Volume 399, May 16 – May 19, 1941

DIARY Book 399 May 16 - 19, 1941 Regraded Uclassified - A - Book Page Allison Engineering Company See War Conditions: Airplanes (Engines) AUGUSTA, USS For HMJr's cruise in Bermuda see Morgenthau, Henry Jr. Asores See Morgenthau, Henry. Jr.: Trip to Bermuda - B - Barth, Alan Resume of newspaper reaction to Hess flight, etc. - 5/16/41 399 125 Bermuda For USS AUGUSTA cruise see Morgenthau, Henry, Jr. Birgfeld, Frank See Communists - investigations of in Treasury Business Conditions Haas memorandum on situation for week ending May 17, 1941 435 - C - Canada See War Conditions: Canada; Lend-Lease Cape Verde Islands See Morgenthau, Henry, Jr.: Trip to Bermuda Chase National Bank See War Conditions: Foreign Funds Control; Silver China See War Conditions: Silver Chrome Ore See War Conditions: Strategic Materials Coast Guard Patrol force for protection of ship repair and manufacturing plants performing Navy contracts to be organized by Treasury and Secretary of Navy 80 informed - 5/16/41 101 Transfer in its entirety to Navy in time of war advocated by Waesche and Gaston - 5/19/41 367 Communists Investigations of in Treasury - HMJr urges caution - 5/19/41 280 a) Birgfeld and Irey discussed - D - Defense Savings Bonds See Financing, Government Regraded Uclassified - E - Book Page Egypt See War Conditions - I - Financing, Government Banks and insurance companies - 50 largest holding 34's of 1941 - 5/16/41 399 118 Tax anticipation certificates - Bell memorandum - 5/16/41 119 Refunding in August: Haas suggestions - 5/19/41 341 a) Yields of Treasury bonds and notes as of May 15, 1941 346 b) Questions and answers 347 c) Conference; present: HMJr, Bell, Haas, Hadley, and Lindow - 5/20/41: See Book 400, pages 36 and 252 1) Eccles-HMJr conversation: Book 400, page 59 2) Sproul-HMJr conversation: - 400, # 254 3) Guaranty Trust, Burgess, etc., suggestions: Book 400, page 297 d) Jones invited to conference with Federal Reserve Board - 5/20/41: Book 400, page 108 Defense Savings Bonds: Sales reports - 5/16/41, etc. 122,226,340 Newspaper reaction - resume of - 5/16/41 123 Conference; present: HMJr, Graves, Haas, Houghteling, Kuhn, Sloan, Powel, Callahan, and Johnston - 5/19/41 304 Radio and Boy Scouts' cooperation reported to FDR 5/19/41 327 - G - Garrison, Lloyd K. Citizenship Day address - Milwaukee - 5/18/41 230 General Counsel, Office of Report on projects during April 1941 165 - I - Irey, Elmer L. See Communists - investigations of in Treasury - K - Keynes, John Maynard See War Conditions: Lend-Lease; United Kingdom - X - Book Page Morgenthau, Henry, Jr. USS AUGUSTA cruise in Bermuda waters - HMJr-King correspondence concerning - 5/19/41 399 360 a) HMJr discusses with Stimson - 5/23/41: See Book 401, page 203 b) American Consul General at Hamilton arranges for HMJr's visit - 5/27/41: Book 402, page 70 c) HMJr thanks Knox - 6/2/41: Book 403, page 5 d) HMJr's impressions on land air base and flying boate for Bermuda, Asores, and Cape Verde Islands - 6/2/41: Book 403, page 8 - P - PRESIDENT COOLIDGE, SS See War Conditions: Silver - R - Revenue Revision Excess Profits Tax: Proposals of Eccles and Henderson - Blough memorandum - 5/17/41 216 Tax anticipation certificates - Bell memorandum - 5/16/41 119 - S - Schurs, Carl See Lloyd K. Garrison address Shipping See War Conditions Silver See War Conditions Switzerland See War Conditions - T - Taxation See Revenue Revision Tydings, Millard 1. (Senator, Maryland) Appointments in Treasury and Justice - HMJr's memorandum for FDR concerning - 5/17/41 210 - U - - Unemployment Relief Work Projects Administration report for week ending May 7, 1941 - 5/19/41 449 United Kingdom See War Conditions: Military Planning; Purchasing Mission; United Kingdom - V - Book Page War Conditions Airplanes: Engines: Allison Engineering Company shipments - 5/19/41 399 415,416 Shipments to British - Kamarck report - 5/16/41 134 Shipments to United Kingdom and overseas commands - British Air Commission report - 5/19/41 414 Canada: Withholding tax on dividends and interest payments to non-residents - Ilsley (Minister of Finance) discusses with Livesey - 5/16/41. 138 Egypt: American equipment in Egypt - status of - 5/17/41 425 Exchange market resume' - 5/16/41, etc 186,229,453 Export Control: Exports of petroleum products, scrap iron, and scrap steel from United States to Japan, Russia, Spain, and Great Britain, week ending May 17, 1941 - 5/19/41 434 Foreign Funds Control: Chase National Bank offers cooperation in bank transactions with German, Italian, and Japanese banks and firms - 5/16/41 106 Lend-Lease: See also War Conditions: Purchasing Mission Canadian purchases discussed by Purvis, Hopkins, Coyne, and Keynes - 5/16/41 145 Keynes, John Maynard: Memorandum on difficulties in bringing certain British requirements under Lease-Lend procedure - 5/16/41 146 Military Planning: Reports from London transmitted by Halifax - 5/16/41, 5/19/41 188,191,455 War Department bulletins: Prisoners - British notes on escape of - 5/16/41 195 Collection of information in battle - British notes on - 5/19/41 460 Price Control: Minutes of May 15 meeting and agenda for May 21 meeting - 5/19/41 398 a) Discussion of 1) Installment credit 2) Lead - stock pile of 3) Bituminous coal 4) Automobile production 5) Hides - price of 6) Nitrogen situation 7) Commodity exchanges 8) Control of speculation in commodity exchanges - V - (Continued) Book Page War Conditions (Continued) Purchasing Mission: Federal Reserve Bank of New York statement showing dollar disbursements, week ending May 7, 1941 - 5/16/41 399 111 Weekly report - 5/16/41 155 FDR authorizes transfer of defense articles to United Kingdom - 5/16/41 156 (See also Book 400, page 100 - 5/20/41) Shipping: French ships should be guarded - - Hull tells Treasury - - 5/16/41 105 Silver: Detention in Shanghai of SS PRESIDENT COOLIDGE because of silver shipment made by Chase Bank reported by American Consul, Shanghai - 5/19/41 421 Strategic Materials: Chrome Ore (Turkish): Offsetting payments against materials furnished British under Lend-Lease not desirable - HMJr's letter to Mack (Procurement) - 5/16/41 159 Switzerland: Army demobilizing demands by Germany reported on by American Consul, Zurich - 5/19/41 417 United Kingdom: Military information given to American officials - report that charge will be made later declared to be "poppycock" - 5/16/41 142 Keynes, John Maynard: Winant asked for underlying purpose of visit to United States - 5/19/41 407 a) Answer 409 Work Projects Administration See Unemployment Relief 1 May 16, 1941 9:00 a.m. RE TAXES Mr. Sullivan Present: Mr. Shoup Mr. Helvering Mr. Foley Mr. Greenbaum Mr. Kades Mr. Knollenberg Mr. Blough Mr. Bell Mr. Kuhn Mrs. McHugh Mr. Gaston H.M.Jr: All right, Roy. (Mr. Blough handed copy of draft of Tax Statement to Secretary.) Now, Blough. Blough: Read? H.M.Jr: How much sleep did you have? Blough: Plenty. H.M.Jr: Did you? You must get along with very little. (Mr. Gaston entered the conference.) Blough: Just for one night. H.M.Jr: Everybody is here but Sullivan. Let's go. Regraded Uclassified 2 - 2 - Blough: "My purpose today is to discuss with you the problem of corporate taxation in the present emergency. What I shall have to say is supplementary to the statement made by Secretary Morgenthau when the current hearings were opened and to the suggestions laid before you subsequently on behalf of the Treasury Department. "The Treasury is called upon to meet expendi- tures greater than have ever been made in the nation's peacetime history, and probably greater than at any period in our history, in peace or war." H.M.Jr: Excuse me. If and when you come to something that is different than last night, will you let me know? When you come to a change and remember, will you say, "I am going to read a change (Mr. Sullivan entered the conference.) Blough: Yes. "At such a time we cannot expect to rely on normal sources of revenue or be content with revenue in normal amounts. We must adopt extraordinary measures to deal with our extraordinary situation. "Your Committee is now formulating changes in our tax system, both to provide the revenues needed to finance the defense expenditures that we are committed to make, and also to assist in maintaining the economic health of the nation. Our people know that great sacri- fices must be made and they are prepared to make them. They rely upon us so to plan our financial program that, however severe its burdens may have to be, they will rest fairly and justly upon all individuals and all busi- nesses. Regraded Uclassified 3 - 3 - "The tax program which you will propose will necessarily consist of many elements. Any one tax, viewed by itself, may appear to be stringent. All must be viewed, however, as parts of & whole. This is an emergency. Taxes that would not be proposed in peace times are a necessity now. We cannot give effect to all those niceties of exemptions and saving clauses that are appropriate to easier occasions but today will defeat our ends.' H.M.Jr: Wait a minute. "Saving clauses." Go ahead. Blough: "I have been asked particularly to discuss the excess profits tax, first enacted in the fall of 1940. Our experience with it is still limited, for many of the returns of the largest corporations have not yet been filed. Enough have been filed, however, to convince Treasury officials in charge of administration that important changes in the law must be made in the interests of fairness. We are collecting large sums by means of this tax, but the profits of 8 good many business firms are not being touched by the tax, although those profits are excess profits by any reasonable standards.' And that was a slight change in wording at that point. "Here is certainly a place to broaden the base. Surely the skill of this Committee and its experts is adequate to the task of bringing within the tax the known cases of corporate excess profits. "I want first to outline the principles which I believe should govern the taxation of excess profits; second, to indicate respects in which Regraded Uclassified 4 - 4 - the present law fails to accord with those principles; and third, to suggest possible remedies which the Congress may wish to consider. "I - Principles "Under present conditions some kinds of profits may be appropriately subjected to heavier taxation than other kinds. This may be necessary in order to distribute the burden fairly and to avoid unfavorable economic effects that might result if the revenue were raised in other ways. "1. Defense profits "The first type of profits which should, in a period of this kind, be subjected to special taxation comprises the profits which may be reasonably attributed to the defense program. Such profits are being made out of the sacri- fices of the people as a whole and should be returned to the people in taxes, insofar as may be possible without destroying necessary incentives to produce defense goods. In the next sentence, "majority" is changed to "many". In many cases it is not possible to distinguish with precision the additional profits due to the defense program. The effects of defense spending are diffused throughout the whole economic system. It is necessary, accordingly, to assume that in general, increases in profits during this period are due to defense." At this point, this sentence was cut out. "Some relief can and should be granted where it is clear that this is not the case." Regraded Uclassified 5 - 5 - "Inability to measure defense profits precisely should not discourage us from subjecting them to special taxation even at the risk of hitting some income not derived from the defense program." And that is changed from "some incomes not due to the defense program." "2. Profits in excess of a necessary normal on invested capital "The other kind of profit that can properly be subjected to special taxation comprises profits in excess of 8 necessary normal return on invested capital even if this return was being earned in the years prior to the defense program. The existence of such profits, while often due primarily to good management, is in numerous cases due to monopoly, imperfect competition, or fortunate circumstances, and not to any outstanding service to the public." At this point the following sentence was elim- inated: "These profits represent in large part money taken from the consumers in excess of the amount necessary to produce the goods or services." "When the imperfection of our economic machine have permitted this to happen, it is equitable and desirable that the excess profits be subjected to special taxation. Furthermore, at a time when heavy taxes must be imposed they should be levied where they will assist best in maintaining a well- functioning economy. To take an especially large share of the profits in excess of a normal return on invested capital will not cause any companies to go into bankruptcy or withdraw from business. Regraded Uclassified 6 - 6 - "I am aware that the anticipation of extra- ordinarily large profits may in many cases have put security prices well above 8. figure that would represent invested capital. The imposition of these special taxes may seem harsh to individuals who have purchased those securities at such levels. We cannot entirely disregard this aspect of the problem, but we must remember that no legislation is ever passed and no progressive step is every taken which does not disturb the established in- terests of some people. We submit that established expectations of high profits are entitled to no more protection than an indi- vidual's expectation of a continued large salary, now subject to a heavy tax. This is an emergency, and changes must be expected. "I am also aware that the application of the principle of taxing profits in excess of & necessary normal return on capital involves difficulties of both principle and technique." There is a slight change here. These words have been added: "These difficulties should not be underestimated, but I feel sure that we should not allow them to stand in the way of our seeking to attain the main objective." Bell: Where you say "subject to a heavy tax", would it emphasize more if you said, "now subject to a much heavier tax"? Blough: It might be, although it isn't always true. You mean "now subject to a much heavier tax than before"? Bell: Yes. You see you are comparing what he says now with what they have been paying. Blough: Good. Regraded Uclassified 7 - 7 - H.M.Jr: Who has the July 8 statement? Somebody took it off my desk. Foley: I gave it to Eddie. What did you do with it, Eddie? Greenbaum: I put it on the table back here yesterday afternoon. Foley: That is the one you got last night. Kades: I will get another copy. H.M.Jr: Get a copy which goes for the President, you see. Foley: Have it run. H.M.Jr: Have it run and give it to Mrs. McHugh. Kades: Yes, sir. H.M.Jr: Now, just a second. If there are going to be any changes, they will have to be made on each page now as we go along. I won't explain it, but there will be no more changes, so if anybody has got anything - I take it that this is the copy here that goes to the President. What? Blough: Mr. Bell had one suggestion. Bell: Not very important. Blough: The first paragraph on page six, next to the last line, "an individual's expectation of a continued large salary, now subject to a heavier tax, If the idea that it has been in- creased. Regraded Uclassified 8 - 8 - H.M.Jr: Wait a minute. I am not with you. Page six, what? Blough: Page six, first paragraph, next to the last line, where it is said that "an individual's expectation of a continued large salary--" H.M.Jr: I still don't see. What paragraph is that? Blough: First paragraph. "Now subject to a heavy tax", just before the last sentence. H.M.Jr: Yes. Blough: "Now subject to a heavy tax." He points out that it - that it would be more in keeping with the rest of it if it said "now subject to a much heavier tax." H.M.Jr: I didn't get the point. Blough: What I said was, "The taxes are being changed and we shouldn't worry too much about that," and Mr. Bell points out that if this said, "now subject to a much heavier tax than formerly," or something like that, "that it might carry more-- H.M.Jr: Well, what do you think? Foley: I think that is a good change. Bell: It is not very important, but what you are trying to do, I take it, is point out that the individual has now had his taxes raised way up whereas these particular corporations are not being hit in this period like the individuals. I just thought "much heavier at this time" would emphasize that point. I don't think it is terribly important. Regraded Uclassified 9 - 9 - Greenbaum: I think it is worth changing, because it does emphasize it. H.M.Jr: What has happened to Kades? Foley: He went to get the July 8 statement. H.M.Jr: Who will correct this, so I can give it to somebody to correct. Foley: I will do it. Are you going to have the first page run again with that change? H.M.Jr: What change on the first page? Foley: Well, there is a typographical error, isn't there? H.M.Jr: Well, that doesn't bother me. Are you just going to change that, Ed? Foley: Yes, make it "heavier." H.M.Jr: Is that all there is? Foley: Yes. Isn't that right, Dan? Bell: That is all right. Knollenberg: "Than before". It might sound as if it is heavier than this excess profits tax. Gaston: If you are going to change it, you might as well make it"now to be subject to a much heavier tax." I think what you are thinking about is the new law that isn't the law yet. Foley: All right, "now to be subject to a much heavier tax." Blough: Do you need a "than" in there? Regraded Uclassified 10 - 10 - Gaston: No. Blough: All right. H.M.Jr: Where were we, Roy? Blough: We were ready for roman two at the bottom of page six. H.M.Jr: Just read the rest of that page and we will send out page six. Blough: "II - Defects of the present law "In the light of the principles just stated, let us now examine the excess profits tax law passed last year, to see in what respects, if any, it fails to correspond to them." H.M.Jr: Now, just a minute. Bell: Want me to take it? H.M.Jr: No. Sullivan: Is page five out? H.M.Jr: Oh, God! We have got to get this at ten o'clock. There is a limit to what we can do. I have got to get this thing over there. What is it, John? Sullivan: It isn't important. H.M.Jr: I mean, how am I going to get this to the President? And I want to see the last part, which is the most important. Sullivan: Very much SO. Regraded Uclassified 11 - 11 - Foley: We can get it over. They can run these pages as we change them. Blough: I can read faster if you like. H.M.Jr: No, it is all right, but I know that we are going to have trouble with the end, and I want to get to that. Blough: "1. Failure to reach large parts of defense profits "The Excess Profits Tax Act of 1940 was a clear expression of Congressional intent that profits growing out of the defense effort should be subject to excess profits tax. The law, however, has not achieved that objective. Many corporations that are the principal bene- ficiaries of the defense effort and that hold large government contracts are paying little or no excess profits tax." Greenbaum: Mr. Secretary, how would it be just to go over the changes and not read the rest of it? H.M.Jr: I want Bell to get it. Go ahead. Blough: "In the absence of complete excess profits tax returns an examination has been made of pub- lished financial data for certain corporations. One company whose profits in 1940 were more than 3,000 percent larger than in 1939 is subject to no excess profits tax whatever on 1940 earnings and this is a company which has thus far received over $70 million of defense contracts. A large steel company which has received over $250 million of defense con- tracts and had earnings in 1940 of nearly 200 percent larger than in 1939 will pay no excess profits tax. It appears that only 5 out of 12 large integrated steel companies will be subject to excess profits tax on the income Regraded Uclassified 12 - 12 - of 1940, although steel companies have in general received huge amounts of defense orders." H.M.Jr: Now, just stop there 8. minute. Sullivan: We mentioned steel twice. If you wanted to take "steel" out the first time, I don't think you would lose anything. Say, "A large company which has received over $250 million, because then later on you talk about steel companies. It looks as though we are rather riding them. H.M.Jr: They said the same thing. How would you change it? Sullivan: Just say, "A large company." Take out "steel." H.M.Jr: We can just cross that out. That is easy. Sullivan: Yes. There is no need of doing the page over. H.M.Jr: You mean just leave out the word "company"? Sullivan: No, "A large company." H.M.Jr: All right. That is done. Foley: Don't you want that rerun. H.M.Jr: No. Dan, have you got anything? Bell: Do you give the reasons? I see, the next para- graph gives the reasons. H.M.Jr: Yes. Go ahead. Blough: "These companies pay little or no excess profits Regraded Uclassified 13 - 13 - tax because they are allowed a minimum credit of 8 percent of invested capital. "2. Failure to tax profits in excess of a necessary normal return "Another serious shortcoming of the 1940 excess profits tax law is that profits in excess of a necessary normal return on invested capital are not subject to the tax unless such profits also represent an increase over the profits of the base period. For example, one company which earned during the base period an average of approximately 40 percent on its present invested capital will be free from the excess profits tax on income in any year equal to approximately this 40 percent and will be taxable only on such increases in income as it may enjoy. "This failure of the law to reach a large por- tion of excess profits is due to the provision of a credit for every corporation equal to 95 percent of its base period earnings, regard- less of the size of those earnings in relation to its invested capital. "III - Remedies "Revisions of the excess profits tax to be considered adequate, must reach the two kinds of profits which I have been discussing. The tax can reach a much larger proportion of defense profits - If and there is a slight change here - "a larger proportion of defense profits if there is 8. reduction in the 8 per- cent credit on invested capital. Profits in excess of a necessary normal return can be reached by taxing all profits above 8. stated percentage of invested capital, regardless of average base period earnings. Regraded Uclassified 14 - 14 - "These were the basic elements of the Treasury excess profits tax proposal of 1940, and it is this plan, with modifications dictated by experience, that we suggest. In that pro- posal corporations were to be allowed tax free their earnings during the base period, but not more than 10 percent of invested capital." H.M.Jr: Just a moment. "To be allowed tax free their earnings"? Blough: It really was an amount equal to their earn- ings during the base period. H.M.Jr: Is that clear? Blough: Free from excess profits tax an amount equal to their earnings during the base period would be more precise. H.M.Jr: A corporation would be allowed tax free their earnings? Kuhn: "To be allowed their earnings, tax free," isn't that a better way of putting it? Bell: "Their earnings during that period would be tax free." Foley: It all depends on the way you say it, Mr. Secretary. Blough: Put a hyphen in "tax free". Foley: It reads all right if you drop your voice. H.M.Jr: Thank you. O.K. Blough: "However, they were granted & minimum credit of 4 percent of invested capital with 6 per- Regraded Uclassified 15 - 15 - cent allowed on the first $500,000. Thus, under that plan - " instead of the Treasury plan, to make sure that it is last year's plan - "Thus, under that plan a concern which earned 7 percent during the base period would be allowed to continue to earn 7 percent free of tax. A concern which earned only 2 per- cent during the base period would be per- mitted to e arn 4 percent free of tax. A concern which earned 15 percent during the base period would be allowed to earn 10 percent free of tax." H.M.Jr: John? Sullivan: It is all right. Blough: "Under the 1940 Treasury proposal it was recognized that if businesses were to be ex- panded and investors were to put money into new corporations, an opportunity must be allowed to earn a substantial rate of return on new capital. The plan allowed an 8 per- cent return, regardless of the earning ex- perience during the base period on old capi- tal. "If the plan submitted by the Treasury last year - a slight change to make sure we have the right plan - "If the plan submitted by the Treasury last year had been applied in the examples previously presented, the tax results would have been quite different. The corporation which had the 40 percent return on its invested capital in the base period would have paid excess profits tax on about half of its 1940 income instead of on about one-twentieth as under the present law." Now, we will have to say "one of the large companies," instead of "a large steel company." Regraded Uclassified 16 - 16 - H.M.Jr: Wait a minute. Greenbaum: Could you describe it as a large company which received two hundred fifty million in defense orders? H.M.Jr: Why not put it this way, Ed? "The large company which received such-and-such 8. contract." Foley: Right. Greenbaum: Yes, we are making just the same correction. H.M.Jr: "The large company that received the - If what was it you said? Greenbaum: "Two hundred fifty million of defense con- tracts," that is the way we described it before. H.M.Jr: Yes, that is right. Blough: It is over two hundred fifty. Gaston: You don't need "large." "The company that received it." Foley: "The large company which received it." H.M.Jr: Well, you call it "the large," don't you? Greenbaum: I would like to repeat the same phrase. It ties right in, then. H.M.Jr: I would repeat. "The large company which received-- Blough: "Over two hundred fifty million dollars of defense contracts." Regraded Uclassified 17 - 17 - H.M.Jr: You can avoid both of them in the first instance if you call it a large industrial company. Blough: What about that? Sullivan: Oh, it has gone out now. Greenbaum: No, that page wasn't changed. Sullivan: I have another thing on this page that bothers me. "The corporation which has the forty percent." It looks as though we are gunning for one company. Now, there were several that had forty percent, Roy. Blough: Well, the examples mentioned it. H.M.Jr: How would you change it? Kuhn: I would leave it. H.M.Jr: Read me ten before it goes out. Foley: "The large company which received over two hundred fifty million of defense contracts would have paid excess profits on over one- third of its income and the other company with poor earnings in the base period would have paid on about one-fifth of its income." H.M.Jr: All right. Foley: O.K.? H.M.Jr: Yes. Bell: Do you mean to be put in there "under the present law"? "Being exempt under the present law," is that what you mean? The last line. Regraded Uclassified 18 - 18 - Blough: Yes, instead of both companies being entirely exempt under the present law - is page ten gone out finally? Foley: Yes, I gave it to her. What do you want changed? Blough: Mr. Bell suggests, "under the present law" be added to the last line. H.M.Jr: Shall we leave it as it is? Gaston: "As under the present law." I don't think it is necessary. Knollenberg: I don't either. Bell: O.K. H.M.Jr: If it isn't necessary-- Gaston: It isn't necessary. Bell: I just thought some of them might raise the question as to whether it was under a pending bill. O.K. I wouldn't change it. Foley: I think when you say "would have had--" H.M.Jr: Well, what do you think? Are you all right? Want to change it? Knollenberg: I think it is clear. We spoke about "pre- viously presented,' which were these com- panies under the present law. H.M.Jr: Want to press for it, Bell, or not? Bell: No. H.M.Jr: O.K., we will let it go. Regraded Uclassified 19 - 19 - Blough: "Even this plan, however, would have failed to reach substantial amounts of defense profits received by corporations which had especially poor earnings during the base period. To meet this defect we would suggest revising the 1940 proposal to provide that where the average earnings of the base period were less than the minimum of 4 percent, the excess profits tax should be applied at 8. low flat rate, possibly 10 percent, to that part of the current profits that is in excess of the base period earnings but not in excess of 4 percent of invested capital. For example, if a corporation earned during the base period an average of $100,000 a year, while 4 percent of its invested capital amounts to $300,000, the first $100,000 of profits in the current taxable year would be entirely exempt from excess profits tax, the next $200,000, representing the difference between the $100,000 average earnings and the $300,000 credit on invested capital, would be taxed at 10 percent and any earnings over $300,000 would be subject to the regular excess profits tax rates. This special rate of tax would subject all increases in profits during the defense period at least to some excess profits taxation while at the same time not being high enough to impose an undue burden on concerns whose increased earnings are not truly defense profits." H.M.Jr: John? Sullivan: All right. H.M.Jr: Go ahead. Blough: "We would suggest also that the rate allowed on new capital be the same as the maximum rate allowed on old capital, namely, 10 percent. Regraded Uclassified 20 - 20 - Any maximum return on capital must be a somewhat arbitrary figure because busi- nesses differ widely in the degree of risk they face. Accordingly, it is desirable not to set too low a maximum rate of return. "Similarly, it would be desirable to keep the tax rate low on that part of the profit which is immediately above the credit. To this end we suggest that tax rates be gradu- ated in accordance with the rate of return on invested capital with a moderate initial rate. It should be possible to raise the desired revenue with 8. lower rate scale on the average than under the present law because of the larger amount of profits that will be subject to tax. "Moreover, with this new broad excess profits base, it would be possible to adapt ourselves quickly and much more easily to 