The Road to Pearl Harbor:

A Reexamination of American Far Eastern

Policy, July 1937-December 1938
FREDERICK C. ADAMS

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AMERICAN Far Eastern policy during the months following the Marco
Polo Bridge incident has proved perplexing to historians. Some scholars be-
lieve that the United States confined itself primarily to verbal opposition to
the Japanese until the beginning in 1940 of the trade embargo with Japan.!
Paul Schroeder argues that, even at this point, American policy in the Far
East was motivated largely by considerations in Europe and not by a realis-
tic evaluation of the situation in the Orient. 2 Other historians note that the
American attitude toward Japan stiffened in late 1938, but downplay the
significance of this change and maintain that the important policy transfor-
mations came at a later date. 3
Mr. Adams is assistant professor of history in Drake University.
1 Herbert Feis believes that American leaders adopted only a rhetorical opposition to
Japan until 1940; he maintains that American policy first began to harden with the July
1940 embargo of scrap metals and oils. Herbert Feis, The Road to Pearl Harbor: The Coming
of the War Between The United States and Japan (Princeton, 1950), 5-7, 88-94. Paul W.
Schroeder argues the same point although he views the matter from a somewhat different
perspective than does Feis. Paul W. Schroeder, The Axis Alliance and Japanese-American
Relations, 1941 (Ithaca, 1958), 2-14. From 1933 to 1938, Dorothy Borg finds little evidence
that the United States was prepared to take actions in opposition to Japan. Dorothy Borg,
The United States and the Far Eastern Crisis of 1933-1938: From the Manchurian Incident
Through the Initial Stage of the Undeclared Sino-Japanese War (Cambridge, Mass., 1964).
2 Schroeder, The Axis Alliance and Japanese-American Relations, 14-22.

2 This point is argued in various forms. William 1. Langer and S. Everett Gleason found

that the American attitude did stiffen toward the end of 1938 but that the new stance was
largely one of words. They do, however, indicate that the ground was prepared for a more
positive program. William 1. Langer and S. Everett Gleason, The Challenge to Isolation,
1937-1940 (New York, 1952),44-45. William 1. Neumann notes that in 1938 the United
States began a series of restrictive measures which culminated in the virtual embargo of Japan
in the summer of 1941; but he later suggests that it was not until 1940 that the way was
opened for harsher actions against Japan. William 1. Neumann, America Encounters Japan:
From Perry to MacArthur (Baltimore, 1963), 226, 255. Although granting that the American
credit of December 1938 did assist China, Arthur N. Young is more concerned with the re-
fusal of the United States to float a cash Joan and with China's failure to receive larger and
·73·
74 The Journal of American History

A close examination of the actions taken by the United States over the
period from July 1937 until the end of 1938 reveals that American policy
began to crystalize by the latter date. The American government, acting
through the Export-Import Bank of Washington,4 committed itself to the
task of strengthening China in the face of continued Japanese aggression.
The Export-Import Bank's action represented the first of a series of steps
which American statesmen thought might be necessary to safeguard their
country's interests in the Far East. Furthermore, they realized that this com-

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mitment could possibly lead to war.
The Japanese invasion of North China confronted American policy mak-
ers with two choices. They could remain aloof from the struggle and
thereby allow Japan to gain control of much of China. Implicit in this
choice was the concept either that the American interests in China could
prosper under Japanese suzerainty, or that these interests were not worth
protecting, or that Japan could not maintain effective control over China
for a long period of time. Or American statesmen could oppose the Japa-
nese by assisting China and by exerting pressure directly upon Japan. The
United States had sufficient economic resources and technical expertise to be
of assistance to China and could also exert economic leverage against Japan.
In 1938, the United States supplied nearly 44 percent of Japan's imports
and purchased 27.9 percent of japan's exports. Moreover, America shipped
to Japan a large volume of potential war materials, including copper, auto-
mobiles and parts, machinery, engines, oil, iron, and steel. These materials
accounted for 58.8 percent of all American exports to Japan in 1937; in
1938, the proportion rose to 66.3 percent. 5 The United States thus could
reduce significantly the flow of vital goods into Japan. 6
prompter foreign aid. Arthur N. Young, China and the Helping Hand, 1937-1945 (Cam-
bridge, Mass., 1963), 72-86. In a later work, Young comments on the American actions at
the end of 1938, but does not make much of them. Arthur N. Young, Chinds Wartime Fi-
nance and Inflation, 1937-1945 (Cambridge, Mass., 1965), 102-03. F. C. Jones discusses the
stiffening of the West's attitude toward Japan in late 1938 and early 1939 but does not
deal with the United States in great detail. F. C. Jones, Japan's New Order in East Asia:
Its Rise and Fall, 1937-1945 (London, 1954), 136-39. Waldo H. Heinrichs, Jr., argues that
although the steps taken by the United States provided a hint of future actions, America
did not become committed to stopping Japanese expansion. In fact, Heinrichs believes that
throughout 1938 and into early 1939, American Far Eastern policy remained a question
mark. Waldo H. Heinrichs, Jr., American Ambassador: Joseph C. Grew and the Develop-
ment of the United States Diplomatic Tradition (Boston, 1966), 272.
4 Early in 1934, President Franklin D. Roosevelt had created the Export-Import Bank of

Washington to provide exporters with financial assistance in their quest for foreign markets.
5 Ethel B. Dietrich, Far Eastern Trade of the United States (New York, 1940), 18,22.

6 Roosevelt apparently believed that America could rely on its economic power, in lieu of
military force, to control Japanese expansion. In a conversation with Vice-President James
N. Garner, the President argued that economic sanctions (quarantines) could be made
Road to Pearl Harbor 75

In the first months following the Japanese attack on China, Washington

officials issued various statements which indicated that America's policy was
in a state of flux. These officials expressed a general disapproval of japan's
actions, but could not decide what steps the United States should take.
While most leaders did not want to become involved in the dispute, they
insisted upon protecting American lives and rights in China. Gradually
these objectives came into conflict and the policy makers had to choose be-
tween noninvolvement and the protection of American interests. 1 When

