Reparations - Complications of cold war compensation

When American, British, and Soviet leaders began to grapple with the problem of war debts and reparations resulting from World War II, they had the benefit of the World War I experience. Instead of granting simple war loans, the U.S. Congress authorized the president in March 1941 to enable any country whose defense he defined as vital to the United States to receive arms, other equipment, and matériel "by sale, transfer, exchange or lease." Lend-lease aid to Britain, China, and the Soviet Union made possible a clear separation of wartime economic aid, reparations, and reconstruction credits. The Allies created a reparations commission at the Yalta Conference of 4–11 February 1945. Under Soviet pressure, the United States and Britain agreed that a figure of $20 billion would be the starting point for discussions about Germany's new reparations obligation. The Soviet Union would receive half of that amount. But at the Potsdam Conference in July 1945, President Harry S. Truman opposed Soviet efforts to collect reparations from current output until Germany exported enough to pay for imports to feed its labor force and fuel its industry. He was following the advice of Secretary of State James F. Byrnes, who was acting in accordance with his understanding of the negative impact of the reparations dispute on European reconstruction and world economic and social stabilization in the 1920s, but was unaware that only U.S. loans had made possible German reparations payments.

By the time of the Potsdam Conference, Germany's unconditional surrender in May 1945 had left the United States, Britain, France, and the Soviet Union with separate zones of occupation in the defeated nation. Even before Potsdam, Soviet occupation forces had begun to dismantle and transport whole German industrial plants to Soviet territory. The Soviets also designated special factories to produce exclusively for them. Moreover, Moscow kept the services of four million German prisoners of war and demanded forced labor from those living in its occupation zone. In general terms, the Soviet Union acted after World War II much as France had after World War I. It wished to reconstruct its own economy and to retard the reconstruction of Germany, both to stabilize itself and to prevent the stabilization of Germany. A destabilized Germany would remain militarily weak and the Soviet Union would become militarily strong. Moscow saw that large reparations taken quickly would facilitate both these objectives. U.S. leaders already had decided that imposition of large-scale reparations on Germany would retard postwar European economic recovery. During 1946, they concluded that without surplus production, the western zones of Germany would become a vast relief camp dependent on U.S. aid.

Concerns about German postwar economic recovery had not stopped the United States from developing plans and organizations late in World War II for conducting industrial espionage and seizing useful patents in chemicals, machine tools, and other technologically advanced industries in Germany. Operation Petticoat and Operation Paperclip sought to acquire German equipment, scientific research, and technical information of both military and industrial value, not only in hopes of shortening the war against Japan, but also for postwar economic advantage. Britain and France conducted similar operations, no doubt justifying exploitation of German industry, science, and technology as legitimate reparations. Subsequently, in the Harmssen Report of 1947–1951, the city of Bremen's economic minister calculated the total value of the information that the Western Allies secured at $5 billion. Citing this report, Soviet Foreign Minister Vyacheslav Molotov set the final amount of German intellectual reparations, including the Soviet portion, at $10 billion. British, French, and U.S. officials disputed these numbers then and thereafter. Also, defenders of the seizures later would point out that Germany looted French companies, practiced slave labor, expropriated possessions of concentration camp victims, and extracted tribute from the countries it occupied.

Discord between the Allies over reparations contributed to starting the postwar Soviet-American Cold War. Devastated by World War II, the Soviet Union insisted upon major reparations payments from Germany to hasten economic recovery. Consequently, Soviet Premier Joseph Stalin proposed that the Ruhr Valley industries be administered jointly by the Soviet Union and the three Western powers to secure reparations from the Western-controlled portions of Germany. The United States and Britain rejected this proposal, revealing the growing differences on matters of priorities to be observed in European reconstruction. Washington increasingly suspected that the Soviet Union's wish to strip Germany, and to slow European reconstruction, meant it wanted to dominate the balance of power in Europe. This negative view of Soviet intentions seemed to be confirmed by Moscow's refusal to accept the U.S. invitation to participate in the Marshall Plan, which was designed to solve the problem of European reconstruction on a joint Europe-wide basis. After considering the matter, Stalin decided to reject the offer, largely because this would have required the Soviet Union to reveal the secrets of its economic capacity. Furthermore, the Marshall Plan would have meant priority for west European reconstruction over that of the Soviet Union, as well as that the east European countries would be linked economically to western Europe, functioning largely as raw material suppliers.

Once the Soviet Union rejected participation in the Marshall Plan, the logic of its situation was to organize East Germany and other areas of Eastern Europe along lines allowing it to seize resources for its own reconstruction. Between 1947 and 1956, Moscow took large reparations from East Germany and much of Eastern Europe, probably far more than the $10 billion it had demanded at Yalta. Based on its experience with France in the controversy over German reparations following World War I, the United States must have expected that the Soviet Union would fail in its effort to achieve unilateral reconstruction based on reparations forcibly taken. Since France had no choice but to withdraw from the Ruhr in 1923 and accept U.S. conditions for European reconstruction, American leaders believed the Soviet Union would ultimately have to give up its domination of Eastern Europe. But what had worked against France in 1922–1923 did not work against the Soviet Union in the Cold War period. The Soviet Union and France were two dissimilar political economies. Because it engaged in state trading and had long been denied supplies for its industry by the Western industrial states, the Soviet Union was in effect isolated from the major impact of the world market. Unlike France after World War I, it had made its unilateral system of reparations collection in East Germany and much of Eastern Europe a sufficient base for its own reconstruction and for its strategic, political, and economic control of Eastern Europe to the Elbe River.

