GIVEN Japan's continuing and portentous activities in China proper, we may do well to attempt casting up Japan's account in Manchukuo. Paradoxically the situation in Manchukuo itself has little to do with the question of profit or loss for Japan. The answer is not to be found there. Manchukuo might be pacified and its Chinese inhabitants reconciled to their lot; its government finances might be in good order, its trade flourishing and its resources on the way to being developed. All this might be true (which it is not) and still prove nothing with respect to the success or failure of Japan in Manchukuo. The test of that is to be found not in Manchukuo but in Japan. It is to be found in the facts of Japan's financial situation, facts like the following:

National expenditure, 1930-31 Yen 1,588,000,000
National expenditure, 1937-38 2,870,000,000
Military appropriations, 1930-31 Yen 470,000,000
Military appropriations, 1937-38 1,400,000,000
National tax revenue, 1930-31 Yen 835,000,000
National tax revenue, 1937-38 1,300,000,000
National debt, 1930 Yen 6,000,000,000
National debt, 1937 10,500,000,000

There are other revealing comparisons. While the volume of Japan's industrial production increased by 92 percent from 1931 to 1936, and the quantity of exports by 46 percent from 1933 (when Japan started her commercial bound forward), the national debt increased by 75 percent and taxes by one-third. The test of Japan's failure or success in Manchukuo lies in facts like that, and in the fact that the excess of Japanese imports over exports for the first half of 1937 was Yen 600,000,000, nearly double that of 1936, with the result that Yen 250,000,000 has had to be shipped to America in three months of the current year, governmental restrictions have already been imposed on exchange and imports, and more stringent control is projected as indispensable for the protection of the currency.

The answer to our question lies, further, in such statements as the following made by Eiichi Baba when he was Minister of Finance in 1936: "People speak of our present conditions as those of semi-wartime economic preparation, and I think that is on the whole an apt expression of the situation." For whether Manchukuo is profit or loss for Japan is determined, not by what Japan has done in Manchukuo but by what Manchukuo has done to Japan. And this is to be found less clearly in detailed statistics than in an understanding of the broad lines that frame Japan's national position today as compared with these that show what her national position was before Mukden was occupied on the night of September 18, 1931.

Early in 1931 Japan was a country relatively at ease. Economically she was caught in the toils of the depression like every other country, but nevertheless she was less constricted than most, since her economic and financial organization was less complex and she was not wholly dependent on factory production. There may already have been fundamental dislocations in her social system, but they had not yet become malignant. As for security, only the United States was in a more enviable position. Japan's neighbors were weak and not particularly hostile. There were conflicts, but only such as could be postponed, if not definitely allayed. With China, Japan's relations were not good; but neither were they severely strained. In the preceding years when China had been swept by nationalism the Western Powers had borne the brunt of Chinese antagonism and Japan has remained comparatively immune. In 1930 there was friction over South Manchuria, but friction of the kind that could have been at least temporarily smoothed over by routine negotiations. With Soviet Russia there were no relations at all. Manchuria served as a buffer, and in any case Russia was a negligible military quantity in the Far East. Its absorption in five-year plans, further, gave every prospect that in a military sense it would remain negligible on its eastern front for some years to come. Japan had nothing specific to fear from without. From the tempests apparently brewing in Europe she was in a position to hold aloof, a disinterested spectator, less liable to involuntary entanglement even than the United States.

Today Japan is a harried country. Economically she is at the danger-point. Her currency reserve is depleted; and the heaviest drain has just begun. The strain of carrying the overhead of state expenditure threatens to buckle the pillars of the financial structure and already has begun to bear down on trade and industry. While an expanding industry cries for capital, banks are pressed to invest in government bonds to cover treasury deficits. Higher taxes to defray state expenditures work out as higher costs of production, and foreign trade is by so much penalized. Rising prices mean a higher cost of living: either wages must be raised, thus penalizing foreign trade still more, or the standard of living, already shockingly low, must be depressed further, with social consequences that may be postponed or repressed but cannot be escaped. The profits of Japan's phenomenal advance in world trade have been consumed, and she will be drawing on her capital soon if she is not doing so already. A country only recently developed in the modern sense and therefore with not a very large capital reserve, she cannot continue long to draw on capital without the obvious results. These results are already foreshadowed and many farsighted Japanese are conscious of the fact. It is this consciousness that is making for passive resistance on one side and pressure for a form of totalitarianism on the other. But Japan's economic problem is one for which totalitarianism can provide at best only an evasion; it cannot offer a solution.