8. need for still larger revenues if the emergency should so require." From now on we have new material in this para- graph. "The future is especially uncertain during an emergency period, and we might have to act quickly. It is better to have a broad excess profits tax base carefully worked out while we still have time than to patch up the present law only perhaps to find ourselves confronted with the necessity of improvising such A base on short notice at a later date. Sullivan: I like that very much. H.M.Jr: Very good. Blough: "IV. Possible but not preferred alternative Regraded Uclassified 21 - 21 - H.M.Jr: Now wait a minute. Blough: That "but not preferred" was added as sug- gested last night. H.M.Jr: Let it just sink in a minute. Sullivan: Then I think Mr. Knollenberg afterward-- Knollenberg: I afterward changed my mind and said to cut it out. Blough: Oh, I am sorry. Knollenberg: Never mind. Foley: I like it. (Laughter) Sullivan: I do. Foley: Next best to taking it out entirely. Sullivan: I am for taking it out. Foley: I mean from there on. H.M.Jr: That is what I wanted to say in the few minutes we had left. Let's take a look at it the way it reads. Just see what the possibile but not the preferred looks like. Sullivan: Don't let that phrase go out. H.M.Jr: All. right. Blough: "Thus far I have outlined what seem to me to be the principles of excess profits taxation that should be followed in this emergency period and have indicated ways in which the existing law fails to carry them out. If you believe with me in these principles, I believe you Regraded Uclassified 22 - 22 - will agree that 8 plan similar to the one I have outlined is the logical method of put- ting the principles into practical operation. Variation in details is not a matter of con- cern, 80 long as the plan adopted fulfills the clear purpose to impose taxes both on defense profits and on excess profits, which is something the present law does not do." H.M.Jr: Now wait a minute. Gaston: There are too many "believes" I think. H.M.Jr: Well, Herbert, I am not going to have patience. That kind of thing we could do over. Sullivan: That is right. H.M.Jr: I mean, you are perfectly right, Herbert, but I am not going to do over a page now. Bell: It seems to me that that whole paragraph belongs at the end of the preceding section. You haven't said anything in that paragraph about what you are going to propose here. You are talking about what you have said in the past, aren't you? Knollenberg: I wanted it cut out for that reason last night, but I think maybe yours is sounder, to let it in and change the heading. You are panting to find out what is the alterna- tive and then you have this whole paragraph. I suggest we cut it out. Gaston: No, I think it is a transition that intro- duces your alternative. I think it belongs in the-- Shoup: You don't want them to come to the point with this alternative. Regraded Uclassified 24 - 24 - h.M.Jr: Is that all new? Greenbaum: No, this is the same as on page fourteen. Foley: He is fixing it up. Knollenberg: When it is run off, Mr. Secretary, you will agree with it. Sullivan: I won't. Greenbaum: If you could see it on paper. It would be the same as on fourteen with a certain part moved from fourteen to thirteen. H.M.Jr: Let me run through the rest of this. He read down to, "If these principles are not to be the guide." Blough: Yes. Now, this next paragraph has more changes in it than all the rest put together. R.M.Jr: Let's just hear them. Blough: "If these principles are not to be the guide for taxing corporations during the emergency period, it might be well to consider carefully the disadvantages of having a tax which involves the administrative difficulties of the present tax, but applies only to part of the profits that it should reach. A simpler, more easily administered plan would, of course, be to abandon the excess profits tax and to increase the corporation income tax by enough to produce the desired revenue. With such an increase in the corporation income tax there should, in my judgment, be coupled a provision for reducing the tax when the earnings of the corporation are immediately made subject to the individual income tax, either through the distribution of dividends or in some other way." Regraded Uclassified 25 - 25 - H.M.Jr: Go on, just read through to the end. Blough: "This kind of a plan would be in harmony with the idea of integrating the corporation and the individual taxes, placing chief reliance on the taxation of income individuals - If it should be taxation to individuals. Sullivan: "Of individuals." Knollenberg: "Taxation of income to individuals." H.M.Jr: Let's let it go the way Knollenberg says it. Blough: "With our experience with previous plans of this general character, many difficulties previously met can very likely be avoided and equitable taxation of profits to the individual stockholder provided. "I do not set forth this plan as one that carries into effect the principles which I previously discussed. It is based on principles of its own and is suggested as an alternative, not 8. substitute. "We cannot expect to devise a painless tax bill. The situation calls for sacrifices. As Secretary Morgenthau has already told you, we have had unmistakable evidence that the people are willing to make sacrifices accord- ing to their ability. Outside the tax field greater sacrifices are being asked and cheer- fully made. There is no basis of comparison of the sacrifice of those who are asked to exchange the security of a job and a home for a soldier's pay and a soldier's hardships with the sacrifice of those who are asked to pay even drastically higher rates of tax." H.M.Jr: Now I am open to suggestion. Regraded Uclassified 26 - 26 - Sullivan: I don't mind whether that heading is moved down one paragraph later, but I would like to have the "not preferred" taken out. H.M.Jr: Do you want it "possible preferred alterna- tive"? Sullivan: No, just "possible alternative." H.M.Jr: Well, you want it how, John? Sullivan: Just "possible alternative." Whether it is moved down one paragraph or not doesn't make any difference to me. H.M.Jr: I see. I think that that would be better down in that heading, Roy. Blough: It is immaterial to me, I am sure. H.M.Jr: What do you think? Gaston: I don't think it matters. H.M.Jr: Ferdie? Kuhn: No, it doesn't matter. I had one point to raise about the whole of the alternative sug- gestion. H.M.Jr: Now, what was this thing, Eddie, that you had? Greenbaum: The reason for this is that at the top of page fourteen, in my opinion, it damns your major proposal. You are saying it has disadvantages of administrative difficulties, and then you are patting the other plan on the back saying it is more easily administered and it is simpler. Kuhn: You are saying"it should, in my judgment," which Regraded Uclassified 27 - 27 - implies a kind of approval of the alternative which we don't like. Greenbaum: Therefore, my suggestion is, and then, and only then I think it is important to change that heading four, would be to add at the end of paragraph on thirteen the thought that you are getting in on fourteen so it would read as follows after full paragraph on fourteen: "Nor should we be deterred by the fact that administrative difficulties exist. It is believed that experience will aid in solving many of them. "IV. Possible alternative "If these principles are not to be the guide for taxing corporations during the emergency period, then, and only then, should considera- tion be given to an alternative plan which it should be noted necessarily can reach only part of the profits that it should reach. Such a plan would have the advantage of simplicity but would, of course, abandon the principle of excess profits tax." Then it would go on. H.M.Jr: What do you think, Roy? Blough: I have no objection to it with one exception. What you are leading up to is some plan for altering the present law which doesn't reach all the profits it should, and the plan that is proposed here reaches more profits than the major proposal does, so that that phraseology, it seems to me, would not be an accurate state- ment. Regraded Uclassified 28 - 28 - Knollenberg: Yes. Greenbaum: It would reach different problems. Gaston: This is on & different basis. Blough: If we are going to put Mr. Sullivan's pro- posal in as an alternative, your language would be excellent in introducing it. Greenbaum: Well, such a plan would have the advantage of simplicity but would, of course, abandon the principle of the excess profits tax. Sullivan: We have already said that, Mr. Greenbaum, We have already said, "If these principles are not to be your guide." Greenbaum: Well, that criticism is true, but it is also ture in the present draft. Then it would go on, "This plan would be to increase the corpora- tion income tax by enough to produce the de- sired income." And then it would be the same as you have it. My major point is, and the only reason I am making the suggestion, par- ticularly at this late hour, is that I do think that the way this is phrased now, you are not only damning your own thing, but you are implying the approval of that al- ternative. Kuhn: If the public gets the impression that the Treasury is really backing this alternative with the undistributed profits tax as part of it, there will be a commotion which we don't want. We are using the defense emergency to put over something which we weren't able to put over five years ago. We are creating new dissensions when we shouldn't be. I think we ought to make it perfectly clear that we only throw this out as something worse than what we would like. Regraded Uclassified 29 - 29 - Knollenberg: Would you be willing to stop on page fourteen, the forth line - there is that clause which says "but applies only to part of the profits that it should reach"? Now that is a somewhat damaging phrase about the excess profits tax. Shoup: In its present form. Knollenberg: Oh! Well, then why don't we say that, to make sure that it is not excess profits taxation in general. "And which in its present form." Shoup: "Of this tax. Which involves the administra- tive difficulties of this tax." Knollenberg: But if we stick in this present tax, you see, Eddie's point is that this seems to damn the principle of excess profits tax. Blough: Oh, I am sorry, we didn't mean to - your criticism is well taken, but couldn't it be met by saying "it might be well to consider carefully the disadvantages of the present tax"? Shoup: "The tax in its present form." Blough: "Of the tax in its present form which involves administrative difficulties while applying only to part of the profits that it should reach." Knollenberg: That cures it. Bell: Put "and" instead of "but." "And applies to only part of the profits." Blough: "It might be well to consider carefully the disadvantages of the tax in its present form which involves administrative difficulties and applies--" 30 - 30 - Knollenberg: "And yet applies." Blough: "And yet applies only to--" Greenbaum: "And does not reach - and reaches only part of the profits that it should reach." Shoup: "Fails to reach all the profits it should." Blough: Well, which of these is better? H.M.Jr: Well, Roy, you do it. You have been doing it. Do one that satisfies you. Greenbaum: He should get his language. Blough: "It might be well to consider carefully the disadvantages of the tax in its present form--" Greenbaum: "Which not only involves administrative dif- ficulties--" H.M.Jr: Give him a chance, Eddie. Blough: "Which not only involves administrative dif- ficulties but fails to reach--" Greenbaum: "Profits that it should reach." Bell: "But reaches only a part.' Greenbaum: "Of the tax." Blough: Are we willing to say "large amounts of profits that it should reach"? Well, then, it would read this way. "It might be well to consider carefully the disadvantages of the tax in its present form which not only involves adminis- trative difficulties but fails to reach large amounts of profits that it should reach." Regraded Uclassified 31 - 31 - Knollenberg: To get what Mr. Helvering said yesterday, I think the phrase would be better, "which involves serious administrative difficulties, and yet--" Sullivan: "Our proposal involves far greater adminis- trative difficulties than the present one." H.M.Jr: Let's just get it down. Blough: Our idea in this connection was this, that you can put up with administrative difficulties if you get what you want, but why put up with administrative difficulties if you don't get what you want. Now we haven't said it, I see. Greenbaum: That is all right. Sullivan: Yes, that is it-- Blough: The disadvantages of the tax in its present form - what was that, Carl? Shoup: "Which involves administrative difficulties that inevitably accompany excess profits taxa- tion while, at the same time, failing to tax large amounts of profits that should be reached." Blough: Will this make everybody happy? "It might be well to consider carefully the disadvantages of the tax in its present form which involves the administrative difficulties that inevitably accompany excess profits taxation while, at the same time, failing to reach - failing to tax large amounts of profits that it should reach. Sullivan: That is all right. H.M.Jr: Is it? Regraded Uclassified 32 - 32 - Sullivan: Yes, because by saying that it inevitably attaches to any excess profitst ax, we are telling parts of the truth of the other statement. I was going to suggest putting in that if it was left the way it was in the first instance that our original proposal, while increasing the administrative diffi- culty, would reach those profits, but I don't think that is necessary with Roy's statement here. H.M.Jr: Are you satisfied? Sullivan: Yes, I am, sir. H.M.Jr: Eddie? Greenbaum: Yes. H.M.Jr: Ed Foley? Foley: Yes. H.M.Jr: Knollenberg? Knollenberg: Yes. Possible doubt about the syntax, but I would have to see that before I am sure. H.M.Jr: Well, you had better take a look at it now because this is your last chance. Knollenberg: All right. Blough: It won't do you any good to look at it. I am afraid you can't read it. H.M.Jr: It is past ten now. Gaston: Instead of "but at the same time failing," make it "but at the same time fails." Regraded Uclassified 33 - 33 - Blough: "Which involves administrative difficulties inevitably accompanying excess profits tax, but fails to tax large amounts of profits that it should tax." Knollenberg: That should be "reached." There you have got a good sentence structure. Bell: You say, "It might be well to consider care- fully the disadvantages." Do you mean that the Committee should consider? It looks as though you are going along to point them out. Blough: Oh, I see. Bell: You mean the Committee should consider? Greenbaum: "You should bear in mind." " Blough: What is the suggestion, Dan? Bell: I was raising the question about the sentence that "it might be well to consider carefully the disadvantages," then you don't say anything about the disadvantages other than the adminis- trative difficulties. Now, what do you mean, that the Committee should consider them or that, as - Eddie points out that the dis- advantages should be bornein mind. When you read it, it looks as though you are going into the disadvantages and you don't. Sullivan: That is a good correction. Blough: "To bear in mind the disadvantages of the tax in its present form." Sullivan: That is right. "You should bear in mind." Blough: Are you willing to say, "You should bear in mind the disadvantages of the tax in its present form"? Regraded Uclassified 34 - 34 - Sullivan: That is right. "You should bear in mind." Blough: Are you willing to say, "You should bear in mind the disadvantages of the tax in its present form"? H.M.Jr: Or "Please bear in mind." Blough: "If the principles are not to be the guide for taxing corporations during the emergency period, please bear in mind--" Helvering: It should be "borne in mind." H.M.Jr: Well, anyway-- Blough: "It would be well to bear in mind," and so forth. H.M.Jr: Now, look, this is the fourth time - third time I have fallen down on him on my time. A word or two here - as long as it is ninety- five percent, I said I would have it over at ten. Now, I mean, you know, one word or two doesn't - we can get another crack at it, maybe. What besides that now is there in this thing? Does that take care of the thing, Eddie, that you had in mind? Greenbaum: Yes, sir. H.M.Jr: Anything else? Greenbaum: The other point is this damn thing on un- distributed profits tax, on the question of inflation. If you insert the word "stock dividends" on fourteen at the end of that paragraph, it would answer my point. Either through the distribution of stock dividends or some other way. I think an excellent improvement has been made in the way it is now, but it still leaves open the point of dishing out cash to individuals and it is Regraded Uclassified 35 - 35 - purposely vague here, and I think that would make it a little more emphasis on the point we legally mean. H.M.Jr: Are you going to limit it to stock dividends? Greenbaum: We say, "or some other way," but I think it ought to be emphasized that you have in mind the inflationary danger of cash dividends. Blough: You don't mean to say you wouldn't allow the credit for the cash dividends? Greenbaum: No, but you are emphasizing the fact that you are thinking of this point, and you want also to call attention to the possibility of doing it by stock dividends. You are saying, "or in some other way. Blough: Would you like to say "cash dividends, stock dividends, or some other way"? Greenbaum: I would like not to mention cash dividends, because that is so obvious. Knollenberg: The other way means that if the stockholders consent then you can tax the stockholders without any dividend at all. Greenbaum: I would rather not have the word "stock" at all if it is coupled with cash. Blough: Why not stop with individual income tax? "The earnings of the corporation are immediately made subject to the individual income." Greenbaum: That would be better. H.M.Jr: John? Sullivan: All right. Regraded Uclassified 36 - 36 - H.M.Jr: Roy? Blough: It doesn't matter to me at all. Kuhn: It is good. H.M.Jr: All right. Greenbaum: Nothing else. H.M.Jr: Now, I think the best thing to do is if you would go with Miss Chauncey in her room, you see, and get that done. 37 DRAFT OF TREASURY STATEMENT ON EXCESS PROFITS TAX My purpose today is to discuss with you the problem of corporate taxation in the present emergency. What I shall have to say is supplementary to the state- ment made by Secretary Morgenthau when the current hearings were opened and to the suggestions laid before you subsequently on behalf of the Treasury Department. The Treasury is called upon to meet expenditures greater than have ever been made in the nation's peacetime history, and probably greater than at any period in our history, in peace or war. At such a time we cannot expect to rely on normal sources of revenue or be content with revenue in normal amounts. We must adopt extraordinary measures to deal with our extraordinary situation. Your Committee is now formulating changes in our tax system, both to provide the revenues needed to finance the defense expenditures that we are committed to make, and also to assist in maintaining the economic health of the nation. Our people know that great sacrifices must be made and they are prepared to make them. They rely upon us 80 to plan our 38 - 2 - financial program that, however severe its burdens may have to be, they will rest fairly and justly upon all individuals and all businesses. The tax program which you will propose will necessarily consist of many elements. Any one tax, viewed by itself, may appear to be stringent. All must be viewed, however, as parts of a whole. This is an emergency. Taxes that would not be proposed in peace times are a necessity now. We cannot give effect to all those niceties of exemptions and saving clauses that are appropriate to easier occasions but today will defeat our ends. I have been asked particularly to discuss the excess profits tax, first enacted in the fall of 1940. Our experience with it is still limited, for many of the returns of the largest corporations have not yet been filed. Enough have been filed, however, to convince Treasury officials in charge of administration that important changes in the law must be made in the interests of fairness. We are collecting large sums by means of this tax, but the profits of a good many business firms are not being touched by the tax, 39 - 3 - although those profits are excess profits by any reasonable standards. Here is certainly a place to broaden the base. Surely the skill of this Committee and its experts is adequate to the task of bringing within the tax the known cases of corporate excess profits. I want first to outline the principles which I believe should govern the taxation of excess profits; second, to indicate respects in which the present law fails to accord with those principles; and third, to suggest possible remedies which the Congress may wish to consider. I - - Principles Under present conditions some kinds of profits may be appropriately subjected to heavier taxation than other kinds. This may be necessary in order to distribute the burden fairly and to avoid unfavorable economic effects that might result if the revenue were raised in other ways. 1. Defense profits The first type of profits which should, in a period of this kind, be subjected to special taxation comprises the profits which may be reasonably Regraded Uclassified 40 - 4 - attributed to the defense program. Such profits are being made out of the sacrifices of the people as a whole and should be returned to the people in taxes, insofar as may be possible without destroying necessary incentives to produce defense goods. In many cases it is not possible to distinguish with precision the additional profits due to the defense program. The effects of defense spending are diffused throughout the whole economic system. It is necessary, accordingly, to assume that in general, increases in profits during this period are due to defense. Inability to measure defense profits precisely should not dis- courage us from subjecting them to special taxation even at the risk of hitting some income not derived from the defense program. 2. Profits in excess of a necessary normal return on invested capital The other kind of profit that can properly be sub- jected to special taxation comprises profits in excess of a necessary normal return on invested capital, 41 - 5 - even if this return was being earned in the years prior to the defense program. The existence of such profits, while often due primarily to good management, is in numerous cases due to monopoly, imperfect competition, or fortunate circumstances, and not to any outstanding service to the public. When the im- perfection of our economic machine have permitted this to happen, it is equitable and desirable that the excess profits be subjected to special taxation. Furthermore, at & time when heavy taxes must be imposed they should be levied where they will assist best in maintaining 8 well-functioning economy. To take an especially large share of the profits in excess of a normal return on invested capital will not cause any companies to go into bankruptcy or withdraw from business. I am aware that the anticipation of extraordinarily large profits may in many cases have put security prices well above a figure that would represent invested capital. The imposition of these special taxes may seem harsh to individuals who have purchased those Regraded Uclassified 42 - 6 - securities at such levels. We cannot entirely dis- regard this aspect of the problem, but we must remember that no legislation is ever passed and no progressive step is ever taken which does not disturb the established interests of some people. We submit that established expectations of high profits are entitled to no more protection than an individual's expectation of a continued large salary, now subject to a heavy tax. This is an emergency, and changes must be expected. I am also aware that the applicati on of the principle of taxing profits in excess of a necessary normal return on capital involves difficulties of both principle and technique. These difficulties should not be underestimated, but I feel sure that we should not allow them to stand in the way of our seeking to attain the main objective. II - Defects of the present law In the light of the principles just stated, let us now examine the excess profits tax law passed last year, to see in what respects, if any, it fails to correspond to them. 43 - 7 - 1. Failure to reach large parts of defense profits The Excess Profits Tax Act of 1940 was a clear expression of Congressional intent that profits growing out of the defense effort should be subject to excess profits tax. The law, however, has not achieved that objective. Many corporations that are the principal beneficiaries of the defense effort and that hold large government contracts are paying little or no excess profits tax. In the absence of complete excess profits tax returns an examination has been made of published financial data for certain corporations. One company whose profits in 1940 were more than 3,000 percent larger than in 1939 is subject to no excess profits tax whatever on 1940 earnings and this is a company which has thus far received over $70 million of defense contracts. A large steel company which has received over $250 million of defense contracts and had earnings in 1940 of nearly 200 percent larger than in 1939 will pay no excess profits tax. It appears that only 5 out of 12 large integrated steel companies will be subject to excess profits tax on the income of 1940, although steel companies have in general received huge amounts 44 - 8 - of defense orders. These companies pay little or no excess profits tax because they are allowed a minimum credit of 8 percent of invested capital. 