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this point was reached, they began to alter their views on noninvolvement.
Secretary of State Cordell Hull, presenting the initial American position
in a press release on July 16, 1937, announced that the existence of serious
hostilities anywhere in the world affected the interests, rights, and obliga-
tions of the United States. America, Hull said, advocated peace and self-
restraint, respected the rights of others, and suggested that all nations adopt
these principles as well as those relating to the equality of commercial op-
portunity and the equality of treatment in international relations. 8 This
statement accomplished little more than to serve notice that the United
States favored the peaceful solution of world problems. It did not set forth
any firm guidelines for future American actions.
During the remainder of 1937, the actions of American leaders sug-
gested that the United States would not offer major opposition to the Japa-
nese. On August 13 and again on September 5, President Franklin D. Roo-
sevelt indicated that American residents in China should leave and that
those who remained would do so at their own risk. 9 While sending a small
contingent of marines to help safeguard the lives of American nationals in
China, the administration asked Congress for a $500,000 appropriation to
cover emergency relief and evacuation expenses. 10 By the middle of Sep-
tember, the President announced that government-owned vessels would not
be allowed to carry munitions to either belligerent; private vessels could
continue to do so, but only at their own risk. l1 During the Brussels Confer-
ence in October and November, the United States' refusal to approve the
effective and would not lead to war. John Morton Blum, From The Morgenthau Diarier
(3 vols., Boston, 1959-1967), 1,489.
7 This dilemma is discussed in a message from Joseph c. Grew to Cordell Hull, Sept. 15,

1937, Department of State, Foreign Relations of the United States: Diplomatic Papers, 1937
(5 vals., Washington, 1954), III, 526. See also Nelson Trusler Johnson to Hull, Sept. 6,
1937, ibid., 513-14.
8 Department of State, Papers Relating to the Foreign Relations of the United States,

Japan: 1931-1941 (2 vols., Washington, 1943), 1,325-26.

Il Harold 1. Ickes, The Secret Diary of Harold L. Ickes (3 vols., New York, 1953-1954),

II, 193~ New York Times, Sept. 6, 1937.

10 Foreign Relations .. . , Japan: 1931.1941, 1,349.

11 Ibid., II, 201.

76 The Journal of American History

use of economic sanctions gave additional support to the view that America
would pursue a passive policy with respect to Japan. This interpretation
was in no way challenged by the swift and peaceful settlement of the P anay
incident in the last month of the year.
But the United States continued to express verbal disapproval of the Jap-
anese assault. At a press conference in the latter part of August, Hull spe-
cifically applied the principles of his July 16 announcement to the Far East-
ern conflict. He asked that both sides reach a peace settlement based on the

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ideals contained in the Washington Conference treaties and the Kellogg-
Briand pact. 12 Roosevelt gave further indication that American policy
might harden; by refusing to invoke the Neutrality Act, he enabled the Chi-
nese, who could not meet the cash-and-carry provisions of the act, to con-
tinue their trade with America. 13 Perhaps more significant was the step the
President took in October when, after toying with the idea of placing a
trade embargo upon Japan, he delivered the famous "Quarantine" speech
in which he recommended that peace-loving nations isolate aggressor states. 14
The United States did provide China with a limited amount of financial
assistance in the closing months of 1937. Secretary of the Treasury Henry
Morgenthau, Jr., persuaded Roosevelt to allow the treasury to continue its
purchase of silver from China and to permit China to borrow foreign ex-
change against gold held on deposit in the United States. These measures
helped to stabilize Chinese currency and thus to avoid severe monetary fluc-
tuations with its associated political disturbances. 15
At the end of 1937, therefore, American policy makers seemed unde-
cided about what actions to take. No one was eager to challenge Japan; nei-
ther was anybody willing to see Japan dominate China. Two important fac-
tors helped condition any decision which the American government might
make. The first was the effect of Japanese domination upon American inter-
ests in China. The second, which was closely related to the first, was Japan's
ability to carry out an extended campaign and to consolidate her control
over large areas of China. If Japan needed massive outside assistance to
implement her policies, the United States could expect to have a certain
12 Ibid., I, 355-57.
13 Ibid., II, 201. Roosevelt also indicated that American policy on the application of the
Neutrality Act was on a twenty-four hour basis.
14 New York Times, Oct. 6, 1937. Roosevelt's plan for a trade embargo is revealed in

Sumner Welles, Seven Decisions That Shaped History (New York, 1950), 71-72. Sumner
Welles thought that this plan was of interest as it illuminated the background of the
"Quarantine" speech. For a complete discussion of the quarantine speech episode, see Borg,
The United States and the Far Eastern Crisis of 1933-1938, 369-98.
111 Blum, From The Morgenthau Diaries, I, 483-84. See also Allan Seymour Everest, Mor-

genthau the New Deal and Silver: A Story of Pressure Politics (New York, 1950), 120.
Road to Pearl Harbor 77
amount of influence in the policies which the Japanese pursued. But if Ja-
pan could get by with minimal foreign assistance, China and the American
interests therein would be left at the mercy of the victorious Japanese.
Those Americans who were cognizant of Japan's recent actions in the Far
East had few illusions about the meaning which a Japanese-dominated
China held for the United States. During November 1937, Julean Arnold,
the American commercial attache in Shanghai and an old China hand, sent
Washington a copy of an article written by a Chinese economist, D. K.

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Lieu. In the article, Lieu pointed out that Japan hoped to achieve economic
self-sufficiency by exploiting China and Manchuria. Japan would control all
China's basic industries in order to ensure herself a steady supply of raw
materials. The captive Chinese market would also allow Japan to mass pro-
duce many items which she could not turn out at that time. Lieu predicted
that America's trade would decline in both China and Japan as a Japanese-
controlled autarky was established. In a note accompanying the article, Ar-
nold commented that Japan's plan to utilize North China as a possible
source of raw materials as well as a monopolistic market was of special in-
terest. For those who believed that Japanese control would benefit Ameri-
can trade, Arnold warned:
The situation in Manchuria, which many anticipated would be developed under
Japanese auspices in a manner to offer increased markets for their products, has
resulted in quite the reverse as Manchuria today is far less of a market for Ameri-
can goods than prior to Japanese occupation, although Japan has invested hundreds
of millions of dollars in development enterprise in that territory. It can only be
expected that should other sectio'ns of China fall under Japan's control, our trade
will suffer accordingly.16
During the following months, American officials often referred to the
Manchurian experience as an example of what to expect when Japan took
control of an area.
Immediately following the outbreak of hostilities, Frank S. Williams,
the commercial attache in Tokyo, reported that Japan had sufficient re-
sources and stockpiles to enable her to conduct an extensive military carn-
paign against China. 17 Three weeks later, however, he disclosed that Ja-
1a Memorandum from Julean Arnold to Far Eastern Section, Nov. 22, 1937, Division of