Politically Japan is in even worse straits. She is caught in a net of enmities from which she cannot extricate herself and through which she dare not try to slash a way. Her neighbors now are implacably hostile and no longer are so weak. China, embittered by Japanese aggressions, thirsts for revenge and has been deterred from seeking it only by her unreadiness. But month by month she has become palpably stronger, building up her strength singlemindedly with the intention of eventually evicting Japan from its soil. Soviet Russia, so far from being negligible, has massed a huge army on her eastern frontier opposite Japanese territory, an army equipped with its own sources of supply and offensive weapons capable of carrying hostilities into Japanese territory. Threats of southward expansion in the direction of British, Dutch and American colonial spheres have aroused a general suspicion which has materialized in intensive fortification programs at Hong Kong and Singapore, conscription in the Philippines, and defensive measures in the Netherlands East Indies. By refusing to enter a naval agreement on the pre-1936 ratios Japan bound herself to participation in a naval race against the richest Powers. The treaty with Germany, instead of breaking through isolation, has tightened the net around Japan. Thereby all practical possibility of reconciliation with Soviet Russia has been closed and by general inference at least Japan has grouped herself in the Fascist bloc. Indirectly Japan has given a hostage in Europe and can be entangled in a war arising out of no direct interests or actions of her own.

Whatever Japan's position may have been in the beginning, it is now defensive as much as offensive. Japan has sown dragon's teeth in Eastern Asia, and the hostile forces have sprung up. Now she cannot disengage herself if she would. However much she may be disposed to reconsider her policy of expansion, she stands committed. And the commitment is one that can be supported only by a force strong enough to operate in continental warfare against any combination of enemies, in particular against a combination of China and Soviet Russia. The initiative is no longer wholly with Japan, nor does the option lie with her alone. She might be drawn into action against her will or judgment, involved not by interest or desire but by the accident of position. As this is being written, the incident on the Amur River has flared up, with Russian troops in occupation of disputed islands, the Japanese peremptorily ordering evacuation and Russian gunboats brought up to prevent forcible expulsion. This incident has apparently -- as I write -- been settled; another one like it may not be. Intrinsically the two disputed islands mean little to Japan. Under normal conditions they would be names on a map. But with two armies facing each other, they or some other names on a map might be the stake on which Japan has to cast her national existence.

The words of Mr. Baba quoted above are an understatement. Japan's conditions are not those of "semi-wartime economic preparation." They are full wartime conditions, the conditions of a possible war which Japan is only doubtfully able to wage successfully and the preparations for which are exhausting her national wealth.

The contrast between Japan's situation in 1931 and 1937 can be explained in one word -- Manchukuo. If this is oversimplification, then it is so only in so far as it is theoretically true that if Japan had taken Manchuria alone she might have escaped the consequences by which she is now jeopardized. In large degree the world has been arrayed against Japan because of what followed after the taking of Manchuria. China might have reconciled herself to the loss of Manchuria. She has been driven to her present almost reckless determination by the subsequent attack on Shanghai, the invasion of China proper and the manifest Japanese intention to incorporate North China into Manchukuo as a Japanese dependency. Soviet Russia might have confined herself to simple vigilance if the Japanese army had not made unmistakable moves in the direction of Siberia and Mongolia. That the Western world would do nothing concrete to restore Manchuria to China was conclusively evidenced at Geneva. Abstractly it may be true that if Japan had stayed north of the Great Wall of China and within the confines of the three eastern provinces of Manchuria she would not have called out the opposition that now compels her to spend herself. But in practical politics Japan could not have restrained herself. Her easy initial successes were an invitation to go further, to realize the Japanese army's dreams at one swoop. And expansion begets further expansion for strategic reasons. Newly acquired territory is always insecure until the adjoining territory is occupied, and then that territory is insecure, and so on. When one foot is advanced, the other must be brought up sooner or later. The taking of Manchuria was not a single act but one link in a chain of acts. And there is little or nothing in Japan's contemporary situation that is not directly or indirectly attributable to the effects of that chain of acts.