2. Failure to tax profits in excess of a necessary normal return Another serious shortcoming of the 1940 excess profits tax law is that profits in excess of a necessary normal return on invested capital are not subject to the tax unless such profits also represent an increase over the profits of the base period. For example, one company which earned during the base period an average of approximately 40 percent on its present invested capital will be free from the excess profits tax on income in any year equal to approximately this 40 per- cent and will be taxable only on such increases in income as it may enjoy. This failure of the law to reach a large portion of excess profits is due to the provision of a credit for every corporation equal to 95 percent of its base period earnings, regardless of the size of those earnings in relation to its invested capital. Regraded Uclassified 45 - 9 - III Remedies Revisions of the excess profits tax to be con- sidered adequate, must reach the two kinds of profits which I have been discussing. The tax can reach a much larger proportion of defense profits if there is a reduction in the 8 percent credit on invested capital. Profits in excess of a necessary normal return can be reached by taxing all profits above a stated percentage of invested capital, regardless of average base period earnings. These were the basic elements of the Treasury excess profits tax proposal of 1940, and it is this plan, with modifications dictated by experience, that we suggest. In that proposal corporations were to be allowed tax free their earnings during the base period, but not more than 10 percent of invested capital. How- ever, they were granted a minimum credit of 4 percent of invested capital with 6 percent allowed on the first $500,000. Thus, under that plan a concern which earned 7 percent during the base period would be allowed to continue to earn 7 percent free of tax. A concern which earned only 2 percent during the base period would 46 - 10 - be permitted to earn 4 percent free of tax. A concern which earned 15 percent during the base period would be allowed to earn 10 percent free of tax. Under the 1940 Treasury proposal it was recognized that if businesses were to be expanded and investors were to put money into new corporations, an opportunity must be allowed to earn a substantial rate of return on new capital. The plan allowed an 8 percent return, regardless of the earning experience during the base period on old capital. If the plan submitted by the Treasury last year had been applied in the examples previously presented, the tax results would have been quite different. The corpora- tion which had the 40 percent return on its invested capital in the base period would have paid excess profits tax on about half of its 1940 income instead of on about one-twentieth as under the present law. The large steel company would have paid excess profits tax on over one- third of its income and the other company with poor earnings in the base period would have paid on about one- fifth of its income instead of both companies being entirely exempt. Regraded Uclassified 47 - 11 - Even this plan, however, would have failed to reach substantial amounts of defense profits received by corporations which had especially poor earnings during the base period. To meet this defect we would suggest revising the 1940 proposal to provide that where the average earnings of the base period were less than the minimum of 4 percent, the excess profits tax should be applied at a low flat rate, possibly 10 percent, to that part of the current profits that is in excess of the base period earnings but not in excess of 4 percent of invested capital. For example, if a corporation earned during the base period an average of $100,000 a year, while 4 percent of its invested capital amounts to $300,000, the first $100,000 of profits in the current taxable year would be entirely exempt from excess profits tax, the next $200,000, representing the difference between the $100,000 average earnings and the $300,000 credit on invested capital, would be taxed at 10 percent and any earnings over $300,000 would be subject to the regular excess profits tax rates. This special rate of tax would subject all increases in profits during the defense period at least Regraded Uclassified 48 - 12 - to some excess profits taxation while at the same time not being high enough to impose an undue burden on con- cerns whose increased earnings are not truly defense profits. We would suggest also that the rate allowed on new capital be the same as the maximum rate allowed on old capital, namely, 10 percent. Any maximum return on capital must be a somewhat arbitrary figure because businesses differ widely in the degree of risk they face. Accordingly, it is desirable not to set too low a maximum rate of return. Similarly, it would be desirable to keep the tax rate low on that part of the profit which is immediately above the credit. To this end we suggest that tax rates be graduated in accordance with the rate of return on invested capital with a moderate initial rate. It should be possible to raise the desired revenue with a lower rate scale on the average than under the present law because of the larger amount of profits that will be subject to tax. Moreover, with this new broad excess profits base, it would be possible to adapt ourselves quickly and Regraded Uclassified 49 - 13 - much more easily to a need for still larger revenues if the emergency should 80 require. The future is especially uncertain during an emergency period, and we might have to act quickly. It is better to have a broad excess profits tax base carefully worked out while we still have the time than to patch up the present law only perhaps to find ourselves confronted with the necessity of impro- vising such a base on short notice at a later date. IV. Possible but not preferred alternative Thus far I have outlined what seem to me to be the principles of excess profits taxation that should be followed in this emergency period and have indicated ways in which the existing law fails to carry them out. If you believe with me in these principles, I believe you will agree that a plan similar to the one I have outlined is the logical method of putting the principles into practical operation. Variation in details is not a matter of concern, so long as the plan adopted fulfills the clear purpose to impose taxes both on defense profits and on excess profits, which is something the present law does not do. If these principles are not to be the guide for Regraded Uclassified 50 - 14 - taxing corporations during the emergency period, it might be well to consider carefully the disadvantages of having a tax which involves the administrative difficul- ties of the present tax, but applies only to part of the profits that it should reach. A simpler, more easily administered plan would, of course, be to abandon the excess profits tax and to increase the corporation income tax by enough to produce the desired revenue. With such an increase in the corporation income tax there should, in my judgment, be coupled a provision for reducing the tax when the earnings of the corporation are immediately made subject to the individual income tax, either through the distribution of dividends or in some other way. This kind of a plan would be in harmony with the idea of integrating the corporation and the individual taxes, placing chief reliance on the taxation of income individuals. With our experience with previous plans of this general character, many difficulties previously met can very likely be avoided and equitable taxation of profits to the individual stockholder provided. I do not set forth this plan as one that carries Regraded Uclassified 51 - 15 - into effect the principles which I previously discussed. It is based on principles of its own and is suggested as an alternative, not a substitute. We cannot expect to devise a painless tax bill. The situation calls for sacrifices. As Secretary Morgenthau has already told you, we have had unmistakable evidence that the people are willing to make sacrifices according to their ability. Outside the tax field greater sacrifices are being asked and cheerfully made. There is no basis of comparison of the sacrifice of those who are aksed to exchange the security of a job and a home for a soldier's pay and a soldier's hardships with the sacrifice of those who are asked to pay even drastically higher rates of tax. 52 - May 16, 1941 10:14 a.m. H.M.Jr: Hello. Operator: Secretary Stimson. Henry L. Stimson: Hello, Henry. H.M.Jr: Good morning. S: Good morning. I got your letter this morning on my desk. The fault of that was mine entirely. I've been thinking of it every night and then forgetting it when I got into the whirl of my office the next morning. H.M.Jr: I see. S: I've just called in Ayres and told him of it and I have tried to recall exactly the conversation I had with you. I should like - he will put on the envelopes that it 18 personal for you. H.M.Jr: Right. S: Now, having done that I want to say this. I went over with Ayres the details which Mr. Haas had asked for and they are - I'm going to say frankly to you - they're very much greater and involve greater labor than I had any 1dea of when I talked with you. H.M.Jr: I see. S: Ayres tells me that he has asked for the names of all of the specific manufacturers of supplies and the weapons; all of the productive schedules - production schedules not only of the finished articles but also their components; all of the actual deliveries - dates of actual deliveries; all of the unit prices and to identify all of the appropriations from which these are published. Regraded Uclassified 53 - 2 - H.M.Jr: Yeah. 8: Now, he tells me that this gives to you very much more than even the Undersecretary, who has direct charge of those things, 16 asking and I know myself that it 1e in- finitely more than I ask for or get, and Ayres says that it means virtual re- duplication of our reporting and distri- buting system of information. Now, is there any way you can make it easier for me for I don't quite - it seems to. me that unless there 1s some pretty vital need that you are asking it for I ought not be asked to set up a more detailed system of report- ing in another Department than goes on in my own. H.M.Jr: You're quite right. You're quite right. Now, I tell you if we could do it this way. I don't want to ask - I mean your attitude couldn't be fairer. S: It 18 intended not only to be fair but to be generous and friendly. H.M.Jr: Well, it's always that. I'll tell Haas this, to confine himself to what Ayres has on hand. Hello? S: Yes. H.M.Jr: If it doesn't fall in, give me a 5 or 10% leeway. Is that all right? I mean, if there is some little special thing that he might want because he thinks he might need it, but I'll tell him to try his best to confine himself to what Ayres has on hand. S; Yes. Well, of course, Ayres has stuck away in the records everything that you want, but he hasn't got the machinery for distributing it regularly. That's the point that I'm mentioning. H.M.Jr: Well, may I do this. I'll tell Haas to go over and see Ayres and see if we can't Regraded Uclassified 54 - 3 - have what I want 80 that we can tell how much money is going to be spent a month, you see? 8: Yes. H.M.Jr: I mean, how rapidly this money is going to be spent 80 we can make our estimates. 8: Can you give me on the phone just the general purpose you have in mind Bo that I can have a fairer H.M.Jr: The general purpose 18 this. We've made an estimate that the defense money is going to amount to #19 billion during the fiscal year beginning July 1. S: Yes, that is $9 billion ..... H.M.Jr: $19 billion - no, wait a minute - I'm wrong. A billion a month, an average of a billion a month - a total of $19. 8: Average 1 billion a month. H.M.Jr: See? S: Yes. H.M.Jr: Now S: During the fiscal year '41. H.M.Jr: Yes. Now, what I'm trying to do is - then you see we set up our whole tax bill on the basis of that. You see? S: Yes, I see. H.M.Jr: And our borrowing. Now, what I want to have is as accurate as possible - that's why we want to go back. Is this stuff going to come off faster or slower. See? S: I see. Regraded Uclassified 55 - 4 - HMJr: How near right are we in our estimate that the total defense expenditures beginning Jily 1, are going to average a billion a month? 8: Yes. The - you mean the expenditures will probably correspond to the deliveries. HMJr: Yes, yes. S: I see. HMJr: Now that certainly - that's something I ought to have in order to make my estimate for borrowing and our estimate for the tax bill. 8: Yes, I see. I see. Well, I should think that could be gotten for you without going into quite 80 much detail. Ayers said that Haae had asked for it. HMJr: Well S: I mean the specific names of the specific manufacturers. HMJr: Well, if you will talk with Ayers, I'll send Haas over and tell him to go over the thing once more, see? S: Yes. All right. HMJr: Did that - now does this request I'm making now sound reasonable? 8: Why yes. I want to - in other words you know I'm most anxious to make your duty as Secretary of the Treasury easy because as a citizen, even not a Secretary of War, I'm interested in that, and I'll try to do my best to make it 80. HMJr: You see, Harry, we have estimated total expenditures at nineteen. The Bureau of the Budget says its going to be twenty-one or twenty-two and OPM egys its twenty-four. 8: Yes, I see. You estimate & total of nineteen. Regraded Uclassified 56 - 5 - HMJr: Yes. S: OPM, twenty-four. HMJr: Yeah. S: And what the Budget..... HMJr: And Budget said they'd split the difference. 8: Yes. Budget then about.... HMJr: Twenty-one or two. S: Twenty-one or two. I see. I think you are entitled to that. HMJr: Not too big a difference. 8: Yes, I see. All right. HMJr: Thank you. 8: Good-bye. Begraded 57 May 16, 1941 11:25 a.m. HMJr: Hello. Grace Tully: Hello, Henry? HMJr: Good morning. To Good morning. I gave that memorandum to the President.. HMJr: Yes. T: And he said to tell you that he would not be able to read that statement until late this afternoon, anyway. He's full of appointments. HMJr: Yeah. T: And that he'd telephone you and if you wanted to go to the country, he'd call you there or call anybody you suggest in your department. HMJr: No, I think - I rather just sit here until he does. T: I see. HMJr: See? T: All right. I'll tell him, Henry. HMJr: Now, I think that - don't you think 80? T: Well, now - I don't know what it requires. HMJr: Well, it's a ..... T: I think probably it would be more satisfactory. Regraded Uclassified 58 - 2 - HMJr: I think so, if he can - if he could - you think there's a chance of getting to it today? T: Well, he said he'd do his best to get to it late this afternoon. HMJr: Well, you tell him that I'm just going to sit until he's ready and if he can let me know as soon as possible, I'd appreciate it. T: All right, I know he will, Henry. HMJr: And if you could remind him, I'd appreciate it. T: I certainly will. HMJr: Thank you. T: Fine. Good-bye. 59 THE SECRETARY OF THE TREASURY WASHINGTON May 16, 1941 My dear Mr. President: I am inclosing herewith the proposed state= ment which John Sullivan will present to the Ways and Means Committee on Monday. I would very much appreciate your comment and suggestions 80 that when John Sullivan goes before the Committee on Monday he can say that the statement he is presenting meets with your entire approval. I am also inclosing herewith a copy of the statement which we gave you on July 8, 1940. I would greatly appreciate it if you could get word to me by one o'clock today whether or not this statement has your approval, or whether you would like to work on it with me over the week-end. If it is un- necessary to work on it this week-end, I would like to go to the farm. Sincerely yours, Henry The President, The White House. Enclosures. 60 July 8, 1940 MEMORANDUM TO THE PRESIDENT Question B Shall we adopt - (a) The war-profits, or emergency-profits, principle, adopted in England and in part in Canada, and which taxes profits above the pre-emergency level, or (b) The excess-profits principle, adopted in our 1918 Act, which taxes profits above a stated percentage of invested capital, 8% in our 1918 Act, or (c) A combination of both principles? Comment (1) The trouble with the straight war-profits principle is that it will not reach corporations with a high level of profits. It would virtually exempt many of our largest businessunits which had immense r e-emergency profits, and at the same time, it would burden heavily their more unfortu- nate competitors which have not done 80 well in that period. For example, J.C. Penney Company is believed 6 have made a high return on its invested capital year after year. (2) The trouble with the straight excess-profits principle is that where the invested capital is large, it will permit Regraded Uclassified 61 - 2 - the escape of huge emergency profits. For example, American Car and Foundry Company has a large invested capital, but a low rate of return. It would pay little or no tax even though its profits increased greatly. There are a good many companies which have not made much of a return on the invest- ment for years, but whose profits will be greatly increased because of the defense program. (3) A combination of the two principles seems essential to a fair workable tax, - one which will tap a maximum of emergency profits and excess profits on a broad base with a minimum of disturbance to business incentive and emergency preparation. Proposals It is therefore proposed (percentage figures merely illustrative) - The tax shall apply to all profits in excess of the rate of return on invested capital which the corporation has actually realized in the pre-emergency period, subject to two qualifications. (1) The company shall be allowed an exemption of not less than 4 percent of invested capital, and (2) in any case, it shall be subject to the tax on what it makes above Regraded Uclassified 62 - 3 - 10 percent of invested capital. For example, (a) if the company made an average of 5 percent on invested capital in 1935-1939, its profits above 5 percent in 1940 will be subject to the tax. (b) If it made an average of only 2 percent in 1935-1939, any profits in 1940 above 4 percent will be subject to the tax. (c) If it made an average of 15 percent in 1935-1939, the tax shall apply to any profits in 1940 in excess of 10 percent. This scheme gives greater flexibility than the rigid 1918 Act scheme of 8 percent recently suggested by Senator La Follette, and is closely allied in principle to the 7-9 percent scheme of the 1917 Act. It will obviate much criticism because invested capital is not the dominant factor, but merely the limitation factor upon the use of pre-emergency profits as a standard. By permitting a reasonable capitaliza- tion of pre-emergency earnings, it may to a certain extent aid pre-emergency high profit corporations, but by the same token it will save from undue hardship concerns which use invested capital, but which also depend largely upon individual enterprise and skill of management. It will also cause less economic dislocation because it more gradually transforms our Regraded Uclassified 63 - 4 - tax system. Excess-profits taxation of individuals should be avoided because they are already subject to much higher surtaxes than the taxes applied to corporations. Moreover individuals, unlike corporations, cannot accumulate surpluses free from individual taxation. We are giving further study to the matter of differentia- tion between "small" corporations and "large" corporations. If a general excess-profits tax is enacted, with the steeply graduated rates which you propose, the provisions of the Vinson-Trammell Act with respect to excess-profits should be repealed. 64 DRAFT OF TREASURY STATEMENT ON EXCESS PROFITS TAX My purpose today is to discuss with you the problem of corporate taxation in the present emergency. What I shall have to say is supplementary to the state- ment made by Secretary Morgenthau when the current hearings were opened and to the suggestions laid before you subsequently on behalf of the Treasury Department. The Treasury is called upon to meet expenditures greater than have ever been made in the nation's peacetime history, and probably greater than at any period in our history, in peace or war. At such a time we cannot expect to rely on normal sources of revenue or be content with revenue in normal amounts. We must adopt extraordinary measures to deal with our extraordinary situation. Your Committee is now formulating changes in our tax system, both to provide the revenues needed to finance the defense expenditures that we are committed to make, and also to assist in maintaining the economic health of the nation. Our people know that great sacrifices must be made and they are prepared to make them. They rely upon us 80 to plan our Regraded Uclassified 65 - 2 - financial program that, however severe its burdens may have to be, they will rest fairly and justly upon all individuals and all businesses. The tax program which you will propose will necessarily consist of many elements. Any one tax, viewed by itself, may appear to be stringent. All must be viewed, however, as parts of a whole. This is an emergency. Taxes that would not be proposed in peace times are & necessity now. We cannot give effect to all those niceties of exemptions and saving clayses that are appropriate to easier occasions but today will defeat our ends. I have been asked particularly to discuss the excess profits tax, first enacted in the fall of 1940. Our experience with it is still limited, for many of the returns of the largest corporations have not yet been filed. Enough have been filed, however, to convince Treasury officials in charge of administration that important changes in the law must be made in the interests of fairness. We are collecting large sums by means of this tax, but the profits of 8. good many business firms are not being touched by the tax, Regraded Uclassified 66 - 3 - although those profits are excess profits by any reasonable standards. Here is certainly a place to broaden the base. Surely the skill of this Committee and its experts is adequate to the task of bringing within the tax the known cases of corporate excess profits. I want first to outline the principles which I believe should govern the taxation of excess profits; second, to indicate respects in which the present law fails to accord with those principles; and third, to suggest possible remedies which the Congress may wish to consider. I - Principles Under present conditions some kinds of profits may be appropriately subjected to heavier taxation than other kinds. This may be necessary in order to distribute the burden fairly and to avoid unfavorable economic effects that might result if the revenue were raised in other ways. 1. Defense profits The first type of profits which should, in a period of this kind, be subjected to special taxation comprises the profits which may be reasonably Regraded Uclassified 67 - 4 - attributed to the defense program. Such profits are being made out of the sacrifices of the people as a whole and should be returned to the people in taxes, insofar as may be possible without destroying necessary incentives to produce defense goods. In many cases it is not possible to distinguish with precision the additional profits due to the defense program. The effects of defense spending are diffused throughout the whole economic system. It is necessary, accordingly, to assume that in general, increases in profits during this period are due to defense. Inability to measure defense profits precisely should not dis- courage us from subjecting them to special taxation even at the risk of hitting some income not derived from the defense program. 2. Profits in excess of 8. necessary normal return on invested capital The other kind of profit that can properly be sub- jected to special taxation comprises profits in excess of a necessary normal return on invested capital, Regraded Uclassified 68 - 5 - even if this return was being earned in the years prior to the defense program. The existence of such profits, while often due primarily to good management, is in numerous cases due to monopoly, imperfect competition, or fortunate circumstances, and not to any outstanding service to the public. When the im- perfections of our economic machine have permitted this to happen, it is equitable and desirable that the excess profits be subjected to special taxation. Furthermore, at a time when heavy taxes must be imposed they should be levied where they will assist best in maintaining a well-functioning economy. To take an especially large share of the profits in excess of a normal return on invested capital will not cause any companies to go into bankruptcy or withdraw from business. I am aware that the anticipation of extraordinarily large profits may in many cases have put security prices well above a figure that would represent invested capital. The imposition of these special taxes may seem harsh to individuals who have purchased those Regraded Uclassified 69 - 6 - securities at such levels. We cannot entirely dis- ? regard this aspect of the problem, but we must remember that no legislation is ever passed and no progressive step is ever taken which does not disturb the established Typectentions interests of some people. We submit that established expectations of high profits are entitled to no more protection than an individual's expectation of 8. continued large salary which is now to be subjected to & much heavier tax. This is an emergency, and changes must be expected. I am also aware that the application of the principle of taxing profits in excess of 8. necessary normal return on capital involves difficulties of both principle and technique. These difficulties should not be underestimated, but I feel sure that we should not allow them to stand in the way of our seeking to attain the main objective. II - - Defects of the present law In the light of the principles just stated, let us now examine the excess profits tax law passed last year, to see in what respects, if any, it fails to correspond to them. Regraded Uclassified 70 - 7 - 1. Failure to reach large parts of defense profits The Excess Profits Tax Act of 1940 was a clear expression of Congressional intent that profits growing out of the defense effort should be subject to excess profits tax. The law, however, has not achieved that objective. 4 71 Many corporations that are the principal beneficiaries of the defense effort and that hold large government contracts are paying little or no excess profits tax. In the absence of complete excess profits tax returns an examination has been made of published financial data for certain corporations. One company whose profits in 1940 were more than 3,000 percent larger than in 1939 is subject to no excess profits tax whatever on 1940 earnings and this is a company which has thus far received over $70 million of defense contracts. A large stool company which has received over $250 million of defense contracts and had earnings in 1940 of nearly 200 percent larger than in 1939 will pay no excess profits tax. It appears that only 5 out of 12 large integrated steel companies will be subject to excess profits tax on the income of 1940, although steel companies have in general received huge amounts Regraded Uclassified 71 - 8 - of defense orders. These companies pay little or no excess profits tax because they are allowed a minimum credit of 8 percent of invested capital. 2. Failure to tax profits in excess of a necessary normal return Another serious shortcoming of the 1940 excess profits tax law is that profits in excess of a necessary normal return on invested capital are not subject to the tax unless such profits also represent an increase over the profits of the base period. For example, one company which earned during the base period an average of approximately 40 percent on its present invested capital will be free from the excess profits tax on income in any year equal to approximately this 40 per- cent and will be taxable only on such increases in income as it may enjoy. This failure of the law to reach a large portion of excess profits is due to the provision of a credit for every corporation equal to 95 percent of its base period earnings, regardless of the size of those earnings in relation to its invested capital. Regraded Uclassified 72 - 9 - III - Remedies Revisions of the excess profits tax to be con- sidered adequate, must reach the two kinds of profits which I have been discussing. The tax can reach a much larger proportion of defense profits if there is a reduction in the 8 percent credit on invested capital. Profits in excess of a necessary normal return can be reached by taxing all profits above a stated percentage of invested capital, regardless of average base period earnings. These were the basic elements of the Treasury excess profits tax proposal of 1940, and it is this plan, with modifications dictated by experience, that we suggest. In that proposal corporations were to be allowed, tax free, their earnings during the base period, but not more than 10 percent of invested capital. How- ever, they were granted a minimum credit of 4 percent of invested capital with 6 percent allowed on the first $500,000. Thus, under that plan a concern which earned 7 percent during the base period would be allowed to continue to earn 7 percent free of tax. A concern which earned only 2 percent during the base period would Regraded Uclassified 73 - 10 - be permitted to earn 4 percent free of tax. A concern which earned 15 percent during the base period would be allowed to earn 10 percent free of tax. Under the 1940 Treasury proposal it was recognized that if businesses were to be expanded and investors were to put money into new corporations, an opportunity must be allowed to earn a substantial rate of return on new capital. The plan allowed an 8 percent return, regardless of the earning experience during the base period on old capital. If the plan submitted by the Treasury last year had been applied in the examples previously presented, the tax results would have been quite different. The corpora- tion which had the 40 percent return on its invested capital in the base period would have paid excess profits tax on about half of its 1940 income instead of on about one-twentieth as under the present law. The large company which received over $250 million of defense contracts would have paid excess profits tax on over one-third of its in- come and the other company with poor earnings in the base period would have paid on about one-fifth of its income instead of both companies being entirely exempt. Regraded Uclassified 74 - 11 - Even this plan, however, would have failed to reach substantial amounts of defense profits received by corporations which had especially poor earnings during the base period. To meet this defect we would suggest revising the 1940 proposal to provide that where the average earnings of the base period were less than the minimum of 4 percent, the excess profits tax should be applied at a low flat rate, possibly 10 percent, to that part of the current profits that is in excess of the base period earnings but not in excess of 4 percent of invested capital. For example, if a corporation earned during the base period an average of $100,000 a year, while 4 percent of its invested capital amounts to $300,000, the first $100,000 of profits in the current taxable year would be entirely exempt from excess profits tax, the next $200,000, representing the difference between the $100,000 average earnings and the $300,000 credit on invested capital, would be taxed at 10 percent and any earnings over $300,000 would be subject to the regular excess profits tax rates. This special rate of tax would subject all increases in profits during the defense period at least Regraded Uclassified 75 - 12 - to some excess profits taxation while at the same time not being high enough to impose an undue burden on concerns whose increased earnings are not truly defense profits. We would suggest also that the rate allowed on new capital be the same as the maximum rate allowed on old capital, namely, 10 percent. Any maximum return 4%? on capital must be a somewhat arbitrary figure because businesses differ widely in the degree of risk they face. Accordingly, it is desirable not to set too low a maximum rate of return. Similarly, it would be desirable to keep the tax rate low on that part of the profit which is immediately many above the credit. To this end we suggest that tax rates be graduated in accordance with the rate of return on invested capital with a moderate initial rate. [It It should be possible to raise the desired revenue with a lower rate scale on the average than under the present law no new because of the larger amount of profits that will be normal subject to tax. ] siscessing here Moreover, with this new broad excess profits base, it would be possible to adapt ourselves quickly and Regraded Uclassified 76 - 13 - much more easily to 8. need for still larger revenues if the emergency should so require. The future is especially uncertain during an emergency period, and we might have to act quickly. It is better to have 8. broad excess profits tax base carefully worked out while we still have the time than to patch up the present law only perhaps to find ourselves confronted with the necessity of impro- vising such 8. base on short notice at a later date. Thus far I have outlined what seem to me to be the principles of excess profits taxation that should be followed in this emergency period and have indicated ways in which the existing law fails to carry them out. If you believe with me in these principles, I believe you will agree that 8. plan similar to the one I have outlined is the logical method of putting the principles into practical operation. Variation in details is not a matter of concern, so long as the plan adopted fulfills the clear purpose to impose taxes both on defense profits and on excess profits, which is something the present law does not do. IV. Possible alternative If these principles are not to be the guide for Regraded Uclassified 77 - 14 - taxing corporations during the emergency period, it would be well to bear in mind the disadvantages of the tax in its present form, which involves the administra- tive difficulties inevitably accompanying excess profits taxation but fails to tax large amounts of profits that should be reached. A simpler, more easily administered plan would, of course, be to abandon the excess profits tax and to increase the corporation income tax by enough to produce