Japan’s Oil Bunker
Japan spent the first decades of the twentieth century becoming extraordinarily good at carrying bunkers. The country that entered the twentieth century was dramatically different from the Japan that had existed only a few generations earlier. Industrialization produced factories, railroads, shipyards, modern communications networks, and increasingly sophisticated financial institutions. Japan built a modern navy, developed an industrial economy, participated in international capital markets, and emerged from victories against China and Russia as one of the major powers of East Asia. By the time Japanese diplomats arrived at the Washington Naval Conference in 1921, Japan could negotiate across the table from Britain and the United States as one of the world’s principal naval powers.
Every new capability solved an old problem while creating another one. Factories required raw materials, ships required steel, aircraft required aluminum, and industrial machinery required imported materials and technology. Merchant shipping required protected sea lanes, while a modern navy capable of protecting those routes required still more industrial production. Most importantly, the increasingly sophisticated machine required fuel.
Japan could solve many of the problems created by modernization through more modernization. Financial problems could sometimes be solved through financial institutions, industrial limitations through additional factories, and military limitations through additional ships and aircraft. Japan became increasingly capable of mobilizing the resources it possessed, but modernization couldn’t create resources Japan didn’t possess. Eventually, the machine reached the oil bunker.
Carrying Gold
Japan’s resource problem developed alongside another problem affecting nearly every industrial country during the interwar period: money. Japan returned to the international gold standard in January 1930 at the old parity of the yen, a decision that coincided disastrously with the beginning of the Great Depression. The yen was effectively overvalued, exports suffered, prices fell, and the Japanese economy entered a severe deflationary contraction. The Bank of Japan’s own historical account describes the return to gold and the international Depression as central causes of the Shōwa Depression.
Then Japan carried the bunker. When Takahashi Korekiyo returned as finance minister in December 1931, Japan abandoned the gold standard. Takahashi combined currency depreciation, lower interest rates, increased government expenditure, and monetary expansion in an unusually aggressive response to the Depression. Beginning in 1932, the Bank of Japan also began underwriting government bonds, creating a mechanism through which the government could obtain financing without relying entirely upon the normal discipline of private capital markets.
The policies worked remarkably well at first: Japan escaped the worst of its deflation earlier than many Western economies, exports recovered, industrial production expanded, and government spending helped support demand. Takahashi eventually became concerned, however, that the mechanism was becoming dangerous, and by 1935 he attempted to restrain expenditures and move away from direct Bank of Japan underwriting because continued expansion threatened inflation and fiscal instability.
The military wanted more money, and Takahashi was assassinated by young military officers during the February 26 Incident in 1936. The Bank of Japan later described what followed rather plainly: after Takahashi’s death, the government financing mechanism he had tried to restrain helped enable rapidly expanding fiscal and military expenditure.
Japan had carried the financial bunker, but carrying it exposed something important about modern state power. A government capable of mobilizing domestic finance can purchase labor, direct factories, issue debt, and order military equipment without immediately running out of money; the number of yen available to the government no longer provides the same hard constraint that gold reserves or reluctant private lenders might have provided. That doesn’t mean the government has escaped scarcity; it has changed which scarcity matters.
The Machine Gets Bigger
Japan’s war with China expanded dramatically after 1937 and refused to produce the quick political settlement Japanese leaders wanted. Japanese forces captured enormous amounts of territory and major Chinese cities, but the Chinese government continued fighting, and the longer the war continued, the more resources Japan had to devote to maintaining it.
Soldiers had to be transported and supplied, aircraft had to fly, ships had to move between Japan and occupied territories, and trucks needed fuel. Factories needed raw materials to replace ammunition and equipment, while merchant vessels had to carry resources through an increasingly complicated imperial economy. Japan could finance much of this activity domestically, but it couldn’t produce all the physical inputs domestically.