The simple, insuperable and (for Japan) disastrous truth is that she was not and is not rich enough to make a success of Manchukuo. Thus Japan's current experience documents a general truth of national expansion: the success or failure of any colonial acquisition depends less on the intrinsic worth of the colony than on the wealth and power of the colonizing country. A country rich enough and powerful enough to pour capital into a colony to develop its resources, simultaneously fortifying itself against other countries that resent its acquisition, may be able to make a colony profitable. No other country can, no matter what the colony. Japan might have had capital enough to develop Manchukuo's resources to the point where they would yield a profit; even that is doubtful. Or she might have had the wealth to build up a military establishment to safeguard her continental possessions against Russia and China and to defy their resentment; that is more doubtful. But that she did not have and does not have the capital to do both is certain. And the attempt to do both is already drawing the social and economic condition of Japan fine and may in time break it.

In actual investments Japan has poured some Yen 1,150,000,000 into Manchuria from 1931 to the close of 1936. Now, an average of two hundred million a year would not be very serious if it came out of a surplus, if the investments were yielding a return or could be counted on to do so in a reasonable period, and if there were more capital available to complete the development of resources without which investments already made cannot become fully productive. Which is to say that there is little use sinking money into railways and other means of transportation if there is not additional money for the opening of mines and mills to provide products to be transported. And all three conditions are contrary to the existing fact.

With respect to the first. In 1931 Japan already had a national debt of six billion yen, a heavy charge on a country with an annual state revenue of one-fifth that sum. She was a country still industrialized only in patches and therefore having the limited annual income of a predominantly agrarian country. And she was just entering on a period of industrial expansion, the export boom that both startled and alarmed the rest of the world, with its urgent demand for capital for plant, machinery and other capital goods. Under the circumstances two hundred million yen a year has been a heavy drain, diverting money from domestic needs and opportunities that could be turned to surer account.

With respect to the second. Not even the most ardent Japanese army apologist maintains that most of the investments already made in Manchukuo have been profitable. For one thing, they have been made with an eye to military strategy rather than economic utility. The railway construction, for example, has been impressive, but many of the new lines, if not most of them, are designed to carry troops toward Siberia rather than freight in and out of Manchukuo. And many of the industrial enterprises are designed to produce materials to make the Japanese army self-sufficient for war purposes rather than commodities for sale at a profit. It is this fact that is responsible for the silent strike of Tokyo bankers against the Kwantung army's demands for funds for Manchukuo in the last year. Money can still be found in Tokyo for enterprises that will yield a return on money invested, but the Japanese bankers and investing classes have made it clear that if money is to be advanced for other purposes, however necessary from the political or military point of view, it must come from the state treasury. And most of the ill-feeling between the headstrong elements in the army and the financial and industrial classes, evidenced in the tug-of-war between the army and the political parties, arises from this conflict. The army is not interested in considerations of economic soundness; the industrial and financial classes are, for they know the force of economic truths.

