The first months of 1941 marked a turning point in the will of the United States to advance from a patchwork of export restrictions to full-blooded financial warfare against Japan. A spurt of work from January through March established the nature of the financial punishment it would mete out when the time came. Above all, that the levers of control would be manipulated not by learned economists and banking technicians, nor by moderate diplomats seeking bargaining leverage, but by truculent lawyers determined to show Japan no mercy.
The vigorous thrust for freezing Japan’s dollars emerged abruptly from a new corner of the soft-line State Department. On 31 January 1941 Roosevelt appointed Dean Acheson, a forty-eight-year-old attorney and Democratic party activist, as an assistant secretary of state.1 Acheson, son of an Episcopal minister and a well-to-do mother, had graduated from Harvard Law School, been mentored by Supreme Court Justices Felix Frankfurter and Louis Brandeis, and worked his way up in a prominent Washington law firm. In 1933 Roosevelt appointed him undersecretary of the Treasury. However, he earned the displeasure of FDR, and of Morgenthau (then heading the Farm Credit Administration), by objecting to the president’s anti-Depression plan to buy gold in order to inflate the currency and raise farm prices. He resigned after six months on the job and returned to private practice. Roosevelt then named Morgenthau to head the Treasury in place of the ailing secretary, William Woodin.
Dean Acheson, emotionally and philosophically a Europhile, was known in Washington circles as ardently anti-Axis and a friend of Britain. In 1940 he rendered legal services to the administration on a deal to exchange overage U.S. destroyers for naval base sites in British Western Hemisphere colonies. Although in 1934 Acheson had coveted the post Morgenthau now held, they respected each other and held the same views on foreign friends and enemies. Morgenthau borrowed him to work with Edward H. Foley Jr., the Treasury’s general counsel, on drafting the Lend-Lease bill to aid Britain. Acheson’s appointment to the State Department was ostensibly a reward from FDR.
Acheson typified the consummate opportunist, a midlevel policy official stretching out to create and control the nation’s most potent weapon of foreign policy save for actual war, but he found that State Department headquarters operated with a relaxed prewar mindset. His job, “coordination of commercial and economic questions with questions of major policy,” was a hodgepodge of settling minor treaties and other trivia. (“Coordination of financial questions” was the duty of another assistant secretary, Adolf A. Berle Jr.) But Acheson’s domain included one plum: supervision of the State Department’s Division of Controls, the division under Joseph C. Green that was established by the Neutrality Act of 1935. From July 1940 onward it had approved or rejected export licenses in cooperation with the ECA. “Everyone in Washington ‘wanted in’ on economic warfare,” Acheson wrote in his memoirs. He soon allied himself with hardliners in other agencies, especially Morgenthau and Harold Ickes, the secretary of the interior.2
Dean Acheson understood that the president had been maneuvering around the State Department’s resistance to economic coercion of Japan. Roosevelt had personally designated by executive orders the commodities subject to export control. He had assigned the ECA as a “military matter” to Colonel Maxwell, who reported directly to the White House, and he later appointed his personal aide, Harry Hopkins, as administrator of Lend-Lease. Roosevelt undoubtedly wanted an energetic anti-Axis presence in the Department of State. As a former Treasury official, furthermore, Acheson bore unique credentials for launching financial warfare.
Acheson had hardly reported to work on 1 February, in the drafty Old Executive Office Building next to the White House, when he took up the notion of freezing the assets of Germany and Italy and possibly Japan. On the sixth he attended a meeting in Maxwell’s office to learn from the U.S. military attaché, recently returned from London, about the techniques of Britain’s Ministry of Economic Warfare. Thomas Hewes of the ECA briefed Acheson on his Planning Division’s goals.3
Morgenthau had rebounded from Roosevelt’s silent rejection at the end of 1940 of his plea for a freeze to fight Axis subversion in Latin America. He took heart that Berle and Herbert Feis disagreed with Hull’s intransigence, and probably from Acheson’s appearance on the scene. On 9 February he tested the issue with Roosevelt again and hinted to reporters that some kind of freeze was imminent. In retaliation, Hull, although conceding the logic of curbing espionage and subversion, told a private press gathering on the thirteenth that freezing was a terrible idea, because Germany and Japan would take revenge against the much larger U.S. investments in their countries. Acheson, and probably others in the State Department, then consulted Francis M. (Frank) Shea, assistant attorney general, about a compromise that might be acceptable to the bickering parties. By 14 February their work emerged as a three-point memo that Hull sent to Roosevelt in advance of a cabinet meeting later in the day. Hull conceded that foreign entities should register their U.S. assets with the government and report regularly any transactions. But, Hull grumbled, a general freezing of Axis assets would invite retaliation and complicate relations with the neutral Swiss and Russians. He proposed instead a “mobility” plan, a selective freezing of assets of subversive companies and persons the attorney general would identify. The Treasury would administer the selective freezing orders.