the desired revenue. With such an increase in the corporation income tax there should, in my judgment, be coupled a provision for reducing the tax when the earnings of the corporation are immediately made subject to the individual income tax. This kind of a plan would be in harmony with the idea of integrating the corporation and the individual taxes, placing chief reliance on the taxation of income to individuals. With our experience with previous plans of this general character, many difficulties previously met can very likely be avoided and equitable taxation of profits to the individual stockholder provided. I do not set forth this plan as one that carries Regraded Uclassified 78 - 15 - into effect the principles which I previously discussed. It is based on principles of its own and is suggested as an alternative, not a substitute. We cannot expect to devise a painless tax bill. The situation calls for sacrifices. As Secretary Morgenthau has already told you, we have had unmistakable evidence that the people are willing to make sacrifices according to their ability. Outside the tax field greater sacrifices are being asked and cheerfully made. There is no basis of comparison of the sacrifice of those who are asked to exchange the security of a job and a home for a soldier's pay and a soldier's hardships with the sacrifice of those who are asked to pay even drastically higher rates of tax. haphasing Cunsumer Dmable Brads Tax abroad of 11 non 11 " 1nx no antso or yiuld Regraded Uclassified 79 DRAFT OF TREASURY STATEMENT ON EXCESS PROFITS TAX My purpose today is to disouss with you the problem of corporate texation in the present emergency. What I shall have to say is supplementary to the state- ment made by Secretary Morgenthau when the current hearings were opened and to the suggestions laid before you subsequently on behalf of the Treasury Department. The Treasury is called upon to meet expenditures greater than have ever been made in the nation's peacetime history, and probably greater than at any period in our history, in peace or war. At such a time we cannot expect to rely on normal sources of revenue or be content with revenue in normal amounts. We must adopt extraordinary measures to deal with our extraordinary situation. Your Committee is now formulating changes in our tax system, both to provide the revenues needed to finance the defense expenditures that we are committed to make, and also to assist in maintaining the economic health of the nation. Our people know that great sacrificestomust be made and they are prepared to make them. They rely upon us so to plan our Regraded Uclassified 80 - 2 - financial program that, however severe its burdens may have to be, they will rest fairly and justly upon all individuals and all businesses. The tax program which you will propose will necessarily consist of many elements. Any one tax, viewed by itself, may appear to be stringent. All must be viewed, however, as parts of a whole. This is an emergency. Taxes that would not be proposed in peace times are a necessity now. We cannot give effect to all those niceties of exemptions and saving classes that are appropriate to easier occasions but today will defeat our ends. I have been asked particularly to discuss the excess profits tax, first enacted in the fall of 1940. Our experience with it is still limited, for many of the returns of the largest corporations have not yet been filed. Enough have been filed, however, to convince Treasury officials in charge of administration that important changes in the law must be made in the interests of fairness. To are colledting large sums by means of this tax, but the profits of a good many business firms are not being touched by the tax. 81 - 3 - although those profits are excess profits by any reasonable standards. Here is certainly a place to broaden the base. Surely the skill of this Committee and its experts is adequate to the task of bringing within the tax the known cases of corporate excess profits. I want first to outline the principles which I believe should govern the taxation of excess profits; second, to indicate respects in which the present law fails to accord with those principles; and third, to suggest possible remedies which the Congress may wish to consider. I - Principles Under present conditions some kinds of profits may be appropriately subjected to heavier taxation than other kinds. This may be necessary in order to distribute the burden fairly and to avoid unfavorable economic effects that might result if the revenue were raised in other ways. 1. Defense profits The first type of profits which should, in a period of this kind, be subjected to special taxation comprises the profits which may be reasonably Regraded Uclassified 82 - 4 - attributed to the defense program. Such profits are being made out of the sacrifices of the people as & whole and should be returned to the people in taxes, insofar as may be possible without destroying necessary incentives to produce defense goods. In many cases it is not possible to distinguish with precision the additional profits due to the defense program. The effects of defense spending are diffused throughout the whole economic system. It is necessary, accordingly, to assume that in general, increases in profits during this period are due to defense. Inability to measure defense profits precisely should not dis- courage us from subjecting them to special taxation even at the risk of hitting some income not derived from the defense program. 2. Profits in excess of 6 necessary normal return on invested capital The other kind of profit that can properly be sub- jected to special taxation comprises profits in excess of a necessary normal return on invested capital, Regraded Uclassified 83 - 5 - even if this return was being earned in the years prior to the defense program. The existence of such profits, while often due primarily to good management, is in numerous cases due to monopoly, imperfect competition, or fortunate circumstances, and not to any outstanding service to the public. When the im- perfection of our economic machine have permitted this to happen, it is equitable and desirable that the excess profits be subjected to special texation. Furthermore, at a time when heavy taxes must be imposed they should be levied where they will assist best in maintaining a well-functioning economy. To take an especially large share of the profits in excess of a normal return on invested capital will not cause any companies to go into bankruptcy or withdraw from business. I - aware that the anticipation of extraordinarily large profits may in many cases have put security prices well above a figure that would represent invested capital. The imposition of these special taxes may seen harsh to individuals who have purchased those Regraded Uclassified 84 new . 6 - securities at such levels. We cannot antirely dis- regard this aspect of the problem, but we must remember that no legislation is over passed and no progressive step is over taken which does not disturb the established interests of some people. We submit that established expectations of high prefits are entitled to no more protection than an individual's expectation of a continued large salary which is now to be subjected to & much heavier tax. This is an emergency, and changes must be expected. I an also sware that the application of the principle of taxing profits in excess of a necessary normal return on capital involves difficulties of both principle and technique. These difficulties should not be underestimated, but I feel sure that we should not allow them to stand in the way of our seeking to attain the main objective. II . Defects of the present law In the light of the principles just stated, let us now examine the excess profits tax law passed last year, to see in what respects, if any, it fails to correspond to them. 85 - 7 - 1. Failure to reach large parts of defense profits The Excess Profits Tax Act of 1940 was a clear expression of Congressional intent that profits growing out of the defense effort should be subject to excess profits tax. The law, however, has not achieved that objective. Many corporations that are the principal beneficiaries of the defense effort and that hold large government contracts are paying little or no excess profits tax. In the absence of complete 020059 profits tax returns an examination has been made of published financial data for certain corporations. One company whose profits in 1940 were more than 8,000 percent larger than in 1939 is subject to no excess profits tax whatever on 1940 earnings and this is a company which has thus far received over $70 million of defense contracts. A large steel company which has reseived over $250 million of defense contrasts and had earnings in 1940 of nearly 200 persent larger than in 1989 will pay no excess profits tax. It appears that only 5 out of 12 large integrated steel companies will be subject to excess profits tax on the income of 1940, although steel companies have in general received huge amounts Regraded Uclassified 86 - 8 - of defense orders. These companies pay little or no excess profits tax because they are allowed a minimum credit of 8 percent of invested capital. 2. Failure to tax profits in excess of a necessary normal return Another serious shortcoming of the 1940 excess profits tax law is that profits in excess of & necessary normal return on invested capital are not subject to the tax unless such profits also represent an increase over the profits of the base period. For example, one company which earned during the base period an average of approximately 40 percent on its present invested capital will be free from the excess profits tax on income in any year equal to approximately this 40 per- cent and will be taxable only on such increases in income as it may enjoy. This failure of the law to reach a large portion of excess profits is due to the provision of a credit for every corporation equal to 95 percent of its base period earnings, regardless of the sise of those earnings in relation to its invested capital. Regraded Uclassified 86 - 8 - of defense orders. These companies pay little or no excess profits tax because they are allowed a minimum credit of 8 percent of invested capital. 2. Failure to tax profits in excess of a necessary normal return Another serious shortcoming of the 1940 excess profits tax law is that profits in excess of a necessary normal return on invested capital are not subject to the tax unless such profits also represent an increase over the profits of the base period. For example, one company which earned during the base period an average of approximately 40 percent on its present invested capital will be free from the excess profits tax on income in any year equal to approximately this 40 per- cent and will be taxable only on such increases in income as it may enjoy. This failure of the law to reach a large portion of excess profits is due to the provision of a credit for every corporation equal to 95 percent of its base period earnings, regardless of the sise of those earnings in relation to its invested capital. Regraded Uclassified 87 - 9 - III - Remedies Revisions of the excess profits tax to be con- sidered adequate, must reach the two kinds of profits which I have been discussing. The tax can reach a much larger proportion of defense profits if there is a reduction in the 8 percent credit on invested capital. Profits in excess of a necessary normal return can be reached by taxing all profits above a stated percentage of invested capital, regardless of average base period earnings. These were the basic elements of the Treasury excess profits tax proposal of 1940, and it is this plan, with modifications dictated by experience, that we suggest. In that proposal corporations were to be allowed tax free their earnings during the base period, but not more than 10 percent of invested capital. How- ever, they were granted a minimum credit of 4 percent of invested capital with 6 percent allowed on the first $500,000. Thus, under that plan a concern which earned 7 percent during the base period would be allowed to continue to earn 7 percent free of tax. A concern which earned only 2 percent during the base period would Regraded Uclassified new 88 - 10 - be permitted to earn 4 percent free of tax. A concern which earned 15 percent during the base period would be allowed to earn 10 percent free of tax. Under the 1940 Treasury proposal it was recognized that if businesses were to be expanded and investors were to put money into new corporations, an opportunity must be allowed to earn a substantial rate of return on new capital. The plan allowed an 8 percent return, regardless of the earning experience during the base period on old capital. If the plan submitted by the Treasury last year had been applied in the examples previously presented, the tax results would have been quite different. The corpora- tion which had the 40 percent return on its invested capital in the base period would have paid excess profits tax on about half of its 1940 income instead of on about one-twentieth as under the present law. The large company which received over $250 million of defense contracts would have paid excess profits tax on over one-third of its in- come and the other company with poor earnings in the base period would have paid on about one-fifth of its income instead of both companies being entirely exempt. Regraded Uclassified 89 - 11 - Regraded Uclassified Even this plan, however, would have failed te reach substantial amounts of defense profits received by corporations which had especially poor earnings during the base period. To meet this defect - would suggest revising the 1940 proposal to provide that where the average earnings of the base period were less than the minimum of 4 percent, the excess profits tax should be applied at a low flat rate, possibly 10 percent, to that part of the current profits that is in excess of the base period earnings but not in excess of 4 percent of invested capital. For example, if a corporation earned during the base period an average of $100,000 a year, while 4 percent of its invested capital amounts to $300,000, the first $100,000 of profits in the current taxable year would be entirely exempt from excess profits tax, the next $200,000, representing the difference between the $100,000 average earnings and the $300,000 credit on invested capital, would be taxed at 10 percent and any earnings over $800,000 would be subject to the regular excess profits tax rates. This special rate of tax would subject all increases in profits during the defense period at least 90 - 18 - to some excess profits taxation while at the same time not being high enough to impose an undue burden on con- cerns whose increased earnings are not truly defense profits. We would suggest also that the rate allowed on new capital be the same as the maximum rate allowed on old capital, namely, 10 percent. Any maximum return on capital must be & somewhat arbitrary figure because businesses differ widely in the degree of risk they face. Accordingly, it is desirable not to set too low a maximum rate of return. Similarly, it would be desirable to keep the tax rate low on that part of the profit which is immediately extlain above the credit. To this end we suggest that tax rates scal be graduated in accordance with the rate of return on invested capital with a moderate initial rate. It should be possible to raise the desired revenue with a lower rate scale on the average than under the present law because of the larger amount of profits that will be subject to tax. Moreover, with this new broad excess profits base, it would be possible to adapt ourselves quickly and Regraded Uclassified 91 - 13 - much more easily to a need for still larger revenues if the emergency should so require. The future is especially uncertain during an emergency period, and we might have to act quickly. It is better to have a broad excess profits tax base carefully worked out while we still have the time than to patch up the present law only perhaps to find ourselves confronted with the necessity of impro- vising such a base on short notice at 1 later date. Thus far I have outlined what seen to no to be the principles of excess profits taxation that should be followed in this emergency period and have indicated ways in which the existing law fails to carry them out. If you believe with me in these principles, I believe you will agree that a plan similar to the one I have outlined is the legical method of putting the principles into practical operation. Variation in details is not a matter of concern, so long as the plan adopted fulfills the clear purpose to impose taxes both on defense profits and on excess profits, which is something the present law does not do. IV. Possible alternative If these principles are not to be the guide for Regraded Uclassified - 14 - new 92 taxing corporations during the emergency period, it would be well to bear in mind the disadvantages of the tax in its present form, which involves the administra- tive difficulties inevitably accompanying excess profits taxation but fails to tax large amounts of profits that should be reached. A simpler, more easily administered plan would, of course, be to abandon the excess profits tax and to increase the corporation income tax by enough to produce the desired revenue. with such an increase in the corporation income tax there should, in my judgment, be coupled & provision for reducing the tax when the earnings of the corporation are immediately made subject to the individual income tax. This kind of & plan would be in harmony with the idea of integrating the corporation and the individual taxes, placing chief reliance on the taxation of income to individuals. with our experience with previous plans of this general character, many difficulties previously met can very likely be avoided and equitable taxation of profits to the individual stockholder provided. I do not set forth this plan as one that carries Regraded Uclassified 93 - 15 - into effect the principles which I previously discussed. It is based on principles of its own and is suggested as an alternative, not a substitute. We connot expect to devise & painless tax bill. The situation calls for sacrifices. As Secretary Morgenthau has already told you, we have had unmistakable evidence that the people are willing to make sacrifices according to their ability. Outside the tax field greater sacrifices are being asked and cheerfully made. There is no basis of comparison of the sacrifice of those who are aksed to exchange the security of a job and & home for a soldier's pay and a soldier's hardships with the sacrifice of those who are asked to pay even drastically higher rates of tax. Regraded Uclassified 94 July so 1040 MEMORANDUM TO THE PRESIDENT Question Shall w adopt - (a) The war-profits, w principle, adopted in England and in part in Canadag and which taxes profits above the pre-emergency level, w (b) The excess-profits principle, adopted in our 1918 Act, which taxes profits above a stated persentage of invested capital, as in our 1918 Act, or (o) A combination of both principles? Comment (1) The trouble with the straight war-profits principle is that it will not reach corporations with a high level of profits. It would virtually exempt nany of eur largest business units which had immense F e-energency profits, and at the same time. it would burden heavily their more unforts- nate competitors which have not done se well in that period. For emample, JoCe Penney Company is balieved - have made 6 high return m its invested capital year after year. (a) The trouble with the straight excess-profits principle is that where the invested capital is large. it will permit Regraded Uclassified 95 = - the cosape of Imge energency profits, For example, American Car and Foundry Company has a large invested capital, but a low rate of return. It would pay little or m tax oven though its profits increased greatly. There are 6 good may companies which have not mis such of a return on the invest- ment for years, but whose profits will be greatly increased because of the defense program. (s) A combination of the two principles seems essential to a fair workable taxe - one which will tap & maximum of emergency profits and excess profits en a broad base with a minimum of disturbance to business inventive and energency preparation. Proposals It is therefore proposed (persentage figures merely illustrative) - The tax shall apply to all profits in excess of the rate of return on invested capital which the corporation has actually realized in the pre-emargency period, subject to to qualifications. (1) The company shall be allowed on exemption of not loss than 4 percent of invested capital, and (2) in any case, it shall be subject to the tax - what st makes above Regraded Uclassified 96 8 20 persent of invested capital. Per example, (a) if the company made an average of s pareent on invested capital in 1985-1989, its profits above 8 percent in 1940 will be subject to the tax. (b) If 10 made an sverage of only $ percent in 1985-1989, any profits in 1940 above 4 percent will be subject to the tax. (e) If it made a average of 15 persent in 1985-1939, the tax shall apply to my profits in 1940 in excess of 10 percent. This scheme gives greater flexibility than the vigid 1918 Act scheme of 8 percent recently suggested by Senster La Fellette, and is clessly allied in principle to the 7-9 persent scheme of the 1917 sets It will obviate smok criticism because invested capital is not the desirent factor, but nevely the limitation faster upon the use of pro-enorgency profits as a standard, n permitting a reasonable capitalize tion of pre-energency earnings, it may to a certain extent aid pre-emergency high profit corporations, but the - taken it will 10,000 from undus hardship conserns which use invested capital, but which also depend largely upon individual enterprise and skill of management. 18 will also - less escusmic dislosation because it more grabually transferms - Regraded Uclassified 97 4 tax system. Excess-profits taxation of individuals should be avoided because they are already subject to such higher surtaxes than the taxes applied to corporations. Mereover individuals, unlike corporations, cannot accumulate surpluses free from individual taxation. We are giving further study to the matter of differentis- tion between "small" corporations and "large" corporations. If & general excess-profits tax is enacted, with the steeply graduated rates which you propose, the provisions of the Vinson-Trammell set with respect to excess-profits should be repealed. Note: This memo prepared by Sullivan, Magill and Randolph Paul and submitted to the President at 12:20 conference, 7/8'40 Regraded Uclassified 98 May 16, 1941 11:40 a.m. Eugene Duffield: Hello. HMJr: How are you, Gene? D: Very well. How are you, sir? HMJr: Oh, alive, anyway. D: Well, I'm sorry if you are not BO well. HMJr: Gene, no. I'm all right. Just a little overworked, which is chronic. You may or may not want to answer this over the phone or in person or not at all D: Yeah. HMJr: Bryant's story this morning on the split in the Treasury I just wanted to know whether it was & leak in the Treasury or whether it came off the Hill. D: It came off the Hill. HMJr: Well, that's all I wanted D: Very definitely. HMJr: Yeah. D: That's absolutely true. He spent all of his time up there recently and he came in with it from the Hill yesterday. HMJr: I see. D: I know specifically where he got it on the Hill because I was very careful to find out, but if you don't mind, I'd rather not say that. HMJr: I wont press you. Regraded Uclassified 98 May 16, 1941 11:40 a.m. Eugene Duffield: Hello. HMJr: How are you, Gene? Very well. How are you, sir? D: HMJr: Oh, alive, anyway. D: Well, I'm sorry if you are not so well. HMJr: Gene, no. I'm all right. Just a little overworked, which is chronic. You may or may not want to answer this over the phone or in person or not at all D: Yeah. HMJr: Bryant's story this morning on the split in the Treasury I just wanted to know whether it was a leak in the Treasury or whether it came off the Hill. D: It came off the Hill. HMJr: Well, that's all I wanted D: Very definitely. HMJr: Yeah. D: That's absolutely true. He spent all of his time up there recently and he came in with it from the Hill yesterday. HMJr: I see. D: I know specifically where he got it on the Hill because I was very careful to find out, but if you don't mind, I'd rather not say that. HMJr: I wont press you. Regraded Uclassified 99 - 2 - Yeah. But, it did come from there. D: HMJr: You mean it would be embarrassing? D: Yeah, I'm afraid 80. HMJr: Well, sometime..... D: I mean you got to work with the fellow.. (laughs) HMJr: I know, well - could I make one guess? D: (Laughs) Well, one. HMJr: One? D: I'll allow one. HMJr: You let me have one? D: Yeah. HMJr: All right, just one and (laughs) I wont cheat. D: Yeah. HMJr: Dan. D: Uh huh. (laughs) Yeah. HMJr: And I give you my word I wont repeat it to anybody in the Treasury. D: I wish you wouldn' t. HMJr: Upon my word of honor D: Okay, sir. HMJr: My word of honor. D: That satisfies me, you know that. HMJr: I wont - nobody will know it. D: Okay. Good-bye. Regraded Uclassified 100 - 3 - But, I've been suspicious of HMJr: that so-and-eo for a long time. Yeah. D: HMJr: It just helps me, but nobody is going to know it, Gene. D: Okay, fine. HMJr: My word of honor. D: Fine HMJr: Thank you. D: You bet. HMJr: Hello. D; Yeah. HMJr: Well, there's nothing D: Some time when you are not very busy - I don t know when that will ever be - I'd like five minutes. HMJr: Well, there will be no time as good as this afternoon because I have no appointments because I thought I was going away and I am not and I have no Cabinet. D: I see. HMJr: So if you care to come in at two- thirty. D: All right, I'll be there. HMJr: Okay. D: Fine. HMJrl Good-bye. Regraded Uclassified 101 May 16, 1941. Dear Mr. Secretary: Supplementing By acknowledgment of April 21, further reference is made to your letter of April 15, in which you suggested the desirability of organising a patrol force, to operate under the Treasury Depart- ment, for the better protection of ship repair and manufacturing plants performing Havy contracts and located upon waterfront property in the various United States ports. Your suggestion has been very carefully con- sidered and we are now engaged in taking steps to put it into effect. Some 270 power eraft of the Coast Guard Auxiliary are to be called into active service and the patrol of waterfront industrial property in the important harbors of the United States will be greatly increased and intensified. Special attention will be given to the protection of those establish- ments which are engaged in the performance of Navy contracts. It will be appreciated if you will cause to be issued to the various Commandants of Naval Districts instructions to provide Captains of Ports, on request, information as to establishments in their areas having Naval contracts. Sincerely yours, (Signed) Herbert E. Gaston Acting Secretary of the Treasury. The Henerable The Secretary of the Havy. CC: Rent to admiral Warselu 5-16-41 cl; Miss Channay Regraded Uclassified 102 April m, 1941. Dear Mr. Secretary: This is to acknowledge receipt of your letter of April 15th, in which you suggest the 4 sirability of organizing a patrol force, to operate under the Treasury Department, for the better protestion of ship repair and manufactur- ing plants performing Havy contrasts and located upon waterfront property in the various United States ports. I shall be glad to give this matter study and will report my conclusions at as early date. Sincerely yours, Secretary of the Treasury. The Honorable The Secretary of the Havy. Regraded Uclassified (COPT) 103 (SC)L9-2 NO SUGGETANT OF THE NAYT $07. 0109116 WASHINGTON Agril 15, 1941. By dear Mr. Secretary: The possibility of the sabotage of ship repair and May- resturing plants performing Havy contracts and located upon reterfrost property is the various United States porte 10 & matter of grave concern to this department. The provention of such eabotage is rendered particularly difficult because of the 0000 with which the seboteurs may gain 800088 to ever plants by small boats under cover of darkness. The problem presented 10 of course clossly related to the general problem of the protection of shipping is our herbors from sabotage. Some EAGGUTO of protection 10 now afforded by the local Comes Ouard harbor patrol units, by local police patrol boats and by the local police patrol along the inshore end of dooks and plants. Also in the case of vessels engaged in foreign trade, which may be lying at the doeks, some protection is given by the presence of U. 5. Customs impectors 08 board the vensels or upon the docks. However, as a practical matter the petrol cerried OR by the Coast Guard and police bonts is of an infre- quent seture and mostly off the ends of the piers, while the veterfront police confine their efforts largely to the gates and entrances to the piers. The guarding of the slips in be- twom the piers, where the seboteurs will operate in most cases, does not appear to be affective. The Coast Guard with its present force in New York is able to patrol part of the waterfrost only case daily and the balance not over two or three times daily. Obviously, the extent of this patrol is not sufficient to make 1% as effective defense against sabotage. It is probable that the seme ineffect- ive patrol exists in our other large ports. In view of the foregoing, I desire to bring to your atten- 110m the advisability of organizing in each of our harbors, where sabotage may be expected to take place. a patrol force operating under the Treasury Department of sufficient sise and Regraded Uclassified 104 - 2 - strength to effectively cope with this problem. This depart- nost will be glad to advise you upon request as to the names and location of the ship yerds and pleate employed on Nevy contracts which 10 considers should reseive this waterfront protection. Sincerely yours, (Signed) Frenk Know Honorable Heary Morgenthau Secretary of the Treasury Washington, D. 0. Regraded Uclassified 105 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 16, 1941 Secretary Morgenthau TO FROM Mr. Cochran STRICTLY CONFIDENTIAL At 2:55 yesterday afternoon Mr. Ray Atherton, Acting Chief of the European Division, telephoned me from the Department of State. He said he had just stepped out of Secretary Hull's office to try to get a message to Assistant Secretary of Treasury Gaston, but had not been able to reach him. Atherton asked, therefore. that I try to communicate to Mr. Gaston, at the earliest possible moment, a message to the effect that Secretary Hull feels that a guard should be placed on all French ships in our ports immediately. Upon receiving this message I went at once to Mr. Gaston's office and learned that be was with the Secretary. Consequently I went to the Secretary's office and informed the Secretary, as wellias Mr. Gaston, of Mr. Hull's message. The Secretary asked Mr. Gaston to put the machinery into effect at once for carrying out this request. r.Atherton called me back later in the afternoon and I confirmed that I had delivered the message immediately after its receipt by me, and that steps had been taken at once to place the guards. 