Regional Information, File No. 442.1 General, 1933-1944, Bureau of Foreign and Domes-
tic Commerce, RG 151 (National Archives). Italics added. D. K. Lieu's article was
entitled "The Economic Significance of the Sino-Japanese Conflict." He noted that since
1932 Japan's trade with Manchuria had tripled while that of the United States had risen
by only 30 percent. He believed that what had happened in Manchuria would be repeated
in China if Japan came into control.
11 Frank S. Williams, Special Financial Report for the Week Ended July 10, 1937, File
No. 600 Japan, 1937, Bureau of Foreign and Domestic Commerce.
78 The Journal of American History
pan's financial situation was reaching a serious stage. If faced with a long
war Japan would need to import large volumes of raw materials. Because
the extra military expenditures would impair Japan's credit abroad, the Jap-
anese would not be able to receive foreign loans to help cover the costs of
these goods. Instead, they would have to pay for the imports with foreign
exchange and gold, both of which were in short supply. Williams believed
that the financial pressure would be such that Japan would have to declare a
moratorium for three or four months on all foreign currency commitments.18

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During the next few months, Williams changed his opinion about Ja-
pan's financial condition. In the fall, he reported that the war had produced
very little interruption in the normal business routine of most Japanese and
that the success of their forces in China had created optimistic attitudes
within the leading financial circles. 19 By December, Williams concluded
that his earlier prediction about a moratorium had been in error; and he
now thought that Japan could weather the Chinese crisis unless a long,
drawn-out guerilla war developed. He was convinced that Japan's financial
authorities had calculated their country's income very closely and that they
would be able to apportion their expenditures in such a way as to conserve
their financial resources. 20 He did believe, nevertheless, that there would be
room for considerable amounts of foreign capital in North China once
peace was established. 21 From the perspective of the American commercial
attache in Tokyo, Japan appeared to possess sufficient resources to carry out
a successful campaign, but was dependent upon foreign capital for the de-
velopment of the subdued territories. Based on this analysis, the United
States could not be certain that the Japanese would be able to seriously in-
terfere with the open door in China.
Japan's actions throughout early 1938 soon undercut this line of reason-
ing. In the middle of January, Japan severed relations with China and thus
ended any hope of a negotiated settlement. 22 The Japanese armed forces,
moreover, continued their offensive which, by the beginning of June,
placed them in control of the key seaboard and railway communications
18 Frank S. Williams, Special Financial Report for the Week Ended July 31, 1937, ibid.
19 Frank S. Williams, Special Financial Report for the Week Ended Sept. 25, Oct. 9, Oct.
16, 1937, ibid.
20 Frank S. Williams, Special Financial Report for the Week Ended Dec. 4~ 1937, ibid.

See also a memorandum by Maxwell Hamilton, Sept. 20, 1937, Foreign Relations . .. , 1937,
III, 533-34 for confirmation of the view that Japan, although undergoing economic stresses,
would not be forced to abandon the military venture in China.
21 Frank S. Williams, Special Financial Report for the Week Ended Dec. 11, 1937, File

No. 600 Japan, 1937, Bureau of Foreign and Domestic Commerce.

%2 For a lengthy discussion of the Japanese attempts to achieve a settlement, see Borg, The

United States and the Far Eastern Crisis of 1933-1938,442-85.

Road to Pearl Harbor 79
that stretched from the Amur River on the Siberian border to the Yangtze
River in Central China. As the Japanese extended their control over these
areas, they erected puppet governments in North and Central China; and
they initiated aggressive economic programs. 23 In North China, they estab-
lished a Reserve Bank which began to issue its own notes in an attempt to
displace the Chinese legal tender. Japan's primary objective was to replace
the Chinese yuan with a currency tied to the yen and hence to create the
basis for an economic bloc. Japanese officials exchanged Reserve Bank notes

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for Chinese government yuan and took the latter to the Shanghai exchange
market to be used for the purchase of foreign currency. This process served
both to provide backing for the new notes and to weaken the Chinese cur-
rency. The latter effect accentuated the inflation within China and provided
a convenient excuse for the Chinese officials to adopt a system of foreign
exchange rationing in the spring of 1938. 24
Japan hoped to make North China into a virtual domestic market by cre-
ating a currency bloc in which the new Reserve Bank notes and the yen
would be nearly equal in value. By controlling the exchange rates, the Japa-
nese depreciated the value of the yuan with respect to foreign currencies
other than the yen. The Chinese in North China consequently had to pay
more yuan for all imports except those from Japan. By November 1938,
there was a 44 percent price differential in favor of Japanese goods. Japa-
nese control of the exchange rates also allowed them to purchase goods
from North China without having to provide foreign exchange at a fixed
(and unfavorable) rate. 25 Apparently the objective of the currency manipu-
lation and trade control was the exclusion of nearly all non-Japanese traders
from the occupied areas. 26
23 A. Viola Smith, "Present Trends of Japanese Economic Penetration in China," June

29, 1938, Reports of Commercial Attache Peiping, File No. 128-X Peiping, Bureau of
Foreign and Domestic Commerce.
24 A. Bland Calder, SR No. S-37, "Finance, Currency and Banking in China in 1938,"

Feb. 6, 1939, File No. 128-X Peiping, Bureau of Foreign and Domestic Commerce;
A. Bland Calder, SR No. S-7, "The Currency Phase of Sino-Japanese Hostilities," Sept.
12, 1938, File No. 600 China, 1938, ibid.; A. Bland Calder, SR No. S-20, "Comments on
the Japanese Reply of November 18 to the American Note of October 6, with Regard to
the Currency and Exchange Features," Nov. 26, 1938, File No. 600 China, 1938, ibid.
For a discussion of monetary conditions within China during the early part of 1938 and
the reasons behind the adoption of foreign exchange rationing, see Young, China and the
Helping Hand, 63-65.
21 A. Bland Calder, SR No. S-20, "Comments on the Japanese Reply of November 18 to
the American Note of October 6, with Regard to the Currency and Exchange Features," Nov.
26, 1938, File No. 600 China, 1938, Bureau of Foreign and Domestic Commerce. Young
outlines some of the difficulties which handicapped the Japanese currency scheme but
agrees that by the end of 1938, the Japanese-supported notes were circulating in North
China. Young, China and the Helping Hand, 66-69.
26 A. Bland Calder, SR No. S-26, "China Annual Economic Report for 1938," Jan. 30,