The United States remained an important supplier of precisely the commodities Japan lacked. A 1939 State Department analysis of essential military materials noted that the United States supplied at least half of Japan’s requirements for petroleum, iron, and copper, while Japan also depended on foreign sources for numerous other strategic materials.
This created one of the stranger economic relationships of the period. The United States increasingly opposed Japanese expansion in China and provided assistance to the Chinese government, while American trade continued supplying Japan with commodities useful to the Japanese war economy. Washington gradually tightened export restrictions, but petroleum remained particularly difficult: cutting Japan off from oil might weaken Japan, but it might also tell Japan where it needed to go next.
American officials understood the problem. In early 1941, State Department discussions about restricting petroleum repeatedly returned to the danger that Japan could respond by moving south toward alternative supplies. A July 1941 U.S. Navy study stated that shutting off American petroleum would probably lead Japan toward the Netherlands East Indies, although it cautioned that such an invasion wasn’t necessarily immediate or inevitable. The same study estimated Japanese oil stocks at roughly eighteen months of wartime operations.
The United States therefore found itself confronting its own bunker. Selling petroleum to Japan helped sustain a military power fighting in China, while refusing to sell petroleum could increase the incentive for Japan to obtain it by force; there wasn’t an option that simply made the problem disappear.
You Can Print Yen. You Can’t Print Oil.
By 1940 and 1941, the contradiction had become increasingly difficult to ignore. American restrictions had already reduced exports of iron, steel, and machine tools, yet petroleum exports behaved differently. A U.S. Navy study prepared in July 1941 noted that the value of American petroleum exports to Japan had actually increased by 21 percent in 1940 over 1939, and exports during the first five months of 1941 were already worth half the value of the entire previous year’s shipments.
The quantities could be startling. In April 1941, State Department officials reported that since export controls had been introduced the previous July, approximately 9.2 million barrels of gasoline had been licensed for export to Japan, along with approximately 22 million barrels of crude oil. Officials were particularly worried that Japan was concentrating its purchases on gasoline and high-quality crude capable of producing aviation fuel.
This wasn’t simply a question of whether Japan possessed enough money to buy petroleum, because Japan had spent the previous decade demonstrating that its government could mobilize financial resources on an enormous scale. Oil obeyed different rules.
A central bank can purchase government bonds and expand the domestic money supply; a government can direct credit toward shipyards and factories, order companies to increase production, and redirect labor toward military priorities. None of those policies, however, creates petroleum beneath the Japanese home islands. You can print yen. You can’t print oil.
That distinction separates a financial bunker from a physical one. Money can change claims on resources, credit can reorganize who gets to use them, government spending can mobilize resources that otherwise would remain idle, and monetary policy can reduce borrowing costs and alter the distribution of economic activity. But somebody still has to possess the resource, and for Japan much of the petroleum it needed existed somewhere else.
Then Europe Collapsed
The geography of Japan’s resource problem didn’t change dramatically in 1940, but the political structure surrounding those resources did. Germany conquered the Netherlands in May 1940, France fell the following month, and Britain remained at war, increasingly concentrating its resources on survival in Europe and the Atlantic while, thousands of miles away, European colonial possessions remained scattered across Southeast Asia.
The Netherlands East Indies contained precisely what Japan lacked: substantial petroleum production. British Malaya possessed rubber and tin, while French Indochina occupied a strategically useful position along the Southeast Asian mainland. Suddenly, the southern resource area looked different.
The oil hadn’t moved, nor had the Dutch East Indies or Japan; what had changed was Europe.
Japan consequently increased pressure southward. Japanese forces entered northern French Indochina in 1940 and southern Indochina in July 1941. The United States responded to the latter move by freezing Japanese assets, while Britain and the Netherlands took parallel measures. The resulting financial controls effectively brought Japanese access to American petroleum to a halt.
This is where sanctions are sometimes allowed to explain too much of the story. The embargo didn’t suddenly create Japan’s petroleum problem; the underlying problem had been developing for decades through industrialization, military expansion, limited domestic resources, and increasing dependence upon imported commodities. What the restrictions changed was the clock.