Morgenthau called a staff meeting with White, Foley, and others. Registration, reporting, and a freeze administered by the Treasury were, of course, acceptable as he had recommended them all along, as was freezing of entire countries or regions, but not Hull’s “ad hoc” freezings of certain companies. The suspects would immediately spirit away their money—Axis funds were already fleeing to South America—or switch them to other owners, so their reports would become obsolete overnight. Legal probes would unjustly embarrass some companies. Foley ridiculed the FBI as “[having] the G-man put on his derby and black coat and walk in and say, ‘Any subversive activities today, boys?’” Morgenthau felt dismayed that Acheson backed such a plan without consulting the Treasury. Perhaps, his aides suggested, Acheson was inexperienced, or didn’t understand it, or had been taken in by his State Department colleagues.
Morgenthau phoned Attorney General Robert H. Jackson, who knew nothing about the matter. Frank Shea hadn’t told his boss; his scheming exemplified the culture of opportunism, a grasping for power over economic war, that was blossoming all over Washington. Jackson mused, “Well, you can tell these fellows a hundred times that you don’t want the jurisdiction of your department extended but they will try to do it.” He wanted no part of playing detective in a “witch hunt,” putting a knife into Hull’s ad hoc scheme. But Shea, overreaching even further, had also conjured up an extravagant executive order to meld together every aspect of economic defense, domestic and foreign, under a so-called Civilian Economic Defense Committee. This gambit also went nowhere.4
Morgenthau grew anxious as to who might administer the ECA if a reorganization occurred. Shea had shown Bernard Bernstein, an assistant general counsel of the Treasury, two draft executive orders. His own version awarded the Treasury an overlordship of export control—subject to State Department veto. Another, by Dean Acheson, awarded the State Department jurisdiction over the ECA (or at least its budget, spending and employment). It was a transparent ploy by which Acheson, the supervisor of State’s Division of Controls, would almost certainly take command of the ECA. Acheson’s first foray into economic and financial warfare was a clumsy power grab. General Maxwell continued to report directly to President Roosevelt.5
After that day’s confusion the ball was in Acheson’s court. He phoned the next day to arrange a Treasury-State conference in his office. On 17 February the team of Foley, White, Bernstein, and John W. Pehle, a special assistant to Morgenthau, arrived to educate Acheson on the realities of asset control. First, they apologized for a misunderstanding: “freezing” meant control and licensing of money transactions, not an absolute lock-up of funds. They disparaged Hull’s “Gestapo” nightmare of hobbling and prosecuting individuals and companies. Only freezing of whole countries was viable. Berle ventured that State was amenable to freezing Europe but not Japan. Acheson, who said he was impressed by the “very worthwhile and helpful” discussion, had learned that the road to power ran through financial warfare, not pumping up his thin role in export controls. Afterward Foley and Pehle consulted Norman Davis, a distinguished diplomat whom Hull respected. Davis felt happy that Acheson was now a key player, telling Hull that Acheson would work out a friendly arrangement with the Treasury.6
Roosevelt, feeling ready for a plan to freeze Axis assets at the right moment, hunted for a way to solve the impasse in his cabinet. On 26 February 1941 he sent a memorandum to Hull, Morgenthau, and Jackson stressing the urgent need to control foreign assets:
I am sure that this is a matter that needs to be prosecuted at once, and, after considering the various proposals, it seems to me the most satisfactory one is to have a Committee composed of the Secretary of State, the Secretary of the Treasury, and the Attorney General to approve of any actions that are to be taken by the Treasury. It is clear to me that all three Departments are vitally involved, and I should like, therefore, to have the approval of all the Departments prior to any recommendation for action whenever a specific proposal is submitted for approval. Inasmauch as the Treasury is responsible for the actual issuance of the orders, I believe it would be advisable to have the Secretary of the Committee chosen from the Treasury staff.