1939, File No. 128-S Peiping, Bureau of Foreign and Domestic Commerce.
80 The Journal of American History
Japan also created two large development companies to monopolize the
basic industries in North and Central China. The development companies,
through the use of subsidiaries, controlled the essential railroads, communi-
cations, utilities, mines, and heavy industries in each area. Although for-
eigners were allowed to purchase stock in the companies, A. Viola Smith,
the American trade commissioner in Shanghai, reported that the Japanese
exerted every influence to control and regulate all foreign capital so that
Japan remained dominant in China. As Smith noted, with the creation of

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these monopolies, the open door was in danger of being " 'banged, barred,
and bolted.' "21
Throughout the summer and fall of 1938, concern about these and other
Japanese actions caused American statesmen to respond in several ways.
Because the Japanese repeatedly bombed civilian areas within China, Hull
announced in June that the American government would discourage the
sale of aircraft and aircraft parts to countries which persisted in this prac-
tice. 28 The state department quickly received the cooperation of American
business groups and by July learned that this "moral embargo" was about
95 percent effective. 29 In conjunction with the move to halt the sale of air-
craft to Japan, the Department of Commerce began to discourage exporters
and manufacturers from extending private credits to Japan. 30 No matter
how effective these moves were, however, they lacked legal sanction and
consequently did not make the American government an active participant
in an attempt to contain Japan.
The continued interference by Japanese authorities with American prop-
erty and rights also led the United States government to lodge a formal
complaint against Japan. On October 6, 1938, the American ambassador to
Japan, Joseph C. Grew, delivered to the Japanese prime minister and min-
ister for foreign affairs, Prince Fumimaro Konoye, a note in which he crit-
icized Japan for violating the principles of the open door policy. Grew
stated that, at the time of the occupation of Manchuria, Japan had promised
to maintain the open door. Instead, the Japanese had taken over the princi-
pal economic activities in the area and had forced a large part of American
enterprise to withdraw. Through the use of exchange control, Japan had
21 A. Viola Smith, "Present Trends of Japanese Economic Penetration in China," June 29,
1938, File No. 128-X Peiping, Reports of the Commercial Attache, Peiping, ibid.
28 Department of State, Foreign Relations of the United States: Diplomatic Papers, 1938

(5 vols., Washington, 1955·1956), III, 617. See also a copy of a letter sent to those com·
panies involved in the sale of aircraft, July 1, 1938, Foreign Relations . .. , Japan: 1931·
1941, 11,201-02.
29 Foreign Relations . .. , 1938, III, 621-22.

30 Aide-Memoire, Department of State to British Embassy, Nov. 9, 1938, ibid., 626.

Road to Pearl Harbor 81

allowed goods to move freely between Manchuria and itself, but had re-
stricted trade between Manchuria and other areas. As a result, Grew as-
serted:
The Government of the United States is now apprehensive lest there develop in
other areas of China which have been occupied by Japanese military forces since
the beginning of the present hostilities a situation similar in its adverse effect upon
the competitive position of American business to that which now exists in Man-
churia.

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In order to prevent this from occurring, the American government asked
Japan to discontinue its discriminatory exchange control and its creation of
monopolies or other preferential bodies. The American government further
requested that the Japanese stop interfering with the property and rights of
its nationals in China. 31
Although the "moral embargo" and the note of October 6 did inform
Japan of America's uneasiness about the course of events in the Far East,
they were not as important as other steps which American leaders under-
took. Of greater significance, was the fact that the United States began to
consider ways of strengthening China. Morgenthau had continued his pur-
chases of Chinese silver, buying 50,000,000 ounces in March and April
1938. For the first time, the United States allowed China to use the pro-
ceeds from the purchase for purposes other than currency stabilization; con-
sequently, the Chinese were able to acquire enough American exchange to
pay for their military purchases. 32 This program in itself proved to be inad-
equate; China's silver supply was dwindling, and the Chinese government
needed large credits to buy strategic materials. 33
By July, several American officials had decided that it would be in the
general interest of the United States to give more extensive assistance to
China. Warren L. Pierson, president of the Export-Import Bank, held this
opinion and thought that the Bank could be of service to such an end. He
met with Stanley K. Hornbeck, the state department's political adviser, to
discuss aid to China. Having taught at several colleges in China from 1909
to 1916 (during which time he had also traveled extensively throughout
Asia) and having served as chief of the state department's Division of Far
Eastern Affairs from 1928 to 1937, Hornbeck was well acquainted with
America's interests in the Orient and with conditions in China. 34 Both men
31 Foreign Relations . .. J Japan: 1931-1941, I, 785-90. The note dealt with the problems

the two men had discussed three days earlier. See Oral Statement, Grew to Fumimaro
Konoye, Oct. 3, 1938, ibid., 782-85.
32 Blum, From The Morgenthau Diaries, I, 508. See also Everest, Morgenthau the New

Deal and Silver, 121; Young, China and the Helping Hand, 61.
33 Blum, From The Morgenthau Diaries, I, 508-09, II, 58.

B4 New York Times, Dec. 12, 1966.

82 The Journal of American History
believed that the United States was justified in assisting China in the pur-
suance of political objectives which also benefited America. They realized
that if the United States chose to act in this manner the political aspects of
any financial transactions would become more important than the economic
aspects. 35 In other words, the Export-Import Bank could participate in cer-
tain plans of questionable economic value if the political benefits were
great enough.
Partly at the urging of William Bullitt, then serving as the ambassador