With respect to the third. It is self-evident that there is no reservoir of capital in Japan from which to draw the sums still necessary if Manchukuo is to be made to pay. There would not be enough even if there were no other claims on such capital as Japan possesses. But with nearly a billion yen a year that has to be earmarked for the purchase of bonds to cover budget deficits; with large amounts required for expansion of plants for munitions industries, and the consequent tightening of the money market; with an increasingly unfavorable balance of trade which calls for a considerable export of capital to maintain the yen abroad; with higher taxes which shave the margin of profits that normally make up a reservoir of investment capital; with an increasing share of production going into armament -- with all these concurrent demands on national wealth, official talk of great sums for the exploitation of Manchukuo is chimerical. Space is lacking here to analyze Manchukuo's economic potentialities and their worth in terms of risk, money and effort relative to possible returns from the same expenditure at home. Undoubtedly the potentialities exist in tempting measure, though quite likely they have been exaggerated in the high-flown discourse of Japanese army philosophers. Nor is there space to analyze the ultimate effects of Manchukuo's completed development in the way of competition with Japanese industry and agriculture; too conspicuous a success in Manchukuo might be self-defeating. But whatever Manchukuo's potentialities or whatever the effects of their exploitation, they cannot be exploited by Japan with her own financial resources.

I have collected in the last year I do not know how many "plans" for Manchukuo's development, varying in scope and in cost from half a billion yen to five billion yen. The latest (put forward in June of this year) is a plan for the economic coördination of Japan, Korea and Manchukuo, calling for a total of ten billion yen, of which nearly two and a half billion is allocated to Manchukuo. The details have not yet been formulated, and it does not matter. Whether the sum is one billion or ten billion or a hundred billion is immaterial. It will not be forthcoming anyway, for it does not exist. There is not that much excess capital in Japan. There would not be even if there were no budget deficits to meet every year, no higher taxes to pay, no pressure on currency and no squeezing of capital resources to pay for mechanization of the army and enlargement of the navy. In actuality there is no prospect of the budget being reduced in the next few years, no prospect of reducing the deficit even if taxes are raised much more, as they will be, and no prospect that the army and navy will moderate their determination to get even bigger appropriations for armament than they have in the last few years. Unless Wall Street, New York, and the City, London, are suddenly smitten with a Tolstoyan frenzy, all the opulent plans for the development of Manchukuo can be forgotten.

The likelihood of an unavoidable cessation of the flow of investments into Manchukuo in the near future might have serious internal repercussions in Japan. For there will be an end to the brisk export of capital goods to Manchukuo, which has had a good deal to do with Japan's boom in the last few years, and much of which has been financed by Japanese credit. When additional credit is not forthcoming the exports will cease or materially decline and there will be danger of deflation. And if the credit already extended is not to be frozen, Manchukuo will have to increase its exports to Japan. If in order to reduce imports from Japan Manchukuo begins to develop its own light industries, such as textiles, what happens to the Japanese market in Manchukuo and the Japanese manufacturers and workers engaged in producing for that market? And if Manchukuo is itself to carry forward its own development, if it is to build railroads and harbors and establish steel mills and power plants, where will it get the surplus to exchange for the Japanese capital goods required? It might do so by concentrating on primary products instead of light industries, thus at the same time avoiding competition with Japanese manufacturers; but this it cannot do without an enormous initial outlay for means of transportation, plant and overhead to carry enterprises until they have reached the point of yielding profits. So we come back to the question: Where will the money for that outlay come from? And to the answer: Not from Japan, for Japan does not have it.

So much for Japan's investment for the development of Manchukuo. This is the least of her expenditure. In addition, there has been appropriated out of the national revenue from 1931 to the current fiscal year the sum of Yen 1,400,000,000 -- what is called in the budget "Manchurian Incident Expenditure." By this is meant the maintenance of the expeditionary force, the cost of pacification measures (which are still required to put down "bandits"), the cost of erecting fortifications, and routine administration. The appropriation for the current year, six years after the occupation of Manchuria, was Yen 270,000,000, more than a tenth of Japan's estimated national revenue for the year. It is significant that to pacify and administer Manchukuo has taken more money than has been available for investments. It is significant also that this cost does not decline, and that there is very little prospect of its declining in the immediate future. In any accounting for the whole of the Japanese economy, investments in Manchukuo would have to show bonanza profits on an unprecedented scale to balance the cost to the Japanese economy of Manchukuo's upkeep. And by any standard of accounting an outright payment of more than one yen for every yen invested is of dubious soundness.

