The United States freezes Japanese assets

On Saturday 26 July 1941 President Franklin Delano Roosevelt signed Executive Order No. 8832. The document was short: it added Japan and China to the list of countries covered by the executive order of April 1940 under which the United States had frozen the assets of Germany, Italy and the rest of continental Europe in June. From that moment every financial transaction – every transfer, every purchase and every commercial exchange – involving the Japanese government or a Japanese firm or national required a licence from the Treasury Department. The move had been announced the previous evening, 25 July, in a statement issued at Poughkeepsie, near the President’s family home at Hyde Park, where he was staying. The statement explained that the order brought under government control “all financial and import and export trade transactions” in which Japanese interests were involved, and that violations would carry criminal penalties.

The same day Britain froze Japanese assets throughout the Empire and denounced its commercial treaties with Japan, and within a few days the Dominions and the Netherlands East Indies did the same. Japan, which bought most of its oil, as well as many other raw materials, in the United States and in the European colonies in Asia, suddenly found itself cut off from Western markets and money.

It is often written that Roosevelt issued the order “in response to the Japanese occupation of French Indochina”. The sequence, however, was slightly different. The freeze came after the French government in Vichy had agreed on 23 July to the entry of Japanese troops into the southern part of the colony, but before they had landed there. The first units did not go ashore until 28 July. Roosevelt was therefore responding to the announced occupation and to the agreement that made it possible, not to the landing itself.

The road to the decision

Tension had been building for a year. In the summer of 1940, after the fall of France, the United States had placed exports of oil and scrap metal under licence, and on 31 July 1940 it banned the sale of aviation fuel outside the Western Hemisphere. In September, when Japanese troops entered Tonkin, Washington announced an embargo on iron and steel scrap, and Japan signed the Tripartite Pact with Germany and Italy. Oil, however, was not stopped. The American government knew that the Japanese fleet and economy depended on it, and feared that cutting it off would push Tokyo into seizing the oilfields of the Netherlands East Indies.

Roosevelt said so openly on 24 July 1941, when he received civil defence volunteers at the White House. People on the East Coast who had heard appeals to save petrol were asking why thousands of tons of fuel were still being shipped to Japan from Los Angeles. The President explained that the aim of American policy was to prevent a war in the South Pacific, from which America and Britain obtained rubber and tin, as well as food from Australia. “If we had cut the oil off, they probably would have gone down to the Netherlands East Indies a year ago, and you would have had a war,” he said. This policy, he added, had worked for two years.

In the summer of 1941 it stopped working. After the German invasion of the Soviet Union, Japan’s leaders decided at a conference attended by Emperor Hirohito on 2 July that Japan would not for the time being attack the USSR but would instead occupy southern Indochina, even at the risk of war with Britain and the United States. The Americans, who were reading Japanese diplomatic traffic, learned of this course within a few days. On 14 July Tokyo presented its demands to Vichy, and Prime Minister Fumimaro Konoe, who on 18 July formed a new cabinet without Yōsuke Matsuoka, did not change direction. When Vichy gave way on 23 July, the American–Japanese talks, conducted since the spring by Secretary of State Cordell Hull with Ambassador Kichisaburō Nomura, stalled. On 24 July the Acting Secretary of State, Sumner Welles, declared that Japan had no justification for its step, since Indochina was threatened by no one, and that what it wanted were bases for further expansion. On the same day Roosevelt proposed to Nomura the neutralisation of Indochina: if Japan withdrew its troops, the powers would guarantee the colony’s inviolability and equal access to its rice and raw materials. Japan replied only on 6 August, with a proposal that made the withdrawal of its troops from Indochina conditional on the end of the war in China. By then the decisions had already been taken.

The order and its scope

The freeze covered Japanese bank deposits, securities, shareholdings and claims in the United States. The financial press of the day estimated them at about $138 million. More important than the sum itself was the fact that without a licence the Japanese could neither pay for any goods bought in America nor sell anything to obtain dollars. Trade with Japan, for which the United States was its most important partner, thus passed into the hands of officials in Washington.

China, too, was included. The White House stressed that it had done so “at the specific request of Generalissimo Chiang Kai-shek” and in order to help the Chinese government. Japan controlled Shanghai and other financial centres on the Chinese coast and could use Chinese banks and firms to get round the blockade. Freezing Chinese assets was meant to prevent this, while licences for the government in Chongqing were granted in a way that would strengthen its foreign trade and currency.