The chronicler of the Morgenthau diaries remarked,” The solution was typically Rooseveltian. The structure of the committee gave special weight to Treasury influence, but the State Department retained a full veto.”
Morgenthau did not react, other than to reaffirm his disinterest in nonfinancial options such as tighter export licensing of Japan. “I wouldn’t touch anything other than the freezing thing,” he said.7 In March 1941 he and his aides were distracted from Pacific matters by the urgent task of spearheading aid to Great Britain. After reelection to a third term, Roosevelt disclosed his plans for a Lend-Lease Act, to be drafted by the Treasury. Morgenthau, Foley, and other lawyers drafted it and testified before House and Senate committees. Congress passed and FDR signed the act, HR 1776, on 11 March. The secretary and his senior staff next prepared and lobbied for a $7 billion Lend-Lease appropriation. In those weeks and afterward Morgenthau conferred frequently with British officials, and in May he met with John Maynard Keynes representing His Majesty’s Treasury.8 The lobbying for financial sanctions against Japan ceased temporarily despite indignation over the secret war chest and evidence that it was fleeing day by day. The distraction left the initiative for financial warfare in the hands of the traditionally peaceable State Department.
One diplomat, Ambassador Joseph Grew, was trying to stir up anger in Washington about problems of American businesses in Japan. Executives of the few remaining U.S. investors operating there, including General Motors, Ford Motor, Otis Elevator, and oil companies, beseeched him for help against Japanese officials who were conducting intrusive inspections and forbidding remittances of money to the United States, harbingers of a coming takeover if not outright expropriation. On 10 March Grew repeated an earlier appeal to prohibit Japan from withdrawing dollars from the United States unless it granted U.S. firms a quid pro quo. Herbert Feis, the department’s adviser on international economic affairs, thought that conditional financial blocking to force reciprocity “would be a good prelude to hermetic isolation” of Japan. Other department officials, however, admonished Grew that U.S. policy shunned both general exchange controls and financial discrimination against nations, even Axis countries and others that blocked U.S. assets. Any freezing or blocking actions would originate from the Treasury and would likely be semitolerant, for example, allowing Japan to repatriate dollar revenues earned after a freezing order.9 The State Department did not care to neuter Japan’s dollars just because of the pains of a few U.S. corporate branches.
In March 1941 the cautious State Department designed the definitive financial weapon for future action. Carlton Savage, a veteran department attorney, drafted an executive order to impose severe freezing and exchange control exclusively on Japan. Savage was a counsel in the Office of the Historical Adviser (reorganized in 1938 as the Office of the Editor of Treaties), which advised the secretary on historical and constitutional questions. He had achieved prominence through coauthoring best-selling volumes of the diplomatic papers of the Woodrow Wilson administration concerning U.S. entry into World War I titled Policy of the United States Toward Maritime Commerce in War and had prepared testimony for Congress on the neutrality acts.10 As a historian and lawyer, Savage was certainly familiar with the Trading with the Enemy Act as applied in World War I, in Roosevelt’s banking and gold actions at the beginning of the New Deal and, more recently, in freezing assets of occupied countries. He was, moreover, a trusted aide to Hull.
On 24 March 1941 Savage delivered the draft order, nominally addressed to Sumner Welles. It presumed an invocation of Section 5(b) of the TWEA because of a continuing period of national emergency to be declared by the president. A presidential order would bar Japan from unauthorized foreign exchange dealings, export or withdrawal of gold, silver, currency, securities, or other documents of ownership, and transactions intended to evade the order. It defined Japanese assets as those which Japanese governments, companies or individuals held an interest, then or at any time previously.11 Implementation was to be vested in the secretary of the treasury, who in accordance with the 1917 act would issue regulations, rulings, and licenses.