Taken together, investments in economic enterprises and appropriations for pacifying and administering Manchukuo have cost Japan some two and a half billion dollars in less than six years. But this is only the direct and visible cost. More important is the indirect cost, the cost of armament.

All else Japan might bear, though with difficulty. But this cost of armament renders the country's situation critical, as may be seen from a few comparative figures. The budget calls for Yen 2,800,000,000, of which half will go to the army and navy. Japan's total government revenue for the current fiscal year (including an increase in taxation of about Yen 300,000,000) is roughly estimated at two billion yen. Something like Yen 800,000,000 will have to be raised by loans. The appropriations for the army and navy are Yen 1,400,000,000 -- nearly three-quarters of the total revenue and half of the budgetary expenditure. In 1930 Japan's appropriations for defense were less than one-third of the total state expenditure; now they are half. In 1930-31 the appropriations for defense were Yen 470,000,000; this year they are three times as much. In the six years before the taking of Manchuria, Japan spent Yen 2,860,000,000 on her army and navy, a yearly average of Yen 477,000,000; in the six years since the taking of Manchuria she has spent Yen 5,860,000,000, a yearly average of Yen 977,000,000. This is an increase of more than 100 percent. In other words, Japan has spent three billion yen more on her military services since she acquired Manchuria than before, and if we add to that sum the total appropriation of Yen 1,400,000,000 for the "Manchurian Incident" account already referred to, we have almost exactly the amount by which Japan's national debt has increased since the acquisition of Manchuria. And if we add to the Yen 1,400,000,000 appropriated for the army and navy this year the debt service charge of Yen 400,000,000 for the year, we have 90 percent of the government's normal revenue for the year. On the other 10 percent she must administer the nation -- on 10 percent and the Yen 800,000,000 which she must borrow. The latter will add still more to the debt service charge next year, which will in turn entail more borrowing, which will add still more to the debt service charge the following year -- the pyramiding process familiar in business before a crash.

Now, not all of this is chargeable to the Manchurian adventure alone. The rising scale of armaments the world over could not leave the Far East unaffected. Japan is a Great Power, and to some extent she would have had to increase and modernize her defenses. But she would not have had to do so to anything like the same extent. To whatever length the European arms race was carried, Japan could have assured herself of security at moderate cost. Geography is, or normally could be, her impregnable defense. No matter how strong Soviet Russia was, Japan could have been at ease so long as Russian strength was massed to face Europe, as it would have been. American naval building is potentially a threat to Japan; but Japan's aggressiveness since 1931 has been the main incentive to American naval building. As for China, without the fear of extinction to goad her on, her army would have remained numerous and ineffective. In passing it may be said that if ever China should become a unified nation capable of self-defense, she will have Japan to thank. Indeed, this may ultimately prove to be the net effect of Japanese encroachment on China. I am not trying here to level any moral preachments at Japan; she is not alone in weakening herself to attain military power. But whereas at least some, if not most, of the other countries engaged in the arms race were the prisoners of their geographical and historical position, Japan was not in that plight. She was in effect a free agent. She is so no longer. But she has forged her own fetters. Her headlong plunge in a desperate effort at self-aggrandizement has frightened the whole world, and the nations most directly affected, Soviet Russia and China, in particular, have been impelled to throw up counter-defenses. Having put herself into a position that is being challenged, Japan must defend the position. But she put herself there of her own motion. That is the principal result of Manchukuo: compulsion to maintain a position that can be maintained only by means that sap the nation's vitality.

This is Japan's national crisis. Its gravity impels Japanese ministers of war always to adjure the political parties to remember it when members of the Diet balk at voting appropriations which they know threaten to bankrupt the nation. All the other controversies, internal and external, all the issues pendent on Japan's policy of expansion, all the other results flowing from that policy, are unimportant by comparison with this central fact: the cost of Japan's armament program and the effect of that cost on Japan's political stability, on her economic equilibrium, on her viability as a society.