76MS Regraded Uclassified 106 MAY 16 1941 Dear Mr. Aldrichs I have your letter of May 12, 1941, enclosing a nemorandum outlining the nature and coope of certain transactions which your bank is carrying on with German, Italian, and Japanese tasks and firms, and advising me that you sould be glad to be guided w the wishes of the Treasury either are or at any time in the future, if in my opinion 11 should be insivisable for your bank to continue to furnish any of these facilities. I appreciate very such your bringing this matter to my attention. I have 1t under stady and will be glad to advise you in case we wast to take advantage of your kind effer. Sincerely yours, (Signed) 1. Morgenthan, Jr. Secretary of the Treasury Mr. Winthrop V. Aldrich, Chairman, Board of Directors, The Chase National Bank, New York City. File to D.W. Bell Copy II to Mr. # Cochran # Thompson II # NMC DWB:nle:ce 5-15-41 Regraded Uclassified 107 - 16 1941 Dear Mr. Secretary: I am enclosing herewith copy of & letter dated May 12, 1941, together with necoration reforred to therein, from Mr. Vinthrop V. Aldrich, Chairma of the Board of Directors of the Chase National Bank of You Terk, raising certain questions as to the advisability of that Bank's continuing to furnish certain banking facilities to German, Italian and Japanese banks and firms. I would appreciate 18 if you could advise as as to how the Treasury should reply to this letter. Sincerely years, (Signed) V. Hergenthaw, JT, The Honorable, File to D.W. Bell The Secretary of State. Copy to Mr. Coohran 3 35 N $ # Thompson If # NMC May 15. 1941 Regraded Uclassified 108 The Chase National Bank OF THE CITY OF NEW YORK New York WINTEROF W ALDRICM May 12, 1941 - - OF - The Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. shell Dear Mr. Secretary: Those of us who are responsible for conducting the policy of this Bank recognize that during the present period of international tension it is extremely important that American banks should cooperate in every possible way with the Administration. On the other hand, it is difficult, in the absence of action by the United States Government to control assets owned by German, Italian and Japanese nationals, for us to refuse to continue to handle for the benefit of our American customers and depositors such ordinary business as they may have in Central Europe, Italy and Japan, or to refuse to continue our correspondent relations with German, Italian and Japanese banks and firms. The nature and scope of the transactions which I have in mind are outlined in the enclosed memorandum. I have no reason to suppose that any of these transactions is in any may con- trary to the policy which the Administration would wish to have us follow, but with the thought in mind that it might not have occurred to you that some of these transactions were being carried on, I have felt it desirable to call them to your attention. I am sure that it is not necessary for as to tell you that if, in your opinion, it should be inadvisable for us to continue to furnish any of these facilities, we will be glad to be guided by your wishes either now or at any time in the future. Very sincerely yours, Chairman Board of Directors. Enclosure, Regraded Uclassified 109 May 22, 1941 GERMANY . A) - No continue to carry current accounts in the of Curren beaks and firms and effect payments and collections ONLY thair babalf, Instading all the routine banking transactions involved is - ordinary correspondent relationship. B) - Ever since the German crisis of 1931, we have been actively engaged in the liquidation of credits extended by this and other American banks in Germany. Under the Standstill Agreements concluded with the German banks, the American banks had the right to require debtors to settle their debts in German Marks. These Marks were and are still being sold to buyors in the United States and elsewhere and are generally used for support of families, charitable contributions and travel. c) - Prominent American concerns doing business in Germany are using our ear- vices in connection with the transfer to the United States, after conver- sion, of interest, dividends, royalties collected in Marks in Germany. D) - No have been instrumental in liquidating funds inherited by United States citizens or residents in Germany. E) - Ne have received from Germen residents of the United States desirous of returning to Germany to take up permanent residence there, dollars which were credited to the account of the Deutsche Golddiakontbank for the purpose of conversion into Marks to be paid to these emigrants upon their arrival in Germany. The gross volume of all transactions completed during the first four months of 1941 amounted to slightly under $4,300,000. II - ITALY A) - We continue to carry current accounts in the names of Italian banks and firms and effect paymente and collections on their behalf, including all the routine banking transactions involved in en ordinary correspondent relationship. B) - Prominent American concerns doing business in Italy are using our services in connection with the transfer to the United States, after conversion, of interest, dividends, royalties collected in Lires in Italy. c) - For American investors, holders of Italian shares and dollar bonds in default, we have been instrumental in the sale and disposal thereof in Italy. D) - We have made and are making remittances representing gifts, support of families and charitable contributions, mainly for account of Italian residents in the United States and for the Catholic Church. Considerable payments of this kind have been made to the Vatican, the Society of Jesus and various missionary societies in Italy. Other sales are made mainly to steamship companies, passenger, travel and freight agencies and American and Italian banks. Regraded Uclassified 110 May 12,1941 -2- II - ITALY continued E) - Tie are transferring funds to subsidiaries and agents of American firms in Italy and to the Italian Offices of the American Press. The gross volume of all transactions completed during the first four months of 1941 amounted to slightly under $1,900,000. III - JAPAN A) - Ne continue to carry current accounts in the names of Japanese banks and firms, most of whom are established in New York, and effect payments and collections on their behalf including all the routine transactions involved in an ordinary correspondent relationship, such as opening of commercial credits on a fully secured basis to finance the importation of silk and rubber, loans against goods in warehouse (stored in this country), loans against U. S. Government Bonds, discount of trade acceptances and purchase and sale of foreign exchange. The gross volume of such transactions on our books at the present time amounts to about $6,100,000. For Miss Chaungey 111 May 16,1941 CONFIDENTIAL Dear Mr. I have pleasure is acknowledging, as be- half of Secretary Morgenthan, the receipt of your letter of May 15. 1941. enclosing your compilation for the week ended May 7. 1941, showing dollar die- bursements out of the British Empire and French accounts at the Federal Reserve Bank of New York, and the means by which these expenditures were financed. Faithfully yours. Technical Assistant to the Secretary mmP 1. Merlo Cechran L. V. Knoke, Bequire, Fice President, Federal Reserve Bank of New York, Bev York, New York. HMC:lap-5/16/41 FRB. Address Disburesement Regraded Uclassified 112 C 0 P I FEDERAL RESERVE BANK OF NEW YORK May 15, 1941. CONFIDENTIAL Dear Mr. Secretary: Attention: Mr. H. Merle Cochran I an enclosing our compilation for the week ended May 7. 1941, showing dollar disbursements out of the British Empire and French accounts at this bank and the means by which these expenditures were financed. Faithfully yours, /s/ L. W. Knoke L. W. Knoke, Vice President. Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Enclosures COPY:mg:5/16/41 Regraded Uclassified ANALYSIS or BRITISH AND FRENCH ACCOUNTS In Millions of Dollars) Veek Ended May 7, 1941. Strictly ComE idential R (BRITISH BANK OF FRANCE DEBITS CREDITS DEBITS CREDITS Proceeds of Net Incr. Gov't Sales of (+) or Gre't Processive Tital Expendi- Other Total Securities Other Deor. (-) Total Expendi- Other Total of 0628 PERIOD Debite tures(s) Debits Credits Gold Official)(b) Credits(c) in Balance Debita tures (d) Debits Credita Sales Credits in Belance First year of war (6/29/39-8/28/40) 1,793.2 605.6 1,187,61,828.2 1,356.1 52.0 420.1 + 35.0 866.3(e) 416.6 (e) 449.7 900.2 195.1(e) -229.0 1940 Aug. 29 - Oct. 2 516.A 244.3 72.5 208.9 271.0 6.0 31,4 - 7,9 6.5 4.4 4.2 1.3 - 1.3 - 7.3 Oct. 3- - 30 196.7 167.8 23.9 198.5 160.3 5.0 32.0 + 1.8 0.5 0.3 0.2 0.5 - 0,5 I Oct. 31 Nov. 27 241.0 201.1 39.9 259.5 210.0 18.0 31.5 + 18.5 0.8 0.1 0.7 0,7 - 0,7 - 0.1 Nov. 28- Dec, 31 234.6 206.8 27.8 198,0 111.4 26,0 60,6 - 36,6 2.1 - 2.1 0.6 - 0.6 - 1.5 War pariod through Des. 2,788.3 1,425.6 1,356,78,793.1 2,109.5 108.0 575.6 + 10.8 878.3 421.4 456,9 1,098.4 900,2 198.2 +220.1 1941 Jan. 2 - 29 197.4 162.7 34.7 259.9 176.2 52,0 31.7 + 62.5 1.7 - 1.7 0.5 - 0,5 - 1.2 Jan. 30 - Feb. 26 164.6 137.8 26.8 101,4 26.6 26.0 48.8 - 63.2 0.2 - 0.2 0.2 - 0.2 , Feb. 27 Apr. 2 229.7 157.6 32.1 237.9 103.7 72.0 62.2 + 8.2 0,7 - 0,7 1.6 - 1.6 - 0.9 Apr. 3 - Apr. 30 126.0 101.9 24.1 218.9 125.6 15.0 78.3 +92.9 0.9 - 0.9 0.9 . 0.9 - May 1- May 28 May 29 - - July 2 July 3 - July 30 July 31 - AUR. 27 Second year of war (8/29/40-3/27/41) Aug. 28 - Oct. 1 Oct, 2- Oct, 29 Oct. 30 - Dec. 3 Dec. 4 4 - 31 WEEK ENTED: April 16 29.2 23.8 5.4 49.0 - 2.0 47.0 +19.8 0.5 - 0.5 0.4 - 0.4 - 0.1 23 37-2 32.6 4.6 16.5 3.0 13.5 -20.7 0.3 - 0.3 0.1 - - 0.1 - 0.2 27.0 20.7 6.3 15.1 4.0 11.1 -11.9 - - - 0.3 - 30 - 0.3 + 0.3 May I, 39.6 29.2 10.4(f) 17.1 - 6.0 11.1(g) -22.5 0,2 - 0.2 0,2 - 0.2 - Average Weekly Expenditures Since Outbreak of War Transfers from British Purchasing Commission to (See footnotes en reverse side) France (through June 19) $19.6 million Bank of Canada for French Account England (through June 19) 27.6 million licek ended May 7 0.5 million Encland (since June 19) 51.7 million Amulation from July 6 162.7 million + For monthly breakdewn see tabulations prior to April 23, 1941. Regraded Uclassified [a] Includes payments for or Periburing Desedention, Brit Lah Air Ministry, British Supply Board, Risketry or Supply Timber Control, and Ministry of Shipping. (b) Estimated figures based on transfers from the New York Agency of the Bank of Montreal, which sypermis proceeds of official Brit ish sales of American securities, including those effected through direct regitistion. In whostics to the official selling, substantial liquidation of securities for private British account occurred, particularly during the early months of the although the receipt of the proceeds at this Bank cannot be 1dent ified with any sccuracy. According to data supplied by nor, the British Treasury and released by Secretary Morgenthau, total official and private British liquidation of our securities through December, 1940 amounted to $334 million. (o) Includes about $85 million received during October, 1939 from the accounts of British authorized banks with New York benks, presumably reflecting the requisitioning of private dollar balances. Other large transfers from such accounts since October, 1939 apparently represent the acquisition of proceeds of exports from the sterling area and other currently socruing dollar receipts. (d) Includes payments for account of French Air Commission and French Purchasing Commission. (o) Adjusted to eliminate the effect of $20 million paid out on June 26, 1940 and returned the following day. (f) Includes about $4.4 million transferred to De Javasche Bank account here. (g) Includes about $3.9 million representing the proceeds of wool exports to U. S. Regraded Uclassified bod Transfers Die period to Prosends ! British NO Total Other Total of Other (+) a Total Official created Debits Debite Credita Cold For Own For French Credits Deer. (-) Debite British Debite Credive Dollar British PERIOD A/C Sales A/C A/C in Belance A/C Sales First year of war 412.7 20,9 38.7 38.4 +181.7 31.2 3.9 27.3 36.1 30.0 6,1 + 4,9 (8/29/39-8/26/40)* 323.0 16.6 306.4 504.7 1940 16.4 27.3 0.2 - 0.4 8.7 2.5 6.2 B.O 6.7 1.3 - 0.7 ALLE. 29 - Cot. 2 44.3 - 44.3 43.9 - 14.3 0.3 + 1.9 10.1 7.5 2,6 7.9 6.5 1.4 - 2.2 Oct. 3 - 30 26.7 - 26.7 26,6 14,0 - - 49.2 16.7 3.7 + 34,4 3.1 0.6 2,5 3.6 2.1 1.5 + 0.5 Oct. 31 Nov. 27 35.2 35.2 69.6 1 4.8 4.8 6,8 4.8 2.0 + 2.0 Nov. 28 - Dec. 31 48.0 48.0 60.6 42.5 13.7 4.4 + 12.6 - - - Mar period tinoush Doo. 477.2 16.6 460.6 707.4 534,8 20,9 110,7 41.0 +230.8 57.9 14.5 43.4 62.4 50.1 12.3 - 4.5 1941 15.0 2.0 + 0,2 4.8 4.8 6,8 5.1 1.7 + 2.0 Jan. 2- 29 33.7 - 33.7 33.9 16.9 I 1 Jan. 30 - Pob. 26 31.1 - 31.1 24.3 14.3 6.8 3.2 - 6.8 5.0 1.7 3.3 3.2 0.6 2,6 - 1.8 - 60,9 46.0 23.1 19.1 3.8 - 14.9 5.8 0.8 5.0 13.7 12,5 1.2 + 7,9 Feb. 27 - Apr. 2 - 60.9 - 35.9 12.5 10.5 12.9 + 1.0 2.8 - 2.8 5.9 4.6 1.3 + 3.1 Apr. 3 - Apr. 30 34.9 - 34,9 - May 1 - May 28 May 29 - July a July 3 - July SC July 31 Aug. 27 Second year of war (8/29/40-8/27/41) Aug. 28 - Oct. 1 Oct. 2- Oct. 29 Oct. 30 - Dec. 3 Dec. 4 4- - 31 WEEK ENDED: 3.9 + 3.5 0,2 0.2 - - 3.6 - 0.2 - - - April 16 4.0 - 4.0 7.5 - 13.9 10,0 1.9 + 2.? 0.3 - 2.0 0,3 4.6 4.4 0.2 + 4,3 - 23 11.7 - 11.7 6.8 1.2 - 8.9 1.1 - 1.1 0.7 0.2 0.5 - 0.4 - 30 16.9 - 16.9 B.O - 3.5 0.5 8,2 + 3.2 1.7 - 1.7 0.1 - 0.1 - 1.6 May 7 9.0 - 9,0 12.2 - Weekly Average of Total Debits Since Outbreak of War Through May 7.4 million * For monthly breakdown see tabulations prior to April 23, 1941. Regraded Uclassified 116 TREASURY DEPARTMENT FOR RELEASE, MORNING PAPERS Friday, May 16, 1941 The Secrutary of the Trensury, by this public notice, invites tonders for $100,000,000. or theruabouts, of 91-day Treasury bills, to be issued on a discount basis under competitive bidding. The bills of this scries will bo detod May 21, 1941, and will mature August 20, 1941, when the face amount will be payable without intorest. They will bo issued in bearer form only, and in denominations of $1,000, $5,000, $10,000, $100,000, $500,000, and $1,000,000 (miturity vnluo). Tondors will bo received at Federal Reservo Banks and Branches up to the closing hour, two o'clock P. m., Eastern Standard time, Monday, May 19, 1941. Tondors will not be received At the Treasury Dopartment, Washington. Euch tondor must be for in even multiplo of $1,000, end the price offered must be expressed on the busis of 100, with not more then three docimals, e. 8., 99.925. Fractions may not be usod. It is urged that tondors be made on the printed forms and for- wirded in the special envelopes which will be supplied by Fedoral Reserve Banks or Branchos on application therefor. Tendors will be received without deposit from incorporated banks and trust companios and from responsible and rocognized dealers in invostment securi- ties. Tondors from others must be necompanied by paymont of 10 percent of the face amount of Treasury bills applied for, unloss the tenders are accompanied by en express guaranty of payment by un incorporated bunk or trust company. Immediately after the closing hour, tenders will be opened at the 25-21 Regraded Uclassified 117 - 2 - Fuderal Reserve Banks and Branches, following which public announcement will be seda by the Secretary of the Treasury of the amount and price range of accepted bids. Those submitting tenders will be advised of the acceptance or rejection thereof. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tonders, in whole or in part, and his action in any such respect shill be final. Payment of accepted tondors at the prices offored must be m.de or completed et the Federal Reserve Bank in cash or other immodiately available funds on May 21, 1941. The income derived from Treasury bills, whother inturest or gain from the selo or other disposition of the bills, shall not have any exomption, 0.8 such, and loss from the sale or other disposition of Treasury bills shall not have any special treatment, as such, under Fedoral tax Acts now or heronfter enacted. The bills shall be subject to ostate, inheritance, gift, or other excise taxes, whether Foderal or State, but shall be exempt from all taxation now or hereafter imposed on the principal or interost thereof by any State, or any of the possessions of the United States, or by any local taxing authority. For purposes of taxation the amount of discount at which Trensury bills are originally sold by the United States shull be considered to be interest. Trousury Department Circular No. 418, 0.0 amended, and this notice, prescribe the terms of tho Trensury bills and govern the conditions of their issue. Copies of the circular may be obtained from any Foderal Resorvo Bank or Branch. - oOo - Regraded Uclassified 8/16 STRICTLY CONFIDENTIAL Fifty Largest Bank and Insurance Company Holders of the 3-1/4's of 1941 118 (In millions of dollars) Name March 31 April 30 Net : change 1. Guaranty Trust Co. of New York 58.0 57.9 -.1 2. The Travelers Insurance Co. of Hartford 40.0 40.0 3. First National Bank, Baltimore 35.0 30.0 -5.0 4. National City Bank, New York 25.0 25.0 5. Bank of New York 23.4 12.8 -10.6 b. National Bank of Detroit 21.7 21.7 7. Equitable Life Assurance Society of U.S., New York 20.7 20.7 8. Central Hanover Bank and Trust Co., New York 14.0 14.0 9. Metropolitan Life Insurance Co., New York 12.5 12.5 10. Union Trust Co. of Pittsburgh, Pa. 12.4 12,4 11. Bank for Savings in the City of New York 10.0 10.0 12. American Trust Co., San Francisco 9.0 5.0 -4.0 13. The Prudential Insurance Co. of America, Newark 8.0 8.0 14. Savings Banks Trust Co., New York 8.0 5.0 -3.0 15. New York Trust Company 7.6 7.6 16. Natual Life Insurance Co. of New York 7.5 7.5 17. Troy Savings Bank, Troy, New York 6.0 6.0 18. Chemical Bank & Trust Co., New York 5.1 - -5.1 19. Penn Nutual Life Insurance Co., Philadelphia 5.0 5.0 20, Provident Mutual Life Insurance Co., Philadelphia 5.0 5.0 21. Bank of the Manhattan Co., New York 5.0 5.0 22. First National Bank, New York 5.0 4.0 -1.0 23, National City Bank, Cleveland 4.3 4.3 24, Wilmington Trust Co., Wilmington 4.2 4.2 25. Toledo Trust Co., Toledo 4.1 4.1 26. American Mutual Liability Insurance Co., Boaton 4.0 4.0 27. First National Bank, Palm Beach, Florida 4.0 4.0 28. Baltimore National Bank, Baltimore 3.5 3.5 29. Bankers Trust Co., New York 3.5 3.1 -.4 30. North River Savings Bank, New York 3.5 3.5 31. Mellon National Bank, Pittsburgh, Pa. 3.3 3.3 32. Lawyers Trust Co., New York 3.0 3.0 33. City Trust & Savings Bank, Youngstown, Ohio 3.0 3.9 4.9 34. John Hanoook Life Insurance Co., Boston 3.0 3.0 35. First National Bank, Boston 3.0 3.0 36. Strafford Savings Bank, Dover, N. H. 2.7 2.7 37. Empire Trust Co., New York 2.7 2.7 38. Franklin Savings Bank in the City of New York 2.7 2.7 39. Greenwich Savings Bank, New York 2.6 2.6 40. Liberty Bank of Buffalo 2.5 2.5 41. Union Dime Savings Bank, New York 2.5 2.5 42, United States Trust Co. of New York 2.5 2.5 43. Flatbush Savings Bank, Brooklyn 2.5 2.5 44, American Automobile Insurance Co., St. Louis, Mo. 2.5 2.5 45. National Fire Insurance Co. of Hartford 2.5 2.5 46. The Merrill Trust Co., Bangor, Maine 2.4 2,4 47, Brown Brothers Harriman & Co., New York 2.4 - -2.4 48. Washington Mutual Savings Bank, Seattle 2.3 2.3 49. First National Bank, Lincoln, Nebraska 2.2 4.3 42.1 50. East New York Savings Bank, Brooklyn 2.1 2.1 Total 427.4 398.8 -28.6 Office of the Secretary of the Treasury, Division of Research and Statistics. May 16, 1941, Regraded Uclassified 119 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 16, 1941 TO FROM given me by Bell may 20th 1441 Tax Anticipation Certificates The following discount tax certificates are proposed to be offered for those who wish to voluntarily make provision for their income taxes in advance. It is suggested that there should be a certificate for each tax date, that is, four series a year -- March, June, September and December. The purchase price should be progressively increased as the time to maturity becomes shorter, thus making the certificate a discount security. Discount rates would be worked out on the basis of a $100 unit of 12 months maturity selling for $99.40, with the price increasing 5% each month as shown in the accompanying tables. These securities would be offered in 325, $50, $100, $500, $1000 and $5000 units. It is proposed: (1) That not more than $5000 of these tax certificates could be turned in in payment of taxes at any given quarterly tax date. (2) That the name of the purchaser and date of purchase should be entered on the certificate at the time of purchase. They would not be transferable. (3) That these certificates will be accepted at par only in pay- ment of income taxes if tendered by the purchaser on or after the maturity date. (4) That the original purchaser may redeem his certificates at the original purchase price at any time. (5) That these certificates be sold only at the twelve Federal Reserve Banks and their branches. (6) That for smaller units than 325, existing Postal Savings stamps could be purchased in anticipation and turned in in payment of taxes. Regraded Uclassified Secretary Morgenthau - Room 280 120 DEFENSE SAVINGS STAFF ADVANCE NOTICE RADIO PROGRAMS FRIDAY, MAY 16 Time: 2:00 - 2:15 P.M. Station: WRC, Washington, D. C., and National Broadcasting Company Red Network. Program: Proctor & Gamble's "Against the Storm". (Closing plug immediately following show) Time: 10:45 - 11:00 P.M. Station: WRC, Washington, D. C., and National Broadcasting Company Red Network. Program: Ignace Jan Paderewski "Buy A Share In America". THESE PROGRAMS PROMOTE SALE OF DEFENSE BONDS AND STAMPS Regraded Uclassified 121 FAMOUS STAR PROMOTES DEFENSE BONDS SALE Here is an example of how noted stars of stage, radio and screen are getting behind the sale of Defense Bonds and Stamps to the nation. Stepping out of her customary role of comedian, Miss Ilka Chase broad- cest the following statement over a coast to coast national broadcasting network last Saturday afternoon, May 10th on her "Luncheon at the Waldorf" broadcast: "It seems to me that the time has come when Americans must take stock. We must stand fast for what we believe in. No- body asks to be born into the generation that has to do the fighting. It is much more convenient to find alibis than to go to bat for your beliefs. But let us not slip into the fatal lethargy which believes that liberty is something won at Valley Forge and automatically ours for all time. "Liberty, ay friends, is almost as perishable as love. We must be constant and alert in our guardianship of it and we must be reolistic, I think, in our contribution towards its maintenance. It may be that with infinite good luck and shrewd- noss and unflagging effort we will still be able to avoid actual combat. But we must have an impregnable defense and if by giving only our money we can assure that, it seems to me the price is very small. "And remember, in this country there is no high-handed appro- prietion of personal funds. Instead, our Government is giving every one of us the opportunity to participate in as sound an investment B.B. there is in the country today. Not only is it our puvilege--it is to our individual advantage to buy as many Defense Savings Bonds as we can afford. Believe ше, it is frightfully importent. Let's All 60 to our bank or nearest post office and purchase what we can, either stamps or bonds in whatever denomination fite our pockets. All of us who do this are making money, which is indeed a roay prospect, but what under the circumstances, is perhaps even more heart-warming, io that we are contributing to our present security and to that better future which must ever be the goal of all free peoples." Such statements by stars whose followers number millions are most con- vincing to huge masses of Americans. We are gratified indeed to find their cooperation so wholehearted and sincere. Vincent F. Callahan, Chief, Radio Section Regraded Uclassified 122 UNITED STATES SAVINGS BONDS AND SAVINGS STAMPS CONFIDENTIAL Daily Sales Since May 1, 1941 Oa Basis of Issue Price (In thousands of dollars) Post Office All Bond Sales Bond. Sales Bank Bond Sales Savings Date Stamps Total Series I Series 7 Series G Series È Total Series I Series I Series G May 1941 1 & 2 $ 35,781 $ 5,087 $ 4,678 $ 26,016 $ 4,405 $ 31,377 $ 682 $ 4,678 $ 26,016 $ 1,145 3 30,401 2,593 3,648 24,160 1,310 29,091 1,283 3.648 24,160 106 5 14,969 2,982 2,087 9,900 1,581 13,387 1,401 2,087 9,900 113 6 14,967 3,845 2,092 9,030 1,607 13,360 2,238 2,092 9,030 91 7 17,802 3,872 2,155 11,775 1,351 16,451 2,521 2,155 11,775 99 8 16,925 4,565 1,210 11,151 1,235 15,690 3,329 1,210 11,151 82 9 15,189 4,011 1,591 9,586 1,156 14,033 2,855 1,591 9.586 81 10 13,800 4,156 1,415 8,229 1,187 12,613 2,969 1,415 5,229 71 12 17,051 4,542 1,578 10,930 1,485 15,567 3,058 1,578 10,930 92 13 19,887 4,374 2,219 13,294 1,220 18,667 3,154 2,219 13,294 92 14 18,019 4,421 1,621 11,977 1,106 16,913 3,315 1,621 11,977 81 15 16,984 4,255 1,952 10,777 1,116 15,867 3,139 1,952 10,777 91 Total $231.775 $ 48,703 $ 26,246 $156,825 $ 18,760 $213,015 $ 29,944 $ 26,246 $156,825 $ 2,144 Treasury Department, Division of Research and Statistics. May 16, 1941. Source: Division of Savings Bonds. The post office figures are estimated by the post office on the basis of actual sales by 100 larger post offices. The bank figures are taken from Federal Reserve Bank reports and include their own sales. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. Regraded Uclassified 123 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 16, 1941 TO Secretary Morgenthau Helen Dallas FROM THE SALESMAN HAS HIS FOOT IN THE DOOR Regardless of any differences of public opinion over foreign policy, there has been almost unanimous approval of the Treasury's defense savings bond campaign. It is a sign that the salesman has his foot in the door. Papers in the Midwest where anti-war sentiment is par- ticularly strong, and notably papers that have been outspoken against Administration foreign policy, such as the Chicago Tribune and the St. Louis Post Dispatch, have been among those to endorse it. Even such an isolationist as John T. Flynn has written in his column: "There is no doubt that the only sound way for the Government to borrow money is from citizens instead of from banks." To date, clippings returned to the Defense Savings Staff total more than 2600. The big bulk of these are news stories. Of that group, 600 were published before the bonds were placed on sale. Most of these were given good placement, and contained most of the points featured in the original release, e.g., that the bonds are intended for everyone -- with emphasis on the Regraded Uclassified 124 - 2 - "little man"; that this is no Liberty Loan drive, but is a campaign for systematic savings; that buying 8. bond is buying a share in na- tional defense; and that the bonds will be a barrier to inflation. Newspaper coverage has been divided as follows: News stories 80% Features and pictures 9% Comments by columnists 5% Editorials 5% Cartoons 1% In addition, banks have placed institutional advertisements running from quarter-page to full-page in nearly 200 newspapers. These feature the sale of defense stamps and bonds. The first phase of the defense savings campaign has con- centrated on the announcement of the bonds to the public. With minor exceptions -- practically the only papers that did not like the idea were the Daily Worker and Social Justice -- the drive in terms of newspaper copy has been successful. The second phase of the campaign will emphasize how well the bonds are selling. This is particularly important in that the American public has a "nothing succeeds like success" psychology. The people must be persuaded that it is & band wagon they are getting on. While two or three financial stories in New York newspapers ten days ago suggested that the bonds were not going 80 well, there has been no spread of this type of newspaper copy. Regraded Uclassified 125 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 16, 1941 Secretary Morgenthau TO Alan Barth FROM MARKING TIME Flight The Mysterious Adventure of Herr Rudolf Hess has brilliantly illuminated the tension which prevails in the United States. Perhaps because, momentarily, this romantic interlude served to snap suspense, and because it furnished 8. brief respite from in- tolerable reality, it was sensationally welcomed by press and public alike. Most American newspapers managed to laugh at their own ex- citement over an incident which some of them confess should not be taken too seriously. But this did not keep them from every conceivable variety of speculation and conjecture as to the Nazi's mission. Innumerable letters to editors outdid even these edi- torial flights of fancy. There was little tendency, however, to romanticize Hess himself. The common view here has been that he is B. blackguard, fleeing from or sent by 8. pack of blackguards and that his own version of his case is no more worthy of credence than Hitler's. Regraded Uclassified 126 - 2 - The widespread hopes which his flight aroused indicate plainly, however, how near the surface were buried all the old, pathetic illusions about the imminence of a Nazi collapse through internal dissension. Since the naked realities of current events seem almost unbearable, Americans have imbibed the Hess adventure as a kind of intoxioant promising escape. For the moment it appears to have elevated their spirits. But it seems unlikely that the ef- fects of such & spree will be more than transient. Several of the more astute newspaper commentators agree that American uneasiness at present is due to a form of schizophrenia -- & split of the national personality, one portion of which desires ardently to remain at peace, while the other portion insists upon a defeat of the Axis. Until this internal conflict can be finally resolved and supplanted by a positive sense of direction, the daily news from abroad is certain to strike here upon jangled nerves and unhappy consciences. Americans cannot fiddle comfortably while London burns. Public opinion polls now show plainly that this country has solved its problem on the intellectual level. It has been persuaded that the sensible thing for it to do is to aid the British -- even at the risk of war. But the vital responses of a nation are not rational; they are emotional. And this nation has not yet been fired emotionally or stirred to the sacrifices which are demanded for heroic action. Regraded Uclassified - 3 - 127 Facts Admiral Land's letter to Senator Vandenberg on British shipping losses threw some cold water on those who have been clamoring that American naval intervention is immediately neces- sary. In several quarters it gave rise to irritated suspicion that the public has been deliberately bamboozled on the shipping problem by the interventionists. But in the main, the Land disclosures were seized as a peg on which to hang renewed demands for greater candor on the part of the Administration. There is an exceedingly widespread insistence that both the British and American Govern- ments give the public the full facts about the progress of the Battle of the Atlantic. Passage of the Ship Seizure bill was generally applauded, the delay over congressional action having previously evoked & good deal of impatience and acidulous comment. There appears to be little fear that even the delivery of German and Italian ves- sels to the British will be taken 8.8 & cause for war by the Axis. Showdown While press reaction to the seizure of French ships is not yet ascertainable, it seems virtually certain that this move will also be generally approved. A large portion of the newspapers which have been urging aid to Britain have shown small sympathy of late for the position of the French Government. There are frequent expressions of pity for the people of France and 8. Regraded Uclassified 128 - 4 - general assumption that the Vichy regime does not truly reflect their sentiments. The recent moves by both France and the Soviet Union which have been taken as indicative of closer collaboration with the Axis have been greeted in rather defiant tone by most American editorial commentators. There is an increasing hostility to any- thing which may be labeled "appeasement." The shipment of food to France or of machine tools to Russia is deplored in a great many newspapers as futile or downright dangerous. The feeling which now apparently dominates American editorial thought is that the time for & showdown has arrived. The United States, as well as France, the Soviet Union, Turkey and Spain, it is held, must soon definitively take sides. There will undoubtedly be an enormous sense of relief when the irrevocable choices are finally made. Until then, there can be only a nervous, impatient marking of time. 129 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 16, 1941 Secretary Morgenthau TO Herbert Merillat FROM HEARINGS OF WAYS AND MEANS COMMITTEE Friday, May 16, 1941 Distilled Spirits The committee showed little interest in protests against increases in the tax on distilled spirits. Concerning witnesses' assertions that increased taxes would result in more bootlegging, Doughton remarked that stricter enforcement was the answer. Non-defense Spending With regard to frequent general suggestions for reductions in non-defense spending, Doughton and Buck are taking the line that witnesses should appear before the Appropriations Committee and make specific suggestions for cuts. Pari-Mutuel Betting With regard to a protest against a tax on pari-mutuel betting on the ground that such betting would be cut and illegal betting increased, Doughton remarked that he failed to see why a Federal tax shouldn't be imposed even if such were the result. In general, he is critical of all protests against excises proposed by the Treasury and Stam (except tobacco taxes). Regraded Uclassified 130 May 16, 1941 Files m. M 3 e'sleck this afterneen I discussed with Under Secretary Bell the letter of April as from Secretary Sees of the Havy in regará to the opening of a sterling account is London to cover disbursements use is that area w the Navy's Daysly Officer is Lendon. with Mr. Dell's agreement, 8 telephoned Sir Preserick Phillips, Mottich Unier Secretary of the Treasury. at 3:30 this afterness. 8 read Secretary Eass' letter to his. Phillips premised to think " over and give - Me advice thereen. me first impression vas that a direct account of our Treasury with the Bank of Regland would be the seet satisfactory mothod of arrangement, provided we are net expecting interest n the account. pms Mc:1ap-5/16/41 Regraded Uclassified 131 0 0 P I CONFIDENTIAL May 6, 1941 Sir: Receipt is acknowledged of your communication of April 28, 1941 (S0)L1-1/MF13) requesting that the Treasury make preliminary arrangements to provide for obtaining English currency for disbursement in London which, it is estimated, may average $1,000,000 per month. The Treasury will take prompt action in the matter and will advise you as soon as the arrangements requested are perfected. Respectfully, (signed) John L. Sullivan Acting Secretary of the Treasury. The Honorable, The Secretary of the Havy. EDB:ew 5-3-41 NDB WE H.M.C. WNT chicopy 5-16-41 Regraded Uclassified C Address reply to 0 The Secretary of the Havy P and refer to initials I and no. HAVE DEPARTMENT Washington 132 April 28, 1941 CONFIDENTIAL Sir: The Havy Department is desirous that preliminary arrangements be made to provide for obtaining English currency for disbursing abroad if and when required. To eliminate the selling of checks and bills of exchange, it would seem desirable that the Staff Supply Officer in London should have placed to his credit in & London bank, a. deposit against which he could issue checks stated in English currency. It is estimated that average monthly requirements would be one million dollars ($1,000,000.00). With this deposit to his credit, the Staff Supply Officer would receive requests for funds from other disbursing officers in English waters and male transfers to the individual deposit accounts of these officers, the accounts to be carried in the same bank as the Staff Supply Officer's account. Please advise if any arrangements as outlined above can be made. Respectfully, (s) Frank Knox Frank Xasx The Honorable, The Secretary of the Treasury ch:copy 5-16-41 Regraded Uclassified 133 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 16, 1941 TO Files FROM Mr. Cochran Mr. John Russell of Honolulu telephoned me from New York this forenoon and asked for an appointment at 4 p.m. When he came in this afternoon he reported that following the message which I had given his office on the 14th, he had been able to complete his negotiations with Messrs. Peacock and Gifford. He is sure nov that the transaction will be ended satisfactorily. When I told him that I had also taken the precaution of letting Sir Edward know that the Treasury had no objection to this transaction, he told me that he thought this conversation with Sir Edward had assisted considerably in the progress of the negotiations. He asked that I thank the Secretary warmly for the support which he has received in these negotiations. While chatting on the general subject, Mr. Russell reported that he is definitely aware that Sir Edward is "putting the heat on" a number of British interests having holdings in this country. When Mr. Russell first visited Sir Edward's office several weeks ago, he found it cluttered up with a variety of individuals seeking commissions, etc. He says that it is now & serious place which gives a good impression. He was much pleased over his contact with Messrs. Peacock and Gifford and considers them entirely competent and qualified. 70mg Regraded Uclassified 134 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 16, 1941 TO Secretary Morgenthau FROM Mr. Kamarok Subject: Airplane Deliveries to the British Summary 1. Shipments for the latest week reported totalled 55 planes. This 18 just below the fourteen weeks average of 58 planes. 2. The heaviest shipment of naval patrol bombers to date was made in this week. The 8 Consolidated Catalina flying boats shipped were all delivered to England by air. 3. In this week, there was reported for the first time & shipment of 4 Grumman Martletts to England. These are single seat fighter monoplanes. The first shipment of 2 United Chesapeakes to the United Kingdom was also reported for the first time. These are single engine scout-bombers carrying a 1,000 pound bomb load. 4. If there is no objection, no attempt will be made to classify the light and medium bombers into separate types since the British appear to be using the light and medium bombers interchangeably for scouting, reconnaissance and bombing missions. Regraded Uclassified 135 - 2 - Division of Monetary Research Airplane Shipments to the Britisn (From January 11 to April 19 by sea February 1 to May 10 by air) Table A. - Shipments by Area Total Latest Reported Week To Date To the United Kingdom Light and medium bombers 31 250 Heavy bombers 1 10 Naval patrol bombers (Consolidated PBY) OR 41 Pursuit 4 4 Total to United Kingdom 44 304 To the Middle East Light and medium bombers (Martin 167) 5 116 Pursuit (Curties P-40) 0 240 Total to Middle East 5 356 To the Far East Light and medium bombers O 6 Naval patrol bombers (Consolidated PBY) o 5 Pursuit 6 88 Trainers o 55 Total to Far East 6 154 Totals Light and medium bombers 36 372 Heavy bombers 1 10 Naval patrol bombers 8 46 Pursuit 10 332 Trainers o 55 Grand Total 55 815 136 - 3 - Division of Monetary Research Table B. - Total Shipments by Types Total Latest Reported Week To Date Boeing B-17 1 5 Brewster Buffalo 6 88 Consolidated Cataline (PBY) OR 46 Liberator 0 5 Curtise Tomahawk (P-40) 0 240 Douglas - Boston o 81 Glenn Martin Maryland (Martin 167) 5 116 Grumman Martlett II 4 4 Lockheed Hudson I 0 1 Hudson III 0 36 Hudson IV 0 18 Hudson V 29 115 Electra 0 3 North American Harvard II 0 55 United Chesapeake 2 2 Grand Total - All Types 55 815 137 - 4 - Division of Monetary Research Table C. - Plane Deliveries to the British by Weeks Light Naval Week and Medium Heavy Patrol Ended Bombers Bombers Bombers Pursuit Trainers Total Feb. # 22 - 3 - - 25 Feb. 15 # 42 - - 100 - 142 Feb. 22 # 35 - - 27 - 62 Mar. 1 # 7 - 5 25 - 37 Mar. 8 # 16 - 3 10 - 29 Mar. 15 + 26 1 4 - - 31 Mar. 22 # 17 - 2 22 f 41 Mar. 29 # 25 - 3 18 - 46 Apr. 5 # 21 - 7 73 - 101 Apr. 12 + 21 2 2 27 - 52 Apr. 19 # 20 3 4 5 - 32 Apr. 26 # 23 2 3 - 28 56 May 3 # 61 1 2 15 27 106 May 10 36 1 8 10 - 55 372 10 46 332 55 815 # The date given 18 for shipments by air. Shipments by water start three weeks earlier. That is, the statement reporting the shipment of planes by air for the week end- ing May 10 would report the shipment of planes by water for the week ending April 19. Regraded Uclassified 138 C 0 P Y DEPARTMENT OF STATE ADVISER ON INTERNATIONAL ECONOMIC AFFAIRS May 16, 1941. To: Mr. Cochran From: Mr. Livesey Will you please return in due course. Returned with thanks ! H.M.C. (5-20-41) dm 139 C 0 Memorandum of conversation with Mr. Ilsley, Minister of Finance. I eat next to Mr. Ilaley at the luncheon for Mr. Mensise today. Ye talked a little about the budget and particularly his having raised the withholding tax on dividends and interest payments to non-residents. He explained that he was running into a great deal of trouble with certain parts of this tax and vas being assured, from many competent quarters, that he vas damaging Canadian credit in the American market. As far as reising the rate of the with- bolding tax on dividends from five to fifteen percent there was no difficulty, nor vas there any on coupons which were payable in Canadian dollars. The trouble arose with coupons where the interest payment was specifically to be made in American dollar currency. For the most part these were provincial bonds, municipal bonds and & very few bonds of private corporations. Dominion bonds were specifically exempted in the budget. It is being alleged that con- pons payable in & foreign currency are morally, if not legally, immine from a withholding tax. Leaving aside ethics and law these bonds are hold for the most part by mutual insurance companies and certain types of banks. Inss- much as autual insurance companies de not pay income tax in the United States they can not deduct the Canadian tax from their American income tax and hence take & serious loss. Many banks likewise have 80 arranged their portfolios that the great mass of their holdings are in tax free securities with just enough income from foreign bonds to balance the legitimate business expenses which they may charge off against their American tax, Both banks and insurance companies have been protesting violently at Ottewa. I asked Mr. Ilsley how much was involved. He said that the Government had calculated in the budget on getting $28,000,000 from the increase in the withholding tax. About $12,000,000 would be lost if the Government should exempt municipal and provincial bonds pay- able in United States dollars. Of these $12,000,000, $4,000,000 were held in Britain and the financial arrangements between Britain and Canada were so complex that ve might forget these $4,000,000 altogether. That left $8,000,000 at play. Should the Government exempt these coupons it would have to find $8,000,000 somewhere else. Furthermore, there vas a distinct hesitation in Cabinet to make an about-face. I suggested that this could be done on petition from the provinces and municipalities that their credit was being affected. Regraded Uclassified 140 - 2 - He admitted this but said there was still another difficulty. The bonds in question had dropped several points of late. Should the Canadian Government now reverse its position it would be unfair to those who had sold at a loss. Mr. Ilsley admitted that this section of the budget had not been given sufficient thought but he added in strictest confidence it had been discussed with the United States Treasury and that the latter had raised no objections nor pointed out the complications which are already facing Ottawa. Ottawa, May 7. 1941. PM/meh COPY - 5/20/41. - dm 141 C 0 ? I May 16, 1941. 12:30 P.M. Following phoned by Miss King, of Captain Phillips Office, O.N.I., (Havy 288): From: Third Naval District, New York. Reliable informant states situation in Banco di Napeli Trust Company, New York, Chicago and elsewhere very tense. Italian employees asked to prepare to leave for Buenos Aires when notified. Officers in United States fear Executive Vice President will flee country with bank's capital. They have asked assurances he will not and will hold meeting today. Italian employees clamoring to leave at once. F.B.I., M. I. D. and Immigration notified. da 142 MAY 16 1941 Dear Fresks Reference is made to your of April 25. is which you breaght to w attention as extract from a securentes propared by ⑉ of year efficers returning from Regland to the effect that Zerá Desverbrook had instituted a system for heoping close track a all cases where information, written # verbal, vas furnished to American personnel with the intention of assigning a value in each case and oventually presenting 6 claim for that value. In w acknovledgemt of April 28, I told you that I vse having this matter investigated. Sir Proderisk Phillips, Under Secretary of the British Treasury, presently in Vachington, to when I referred this matter, has nev received word back through Lord Beaverbreck's agent, His Marris Vilson, to the effect that the report was "pepprosck", to use the czmet language of the message, Sincerely yours, (Signed) Henry The Nenerable Treak Knez, Secretary of the Havy. By Messenger 386- HMC:dm:5.16.41 Regraded Uclassified 143 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 15, 1941 TO Secretary Morgenthau FROM Mr. Cochran While talking with Sir Frederick Phillips by telephone at 11:30 this morning, he referred to the letter which Secretary Knox had written Secretary Morgenthau some days ago, in regard to the keeping of books in London on military information given to American officials. Phillips told me that he had received word back through Lord Beaverbrook's agent, Sir Morris Wilson, to the effect that this re- port was "poppyceck". AMS. Regraded Uclassified 144 (COPY) THE SECRETARY OF THE NAVY Washington CONFIDENTIAL Apr. 25, 1941 MEMORANDUM for the Secretary of the Treasury. SUBJECT: Possible Charges by British Government for Aircraft Information Supplied to the United States Government. 1. There 18 quoted below, as a matter of possible interest, an extract from a memorandum prepared by a naval officer recently returned from observer duty in England: "I was informed while in London that Lord Beaverbrook had instituted a system for keeping close track of all cases where in- formation, written or verbal, was furnished to American personnel, with the intention of assigning a value in each case and even- tually presenting & claim for that value." /s/ Frank Knox CONFIDENTIAL Regraded Uclassified 145 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 16, 1941 Secretary Morgenthau TO Mr. Cochren FROM STRICTLY CONFIDENTIAL At 5:50 last evening Mr. Coyne, Financial Adviser of the Canadian Legation, telephoned no. He thought that we had given Mr. Clark and himself worthwhile advice to the effect that they should get directly in touch with Mr. Harry Hopkins in regard to the Lend-Lease proposition involving British-Canadian items. Kr. Clark had not gone directly to see Mr. Hopkins, since he learned that Mr. Purvis had an appointment yesterday noon, shortly after the hour at which I told Mr. Coyne the Secretary's mossage, transmitting the Canadian memorandum, had been delivered. When ..Purvis returned from his interview with Mr. Hopkins he reported that the latter had the idea that the memorandum involved old contracts, and Hopkins had objections to taking these over. Coyne then got in touch with Mr. Hopkins by telephone and explained the matter in more detail than Purvis had apparently been able to do. Thereupon Mr. Hopkins told Coyne to go shead with the plan, submitting two or three requests to try out the system. The Canadians will follow this advice at once. Coyne told me further that while Mr. Purvis Vas present with Mr. Hopkins. Kr. Keynes arrived to discuss the question of lend-lessing with Hopkins. When it came to handling old contracts for the Rritish, Hopkins insisted to Keynes that this had not been anticipated under the Lend-Lease Act and that the Director of the Budget had given testimony to the effect that these old contracts would not be included under the Lend-Lease system. I gave the following information orally to the Secretary this morning. I told him further that Under Secretary Bell, Mr. Coe and I had net yesterday afternoon to go further into the questions raised by Keynes and Phillips with us. Ve had not endeavored to get in touch directly with Hopkins or his organization for further exploration. The Secretary approved the idea that ve should do nothing further on this until next week. It is hoped that by Monday we may have the information re- quested by Under Secretary Bell from Assistant Secretary of War NcCloy and also a senorandum from Mr. Keynes giving detailed data with respect to British requirements, and particularly as to the purchases which the British are not finding feasible to make under the Lend-Lease system. I reported the above conversation to Under Secretary Bell as soon as I came out of Secretary Morgenthau's office. Smil Regraded Uclassified 146 THE BRITISH SUPPLY COUNCIL IN NORTH AMERICA Box 680 TELEPHONE: REPUBLIC 7860 BENJAMIN FRANKLIN STATION WASHINGTON, D. c. The Hon. Henry J. Morgentheu, Jr., May 16th,1941 United States Treasury, Washington, D.C. Dear Mr Morgenthau, I now enclose the memorandum which you asked Phillips and mysèlf to prepare for you. There is only one thing I should like to add to what is written in the text. I believe that, if something of this sort could come to pass, there would be intangible advantages beyond those considerations of administrative convenience etc. which are mentioned in the enclosed. We have great anxieties and preoccupations, much to concern us and much to decide, in all parts of the world. It is natural, therefore, that sometimes we should worry a bit. The uncertainties of the exact financial arrangements over here in the past months - inevitable though they were in the light of the political and other difficulties have weighed on the Chancellor of the Exchequer and his advisers, although at no time has he had any doubt that in the end, if we could have faith, all would be well. If from now on we could have a clean-cut settlement on the lines suggested, which would give us an immediately assured position against contingencies and remove all debateable points of any significance, it is difficult to exaggerate what a comfort this would be to everyone in the Treasury at home. It is easy to argue, indeed I am sure it would be true, that many of our worries have been quite unnecessary and that we have wasted time and thought on what was certain to come right in the end. But in London it is difficult to be sensitive to the background in Regraded Uclassified -2- 147 Washington - it makes all the difference in the world to come here in person - and I stress, therefore, that the advantage of a clean-cut arrangement of the kind which the Chancellor of the Exchequer has instructed me to propose to you would be much more than is apparent on the basis of mere statistics and accounting and strict logic; and out of proportion to the sums involved, which are only a fraction of the vast assistance you are giving us. I venture to say all this, since you will have a fellow-feeling for the Chancellor of the Exchequer in the burden he is carrying. Yours sincerely, JMKeyns YM Regraded Uclassified 148 MEMORANDUM. 1. Experience of Lease-Lend already shows that there are certain British requirements which are difficult to bring under Lease-Lend procedure because of either (a) mere administrative complexity or (b) legal or political difficulties under the Act. This memorandum makes suggestions for a re- arrangement by which it is considered that these difficulties could be largely overcome without increasing total Lease-Lend appropriations. It is suggested that the difficult categories should be dealt with by ordinary purchase outside Lease- Lend altogether. This will naturally increase the current charges for which the British Government will have to find dollars, and correspondingly reduce the charges on the Lease-Lend appropriations of the U.S. Government. If a sum corresponding to these savings could be applied at the outset towards taking over existing British commitments, no net increase in total appropriations would be called for, but the British Government would be placed in a position to remove the "difficult" categories from Lend-Lease altogether. 2. As shown in Appendix A hereto, the categories which are likely to be administratively difficult (difficulty (a) above) appear to call for some $200 millions per annum. For easing legal or political difficulties under the Act (difficulty (b) above) a figure of $125 millions per annum is Regraded Uclassified 149 - 2 - provisionally suggested, but it would be for Mr. Hopkins to say what reserve he might think it prudent to set aside. Assuming, however, $125 millions for difficulty (b), the total requirement to make this scheme effective would be $325 millions per annum, so far as the U.K. is concerned. 3. The question of the provision to be made for supplies (whether strictly warlike or other) to the Sterling-using Dominions is still uncertain. But: (a) if nothing - i.e. not even strictly warlike supplies - is lease-lent to the Dominions, a further provision would have to be made under this head. (b) if, however, strictly warlike supplies are lease-lent to the Dominions, no addition would be needed to cover the purchase of non-warlike supplies, since Sir F. Phillips' estimates already submitted to Mr. Morgenthau assumed as a statistical basis that the U.K. would have to find the main part of the dollar finance for such supplies. 4. Thus, assuming no addition on account of the Dominions, the total amount which would be removed from the scope of Lease-Lend under these proposals would be $325 millions a year, which would, of course, result in a corresponding reduction in the charges on Lease-Lend appropriations. Regraded Uclassified 150 - 3 - As explained in # 1, the proposal is that a sum corresponding to these savings should be applied at the outset in taking over existing British commitments. But, since this method of providing relief against existing commitments has to be applied at this stage or not at all, it would seem advisable to provide for two years' requirements at the present time, making $650 millions for the two years. 5. Since this $650 millions relief from existing commitments would subsequently be re- absorbed by cash payments on new commitments outside Lease-Lend, it would be additional to the relief of $300 to $400 millions already agreed by Mr. Morgenthau in his interview with Sir Frederick Phillips on March 19th. (It will be recalled that this referred to contracts which the Army and R.F.C. would take over). Thus the total relief from old contracts would be $950 - $1050 millions (less some $70 millions which represents progress already made towards the $300 - $400 millions referred to above). As payments due under the existing contracts out- standing on May 1 were approximately $1,300 millions and advance payments outstanding at that date $700 millions, making a total of $2,000 millions, there is ample scope now to cover the $950 to $1050 millions mentioned above. In six months' time, however, this would become difficult or impossible as the existing commitments are running off rapidly. 