Acting on the same assumptions that guided its policy toward Germany, the United States did not collect reparations from Japan. But the nations victimized by Japanese aggression in World War II demanded compensation immediately after the conflict ended. In Tokyo, the Far Eastern Commission began discussions on how to meet these demands in the fall of 1945. Early in 1946, President Truman named Edwin W. Pauley as special ambassador, with instructions to conduct a fact-finding mission for recommendations on Japanese payment of reparations. Made public in April 1946, Pauley's plan provided for transferring to the devastated nations of Asia all Japanese industrial equipment beyond that needed to maintain Japan's prewar living standard. Japanese leaders criticized the plan as both unduly harsh and impractical. General Douglas MacArthur, the supreme commander of Allied powers and head of the U.S. occupation, agreed that the imposition of reparations would delay, if not prevent, Japan's economic recovery. Many American officials in Tokyo and Washington shared his concern. By the fall of 1946, as Soviet-American relations deteriorated in Europe, serious doubts about Pauley's plan arose in the War and State departments.

Early in 1947, the United States adopted the containment policy. This would lead to implementation of the "reverse course" in U.S. occupation policy toward Japan. Its objective was to create an economically powerful and friendly Japan that would be the cornerstone of a postwar U.S. policy in Asia to block Soviet-inspired communist expansion. While the United States abandoned Pauley's plan, the nations serving on the Far Eastern Commission were deadlocked over the complex question of how best to distribute the required reparations equipment. The War Department first commissioned several reevaluations of the reparations and economic policy that resulted in a two-thirds reduction of the demands. During May 1949, the United States broke the stalemate by unilaterally terminating all demands for reparations payments. The Philippines strenuously objected, compelling Washington to include in the 1951 Japanese Peace Treaty an article providing that Japan negotiate and pay reparations in goods and services to any former victim of its aggression that demanded compensation. Japan's government and its business community would make a virtue of necessity after U.S. occupation ended in May 1952. They pursued a successful strategy for establishing friendly and productive relations with its former imperial conquests that utilized reparations payments to help reopen East Asian markets and regain access to raw material sources in Southeast Asia.

After regaining its sovereignty, Japan negotiated a series of agreements providing consumer goods and industrial equipment, often tied to economic assistance and loan programs, with the Philippines, Burma, Indonesia, and South Vietnam (after the division of Vietnam in 1954). Controversy in Japan surrounding alleged government-business collusion in awarding reparations contracts prolonged the talks, but separate agreements finally were reached with all four countries. In November 1954, Burma gained $200 million over a term of ten years, and in March 1963 supplementary payment of $140 million paid over twelve years. In May 1956, the Philippines accepted $550 million in reparations over a term of twenty years, and the agreement with Indonesia in January 1958 provided for payment of reparations of $223 million over twelve years. South Vietnam in May 1959 accepted $39 million over a term of five years. These four nations received an additional $707.5 million in the form of loans. Cambodia and Laos accepted "free technical aid" rather than formal reparations. Under these agreements, recipient nations agreed to provide Japan with necessary raw materials. In addition, receipt of economic aid often required purchase of Japanese manufactured goods, contributing significantly to Japan's economic recovery and later expansion, especially in its steel, shipbuilding, and electronics industries.

Japan did not pay reparations to China after World War II because of the outcome of the civil war in that country. Under pressure from the United States, the Japanese did not recognize the People's Republic of China. This precluded negotiations regarding reparations with the Chinese communist government, and the Republic of China, in exile on Taiwan, could not make claims because that island had been part of the Japanese empire. South Korea demanded that Japan pay $8 billion in reparations for gold and art objects taken from Korea, forced labor, and lost Korean investments during forty years of Japanese imperial rule and brutal colonial exploitation of the Korean peninsula after 1905. After protracted negotiations beginning in 1952, Tokyo and Seoul finally signed in June 1965 the Treaty of Basic Relations Between Japan and the Republic of Korea, which provided for Japan's commitment to extend to South Korea's government $200 million in long-term, low interest loans, $300 million in goods and services over ten years, and $300 million in commercial loans to promote the development of South Korea's economy. Meanwhile, Japan had established and developed quasi-official contacts with North Korea, resulting in expanded trade that in 1964 reached $30 million. By that year, Japan had paid over $1 billion in reparations and $490 million in economic assistance to Burma, Indonesia, South Korea, Malaysia, Laos, Cambodia, and South Vietnam.

In August 1990, Saddam Hussein launched an invasion of Kuwait. The United Nations then authorized the United States to organize military action to liberate Kuwait if Iraqi forces refused to withdraw. The Gulf War during January and February 1991 resulted in Iraq inflicting tremendous destruction on Kuwait, including its oil wells. After Saddam's surrender, the UN Security Council in April passed Resolution 687 to impose punishment on Iraq. One of its provisions stated that Iraq was liable under international law for all direct loss, damage (including environmental damage), and the depletion of natural resources, or injury to foreign governments, nationals, and corporations, as a result of Iraq's unlawful invasion and occupation of Kuwait. No concrete plan for collection emerged, because the resolution also called for measures to restrict Saddam's ability to produce weapons of mass destruction. Accordingly, Iraq was prohibited from selling oil until it met the cease-fire conditions. But Saddam increasingly engaged in defiance and deceit to avoid full compliance with the resolution. The UN inspectors ultimately left Iraq in protest and new U.S. air strikes failed to alter Iraq's behavior, let alone revive any expectation of reparations payments. The Gulf War showed the supremacy of international power over international law.