I have said very little in this article about internal changes in Manchukuo since 1931, very little about the concrete results there of Japanese rule.[i] There are some solid achievements. The Japanese have much to their credit. The currency of Manchukuo is stable for the first time in a generation. Taxation is regularized. There is order; bandits move about with less impunity than at any time since 1911 -- not a small matter to peasants whose villages were periodically despoiled. More iron, more steel, more coal, more shale oil, more electric power are being produced. The wealth of the region has been enhanced. There are more social services. In many respects the country is better governed than it ever has been. This is not to say, however, that Japan is successful as a colonizer. She is not. What capacity she possesses for construction is counterbalanced by a lack in the intangibles of ruling. Her notorious psychological deficiencies have never been more conspicuous. As a result not only are the inhabitants of Manchukuo unreconciled; they are hostile, unreconstructedly hostile. Japan can hold them only by buying them or cowing them. If the Japanese expeditionary force were withdrawn, the Manchukuo state and the Japanese supervisory régime there would not last a week. Japan has not the capacity to win loyalty by sharing benefits and rewards. Chinese business men who go in with Japanese soon find themselves thrust out. For others there is place only as hewers of wood and drawers of water. The Japanese can command but they cannot coöperate. All these considerations I have not discussed, because they are local to Manchukuo and irrelevant to the larger question. They are irrelevant even to the specific question of the ultimate future of Japanese rule in Manchukuo.

As I said in the beginning, what matters with respect to Japan's six years in Manchukuo is not what Japan has done in Manchukuo but what Manchukuo has done to Japan.

Japan is in a state preliminary to war and must sacrifice every consideration of national welfare to the possible eventuality of that war. National credit is impaired. Currency is jeopardized. Trade is handicapped. The social services are starved. Education is on short commons. Medical examinations of army recruits and factory workers show the deleterious effects of overwork and under-nourishment. Alleviation of the agrarian problem, acute these many years, is out of the question. The factory worker is being ground harder, and must be ground still harder, for wages must be kept down in order that the price of manufactured products for export can be kept low enough to undercut competitors -- this being made more and more difficult by the higher level of taxation. And foreign trade not only cannot be allowed to decline; it must be increased, in order that Japan may be able to pay with goods for the raw materials which she must import not only for her ordinary factories but, still more, for her munitions plants. So the industrial worker must be kept down. Real wages have dropped by 18 percent since 1931; the cost of living has gone up by 25 percent.

And there is no way out. The new cabinet that took office at the end of June has appointed a national planning board to coordinate economic activities on the basis of a three-point policy: expansion of productive power, balancing of international accounts, adjustment of demand and supply of commodities. This is baying at the moon. Productive power of a sort can be expanded and is being expanded, dangerously so. For much of the expansion is for the production of armament. A good deal of Japan's recent appearance of prosperity is unhealthy precisely because it is based on the production of arms and munitions. Once that lets up, there will be a dangerous deflation; and sooner or later it must let up, because it cannot be paid for. The balancing of international accounts is a physical impossibility so long as the country runs deeper into debt and must strip herself in order to pay for imported raw materials needed for munitions and for manufactures to be exported to pay for raw materials. For the same reason the demand and supply of commodities cannot be adjusted, because there is an uneconomic factor in the equation. No programs or policies, no techniques or devices of organization, are of avail so long as Japan is defying a simple law of mathematics. Whatever permutations of the figures there may be, the resultant will always come nearer the minus sign.

If Japan possessed the assets and resources of Great Britain and the United States, she might have made a success of Manchukuo. She did not, so she has not. A hundred years ago, when conquest was technically simpler, she might have been successful. Had she waited until a hundred years from now, when her resources were more intensively developed, she might have been successful. Now she has not been successful and she cannot be successful. All the conditions of her physical and social being were against success. She has overreached herself. She will fail.

[i] I say Japanese rule, because everybody knows that Manchukuo's independence is a fiction.

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  • NATHANIEL PEFFER, lecturer on Far Eastern questions in Columbia University, 1929-1935; author of "Must We Fight in Asia?" and other works
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