In a highly significant departure from all invocations of the TWEA, detailed administration of the freeze was to lie in the hands of a cabinet-level policy-making Foreign Exchange and Foreign Owned Property Committee consisting of the secretaries of the State and Treasury Departments and the attorney general. The committee could prohibit all Japanese transactions, even those wholly within the United States, and thereby nail Japan’s money and assets precisely in place. It could demand reports, even from non-Japanese entities that did business with Japan. But the decisions of Morgenthau were to be automatically deemed committee policy, and he could appoint and supervise a committee staff, if any were needed. This scheme of a freewheeling committee to control the reins, despite the powers reserved to the secretary of the Treasury, was to have fateful consequences for Japan, the United States and the world. It was odd that an attorney of the reluctant Department of State prepared the order for actions that were quintessentially a function of the Treasury Department. Acheson, seven weeks on the job, was almost certainly the motivator; no other officer of the State Department had shown any taste for financial warfare, nor were any as qualified in finance as Acheson. Although the committee structure ensured a management seat at the table for Hull, his position was to be distinctly junior.12
But no action followed. Savage’s draft slumbered on the shelf while Acheson and the Treasury staff were busy lawyering for Lend-Lease. In April Acheson prodded Morgenthau to lobby the president again to launch the “powerful weapon” of freezing, but Morgenthau was reluctant to try once more.13 Yet Acheson, a senior officer of the State Department, had advocated all-out financial war against Japan and had set forth who would control the campaign—a team, most likely including himself as Hull’s alter ego and the reigning financial expert on the three-man committee.
If nature abhors a vacuum, so do bureaucracies. Into the planning vacuum resulting from the tug-of-war in the cabinet slipped another group of opportunists at General Maxwell’s Export Control Administration. Not content with studies that urged embargoes of trade with Japan (chapters 10 through 13), even of nonstrategic U.S. exports and of imports from Japan, the ECA delved into the more potent strategy of financial attack. As early as 10 January 1941 Chandler Morse of the ECA Projects Section, always an advocate of energetic action, recommended to Thomas Hewes, his chief, educating Maxwell by conducting studies of financial sanctions. These included refusal to buy gold, restriction of financial assets, and other steps to “disorganize the financial system” of enemies.14 Another colleague, Eugene Staley, advocated tracking of foreign transactions and licensing controls of unfriendly countries’ funds balances and movements, citing the shopworn rationale of thwarting spies and saboteurs. But another study for the section by Hal Lary of Japan’s vulnerability to financial pressure was labeled unsatisfactory and returned to him for reworking.15
On 31 March, during a meeting with Noel Hall, the British Minister of Economic Warfare who was visiting Washington, Hewes complained that the U.S. arsenal lacked financial weapons. His Projects Section had formed a Financial Committee to look into sequestering enemy property, and he hoped to spawn subcommittees to investigate financial actions against various regions and countries to educate General Maxwell. He had solicited the Commerce Department for expertise on direct investments, and the Federal Reserve was cooperating with him. But as dollar controls were the Treasury’s domain, Hewes tried to enlist Bernard Bernstein, Morgenthau’s assistant general counsel, into the embryonic committee. Hewes stressed that a Treasury expert could take charge of all the financial investigations.16 A reply from Bernstein has not been located but it is clear that he spurned the invitation. Morgenthau was certainly not going to subordinate his department’s prerogatives to a novice bureaucracy.
Hewes, undeterred, pressed to advance the ECA’s role from proposing commodity embargoes into conducting studies of more virile strains of economic warfare. On 8 April, echoing the interagency approach of the “vulnerability” teams studying strategic commodities, he proposed to launch four analytical task forces covering all foreign nations of interest. The first, the vulnerability teams, were already finishing their work on Japan. The second team, just getting organized, would address international loans and insurance, matters largely inapplicable to Japan, and management of alien property. A third team, not yet assigned, would consider financial help for friendly powers and the freezing of funds. The fourth, when all else was completed, would investigate foreign dollar holdings. In the mindset of a bureau charged with limiting exports, the ultimate power of trapping enemy dollars ranked as the final step. As presciently but prematurely remarked by Warren S. Hunsberger, a junior ECA staff member and later the State Department’s chief of research on the Far East, “The United States is now using its financial power in the international political and economic struggle. Whether or not one calls the use of financial weapons in international competition warfare, these weapons are powerful, and this country has begun their use.”17
However, the ECA’s dream of sallying into financial combat was soon to be doomed. The State Department was the agency properly charged with conducting foreign affairs, and the Treasury Department was the agency with the knowledge and authority to control funds under the Trading with the Enemy Act if and when the president invoked it.