On the same day, 26 July, the War Department created a new command, United States Army Forces in the Far East (USAFFE), with its headquarters in Manila. Acting on a request made by Secretary of War Henry Stimson on 25 July, Roosevelt called the armed forces of the Commonwealth of the Philippines into the service of the United States and recalled Douglas MacArthur to active duty as commander of USAFFE. The former Chief of Staff of the US Army had since 1935 been military adviser to the Philippine government and a field marshal of the Philippine Army. He returned to the US Army as a major general and the next day was promoted to lieutenant general. The decision showed that Washington was reckoning with war and intended to defend the archipelago, which earlier American war plans had regarded as very difficult to hold.

London, the Dominions and Batavia

Britain acted in concert with Washington. On 26 July Winston Churchill’s government froze Japanese assets and denounced the Anglo-Japanese Treaty of Commerce and Navigation of 1911, together with Japan’s trade agreements with India of 1934 and with Burma of 1937. Canada, Australia, New Zealand and South Africa took similar steps. For Japan this meant losing access to the markets of the Empire, including rubber, tin and iron ore from Malaya and jute and cotton from India, on which Japanese industry largely relied.

The authorities of the Netherlands East Indies in Batavia froze Japanese assets a few days later and placed all trade with Japan under licence. In practice this meant suspending the oil agreement that the Dutch had concluded with the Japanese in the autumn of 1940 after lengthy negotiations, which had assured Japan of part of the output of the oilfields of Sumatra and Borneo. The Dutch knew that their oil-rich colony might become the first target of a Japanese attack, but they did not want to be left alone outside a common front with Washington and London. From then on Japanese propaganda spoke more and more often of “ABCD encirclement”, from the initial letters of America, Britain, China and the Dutch.

Tokyo responded on 28 July by freezing American, British and Dutch assets in Japan. The New York financial press estimated American investments in Japan at about $229 million, although a large part of them had in any case long been immobilised by Japanese exchange controls. As early as 27 July the Finance Minister, Masatsune Ogura, declared that Japan had expected the American and British measures, but that it must now all the more keep to the path it had chosen. On 31 July Japan also stopped exports to Panama, in response to the closure of the Panama Canal to Japanese ships, which the Americans had justified in mid-July on the grounds of repair work.

From licences to embargo

The order of 26 July did not prohibit trade with Japan. It gave the government a tool with which it could ration that trade at will. Roosevelt initially wanted to keep the Japanese guessing: he intended to issue licences for oil in quantities that would not exceed the previous level, and not to sell them fuel suitable for aircraft. This was how it was set out on 1 August, when the American export control administration banned the export of aviation fuel and certain lubricating oils outside the Western Hemisphere, the British Empire and countries defending themselves against aggression, while exports of other petroleum products were to be licensed within pre-war quantities.

In practice, no more American oil ever reached Japan. Every transaction had to be paid for in dollars, and releasing them from the frozen accounts required the consent of an interdepartmental foreign funds control committee. It included representatives of the State, Treasury and Justice Departments, and the leading role in it was played by the Assistant Secretary of State for Economic Affairs, Dean Acheson, an advocate of a hard line, as was the Secretary of the Treasury, Henry Morgenthau. The committee piled up formalities, demanded that the Japanese pay in gold or with money held outside the United States, and in the end did not release funds for a single oil shipment. Export licences existed on paper, but without money they were useless. Some historians, among them Edward S. Miller, author of a study of America’s financial war against Japan, believe that Roosevelt became fully aware of this only at the beginning of September, after returning from his meeting with Churchill in the Atlantic. He then concluded that backing away from what had become a de facto embargo would look like weakness, and changed nothing.

The difficulties began at once. Japanese ships on their way to America did not know whether they would be allowed to unload their cargo and buy fuel for the return voyage. Ambassador Nomura raised the question with Welles as early as 28 July, and in the following days the embassy kept asking about the cargo of the liner Tatsuta Maru, which had arrived in San Francisco with raw silk. The Americans agreed that ships arriving by 2 August could leave with their cargo, and each payment was considered separately. Japanese shipping lines soon suspended their sailings to the United States, and the government, in order to conserve stocks for the military, halted the processing of raw silk – overwhelmingly Japanese – in industries not working for defence.