Before the cutoff, Japan could continue purchasing a resource it couldn’t produce in sufficient quantities itself; afterward, every barrel consumed from existing reserves reduced the amount of time available before something had to change. Petroleum became more than a commodity; it became time.
There’s Oil Down There
The obvious solution could be seen on a map. South of Japan lay the petroleum resources of the Netherlands East Indies. Japan had already been negotiating for greater access to those supplies, and American diplomatic documents from 1941 show how central the question had become. Japanese proposals contemplated guaranteed quantities of crude and refined petroleum and even arrangements for participation in undeveloped oil resources of the southwestern Pacific.
If Japan couldn’t reliably purchase the petroleum it required, possession of the resource fields offered an increasingly attractive alternative. Except carrying the oil bunker revealed another bunker behind it.
Oil in the ground isn’t fuel in an aircraft. The petroleum had to be extracted, wells had to remain intact, refineries had to operate, storage facilities had to exist, and tankers had to load the petroleum and move it north. Ports had to function, sea lanes had to remain open, merchant ships had to survive the journey, and naval and air forces had to protect an enormous logistical network stretching across thousands of miles of ocean.
Geography had also placed other countries in inconvenient locations around that network. The British possessed important positions across Southeast Asia, the Netherlands controlled the oil-producing territory Japan wanted, and the United States possessed Guam and, much more importantly, the Philippines along the routes between Japan and the southern resource area. American, British, and Dutch military forces existed throughout the region.
Japan had found the oil, but now it had to figure out how to get to it, secure it, transport it, and keep everybody else from cutting the route afterward. The solution to the petroleum bunker had become a logistics bunker.
Carrying Bunkers
This is what makes Japan’s petroleum problem such a useful example of the Daly Doctrine. The history isn’t a simple story of a resource-poor country irrationally deciding it needed more territory; Japan had spent decades becoming remarkably capable at overcoming constraints.
Western industrial technology helped overcome limitations in production, while modern financial institutions helped mobilize capital. Leaving the gold standard helped escape a destructive monetary constraint, and Bank of Japan financing reduced the government’s dependence on conventional borrowing. Industrial expansion increased military capability, while military expansion increased Japan’s ability to acquire and defend territory. Every successful solution changed what Japan was capable of doing, but it also changed what Japan needed.
A country without aircraft carriers doesn’t need fuel for aircraft carriers; a country without a mechanized military doesn’t need petroleum for thousands of military vehicles; and a country without a large industrial economy doesn’t require the same quantities of imported industrial raw materials. Modernization gave Japan enormous new capabilities while simultaneously creating an enormous logistical machine that had to be continuously fed.
Eventually, that machine reached a bunker it couldn’t carry with another financial innovation. The Bank of Japan could help finance another ship, but it couldn’t fill the ship’s fuel tanks. Japan could accumulate petroleum reserves, but reserves only delayed the problem; it could negotiate for continued access to foreign supplies, but that access depended upon other governments; and it could attempt to seize the oil fields, but then it would inherit the enormous problem of protecting the infrastructure connecting those fields to Japan.
Every route around the bunker revealed another bunker. By late 1941, Japanese leaders were confronting an increasingly uncomfortable map: their industrial and military system required petroleum, their principal American supply had been effectively cut off, existing reserves were finite, and the most attractive alternative supplies lay to the south, where the collapse of European power had made colonial possessions look more vulnerable than they had only a few years earlier.
But the oil wasn’t sitting beside Japan. Between the Japanese home islands and a secure southern petroleum supply stood thousands of miles of ocean, foreign territories, military bases, ships, aircraft, and several governments capable of interfering with the route.
Japan had spent half a century constructing a modern state capable of overcoming problems that earlier generations could scarcely have imagined. Now the problem was embarrassingly physical: there was oil down there, Japan was up here, and there was an awful lot of infrastructure in between.