6. The advantages claimed for this re- arrangement are the following:- Regraded Uclassified 151 - 4 - (1) The Lease-Lend Act would be restricted to materials directly related to warlike purposes and to agricultural products; with the elimination of marginal cases, no further questions of the eligibility of any materials under the Act would arise, and the U.S. Government could claim that the Act had been administered much more strictly than its wording required; (2) The administrative burden on both Governments would be greatly reduced with a gain to efficiency and to promptness of action. (3) If the British Treasury had a reasonable reserve against contingencies, both they and the American Administrator of the Lease-Lend Act would be subject to much less embarrassment whenever items came forward which the latter felt to be for any reason open to criticism, since the British Treasury would have no difficulty in accepting those criticisms immediately. It would also mean that the British Treasury could take the responsibility of itself financing any entirely unforeseen require- ments which might develop, which it might be difficult for legislative reasons to bring within the ambit of the Lease-Lend procedure except after an inevitable delay. (4) If the British Treasury were relieved from a position where their resources are Regraded Uclassified 152 - 5 - likely to fall to a dangerously low level in the near future, they could face with far greater assurance the various unfore- seen risks and contingencies which may face them in any part of the world during the particularly anxious period of the ensuing twelve months. (5) All this would be achieved without inflating the total appropriations which would be required under the Lease-Lend Act as compared with the alternative course now in operation, of working that Act as hard as possible and bringing under it virtually all British purchases in U.S.A. Washington, D.C. May 16, 1941 Regraded Uclassified 153 APPENDIX A the Break-up of the total of $200 million referred to above is as follows:- $ million (1) Certain Machinery components etc. 40 Certain chemical manufactures, drugs (2) 30 Sundry materials, machinery and consumption goods 18 Vehicle parts 8 Civil road vehicles, including fire pumps, cranes etc, 24 Abrasives 4 Rutile, Bentonite, Diatomaceous Earth, Tin Residues and certain minor non-ferrous metals 6 Timber other than aero-sitka and aero plywood 10 Bagasse: other paper, cotton and linen rags, 7 Borax, Razorite, Sundry chemicals, Fibestos & Synthetic Resins, Carbon black, Pine Tar Rosin, Turpentine and Asphalt 6 Agricultural Machinery 12 Agricultural Seeds 4 011 Plant Equipment 30 199 Note: The inclusion of a description in this table does not necessarily mean that the whole of that description will be "difficult". The values attributed above are intended to refer only to the "difficult" part of such categories. It should be stressed that all these articles are essential, having been subject to the strictest criticism, and that many of the larger items, particularly machinery components, are in fact used for defence purposes. Some of these essentials, however, are for use or consumption on private account, and in all the above cases (1) The heading 'machinery components' com- prises, inter alia, miscellaneous wireRess apparatus, accumulators and parts, electrical heating and cooking apparatus, electric lighting apparatus, air and gas compressors, boot and shoe making machinery, hydraulic, pneumatic and separating machinery, prim# movers, pumps, textile and knitting machines bearings (a very large item), and setentifie instruments. (2) The heading 'sundry materials' comprises such diverse requirements as brass screws and fittings, implements and hand tools, (cont. over) Regraded Iclassified 154 2 it is difficult to isolate and route them for purchase through the Lend-Lease procedure. Many of the above products are highly specialised, are bought to particular specifications and in comparatively small quantities from particular U.S. suppliers. A large part of the machinery demand 1s not for machines as such, but for bearings, parts etc. Many of the requirements mentioned are obtained by English firms from U.S. suppliers with whom they have maintained close trade connections for many years, and it would be a great waste of effort to interpose official machinery on both sides of the Atlantic between the regular purchaser and the regular supplier. It is relevant in this connection to point out that the import licences for the U.S.A. outstanding on March 15th last (to select a recent date at random) were over 10,000. Apart from the administrative difficulty of handling the question of purchase, the reception, storage, distribution etc. of the goods after arrival in the United Kingdom would require the establishment of a special Government organisation. At present such arrangements are carried out through the ordinary channels of tzade. Given the very large number of transactions, documents etc. which would have to be handled, the administrative difficulties would be out of all proportion to the sums involved. (Note to page 1 continued) (2) needles for sewing machines, hosbry machines, refractory bricks, electrical testing apparatus, moulding and presses. Regraded Uclassified 155 TREASURY DEPARTMENT PROCUREMENT DIVISION office of THE DIRECTOR WASHINGTON May 16, 1941 MEMORANDUM TO THE SECRETARY: Weekly Report - Lease-Lend Purchases (5/10 - 5/16/41) Purchases to 5/9/41 $ 2,482,371.36 Purchases 5/10 to 5/16/41 1,571,178.26 Total to 5/16/41 $ 4,053,549.62 Requisitions Pending Estimated Cost Cleared by O.P.M. $ 157,968,883.95 Awaiting clearance by O.P.M. 9,892,668.64 Total pending requisitions $ 167,861,552.59 Included in the above figures are requisitions for metals totaling $118,000,000.00. Contracts for fifteen transport planes amounting to $1,455,726.16 were concluded this week. & Director Procurement cight Clifton of E. thank Mack 156 THE WHITE HOUSE WASHINGTON MAY 16 1941 My dear Mr. Secretary: I find that: (1) The defense of the United Kingdom is vital to the defense of the United States; (2) Sections 4 and 7 of the Act of March 11, 1941 have been complied with by the necessary agreement on the part of His Majesty's Government in the United Kingdom; (3) It would be in the interests of our national defense to transfer the defense articles set forth in the annexed schedule. I therefore authorize you to make the transfer to His Majesty's Government in the United Kingdom of the de- fense articles set forth in the annexed schedule. I would appreciate it if you would arrange with the Chairman of the British Supply Council in North America for the time, method, and other details of the disposition. Very sincerely yours, Masunds The Honorable The Secretary of the Treasury Regraded Uclassified TRANSFER DIRECTIVE NO. D-30-T 157 Defense Articles Authorised for Transfer to the United Kingdom by the Secretary of the Treasury Articles Number Quantity Description 289 3,018 Stanley, Vacuus Bottles, 1 pint sise, No. 9058 500 Stanley, Jug, stainless steel lined, 1 gallon size. 345 40 Model I Type 205109 Rope Starter Motors 80 Model B Type 300261 Rope Starter Motors 80 Model z Type 304106 Hope Starter Motors 349 24 Harvester Threshere 356 5,000 18" Diamster Dished Heat Treated Discs, 10 gauge with 1-3/4" concave and 1-1/16" square hole in centre with polished back bevel and varnished SBS Spare Parts for Surge Milking Machine 384 1 Clipper Combine, 6 feet P.T.O. with Bagger Soourklean and pick up attachment 385 Spare Parts for Agricultural Implements 420 4 No. 22 Threshers 426 6 1000 Gallon Etnyre "MX" Model Distributors with Barrel Hoists and 12 Months Supply Spare Parts. 427 Tractors, Plows, Cultivators etc. From Simplicity Mfg. Co. also repair parts 436 6 No. 12A Power Driven Combines Equipped with Sacking Attachment with Straight Sacking Spout and Auxiliary Auger. Without Hart Seed Cleaner and Grain Tank, with Three Sickles (AP 11914) and Hook-up for John Deere Model "A" Tractor 158 lequisition Articles Quantity Description Fumber 421 Any amount of the Prime Western Virgin Slab Zinc 132,832 tons covered by the requisition which becomes avail- able for transfer by September 30, 1941. 588 50 short tons Paris Green Packed in 50 Pound Net Tin Containers. 159 WAY 16 1941 Dear Mr. Mack: This will acknowledge receipt of your letter of May 6, 1941 with respect to payments due the United Kingdom Commercial Corporation for Turkish chrome ore purchased for your stock- pile. I do not think it would be desirable at this time to attempt to offset payments due under this contract against materials furnished the British under the Lease-Lend Act. Sincerely yours, (Signed) H. Morgenthaw, in Secretary of the Treasury. Hon. Clifton E. Mack, Director of Procurement, Treasury Department, Washington, D. C. JJO'C.Jr/Lsw 5-12-41 File to Mr. Thompson By Messenger 305 Regraded Uclassified 160 TREASURY DEPARTMENT COPY Procurement Division Office of the Washington Director. May 6, 1941 The Honorable The Secretary of the Treasury Sir: The Procurement Division has contracted with the United Kingdom Commercial Corporation for 100,000 tons of Turkish chrome ore at & total price of $2,100,000. Payment for this ore and the freight charges is to be made upon arrival in this country. Mr. Oscar 8. Cox was asked informally whether the Lend Lease Act was sufficiently broad to permit offwetting pay- ments due the British Government on chrome ore, and it was his suggestion that this question be brought to your attention. In addition to the chrome contract arrangements have also been made, through the United Kingdom Commercial Corporation, with representatives of the Indian Government for acquisition of stocks of munitions mica. While payment for this is to be made to agents of the United Kingdom Commercial Corporation, it would appear that since they represent transactions with the Indian Government they could not be considered in the same classification for offsetting purposes. May we have your advice before concluding talks with the representatives of the United Kingdom Commercial Corporation relative to these payments. Very truly yours, (Signed) Clifton E. Mack, Director of Procurement. Regraded Uclassified 161 Federal Reserve Building 1 in ink May 2, 1941. Dear Clif: I wish to thank you for your memorandum of April 29th, sending along Mr. Leaycraft's memorandum of April 28th, addressed to you, on the question of the payments to be made to the United Kingdom Commercial Corporation for chrose ore. I would suggest that you send a nemorandum direct to Secretary Morgenthau on this question. He is directly concerned with the master agreement which may be worked out between the U. S. and U. K. Governments under the Lend-Lease Act. My own ten- tative judgment is that, for the time being, the payments to be made by the United States for the chrome ore will not and should not be used as an off-set against the amounts due to the United States for lend-lease transfers. Sincerely yours, Oscan S.lot Oscar S. Cox. Hon. Clifton E. Mack, Director, Procurement Division, Treasury Department, 9th and D Streets, S. 1., Washington, D. C. 05C:djb CCI Secretary Morgenthau Mr. Foley Regraded Uclassified 162 TO: Mr. Oscar Cox 4/29/41 The attached supplements our tele- phone conversation this afternoon relative to chrome purchases and the question of whether the lend-lease provision calls for any action other than originally contemplated when purchase was made. M H2 From Mr. Nack 163 TREASURY department Regraded Uclassified PROCUREMENT DIVISION are of THE DIRECTOR WASHINGTON April 28, 1941 MEMORANDON TO: Mr. Clifton B. Mack FROM: W. 8. Leaycraft The Procurement Division has contracted with the United Kingdom Commercial Corporation for 100,000 tons of Turkish chrome ore at a price of $21.00 a long ton, fob Turkish ports. The chartering of freight space for the movement of this chrome ore from Turkish ports direct to Philadelphia Har- bor and from Turkish parts to Lourenco Marques has also been arranged by the United Kingdom Commercial Corporation through the British Ministry of Shipping. The payment for freight to to be made on arrival of ore in this country direct to the agents of the shipping company. On ore shipped from Turkish ports to Lourence Marques freight 18 paid upon receipt of shipping documents in this country, and OR ore transshipped from Lourance Marques to Philadelphia on Ameri- can bottoms freight is payable to the shipping companies on are rival. The British Ministry of Supply have arranged through the British Iron and Steel Corporation to contact us this week relative to the making of payments on approximately 10,000 tons of ore that bas already been received, and will undoubtedly reise the question of the 75% payment due on ore as it is loaded on boats. This memorandum is in connection with the previous tolo- phone conversation wherein the question was raised as to the possi- bility of using these payments for Turkish chrose are as an offset against purchases mde under the Land Lease Bill. The nice contracts that were arranged through the United Kingdom Commercial Corporation and representatives of the Indian Government are on the basis of these corporations making purchases for the account of the Procuresent Division, and it is a question as to whether they could be considered as offset payments under the Lend Lease Bill. May we have your comments before we talk to the repre- sentatives of the British Iron and Steel Corporation relative to chrome payment. with (COPY) 164 TREASURY DEPARTMENT Inter Office Communication May 8, 1941 TO: Mr. Merle Cochrane, FROM: J. J. O'Connell, Jr. Attached 18 a copy of a letter the Secretary received yesterday from the Director of Procurement. You will note that Mr. Mack raises what 1s essentially a policy question, namely whether he should pay the United Kingdom Commercial Corpora- tion ( which is apparently owned by the British Government), for certain strategic materials pur- chased for stock pile purposes, or whether lease lend materials should be offset against the cost of the material purchased from the British. Harry White suggested that I call the situation to your attention and that, after you have had an opportunity to consider it, you, he and I get together to disouss it. /8/ Joseph J. O'Connell, Jr. Enclosure. 165 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE MAY 16 1941 TO Secretary Morgenthau FROM Mr. Foley In accordance with the request contained in Mr. Thompson's memorandum of December 26, 1939, there is attached & summary report of studies or projects carried on in the Office of the General Counsel for the month of April, 1941. 9107h 166 SUMMARY REPORT ON STUDIES OR PROJECTS IN THE OFFICE OF THE GENERAL COUNSEL- APRIL 1941 The following matters received attention in the Office of the Chief Counsel for the Bureau of Internal Revenue: 1. Low taxable income of mutual insurance companies. Collector James J. Hoey (Second District, New York) has submitted a memorandum calling attention to the fact that mutual insurance companies other than life are either exempt under section 101 (11) of the Inter- nal Revenue Code or, if subject to the tax imposed by section 207 of the Code, they are permitted to deduct the amount of premium deposits returned to their pol- icyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves. The result is that they have little or no taxable income. On the other hand, insurance companies other than life or mutual are subject to the tax imposed by section 204 and although they compete with mutual in- surance companies they are required to pay substantial income taxes. In 1938 a 62-page report on the Federal taxation of mutual insurance companies other than life was prepared in the Chief Counsel's Office, discussing 167 - 2 - the present method of Federal taxation of mutual insurance companies other than life and the equity of such method. Recommendations were made therein for changes in the law. That report, or a copy thereof, has been submitted to the Legislative Counsel. 2. Exemption of American citizens in our possessions from Federal income tax on income from sources without the United States. Under section 251, Internal Revenue Code, United States citizens and domestic corporations in our possessions are generally not subject to Federal income tax on income from sources without the United States. Such persons, however, are generally liable to income tax imposed by the possessions, for example, in Puerto Rico and the Philippine Islands. It is noted, however, that no income tax is imposed by the Panama Canal Zone, and hence our citizens and domestic corpora- tions as well as aliens living there are exempt on in- come from sources without the United States. A similar situation exists with respect to such taxpayers in Guam, American Samoa, Wake and our other Islands (other than the Philippines) in the Pacific. The problem is being Regraded Uclassified 168 - 3 - studied with a view to determining whether legislation should be recommended. The above matters were handled under the supervision of Mr. G. E. Adams, Head, Legislation and Regulations Division. The following matters received attention in the Office of Assistant General Cairns: 3. Exemption of Defense Articles from Duties and Other Taxes. During the month of February, Mr. Dwan, Chief Counsel, Customs, prepared 8. redraft of a proposed bill initiated by O.P.M. to exempt strategic and critical ma- terials from customs duties and internal revenue taxes in certain cases. This redraft was discussed with var- ious legal and administrative officers of the Treasury Department and was then discussed with O.P.M. and R.F.C. The War Department subsequently prepared a somewhat broader bill for the exemption of defense articles from duties and other taxes and submitted it to the Bureau of the Budget, which asked for comments by the Treasury Department. Mr. Dwan prepared a letter to Budget com- menting on the bill and attaching 8 proposed redraft. The letter and redraft were discussed with representatives 169 - 4 - of the War Department, O.P.M., R.F.C., and Procurement before going forward for signature. 4. Inter-American Coffee Agreement. Messrs. Everett Smith and Dwan, of the Customs legal staff, examined the text of 8. draft of & proclamation to put the Agree- ment into force in respect of the United States and of two Executive orders prescribing regulations for the execution of the obligations of the United States under the Agreement. Several amendments suggested by Dwan's office were incorporated in the instruments prior to the signature thereof. The review in question was under- taken in order to insure administrative feasibility and legal adequacy of their provisions. The President's proclamation, signed April 15, 1941, has been published as 8. Treasury Decision, and it is expected that the Executive order allocating according to types the coffee quota established by the Agreement for countries not signatory thereto, signed April 21, 1941, will be pub- lished in an early issue of the weekly Treasury Decisions together with the public notice of the Secretary which is required by the terms of that Executive order. 170 - 5 - 5. Currency conversion. A representative of Dwan's office, Mr. Everett Smith, joined Mr. Cairns and Mr. Feidler in a conference with Mr. Rufus Trimble, Mr. McKeon and Mr. Lang of the Federal Reserve Bank of New York at the Bank in a discussion of a draft of an amendment to section 522 of the Tariff Act of 1930. Mr. Logan, General Counsel of the Federal Reserve Bank, was present during the latter part of the conference. The representatives agreed upon a final draft of an amendment and also agreed that such draft, if finally approved by the Treasury Department, would be submitted to the Federal Reserve Bank of New York for its final approval. It was understood that if finally approved by both the Treasury Department and the Bank, the pro- posed bill would be transmitted to the Congress for consideration and would be supported by both the Trea- sury Department and the Bank. A letter submitting the proposed bill for the formal approval of the Bank pre- pared by the above-named representatives of the Treasury Department and signed by the Secretary has been sent to the Bank. Regraded Uclassified 171 - 6 - 6. Authority of Treasury officers to accept & proposed devise of property to the United States. An opinion on this question, prepared by Messrs. Feidler and Gilmore, and Miss Goode, of the Opinions Unit, was addressed to Mr. Bartelt on April 3, 1941. The question arose out of 8. proposed testamentary gift of property to the United States by Miss Martha Young of Raleigh, North Carolina. The opinion states the various ways in which gifts may be accepted: (1) by specific act of Congress, (2) by statutory authority to accept gifts for 8. particular purpose, (3) by implied authority to accept gifts for particular purposes, (4) by conversion of the property into money to be given unconditionally to the United States. The opinion suggests advising Miss Young to pro- vide for conversion. 7. Transfer of part of Coast Guard functions, personnel, and equipment to Navy. This opinion, prepared by Mr. Feidler, and dated April 11, 1941, concludes that the transfer of part of the Coast Guard to the Navy is au- thorized by existing statutes, at the direction of the President. 172 - 7 - 8. Payment of Government checks drawn by a particular disbursing officer after notice of irregularities in his accounts. An opinion to the Treasurer of the United States under date of April 23, 1941, concludes that the existing practice followed by the Treasurer's office of paying certain of such disbursing officer's checks should be followed, since it corresponds to commercial practice under similar circumstances. The opinion WBS prepared by Messrs. Feidler and Meeker. The following work was handled under the supervision of Assistant General Counsel Bernard: CONTINUATION OF PROJECTS 9. Bill to relieve the hospitals from double taxation under Harrison Narcotic Act (for description see original report, item 9). This bill and letters of transmittal therefor have been redrafted by Miss McDuff to comply with the recommendations made by the Bureau of the Budget in its letter dated March 28, 1941, addressed to the Secretary of the Treasury. This material has been sent forward for initialing. 10. Fidelity bond bill (formerly identified as "Bond Survey") (for description see original report, item 10). Regraded Uclassified 173 - 8 - In accordance with recommendations which have been made by other departments and agencies, this bill, which was prepared by Mr. Spingarn, is being revised. It was submitted to Budget last year, and has been cleared with nine of the departments and establishments, though it has not yet received final Budget clearance. During the past month, several conferences were had with Mr. Bartelt about the changes that are being made in this bill, and as soon as such changes are completed, 8. conference will be arranged with Budget and G.A.O. representatives on this matter. 11. Federal Depositary System (for description see original report, item 6). The Legislative Section is cooperating with Mr. O'Connell's office in making sev- eral minor changes in this bill to comply with the sug- gestions recently made by Under Secretary Bell. 12. Acting administrators bill (for description see June report, item 33). Work on this bill has been sus- pended for the time being. 13. Law Committee of Defense Communications Board (for description see November report, item 23). Mr. Spingarn 174 - 9 - is continuing his work 8.3 the Treasury representative on the Law Committee of the Defense Communications Board. Mr. Spingarn, as 8. member of a two-man subcommittee, pre- pared an opinion for the Law Committee on the legality of establishing traffic priorities in radiotelegraph, tele- graph, and cable communications for governmental and other national defense traffic (1) in time of war, and (2) in time of national emergency short of war. 14. Codification of Public Debt laws (for description see December report, item 14). Work on this project has been suspended for the time being. 15. Survey of tax-exempt Federal securities, other than obligations (for description, see February report, item 7). In conjunction with Mr. Sullivan's office, Mr. Morton is continuing his study to determine what agencies, corpo- rations, associations, etc., issue stock, evidences of in- debtedness, and similar Federal securities, other than obligations, which are tax exempt. In connection with this study, he has prepared 8. draft of an amendment to the Public Debt Act, 1941, which will have the effect of removing the exemption from taxation of such securities. Regraded Uclassified 175 - 10 - 16. Administrative procedure bills (for description see April report, item 8). Mr. Koken is continuing his work on the coordination of the views of the S taff mem- bers on the three pending Administrative Procedure bills, S. 675, S. 674, and S. 918, in order that the Department may be in a position to submit a detailed report to the subcommittee handling the bills which will show the im- pact of each bill on Treasury activities. Hearings on these bills commenced on April 2, 1941, and the Trea- sury's general views on the subject were explained to the subcommittee by Under Secretary Bell, Mr. Bernard, and others, on April 15, 1941. NEW STUDIES 17. Proposed legislation to regulate production of opium poppies. In conjunction with the Narcotic Division, Mr. Morton is preparing legislation to authorize and regulate the production and distribution of opium poppies in this country. The need for this legislation arises from two factors: (1) Opium poppies are B. source of poppy seeds, commercially used by bakers on rolls. The war has cut off the foreign supply of these seeds, and the result has been to increase enormously the domestic price of the Regraded Uclassified 176 - 11 - seeds. (2) The war has also cut off our sources of crude opium, such as Yugoslavia. It will probably be necessary, therefore, for the first time to grow opium poppies in this country to make up the lack. This bill will be based principally upon the treaty power, but will also include the taxing power and inter- state commerce power. The following matters were worked on under the direction of Assistant General Counsel Bernstein: 18. Foreign Funds Control. Freezing control was ex- tended to Greece, this office preparing the necessary papers. In connection with this extension of the con- trol we had the problem of two New York banks engaging in a general banking business - and not merely agencies, that would be "nationals" under the Order. Since even & temporary delay in their operations might have re- sulted in the dishonoring of all checks drawn on the banks, the loss of public confidence, and extreme dif- ficulty in returning to normal operations, it was necessary for us to draft a comprehensive license for their operation and time its issuance with the announce- ment of the Order. This operation was successful and Regraded Uclassified 177 - 12 - there was not the slightest interruption in the banks' business. The question of a general extension of freezing con- trol again became active. Justice and State proposed a new draft of an Order which, among other things, vested in the Economic Defense Committee broad powers to extend the freezing control on its order; authoriz- ing ad hoc freezing; and in general coordinating the ad- ministration of freezing control and export control. This proposal was studied and this office drafted 8. counter-proposal which in effect established a committee to supervise the administration of freezing control and export control and to study the problem of economic de- fense in general. This draft is now receiving considera- tion. The White House requested that in connection with the President's Public Papers and Addresses we furnish them with a memorandum dealing with freezing control. This office, with the cooperation of Monetary Research, pre- pared a note for the President's Papers on such subject. rde 178 - 13 - A question arose regarding the litigation between the Commission for Polish Relief, Ltd., and the Na- tional Bank of Rumania arising out of the alleged re- fusal of the Central Bank of Rumania to deliver over to the Polish Central Bank certain gold. The plain- tiff had attached the assets of the National Bank of Rumania in New York and application had been filed with the Treasury Department to permit the transfer of such assets to the sheriff in order to perfect attach- ment proceedings. It was decided, after consultation with the State Department that no affirmative action permitting the transfer of such funds should be taken at this time and the application was denied. This office participated in the redrafting of the basic license issued to banks in the United States holding balances for foreign banks subject to the Order but which are not in the occupied area. The new license deals with the operation of such foreign banks in a somewhat comprehensive manner. A case arose in which the Incasso Bank in the Netherlands gave instructions to the Central Hanover Regraded Uclassified 179 - 14 - Bank and Trust Company to sell a large block of securities from their portfolio. The Central Hanover Bank could not obtain authorization from the Dutch Legation to effect such sale and turned to the Trea- sury Department for protection against the conflict- ing claims. The whole matter of consistency of ap- proach by the Dutch Legation and the Treasury Depart- ment was already under consideration and the Treasury hesitated to take definitive action in the premises, particularly since General License No. 4 authorized the sale in question. This office brought to the at- tention of counsel for the Central Hanover Bank the provisions of the recent amendment to the New York Banking Law relating to instructions from territories, and on the basis of the protecti forded by such statute, Central Hanover was sfied in the premises. This office participated in the set of a series of "clearing" agreements with Indo China, Madagascar, North Africa and Syria. the case of French Indo China, Rubber Reser and Metals Reserve Regraded Uclassified 180 - 15 - were interested in obtaining rubber and certain critical minerals. Since the Indo China accounts were blocked, the French would not furnish these materials unless we agreed to issue licenses permitting them to make use of the sums received in payment, as well as certain other concessions with respect to certain other blocked funds. The matter was the subject of several conferences with the interested Government departments and arrangements were effected. In the case of Mada- gascar, we were interested in obtaining graphite and mica and 8. similar agreement was made. Syria and French North Africa, while not furnishing us with strategic commodities, were accorded modified clearing arrangements at the request of the State Department. The entire staff worked on these matters. 19. Transactions under Federal Reserve Act amendment. The following transactions were effected pursuant to the provisions of the Act of April 7, 1941, amending Section 25(b) of the Federal Reserve Act, as amended: (a) Transfer of $100,000 from the account in the name of the Central Bank of Yugoslavia at the Federal Reserve 181 - 16 Bank of New York to an account in the name of the Royal Yugoslave Legation at the Hamilton National Bank, Washington, D. C. (b) Transfer of approximately $21,000,000 in the dollar account and gold valued at approximately $46,000,000 in the gold account, in the name of the Central Bank of Yugoslavia at the Federal Reserve Bank of New York, to dollar and gold accounts at the Fed- eral Reserve Bank of New York in the name of the Gov- ernment of Yugoslavia. (c) Authorization to the Yugoslavian Minister to withdraw not exceeding $10,000,000 during the period of a year from the dollar account established at the Federal Reserve Bank of New York in the name of the Government of Yugoslavia. (a) Authorization covering the withdrawal of funds from accounts in the name of the Danish Legation at the Riggs National Bank, Washington, D. C. These transactions involved the issuance of appropriate licenses; notifications to the State Department of the issuance of such licenses; certifications by the 182 - 17 - Ministers of Yugoslavia and Denmark as to their au- thority over the accounts; certifications by the State Department with respect to the authority of the Ministers to effect the transactions; and instructions to the banks involved by the Ministers. In addition to preparing licenses and notifications, there were also prepared, in each case, drafts of the documents required to be executed by the State Depart- ment and the Ministers. Mr. Bernstein and Mr. DuBois worked on this matter. 20. Spanish silver. This office worked on the problem of the charges to be made by the New York Assay Office for the melting and refining of silver coin purchased from the Government of Spain and cooperated with Mr. Dietrich and the Mint Bureau in the drafting of appro- priate letters of instruction to the New York Assay Office as well as a letter to the Spanish Ambassador with respect to the Mint charges for melting and refin- ing which will be deducted from the final payment to the Spanish Government. Mr. Bernstein, Mr. Sutton, and Miss Hodel worked on this matter. Regraded Uclassified 183 - 18 - 21. Shipments of gold from Bank of China to New York Federal Reserve Bank. This office cooperated with Mr. Dietrich and the Bureau of the Mint in working out the appropriate procedure for the deposit of two shipments of gold from the Bank of China at the Federal Reserve Bank of San Francisco for the account of the New York Federal, the payment to be made by the New York Assay Office to the New York Federal. Mr. Bernstein and Miss Hodel worked on this matter. 22. Movement of silver to West Point Depository. This office cooperated with the office of the Chief Counsel at Procurement and with the Bureau of the Mint in the drafting of instructions to bidders, the neces- sary bonds, and the form of contract which were approved and used in connection with the contract for the moving of about 150,000 ounces of silver to the West Point De- pository. Mr. Bernstein, Mr. Groman, and Miss Hodel worked on this matter. 