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to France, Roosevelt concluded that the United States should do everything
possible to assist in the sale of flour and grey goods to the Chinese govern-
ment. In early August, he ordered the treasury department to push the mat-
ter with the Departments of State and Agriculture, and, if necessary, the
Reconstruction Finance Corporation, the Commodity Credit Corporation,
and the Export-Import Bank. 36 Morgenthau and Secretary of Agriculture
Henry Wallace had favored a similar plan two months earlier, but Hull
had opposed it unless an identical offer was made to Japan. 37 In August,
however, the secretary of state agreed to give the matter full consideration. 3s
Nevertheless, the American government postponed a final decision until
the arrival of a group of Chinese financiers who had been invited to confer
with officials in the treasury department. 39
Morgenthau was extremely eager to do something to help the Chinese,
and he thought that this mission represented the last opportunity to keep
the Western Pacific from being completely dominated by Japan. In a con-
versation with Herbert Feis, the state department's economic adviser, and
Maxwell Hamilton, the chief of the state department's Division of Far
Eastern Affairs, Morgenthau learned that these officials would try to per-
suade Hull to approve any promising proposal that might be reached. 40 The
Chinese delegation, headed by K. P. Chen, a prominent Shanghai banker,
arrived near the end of September. Chen quickly informed Morgenthau
that China no longer sought what were essentially relief loans (that is,
money to be used for cotton and wheat) but wanted more substantive assis-
tance.-'l
S5 Foreign Relations • •. , 1938, III, 538·40.
as Ibid., 544-45; Roosevelt to Roswell Magill, Aug. 16, 1938, PSF: Treasury Department,
1938, Franklin D. Roosevelt Papers (Franklin D. Roosevelt Library, Hyde Park).
3T Blum, F1'om The M01'genthau Diaries, 1,508.

:JS Foreign Relations . .. , 1938, III, 546.

39 Ibid., 559.
40 Morgenthau Diaries, Book 142, p. 176, Henry Morgenthau, Jr., Papers (Franklin D.
Roosevelt Library, Hyde Park); Foreign Relations . .. ,1938, III, 562-63.
41 Morgenthau Diaries, Book 142, p. 179, Morgenthau Papers. Young discusses the back-
ground, from the Chinese perspective, to K. P. Chen's trip and notes that the Chinese
Road to Pearl Harbor 83
japan's military successes undoubtedly played a major role in governing
the change in China's requests. By October 1938, Japan controlled all of
the large Chinese seaports except Canton, which was soon to come under
attack. China, as a result, was left with only three main links to the outside
world. One of these was a highway running from northwest China into
Russia and was of little importance as far as American aid was concerned.
A second route was a railroad which went from the port of Haiphong
through French Indo-China into southwestern China. A drawback of this

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route was that the French were susceptible to pressure from the Japanese
and were liable to restrict the flow of goods at the latter's request. In addi-
tion, the railroad had a limited carrying capacity. The final link was the
Burma-Yunnan highway which was scheduled for completion near the end
of the year. The road was 650 miles long and was to be macadamized for
all weather traffic. This route held many advantages over the Indo-China
railroad, especially since the cooperation of the English and Burmese gov-
ernments could be counted upon. 42
China had, therefore, become largely dependent upon truck transporta-
tion. To ensure that this system functioned smoothly, she needed adequate
supplies of trucks, spare parts, gasoline, and lubricating oils. 43 A primary
objective of the Chen mission was to obtain American technical and mate-
rial assistance for the development of China's truck transportation network.
Roosevelt was aware of China's difficult situation. The President told
Chen that above all else" 'get your transportation organized: .. To help
with the organization, Roosevelt agreed to ask the army to send the Chinese
a new military attache who would be the army's leading expert on transpor-
tation. This officer was to be placed at Chen's disposa1. 44 Of even greater
significance was the tentative arrangement worked out within the treasury
department in the middle of October. Under this plan, the Chinese govern-
ment would sell tung oil (needed for paint) to a syndicate of American
consumers. The proceeds of the sales would be used to purchase American
hoped to receive currency and commodity support. Young, China and the Helping Hand,
77·79.
43 A. Bland Calder, SR No. 5-34, "Resume of Military and Political Events in China in

1938," Jan. 24, 1939, File No. 128-X Peiping, Bureau of Foreign and Domestic Com-
merce; A. Bland Calder, "New Problems in Maintaining Trade Access Between Chinese
Controlled Territory and the Outside World," Dec. 13, 1938, File No. 128-X Peiping,
Reports of Commercial Attache, Hong Kong, ibid.; Henry Morgenthau, Jr., to Roosevelt,
Dec. 13, 1938, PSF: China, 1938-1940, Roosevelt Papers.
43 A. Bland Calder, "New Problems in Maintaining Access Between Chinese Controlled

Territory and the Outside World," Dec. 13, 1938, File No. 128-X Peiping, Reports of Com-
mercial Attache, Hong Kong, Bureau of Foreign and Domestic Commerce.
44 Morgenthau Diaries, Book 145, p. 387, Morgenthau Papers.
84 The Journal of American History

trucks, oil products, and other essential materials. The tung oil sales would
extend over a five-year period; but because the Chinese government wanted
funds immediately, the treasury department proposed that the Export-Im-
port Bank loan China 50 percent of the value of the oil ultimately to be
delivered. The Chinese government would work through a corporation
(Universal Trading Corporation) which it had established in the United
States to buy materials for China and to sell Chinese goods. 45
Morgenthau contacted members of the California-Texas Oil Company

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and the Socony-Vacuum Company to solicit their assistance in the organiza-
tion of China's transportation system. The Chinese needed technical advice
on the best manner to ship petroleum products and tung oil into and out of
China. Morgenthau indicated that in return for their cooperation, the oil
companies could "practically get a monopoly for American oil products" in
China. Moreover, United States businessmen would have "a complete mo-
nopoly on Chinese tung oil"; all of which would come to them for redis-
tribution to the world. 46 The treasury department also contacted every ma-
jor truck company in order to gain their cooperation in lowering prices and
in making suitable modifications so that the trucks could function properly
in the tropics. 47 By October 17, Morgenthau had found solutions for the
transportation problems and received bids for trucks and servicing equip-
ment,48
The secretary of the treasury was quite enthusiastic about the proposed
transaction. He thought that China's economic plight was desperate and
that without immediate outside assistance the Chinese might not be able to
continue against Japan. If the United States was going to aid China, it
should do so at once. He calculated that a small loan could enable China to
continue for a long time. But if China fell, the United States would have to
spend far greater sums on naval expansion. Following this reasoning, Mor-
genthau argued that an advance to the Chinese government of the cost of a
new battleship would be a sound venture even if the loan remained unpaid.
Furthermore, China's goodwill would be important for the future. As he
noted:
The potential economic development of China is admittedly enormous, and if this
country helps China in her time of need, resulting benefit to American trade and
business can be counted upon in the years to come. 49
46 Blum, From The Morgenthau Diaries, II, 58-59.
46 Morgenthau Diaries, Book 144, pp. 279, 282-83, 285, Morgenthau Papers.
41 Morgenthau Diaries, Book 145, pp. 248-50, ibid.
4S Morgenthau Diaries, Book 146, p. 66, ibid.