The yen and Japanese bonds

The freeze was immediately felt on the financial markets. The yen, held by the Bank of Japan at a fixed rate against the dollar, was quoted in New York at about 23.5 cents. The last quotations dated from 25 July; after that trading in the yen in New York was suspended, because without a licence it could be neither bought nor sold. The New York Stock Exchange, which at the time also opened on Saturdays, took the announcement of the freeze itself calmly. On Monday 28 July, once investors had assessed its consequences, Japanese bonds fell sharply, both on Wall Street and in London. These were dollar loans raised by the Japanese government, cities and companies in the 1920s, of which, according to contemporary estimates, about $105 million remained in the hands of American investors. Investors feared that Japan, deprived of access to dollars, would stop servicing them. Over the following days prices partly recovered. The Japanese financial commissioner in New York, Tsutomu Nishiyama, gave assurances that the government intended to continue servicing the debt in full, but it was clear that this depended on the Americans agreeing to release the frozen funds.

It is sometimes said that the yen “became worthless” and that Japanese dollar bonds fell on Wall Street to 20–30 per cent of their face value. This is an exaggeration. The yen did not lose its value; it merely ceased to be convertible on the American market. Some Japanese bonds, especially municipal and corporate issues, had long been quoted well below par, but contemporary market reports speak of a sharp fall and a partial rebound, not of the whole market in Japanese securities collapsing to a fifth of its value.

The Sukumo Bay accusation

On 31 July the Japanese Navy Ministry accused the United States of violating Japanese territorial waters in Sukumo Bay off the coast of the island of Shikoku. According to the statement, American vessels had entered the bay and then fled. The Japanese produced no evidence for this, and the available American sources contain no trace of any such incident. The choice of location was no accident. The bay at the town of Sukumo in Kōchi Prefecture was one of the anchorages where the Japanese Combined Fleet exercised. The accusation fitted into a press campaign that portrayed Japan as a country hemmed in by hostile powers.

On the same day Japanese bombs fell right beside the American gunboat Tutuila, which was lying at anchor on the Yangtze at Chongqing, and damaged her. Tokyo quickly apologised, and Welles considered the matter closed. Washington did not want a minor incident to overshadow the dispute over fundamental issues. The most important conversation of 31 July, however, took place in the Imperial Palace. According to the diary of the Lord Keeper of the Privy Seal, Kōichi Kido, the Chief of the Navy General Staff, Admiral Osami Nagano, reported to the Emperor that oil stocks would last about two years, or a year and a half in the event of war, and that since oil could not be obtained in any other way, it would be better to strike as soon as possible, while there was still something to strike with.

Place in the war

The freezing of assets on 26 July 1941 was one of the turning points on the road to the Pacific War. Japan imported about 80 per cent of its oil from the United States and most of the rest from the Netherlands East Indies. Once both sources were cut off, its fleet and industry began living off stocks that dwindled month by month. For the Japanese high command, and above all the navy, time became the decisive argument: either an agreement with Washington that would restore supplies, or a war for the oilfields of Borneo and Sumatra before the fuel ran out.

Washington hoped that economic pressure would stop Japan from advancing further south and perhaps induce it to make concessions in China. The opposite happened. The Japanese, who spoke of “ABCD encirclement”, saw the embargo as proof that the West wanted to strangle them. In August 1941 Roosevelt and Churchill met off the coast of Newfoundland and proclaimed the Atlantic Charter, and Washington warned Tokyo against further steps in South-East Asia. Konoe sought a personal meeting with Roosevelt, but it never took place. On 6 September a conference in the Emperor’s presence decided that Japan would prepare for war and that, if by the beginning of October the negotiations offered no prospect of success, it would resolve on war with America, Britain and the Netherlands. In October Konoe resigned and General Hideki Tōjō became Prime Minister. Hull’s talks with Nomura went on until the end of November, but the United States would not agree to resume supplies without a Japanese withdrawal from Indochina and China, and Japan was unwilling to accept this.

The freeze on assets and the oil embargo were never lifted. On 7 December 1941 Japanese carrier aircraft attacked Pearl Harbor, and within the same twenty-four hours Japanese forces also struck Malaya and the Philippines, where MacArthur was in command. In mid-December the Japanese landed on Borneo, and in January and February 1942 they seized the oilfields of the Netherlands East Indies, which had in essence been at stake since July 1941.