in nonfood goods and services ranged from 20 percent to more than 30 percent per capita. As with food, the gains were mostly achieved by surges in production from domestic resources, notably chemicals, electrical energy, and paper, and by the effect of rayon pulp (10 percent of textiles cost) substituting for raw cotton (50 percent of textile cost). The experience implied that if postwar Japan could import consumer needs for its populace at the 1930 rate in real terms per capita, reduction of the standard of living would be tolerable, although disappointing for a population used to improving conditions.5
For his “highly tentative” postwar models of trade and living standards Hersey adopted the hypothetical year “1950” to represent a date a few years after the war when physical reconstruction would be largely completed, production of most domestic-sourced goods recovered, and crop yields normal. Population growth was a crucial assumption. Japan’s population had risen steadily at about 1 million per year, from 64.4 million in 1930 to 72 million in 1938. Expecting continuation of that rate, Hersey expected a population increase to 81 or 82 million in “1950,” after adjusting for war casualties and repatriation of Japanese émigrés from Asia.6 For a country that historically found difficulty in feeding itself, millions of extra mouths would intensify the dilemma of maintaining living standards in the face of weakened exports.
Three adjustments have been made here to adapt Hersey’s data from “1950” to represent Japan in, say, 1942, under a freeze but not at war with the Allies. First, the population differences between the periods of seven to eight million people are neutralized by converting trade to per capita values. Second, yen are converted to dollars at appropriate exchange rates. Third, his eight commodity groups are simplified into two: consumer commodities and other.
Japan’s postwar future was clouded by an anticipated vicious cycle of trade: uncertain markets, adverse prices, and technological changes (notably the substitution of nylon, reducing raw silk exports by an assumed 50 percent)7 resulting in a shortage of hard currency to buy raw materials for factories that produced for export. The uncertainties were profound. Rather than guess at world appetite for Japan’s specialized goods, Hersey found it easier and surer to calculate imports essential for survival of an impoverished populace. He therefore set imports as the independent variable and assumed two levels of “retained” and other imports. He then “reverse engineered” his models to determine the exports necessary to fund the purchasing abroad. Japan’s exporting capability became the dependent variable.
Hersey developed two scenarios of the Japanese standard of living in “1950” by arbitrarily assuming two levels of nutrition, expressed as daily calories per person, which set an upper limit on non-food imports. Case A assumed the 2,250 calories prevailing in 1930, which had not increased much if any in the following ten years. Assuming, however, that Japan’s capacity to harvest crops and fish had topped out by 1941, a larger share of its limited postwar earnings would necessarily have to pay for imported food, fertilizer, and fishing boat fuel. Imports of materials for clothing, shelter, and infrastructure would have to be severely constrained by government priority rules, leaving little or nothing for other consumer goods such as foodstuff varieties. The procedure resulted in reduced postwar living standards of 25 to 33 percent depending on the details assumed.8
Case B envisioned a horrendous outcome for the Japanese people because of an exporting capacity so enfeebled that not even basic nourishment and health could be maintained. Hersey arbitrarily assumed a 20 percent reduction in nutrition below Case A, to 1,800 calories per person per day. Food and fertilizer needs would overwhelm other import priorities. Only minor imports could be financed for other consumer needs and urgent infrastructure. Retained imports per capita would slump 67 percent below 1930.9
Hersey also calculated terms of trade for 1936, the last peacetime year and a “worst case” year for Japan. Raw silk prices had fallen disastrously. Textiles and other wares were restricted by U.S. tariffs and quotas and by British imperial preference. Although exports of chemicals and mechanical products—bicycles, sewing machines, industrial machinery—held up better, Japan mostly sold them to the empire for yen. Meanwhile, prices of imported commodities were propped up by dominant suppliers such as U.S. government supports of cotton. (Strategic metals and fuels remained relatively cheap but were minor items of import before the war in China.) Relative to a 1930 index of 100, export prices in 1936 dropped to 95 whereas import prices soared to 129. Japan then had to sell 33 percent more goods to buy the same basket of imports. Because Hersey assumed the value of other imports as equal to Japan’s residual buying power after meeting food and fertilizer needs, the large difference between 1930 and 1936 terms of trade dictated a necessity of much larger exports, but did not alter his Case A and B models of “1950.” For example, Case A, calibrated to the 1936 terms of trade, required 55 percent more exports versus the 1930 terms of trade model, $1.62 billion versus $1.05 billion, to achieve the same standard of living established by Hersey’s assumptions. (Hersey did not itemize exports in detail as he did for imports because of extreme uncertainty over the products Japan could sell, and to which countries, after the war.) Despite Japanese censorship of data from 1936 onward, Hersey calculated a somewhat improved 1938 terms of trade index but did not rely on it because distortions caused by the war in China, commodity stockpiling, and a renewed U.S. depression that lowered the cost of Japanese imports rendered it irrelevant to his vision of “1950.”10