49 Morgenthau Diaries, Book 150, pp. 203-04, ibid.

Road to Pearl Harbor 85

Not everyone in the treasury department approved of the transaction.

Wayne Taylor, an assistant secretary, argued that the extension of a credit
from an agency of the American government to a belligerent would signify
that the United States favored one combatant over the other. The nuance of
loaning to the Chinese government-owned corporation would not alter the
fundamentals. Because he believed that the transaction would involve the
responsible officers of the American government in a series of acts leading
to the use of public funds for the purpose of giving financial aid to a bellig-

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erent, Taylor opposed the extension of such credits unless the American
people specifically requested them. In the absence of a request, he con-
cluded:
any executive officer of this Government would stretch to the breaking point any
authority hitherto delegated to him by Congress if he approved the proposed tung
oil transaction, the wheat and cotton credits, or any other credits involving the
direct or indirect use of Government funds to aid active combatants engaged in
declared or undeclared war. 50
Despite Taylor's opinion, the tung oil deal moved toward completion.
On October 24, Jesse H. Jones, the chairman of the Reconstruction Finance
Corporation, notified Morgenthau that the Export-Import Bank was pre-
pared to extend a credit of $20,000,000 to the Universal Trading Corpora-
tion. 51 On the following day, Morgenthau went to Roosevelt to gain his
acceptance of the proposal. Events in China, however, caused Roosevelt to
withhold his approval. Within the preceding three or four days, the Japa-
nese had seized Hankow and Canton, and this had triggered rumors that
Chiang Kai-shek's government would collapse. Roosevelt thought that it
would be embarrassing to make a loan and then find that a new provisional
government had been set up. Owing to the changed situation, he decided to
delay and see what type of statement Chiang Kai-shek made. If he an-
nounced that the Nationalists had pulled out of Hankow and Canton for
strategic reasons and that he would regroup his forces, and if he could con-
vince the world that his government would not fall, then Roosevelt said
that he would be "very glad to promptly approve this loan."52
In early November, Roosevelt received satisfactory assurances from
Chiang Kai-shek that he would continue to oppose the Japanese. Nonethe-
less, before Roosevelt approved of the tung oil transaction, he asked Mor-
;;1 Memorandum from Wayne Taylor to Morgenthau, Oct. 20, 1938, attached to Hull to

Roosevelt, Nov. 14, 1938, PSF: China, 1938-1940, Roosevelt Papers.

;;1 Copy of a letter from Jesse H. Jones to Morgenthau, Oct. 24, 1938, OFF, 971 Export-

Import Bank, 1937-1945, ibid. In addition to being head of Reconstruction Finance Corpo-
ration, Jesse Jones was the chairman of the board of the Export-Import Bank.
52 Morgenthau Diaries, Book 147, pp. 435-36, Morgenthau Papers.
86 The Journal of American History
genthau to clear the plan with Hull. 53 This request precipitated a full-scale
discussion within the state department about the implications which the
deal held for America's Far Eastern policy.
In a memorandum written on November 13, Hamilton expressed disap-
proval of the tung oil project. Although he did not wish to see Japan defeat
China, Hamilton believed that the proposal was impractical and would not
have any decisive effect on the outcome of the struggle. Essentially, he
thought that it was too late to help China unless the United States was pre-

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pared to accept the possibility of a war with Japan. He wrote:
It is my view that to adopt a course of assistance to China now, after Japan has
almost completed its positional warfare, would be of no decisive aid to China and
would be a profitless irritant to Japan, unless the United States is prepared to give
really substantial and long-continued assistance to Cbina. And if that decision be
made, it should be made with realization that the course may lead to armed con-
flict with Japan.
Rather than assisting China, Hamilton favored a long-range program of
applying pressure on Japan. Such action would be of little consequence in
the current struggle, but it might produce a situation under which the
United States would enjoy some measure of equality of treatment. He as-
sumed that this policy could be pursued without risking a war. 54
Writing on the following day, Hornbeck addressed himself to the politi-
cal aspects of the tung oil project. He argued that it was in the interests of
the United States that Japan not gain control of China. Hornbeck warned
that unless the Japanese were stopped by some other nation, Japan and the
United States would have a face-to-face confrontation. In an attempt to
avert this possibility, he recommended that the American government adopt
a plan of action designed to halt Japan's advance. A program of this type
necessitated the use of material obstacles and pressures; but, if all else
failed, it could require the use of armed forces. He emphasized that the
United States had to use something stronger than words to achieve its goals
and suggested that the American government follow a course of assisting
the Chinese and of withholding from the Japanese those things which aided
their military efforts. In line with the latter objective, he proposed the de-
nunciation of the United States-Japan Commercial Treaty of 1911, the plac-
ing of embargoes upon trade and shipping between Japan and the United
States, and the disposal of the fleet in the Pacific so that Japan knew that
53Morgenthau Diaries, Book 150, p. 200, ibid.
G4Memorandum by Hamilton, Nov. 13, 1938, File No. 893.51/67362/8, General Records
of the Department of State (National Archives). The memorandum is reprinted without
Hamilton's emphasis marks in Foreign Relations . .. J 1938, III, 569-72.
Road to Pearl Harbor 87
America meant business. Although the tung oil project would provide as-
sistance to China, Hornbeck advised against it unless the American govern-
ment was prepared to adopt a comprehensive program similar to the one
that he had outlined. He personally endorsed the adoption of a firm policy;
for that reason, he hoped that the proposed transaction would be under-
taken. 55
Hull added the final comments to the debate. Although he too did not
wish to see Japan overrun China, he was wary about provoking the Japa-

