The judgment of history is that Japan attacked Pearl Harbor and launched the Pacific War to thwart American resistance to its designs of imperial conquest in East Asia. U.S. opposition included diplomatic pressure, military preparations, and, above all, economic sanctions. Historians have emphasized the de facto embargo of oil as the most deadly sanction because Japan’s navy and army depended on U.S. exports of fuel, a situation the military leaders effectively in control of Japanese policies perceived as an intolerable weakness. But the U.S. action of 26 July 1941 was not just a trade embargo. It was an emasculation of Japan’s laboriously accumulated international money reserves, imposed by President Franklin D. Roosevelt by invoking an obscure 1917 law, the Trading with the Enemy Act.
I propose that the most devastating American action against Japan was the financial freeze. Money mattered. In 1941 war had congealed the financial systems of other great powers, rendering their currencies inconvertible. Abroad, the yen itself was illiquid, that is, not acceptable for payments outside the Japanese Empire. The United States stood in the extraordinary position of controlling nearly all the world’s negotiable money resources. It applied its extraordinary power to “bankrupt” Japan.
Bankruptcy is a condition imposed by a court of law to compel settlement of debts. A bankrupt person or company that is judged insolvent lacks sufficient assets to pay. A sovereign nation, however, is not subject to a court’s jurisdiction, and in any case, on 25 July 1941, Japan held ample liquid assets—dollars in U.S. banks and gold bars in Tokyo vaults—to purchase vital imports and service its relatively small international debts. Japan was not insolvent, then or later. On 26 July, however, a stroke of the pen rendered it illiquid. The freeze isolated Japan economically from the outside world, voiding its monetary assets, both sums on hand or obtainable in the future. Consent to buy strategic goods in the United States, or in any country that exported for dollars, was withheld by the United States in conjunction with parallel freezes by the British and Dutch empires. Japan’s commercial sphere shriveled to the “yen bloc” of its colonies and conquered regions in East Asia.
Midlevel officials of the U.S. government applied the monetary freeze with devastating effect. Financial strangulation was not the intended policy of Roosevelt or his cabinet secretaries or Congress. It was a weapon honed by staff aides who were thrust suddenly into positions of power due to their expertise. They opportunistically seized the reins to drive a U.S. policy “designed to bring Japan to its senses, not its knees” toward a warlike confrontation.1
“Bankrupt” and “impoverished” are terms often used interchangeably. Japan’s international illiquidity would, beyond doubt, have impoverished the nation within a couple of years. The U.S. freeze presented Japan with three choices: suffer economic impoverishment, accede to American demands to yield its territorial conquests, or go to war against the United States and its allies. Unfortunately for Japan, it chose the latter.
Rarely before had illiquidity—equivalent to bankruptcy in foreign affairs—presented such a Hobson’s choice to a powerful nation. Nor is it likely to happen again. The world of the twenty-first century is awash in liquid funds that migrate freely across borders, beyond the command of any nation seeking to control the financial destiny of another.