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nese. And since he regarded the tung oil deal as being "almost purely polit-
ical" in nature, he assumed that the character of the transaction would lead
to increased Japanese retaliation against American interests in China and
perhaps even to war. Consequently he did not think that the new policy
should be followed unless the American people and Congress supported it.
The secretary thus refused to approve the proposal and recommended that
the United States refrain from any action for a few months in order to
await further developments. 56 On the basis of Hull's opposition, Roosevelt,
on November 15, postponed making a decision on the tung oil project. He
was disturbed by the turn of events and informed Morgenthau that he
would discuss the matter with Hull. 57
The tremendous political significance which American policy makers at-
tributed to this proposal is worthy of attention. They saw the project as an
overt step by the United States to support China against Japan. Both Ham-
ilton and Hornbeck believed that it could be effective only as a part of a
general program designed to strengthen China and to restrict Japan. All
three observers saw the proposal as the first step in a chain of events which
ultimately could lead to a military confrontation between the United States
and Japan. If at any time in the future the United States undertook the tung
oil project, it would be logical to assume that this action represented a hard-
ening of America's Far Eastern policy and that it was made with the real-
ization that it involved the risk of war.
Throughout November, the Japanese further clarified their intentions in
the Far East. On November 3, the Japanese government announced that it
intended to establish in East Asia a New Order which would be based upon
a tripartite relationship among Japan, Manchuria, and China. The primary
objectives of this relationship were to promote political stability and to fa-
cilitate economic cooperation among these countries. Japan called upon the
other powers to adapt their policies to the new conditions prevailing in East
,5 Foreign Relations . ... 1938, III, 572-74.
:,i Ibid., 574-75.
51 Morgenthau Diaries, Book 151, p. 19A, Morgenthau Papers.
88 The Journal of American History

Asia. 58 In his reply to the American note of October 6, Japanese For-

eign Minister Hachiro Arita gave a further indication of the meaning of
the New Order. While refuting the American complaints, Arita failed to
give assurances that Japan supported the principles of the open door policy.
Although the Japanese had always given such assurances in the past, the
foreign minister now announced that the new conditions in East Asia de-
manded new principles and concepts. 59
On November 19, Arita called on the counselor of the American em-

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bassy to discuss Japan's situation in the Far East. He stated that there were
two ways in which one nation could try to subdue another-military force
and economic sanctions. The New Order would provide Japan with the
necessary raw materials and markets to protect herself against the second
possibility. The Japanese had to monopolize various sectors of the Chinese
economy in order to provide themselves with the same degree of economic
freedom which the United States and British empire received from their
vast internal markets. Once its security was assured, Japan would guarantee
the equality of economic opportunity for others. Arita asserted that Japan
no longer could guarantee the open door because her actual needs and ob-
jectives could not be reconciled with the principles of this policy, and he
hoped that a new definition of the open door could be reached. 60 With this
declaration, Japan issued an outright challenge to the historic Far Eastern
policy of the United States. If American leaders acquiesced in the Japanese
demands, the American interests in East Asia would fall under the control
of Japan.
On November 21, Grew informed Arita that the United States would
continue to adhere to the principle of equality of commercial opportunity.
If all nations observed this principle, he assured Arita that peace and gen-
eral prosperity would result. In addition, he indicated that the American
government believed "it to be incompatible with the establishment and
maintenance of American and world prosperity that any country should en-
deavor to establish a preferred position for itself in another country."
Moreover, the United States opposed attempts by one nation to impose its
will upon others. 61
Morgenthau meanwhile continued to seek Roosevelt's approval for the
tung oil project. At the end of November, Hull departed for the Lima Con-
58 Statement by Japanese government and radio speech by Prince Konoye, Nov. 3, 1938,

F01'eign Relations • .• , Japan': 1931-1941, I, 477-81.

59Hachiro Arita to Grew, Nov. 18, 1938, ibid., 797·800.
Memorandum by E. H. Dooman, Nov. 19, 1938, ibid., 801-06.
60

610ral statement, Grew to Arita, Nov. 21, 1938, ibid., 809.

Road to Pearl Harbor 89
ference and left Sumner Welles in charge of the state department. Under
an arrangement whereby Morgenthau agreed to help Welles with certain
problems in Cuban-American relations, Welles promised to talk with Roo-
sevelt about the situation in China. After calling the President, Welles told
Morgenthau that the deal would go through. 62 On the following day (No-
vember 30), Roosevelt repeated this decision to Morgenthau. 63
The situation soon became more complicated. On the same day that Mor-
genthau received the go-ahead signal from Roosevelt, Welles recommended

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that the tung oil project be postponed until December 6, by which time the
President (who had left Washington) would return. Welles had learned
that the Japanese government was going to determine which countries
would be allowed to trade with China, and in response to this new situa-
tion, he thought that it might be possible for the United States to state its
position clearly and to undertake economic actions designed to pressure Ja-
pan. The tung oil transaction could be a part of the latter policy. Welles
preferred that any decision on an active policy await Roosevelt's return. 64
The state department also expressed concern about a particular aspect of
the transaction. Because the project involved the cooperation of the Chinese
and American governments to create a virtual monopoly on tung oil ex-
ports, it might violate the Nine Power Treaty and the Sino-American
Treaty of 1844. To bypass this objection, the treasury arranged to keep
both governments out of the contract and to have the contract provide for
the purchase of only that proportion of China's tung oil production which
the United States had purchased in 1937. Welles explained that the state
department was cautious because the United States was coming squarely to
an issue with Japan on whether the Nine Power Treaty was still in force\
and the state department did not want Japan to have any violation on
America's part to which it could point. 65 A final complication arose on De-
cember 4 when Hull indicated that he could not approve the proposed
transaction. 66
Upon his return to the White House, Roosevelt gave his approval to the
deal despite Hull's attitude. On December 13, the Export-Import Bank
agreed to extend a credit of $25,000,000 to the Universal Trading Corpo-
<)2 Morgenthau Diaries, Book 153, pp. 300-02, Morgenthau Papers.
Ibid., 366-67.
<)3

<J4Ibid.
(/" Morgenthau Diaries, Book 154, p. 347, Book 155, pp. 76, 116-18, Morgenthau Papers.
As the entire thrust of America's opposition to Japan was based on the latter's violation of
treaties, the Department of State's concern about not violating the Nine Power Treaty and
the Sino-American Treaty of 1844 was quite understandable.
66 Foreign Relations . .. , 1938, III, 577.
90 The Journal of American History

ration with the understanding that China would repay the credit over a five-
year period from the proceeds of the oil sales. 67 On December 15, the Re-
construction Finance Corporation issued a press release announcing the
agreement, but described it solely as a commercial transaction. 6s Four days
later, Morgenthau disclosed that the arrangement of July 9, 1937, which
had allowed the Central Bank of China to obtain dollar exchange for stabi-
lization purposes, had been extended beyond December 31, 1938. 69
With these measures, especially with the bank credit, the United States

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moved to strengthen China and thus to restrain Japan. These actions repre-
sented a toughening of policy and indicated that the American government
would use material pressure to preserve the open door in China. As a fur-
ther clarification of this point, Grew notified Arita on December 30 that the
people and government of the United States could not assent to the estab-
lishment by any third country of a regime which would deprive them of the
long established rights of equal opportunity and fair treatment. If new situ-
ations required alterations in treaties, the changes could be made by the or-
derly process of negotiation and agreement among the parties of the treaty.70
It is tempting to dismiss the Export-Import Bank's credit as being too
small to be of great significance. Several events must be kept in mind, how-
ever, when assessing the importance of the Bank's action. While the credit
itself was not large enough to be a determining factor in China's struggle
with Japan, its importance, both in material and symbolic terms, far tran-
scended its face value. The response of the American government estab-
lished a precedent which others soon followed. On December 20, the Brit-
ish government announced the extension of a small export credit to be used
for the purchase of trucks and intimated that further credits would be
forthcoming. 71 Chinese officials reported that, altogether, they were able to
secure $75,000,000 on the basis of the $25,000,000 credit received from
the United States. 72
61 Agreement between the Export-Import Bank and the Universal Trading Corporation,

Dec. 13, 1938, Export-Import Bank Credit Files, Project No. 217, Universal Trading Cor-
poration, Records of the Export-Import Bank of Washington, RG 275 (National Archives).
68 Foreign Relations ... , 1938, III, 586-87.

69 Press Release by treasury department, Dec. 19, 1938, ibid., 588.

70 Grew to Arita, Dec. 30, 1938, Foreign Relations . .. , Japan: 1931-1941, I, 820-26.

71 Jones, Japan's New Order in East Asia, 139; Young, China and the Helping Hand,

84-85. There is some disagreement between these two men over the size of the credit; Jones
indicates that it was £450,000 while Young has it as £500,000. In March 1939, Britain pro-
vided a £10,0001,000 exchange stabilization fund. Jones, Japan's New Order in East Asia,
147.
12 Morgenthau Diaries, Book 156, p. 228, Morgenthau Papers; Department of State,

Foreign Relations of the United States: Diplomatic Papers, 1939 (5 vols., Washington,
1955-1957), III, 675-76.
Road to Pearl Harbor 91
The Export-Import Bank's action, moreover, did help to strengthen
China. It provided assistance for her transportation network, which was vi-
tal to her continued resistance, and it came at a time when China faced the
possibility of having to curtail drastically her foreign purchases because of
the depletion of her overseas assets. 73 In other words, it filled the gap cre-
ated by the exhaustion of China's financial resources. The credit also had an
inspirational effect upon the Chinese. Nelson Johnson, the American am-
bassador to China, reported that Chinese morale was at an all-time high and

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that he doubted Japan would be able to complete the conquest of China. 74
The American aid had the additional effect of causing the Chinese to be-
lieve that other assistance would follow and that the West would not per-
mit a Japanese victory.75
The Japanese reaction to the Export-Import Bank's credit was another
indication of the latter's significance. Although Arita stated that he did not
interpret the credit as a political act, he expressed regret at the American
action which, he believed, would only serve to prolong hostilities. 76 Grew
nevertheless noticed that the tone and atmosphere of Arita's conversation
were markedly more conciliatory than in earlier talks. 77 The Japanese army
saw that this aid was an important element in enabling China to continue
the struggle and one that would assume greater importance as the struggle
came to be waged by economic and financial means rather than military
ones. 78
In the final analysis, the chief significance of the tung oil project was that
it provided an implicit warning to Japan that Washington would not rede-
fine or modify the traditional open door policy. The fact that Hamilton,
Hornbeck, and Hull realized that the credit could ultimately lead to war
demonstrates the degree of importance which they attached to the measure.
As Hornbeck noted, if the United States wanted to protect its interests in
China then it would have to resort to the use of weapons stronger than ver-
bal arguments. 79 The Export-Import Bank credit represented one such
weapon, as did the severing of the United States-Japan Commercial Treaty
of 1911 (on July 26, 1939, Hull notified the Japanese that the treaty would
,3 Young, China and the Helping Hand, 85.
H For the ambassador's reaction, see Ickes, Secret Diary of Harld L. Ickes, II, 563.
,.>Young, Chinds Wartime Finance and Inflation, 103; Jones, Japan's New Order in
East Asia, 140.
78 Grew to Hull, Dec. 19, 1938, Foreign Relations . .. , 1938, III, 589-90.

or Joseph c. Grew, Turbulent Era: A Diplomatic Record of Forty Years, 1904-1945 (2

vols., Boston, 1952), II, 1208-09.
78 Jones, Japan's New Order in East Asia, 140.

7~ Foreign Relations . .. ,1938, 111,573.

92 The Journal of American History

be terminated six months hence) and the other economic sanctions that
were placed into effect during the period leading to December 7, 1941. 80
Japan's actions in November 1938 help explain why the administration
acted when it did. For the first time, Japan officially indicated that it would
not give assurances to the preservation of the open door. Once Japan took
this step, the initiative swung to the United States which could either ac-
quiesce in the Japanese claims or try to uphold the old policy. The Bank
credit coupled with Grew's statements of November 21 and December 30

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demonstrated that the United States would try to uphold its historic Far
Eastern policy. By financing the sale ·of trucks and petroleum products, the
Export-Import Bank provided China with much needed assistance. This ac-
tion represented the first material pressure which the United States govern-
ment took in its attempt to restrain the post-1937 Japanese expansion and
thereby to safeguard American interests in China. 81
80 Foreign Relations . .. , Japan: 1931-1941, II, 189. Hornbeck had recommended all of

these actions, as well as some others. See memorandum by Hornbeck, Nov. 14, 1938, Foreign
Relations . .. , 1938, III, 573-74.
81 During December 1938, the Department of State also carefully considered the possi.

bility of instituting a comprehensive program of economic retaliation against Japan, but

concluded that such a plan was too risky at that time. Instead it recommended that the
government continue to discourage credits and loans to Japan and make preparations for the
severance of the Treaty of 1911. The consensus was that these steps would not lead to Japa-
nese counteractions, but still would clear the decks for future action. Memorandum pre-
pared by Francis Bowes Sayre for Hull, Dec. 5, 1938, Foreign Relations ... , 1938, III,
406-09. Hornbeck presented his analysis of the above memorandum, Hornbeck to Sayre,
Dec. 22, 1938, ibid., 425-27.