23. Mexican Claims litigation. A bill of complaint having been served on March 3, 1941, in the case of Regraded Uclassified 184 - 19 - Nugent V. Morgenthau, et al., in the District Court for the District of Columbia, a letter to Justice was prepared suggesting in detail answers to the allega- tions of the bill of complaint and also suggesting mo- tions to dismiss, and copies of relevant documents were transmitted. Mr. Bernstein, Mr. Sutton, and Mr. Johnston worked on this matter. 24. Stabilization and dollar devaluation powers. We drafted letters for the President to send to the House and Senate Committees recommending extension of these powers until June 30, 1943. Mr. Bernstein worked on this matter. 25. Ida Werfel V. Zivnostenska Banka. This is a case now in the Court of Appeals of the State of New York in which the Department of Justice is appearing as amicus curiae and involves 8. suit by B. person in this country against the assets of a Czechoslovakian bank. We dis- cussed vi th Justice the wisdom of appearing in this action and the nature of the argument to be made. Mr. Bernstein and Mr. Friedman worked on this matter. 26. Konversionskasse Bonds. Pursuant to 8. request of Justice we have drafted 8. memorandum on the legality of 185 - 20 - the sale of Konversionskasse bonds in exchange for Reichsmarks acquired by American business institu- tions. We are awaiting some material on the economic aspects from Dr. White's office. Mr. Bernstein and Mr. Friedman worked on this matter. 26. Anglo-Palestine Bank. We had a number of confer- ences with Istorik on the matter and prepared a memo- randum for the Secretary and a letter which the Secre- tary sent to Mr. Istorik, a copy of which was furnished to the British Embassy. Mr. Bernstein worked on this matter. 27. Chinese Stabilization Agreement. We have put in final form all of our papers in connection with this arrangement and checked over the papers executed by the British and Chinese in connection with the British- Chinese arrangement.. The Chinese Agreement was signed by the Treasury and the Chinese on April 25. Mr. Bern- stein worked on this matter. Regraded Uclassified 186 TREASURY DEPARTMENT Ms. Regraded Uclassifi INTER OFFICE COMMUNICATION DATE May 16, 1941 10 Secretary Morgenthau FROM Hr. Cochran CONFIDENTIAL Registered sterling transmotions of the reporting banks were as follows: Sold to commercial concerns £100,000 Purchased from commercial concerns & 27,000 Open market sterling vas quoted at 4.03-1/4. Transactions of the reporting basks were as follows: Sold to commercial concerns £7,000 Purchased from commercial concerns 22,000 The Canadian dollar advanced to close at 12-11/16% discount, as compared with 13-1/16% last night. The Cuban peso, which touched a now current high of 2-1/16% discount , asterday, reacted to close at 2-7/16% today. In New York, closing quotations for the foreign currencies listed below were M follows: Swice franc .2320 Swedish krons .2385 Reichemark .4005 Lira .0505 Argentine peso (free) .2375 Brasilian milrois (free) .0505 Mexican peso .2066 In Shanghai, the yusa in terms of our currency vas unchanged at 5-11/324, and sterling vas again quoted at 3.90-7/8. There were no gold transactions effected by us with foreign countries today. The Treasury issued a license under the Gold Reserve Act permitting the Federal vaults: Reserve Bank of New York to effect the following transfer of gold in its $1,134,000 from the account of the Bank of Finland to the account of the Bank of Sweden. - a - 187 No nov gold engagements were reported to the today. Is London, the price fixed for spot silver was 23-1/24, up 1/16d. The forward quotation declined 1/16d to 23-?/16d. The U. 8. equivalents were 42.674 al 42,564 respectively. the Treasury's purchase price for foreign silver vas unchanged at 354. Handy and Harman's settlement price for foreign silver was also unchanged at 34-3/44. Ve made two purchases of silver totaling 250,000 ounces under the Silver Purchase Act. This consisted of nov production from Pera, and vas bought for forward islivery. Suir CONFIDENTIAL 188 BRITISH EMBASSY, WASHINGTON, D.C. May 16th, 1941. Personal and Secret. Dear Mr. Secretary, I enclose herein for your personal and secret information a copy of the latest report received from London on the military situation. Believe me, Dear Mr. Secretary, Very sincerely yours, Halifax The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. 189 Telegram from London dated May 14th. 1. Naval. During Pleat operations in the Central Mediterranean between May 6th - 12th, 9 enemy aircraft shot down and 1 damaged; our losses 5 Pulmare and 2 Albacores, only 2 were due to onemy action. 2. A.4.C. believed "Salopian" reported sorpedoed and abandoned A.M./13th 650 miles Southwest of Iceland (e). 3. Bulolo P.M./13th intercepted French 4484 ton ship about 100 miles south west of Dakar. She carried 400 native troops for Madagasear. 4. At 20.30/12.4 naval aircraft attacked convoy on passage Tripoli hitting 1 destroyer and one 8,000 ton merchant vessel. 5. Military. Sollum Area, Early 12th. Enemy advanced in several columns with approximately 30 armoured cars and 30 tanks; Afternoon. AIr and ground reconneissance reported enemy columns had converged and were stationary near Bir Sofari; Evening. Whole force was reported to have withdrawn while successfully bombed and machine gunned by 22 Hurricanes and Blenheims. One Hurricane missing. 6. Ethiopia, Amba Alagi area, Operations are continuing satisfactorily and 200 Italian prisoners have been captured. 7. Royal Air Foros, May 13th. Bienheim obtained direct hit on deck of "Nassire" and claims to have destroyed it. 8. Night of 13th/14th. all bombing operations cancelled. 9. Oerman ME Force. Day 13th. Nnemy activity slight. 1 Dornier bomber shot down into the sea. 10, Night of 13th/14th. 40 enemy aircraft operated against shipping and 6 mine-laying. 11, Libya. May 12th. 46 enemy airoraft bombed Tobruk harbour, hitting 2 anti-aireraft gun positions. Our anti- aircraft defences probably destroyed 3. 12. malta/ Regraded Uclassified 190 + 12. Malta. Night of 11th/12th. Luga aerodrome attacked by 30 enemy aircraft, I hanger hit and Maryland (Glen Martin light bomber) burnt and two others destroyed. Following night attack repeated; damage caused in dosk yard. Regraded Uclassified 191 BRITISH EMBASSY, WASHINGTON, D.C. PERSONAL AND SECRET May 16th, 1941 Dear Mr. Secretary, I enclose herein for your personal and secret information a copy - of the latest report received from London on the military situation. Believe me, Dear Mr. Secretary, Very sincerely yours, Halifax The Honourable, Henry Morgenthau, Jr., United States Treasury, Washington, D.C. 192 TELEGRE RECEIVED FROM LONDON DATED MAY 18th, 1941 Ladybird after long period on North African coast during which she regularly successfully bembarded enemy forces and positions was sunk by two darect hits from dive bombers Tobruk harbour pome /12th. After-part .... of disintegrated remains on fire many hours. Foremost gun continued firing after the ship hit and on fire. a Sues Canal closed Port Said to Kantara, Lake Tamsah to Great Bitter Lake. 3. A.M./14th Fokke Wulf A/C sank Norwegian ship in outward convey western approaches but Wellington aircraft drove it off convoy. 4. 14 Beaufort aircraft torpedoed 5000 ton merchant ship out of convey of 5 off Ijmuiden. Both battle cruisers sighted Brest; belloon barrage was seen. 5. Night of 19th/13th Suda Bay attacked by single aircraft for 7 hours. No damage, no casualties. 6. IRAQ. About 1000 Iraqis who withdrew from Baerah area are reported to be reforming at Qurna and Hammadiya. 7. GERMAN AIR FORCE. Day 14th. About 20 enemy aircraft came over land, Regraded Uclassified 193 our fighters damaged four enemy bombers. 8, Night of 14th/15th. About 50 aircraft engaged in mine- laying or against shippings 1 destroyed in Humber by Navel Anti-Aircraft gunfire. Regraded Uclassified 194 RESTRICTED 0-2/2657-220: No. 393 M.I.D., W.D. 12:00 M., May 16, 1941, SITUATION REPORT I. Western Theater of War. Air: German. Light and scattering attacks last night. British. Normal night operations with principal effort against Hanover. Berlin, Hamburg and the French coast were also raided. II. Mediterranean and African Theaters of War. Ground: North Africa. British troops have occupied Sollum and Halfaya Pass. The latter controla the approach from the desert escarpment road to the coastal road. The British have advanced to Mu Said which is about four miles west of Sollum. This operation is believed limited in character. East Africa. The British have captured Scinsciamanna in southern Abyssinia (Ethiopia). Air: Axis. Attacks on Malta and Crete. Close support of ground forces at Tobruk and Sollum. III, Middle Eastern Theater. Iraq: Ground. Iraqi forces expelled from the Baora area are reorganizing at Hammadiya, just south of Baghdad. Air. Believed that about 30 German planes have reached the theater, The R.A.F. is attacking Iraq troops and airdromes. Syria: The British have bombed French airdromes, probably at Palmyra, Rayak and Damascus as & result of their use by German planes. RESTRICTED Regraded Uclassified 195 CONFIDENTIAL MILITARY INTELLIGENCE DIVISION TENTATIVE LESSONS BULLETIN WAR DEPARTMENT No. 105 Washington, May 16, 1941 G-2/2657-235 NOTICE The information contained in this series of bulletins will be restricted to items from official sources which are reasonably confirmed. The lessons necessarily are tentative and in no sense mature studies. This document is being given an approved distribution, and no additional copies are available in the Military Intel- ligence Division. For provisions governing its reproduction, see Letter TAG 350.05 (9-19-40) M-B-M. BRITISH NOTES ON ESCAPE OF PRISONERS SOURCE These notes are based upon the experiences of British prisoners in Belgium and Northern France at a time when these areas were passing into a state of organization. The information was published by the British War Office shortly after the fall of France. CONTENTS 1. SEARCH, GUARDING, AND TREATMENT 2. OPPORTUNITIES FOR ESCAPE 3. PREPARATIONS FOR ESCAPE 4. PRECAUTIONS FOR ESCAPERS CONFIDENTIAL -1- 196 CONFIDENTIAL BRITISH NOTES ON ESCAPE OF PRISONERS 1. SEARCH, GUARDING, AND TREATMENT Immediately after capture, prisoners of all ranks were compel- led to surrender their arms and equipment, and sometimes their steel helmets and respirators also. Apart from this, they were searched only perfunctorily or not at all, and there was little or no attempt at interrogation in the first stage, Officers were able to destroy documents, and the exercise of a little ingenuity enabled several of them to conceal and retain compasses, maps, money, pocket knives, and other articles which might be useful in an attempt to escape. In case of capture, the compass should be removed from the pouch and concealed in a pocket or other suitable hiding place, There appeared to be no organized prisoner of war camps close to the front. Prisoners were marched back for several days in columne consisting of military or military and civilian prisoners. In the columns they were usually divided up by nationalities into officers, other ranks and civilians. Positions of the various groups in the columns varied. The ncans of guarding prisoners usually consisted of machine guna carried on lorries at the head and tail and occasionally in the middle of the column, and of motorcyclists or bicyclists armed with rifles or sub-machine guns patrolling the length of the column or moving ahead and occupying points of vantage from which the column could be supervised. Prisoners were generally exhausted and there was much straggling. Officers or wounded were sometimes carried in lorries. Prisoners were housed at night in convenient buildings, such as barns, Ints, churches or halls, although on some occasions they re- mained in the open. There was little or no attempt to take names or to compile or call rolls on the march, and more often than not, heads were not even counted. Food at this stage was scarce and poor, and the general impression was that no very effective preparations had been made for dealing with large numbers of prisoners. 2. OPPORTUNITIES FOR ESCAPE Opportunities to escape usually presented themselves soon after capture, and several prisoners made every effort to take ad- vantage of such opportunities in spite of their physical condition. Most escapers managed to get away during halts on the march by slipping attention was distracted or the escapers' movements were concealed by through caps in hedges into ditches, or into woods while the guards' CONFIDENTIAL -2- Regraded Uclassified 197 CONFIDENTIAL others. In a number of instances, guards were confused by deliberate straggling, which caused breaks in the column, and which they were compelled to attempt to close up. One officer, who had escaped previously and had been re- captured, procured civilian clothes and marched, after recapture, with the civilians in the column. He got away again by slipping into the crowd at the roadside when passing through a town. Another officer who had escaped and been recaptured was marched back by the same route in the following day's column. He again succeeded in making his escape, after he and his companion's movements had been cloaked by others, through the sane hedge-gap that he had used on the previous day. 3. PREPARATIONS FOR ESCAPE It was difficult to make any elaborate preparations for escape, but the following hints are probably worth noting: B. Save and conceal a portion of your rations, if possible. b. Obtain and fill a receptacle for water. C. If you have no compase or map, endeavor to obtain them. d. Try to procure an extra pair of socks. e, For money, try to get notes of small denominations. f, If several prisoners contemplate escape together, they should leave separately after arranging, if possible, a subsequent rendezvous. Rendezvous should be arranged at frequent intervals during the escape journey, since the party may get separated. 4. PRECAUTIONS FOR ESCAPERS Great care had to be exercised by escapers in approaching civilians for aid or information. Many of them were very helpful despite their very natural fear of the consequences, but a number were most anxious to avoid all contact with escaped prisoners. It should be borne in mind that a civilian helps an escaped prisoner at the risk of his own life, Unless and until civilian clothes can be obtained, an escaped prisoner should travel only by night and across country, avoiding main roads, towns, and people. He should hide during the daytime, but avoid woods as hiding places, since they might conceal other stragglers whose presence might give him away. Failing a loft, barn, or deserted house, the best cover is in the middle of & field with standing crops, provided CONFIDENTIAL -3- 198 CONFIDENTIAL harvesting has not begun. Once civilian clothes have been obtained, travel by day is practicable, main roads can be used, and large towns can be passed through in reasonable safety. Side roads and small villages should be avoided, as a stranger in the latter excites suspicion. The following points, noted by one who escaped from France in civilian clothes, illustrate the importance of conforming to the habits of the country from which a prisoner is attempting to escape: 8, Do not march in a military fashion, but adopt a tired slouch. b. Try to secure a bicycle; bicycles proved invaluable to several escapers. C. Do not wear a wrist watch; carry it in your pocket, d. Sling your haversack; the French peasant commonly carries one this way, but never as a pack on his back. e, Do not use a cane or walking stick; this is a British custom. f, Get rid of army boots and adopt, if possible, a pair of rope-soled shoes as worn by peasants. g. French peasants are generally clean shaven, although a slight growth of beard is not uncommon. h. A beret is a very effective disguise. 1. Village priests are likely to be helpful. Care should be exercised in approaching them, and one should avoid being seen talking to them. Escapers should notice everything they can of military im- portance both before and after escape. Many of them brought back valuable military information. It is probably advisable to avoid making notes unless they are in such a form that they can be easily destroyed in the event of recapture. CONFIDENTIAL 1/1 CONFIDENTIAL 199 of Date - - filed 14:30, My 16, MAL. anthorities have my that Smith, Information to evatishic N a - for the procurement of - additing publications má ango to - This information to minitted because they - w will have - Mithoulty, if w as ENG already, to shindaing sub naturial, est they recommed - W abbrept be - violater my be possible before the - of my is dub off. - Distribution: Secretary of Me State Department Secretary of truesary Unior Secretary of the Whief of Staff Accistant thist of Staff, 6-2 Ver Please Dévision Office of Noval Intelligence Me Garge CONT .DENTIAL CONFIDENTIAL 200 Paraphrase of Code Cablegram Recedved at the War Department at 08:31, May 16, 1941. London, filed 14:30, May 16, 1941. 1. British Air Activity over the Continant 4 Day of Nay 15, Planes of the Reyal Air Force bonbed a convoy of five aerchant vessels and three escorting ships off the Dutch coast. Three ships were net afire, one Anis plane destroyed and two damaged, 2 Wight of Bomber operations from Britain were cancelled, but planes from the Coastal Command mined sections of the French coast. Royal Air Force fighters, on several offensive patrols over northern France, destroyed two Junkers Ju-52's and damaged a number of aircraft on the ground. The barracks and personnel of several airfields were also machine gummed. 2. German Air Activity over Britain & Hight of May 15-16, Attacks were alight and scattered with several aircraft over the southmestern penincula and as for north as Bristol. Single planes were over East Anglia, Lincolnshire and around London, and off the coasts of Liverpool, East Scotland and Bristol. 100 Day of May 15, German activity consisted nestly of patrols over the Calais area, and alight reconmissance over the English coast. CONFIDENTIAL Regraded Uclassified CONFIDENTIAL 201 30 Aircraft n No British leases reported. w British fighters shot dom - confirmed, - probable and damaged - plans during the Gurman operations a the day of May 15. 40 Brittsh Other Theaders s Kerekian thester. Reyal Air Force planes based in Egypt hombed airfields on the Iale of Rhodes, Benghard railroad and harbor. Airfields at Massani, Derma and Bondrum were also attacked, A Trant thester. The Reyal Air Force bonked Traqi foress at Rashid and Hosal, 5. Asia Air Activity. Other Theaters s Egyotian theater. Avia planes made four attacks a airfields in Halta which resulted in come civilian damage. Grote will twice heavily bombed but with only slight damage. 6. Aircraft Losses, Other Theaters & No British losses reported. D Eight Axis planes were destroyed and cone damaged during the bombing of Crete. LEE Distributions Secretary of War State Department Secretary of Treasury Under Secretary of War Chief of Staff Assistant Chief of Staff, 0-2 War Plans Division Office of Naval Intelligence Air Corps G-3 CONFIDENTIAL Regraded Uclassified CONFIDENTIAL 202 Pursphrse of Code Cablegram Received at the the Department at 08:42, May 17, 1941. Lendon, filed 14:30, May 17, 1941. 1. s The only air activity reported is the bombing of an unnesed German nurchant ship off Targen. This skip - smk. k One Inmired and two British beature attacked Hanever, n attacked Boulegne, Calate, Disppe, and in northwestern Commany, and 23 attached Berlin. Planes from the Coastal Command attacked the "mesquite best" base at Ijusiden, submissines and shipping at St. Massire. 2. s Injury attacks ware a & larger scale than previously had been the case. Principal objective wes the Midlands, while some attacked south and middle Wales. n Corum sttacks emailsted of almost - tinuous fighter aware in small formations in the vicinity of East Kent and the Charmel, 3. & During the raids en the night of May 15-16, fear bookers were lest. m During the may activity on the day of May 16, fighters destroyed five Memocrochmitt Me-109's, - probable and five damaged, and antiaireraft fire destruyed two others. During the activity on the night of May 16-17, night fighters shot dom too benefors. CONFIDENTIAL Regraded Uclassified CONFIDENTIAL 203 4. British Air Activity. Other Thesters. & Egyptim Theater. British planes bombed Bengasi Harber, several airdromes, and energy troops at Halfaya and Sellum. Fighters destroyed one and damaged two Axis aircraft, and machine-guined troops between Tobruk and Bardia. 5. Axis Air Activity, Other Theaters, a. Middle East Theater. The presence of at least 12 German troop-transporting planes in Syria has been noted and an undeterwined number of Messerschmitt Me-109's and Heinkel Ht-111's are now operating over Iraq from Byrian bases. It has been definitely ascertained that the German air force headquarters has been established at Palmyra, b. Irani Theater. Three German planes attacked British air- field at Habbaniya but no damage was done, 6. Aircraft Losses, Other Theaters. 4. During attacks on Malta, nights of May 13, 14 and 15, the British lost ten planes. b. Four German aircraft were damaged at Palmyra. In Iraq one German plane was destroyed and one damaged. In the attack - Habbaniya airfield one Heinkel He-lll was shot down. During attacks on Crete, May 13 and 14, Germans lest nine planes. 7. The Sues Canal has not yet been opened, LEE Distribution: Secretary of War State Department Secretary of Treasury Under Secretary of War Chief of Staff Assistant Chief of Staff, 0-2 War Plans Division Office of Naval Intelligence 0-3 Air Carps CONFIDENTIAL Regraded Uclassified By C. of S SECRET Date MAY 19 194k 1-2 ) Paraphrase of Code Cablegram Initials Received at the War Department 204 at 04:57, May 17, 1941. Cairo, filed 22:40, May 15, 1941. 1. On May 5, concentration of German motor torpedo boats was observed in the Black Sea. 2. Six Nasi vessels have been observed transiting from the Black Sea to the Aegeen. One was the Arcadia with a heavy load of unknown character aboard. 3. Sixteen assault boats powered by outboard motors were employed by the Germans in the capture of the Thases. The outboard motors developed 200 horsepower each and can be transported by 8 men, Samothrace was occupied by elements transported on 2 tankers and 1 transport. In the taking of Khics, 1 freighter and 2 torpedo boats were employed. There is now a force of 800 sen on the island. On May 6 the Germans captured Santorini and on May 12, Antikythers. Fifty Germans are garrisoning Spalmatori. FELLERS Distribution: Secretary of Her State Department Secretary of Treasury Under Secretary of Mar Chief of Staff Assistant Chief of Staff, 0-2 War Plans Division Office of Naval Intelligence 0-3 SECRET Regraded Uclassified SECRET By authority A. C. of S., 0-2 Paraphrase of Code Cablagres Date MAY 20 1941 ) Received as the for Department Initials at 14:40, May 17, 1941. 205 London, filed 14:20, May 17, 1941. 1 In reference to the Heinkel 4-engined bouher in your cable of May 8th, it to helieved to be the He-177 reported to be in small scale production at the present time. 2. Present available information indicates that the Genes Air Force has had considerable trouble with He-177 prototypes. On trials at least two have areshed. & small meber of He-177's are MW in production and will shertly go into service the British believe. 3. The original protetype of this beaber - powered with two 12 cylinder DB 606 engines with mucless output of 2200 h.p. per engine at 15,000 feet. The ID 606 engine is reported to be two 12 qualinder units driving one propeller, - unit can be out out in the event of engine failure, probably by declutching. It is probable that mother Be-177 version having four 12 cylinder DO 603 engines totaling 5600 h.p. exten as against original twin-engine prototype totaling 4400 h.p. meximum. 4. The nearly complete data en He-177 fellows; due to - flicting figures it night indicate the considerable medification of the original prototype: Law wing memoplane with retractable landing gear. Langth, 67 fest; spen, 103 feet; wing area, 1100 sq. ft. (presumsbly gross.) Crew, 5 to 6 (eriginal report, but due to sise of airplane arew estimated at 8 to 10 w British. Crew of 14 - SECRET Regraded Uclassified SECRET 206 quoted in round figures in your cable of May 8th my be for long range recennaissence type reported to have twenty hour endurance.) Weight (flying) - 65,000 lbs. Speed - Meximum 340 m.p.h. at 18,000 feet. (Original report - excessive.) British estimate 290 to 300 m.p.h. at 17,000 feet approximately. Ceiling - 23,000 fest. Range - 1000 miles with boah load of 13,200 1bs. (British estimate of musimm) Report states 20 hour version with reduced bomb load for reconnaissance, Armant - Hose and tail turrets (original report). Probably increased with gm stations in wings controlled remotely from fusalage turret for sighting. LEE Distribution: Secretary of for State Department Secretary of Treasury Under Secretary of TER Assistant Chief of Staff, 0-2 Mar Plans Division Chief of Staff Office of Naval Intelligence Air Carge + SECRET Regraded Uclassified 207 RESTRICTED 0-2/2657-220; No. 394 M.I.D., W.D. 12:00 M., May 17, 1941. SITUATION REPORT I. Western Theater. Air: German. Subnormal offensive activity over Great Britain last night, involving 100-200 planes. Principal effort against Birmingham and other Midlands industrial centers. British. Normal night operations, involving about 125 bombers. Main attack was made on Cologne. The invasion coast also was attacked. II. Mediterranean and African Theaters. Ground: North Africa. Axis troops have recaptured Sollum and other positions on the Libyan-Egyptian frontier which the British had retaken. East Africa. British troops are reported to have reached Adola, 50 miles north of Neghelli, in southern Abyssinia (Ethiopia). Air: Axis. Close support in the Sollum area. Raids on Malta and Crete. British. Harassing raids in Libya. III. Middle Eastern Theater. Iraq: Desultory air and ground fighting. Syria: Unconfirmed reports of British-French border clashes. The R.A.F. continued small-scale raids on Syrian airdromes. RESTRICTED 208 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 17, 1941 Secretary Morgenthau TO FROM Kr. Cochran STRICTLY CONFIDENTIAL Assistant Secretary of War McCloy called ne at 1 o'clock today. He referred to the $230,000,000 program on supply contracts. He said that his Ordnance people had *taken out" $49,600,000 of the above amount, using Ordnance funds therefor. Be said these represented the only contracts in the $230,000,000 program which the British had entered into prior to the Lend-Lease legislation. He assumed that eny- thing beyond the $49,600,000 would have to be taken care of under Lend-Leasing, Be referred to the plant facilities program as amounting to $133,000,000. Through the R. 1. C. the Army has already "taken out" $48,300,000. The R. P. 0. finances this. although the Ordnance people must eventually repay R.F.C. McCloy 10 still working on the difference of $85,000,000 between the $48,000,000 and the $133,000,000. He is trying to get either the Ordnance or the R.F.C. to take over all of this difference. The Ordnance itself might have enough money for all of this, but McCloy thought it much preferable that the Defense Plant Corporation do the transaction, since an immense amount of legal work is necessary which Jones 18 in a. better position to perform than is the War Department. The Army is prepared to certify that all of the plants should be taken over for national defense, whether by R. 1. C. or Ordnance. KcCloy has consulted again with Secretary Stimson. since last talking with Treasury people on the subject, and the Secretary of War feels very definitely that the Army should not go ahead and take the British out of more supply contracts unless instructions from the White House are received. They feel that they need such instructions, particularly in the light of the testimony given to Congress by the Budget Director. Referring to the $49,600,000 item, Mr. McCloy pointed out that this is the face amount of the contracts of which the British are being relieved. The Army negotiates new contracts replacing these, It 18 up to the British, therefore, to negotiate with the manufacturers to 800 how much cash 16 refunded to them on such contracts. Department wants to far as possible in assisting him, and in relieving him In summary. Mr. McCloy asked that I tell Secretary Morgenthau that the War taken. They feel, to however, take care that they cannot themselves go beyond the $49,600.000 told of the commitment go AS of $300,000,000 to $400,000,000 which he had under- on supply contracts without definite clearance from the White House. I Bell and that one of us would upeak call him back if any further information is required. Kr. McCloy that I would a with both Secretary Morgenthau and Under Secretary Regraded Uclassified 209 - 2- May 19, 1941 At 2:30 this afternoon I talked with Mr. McCloy by telephone to confirm that I had the above story correct. McCloy reiterated that he is going ahead to see what can be done further on plant facilities. He said that there was a meeting held this morning by the Ordnance, Air Corps and other Services to see if there 18 anything further any of them can do. A decision will be reached on this point within the next day or so. Suid 210 May 17, 1941. Memorandum for the President: Reference is made to your memorandum of key 14th with which you transmitted a copy of a communication addressed to you by Senator Millard E. Tydings with respect to certain matters of appointment in the State of Maryland, both under the Department of Justice and under the Collector or Internal Revenue of the Maryland District. or course, this Department is without knowledge of the situation with respect to appointments under the jurisdiction of the Department of Justice. In view of the fact that Collectors of Internel Revenue are held responsible under heavy bond for the faithful performance of their duties, this Department has taken the position that it should consistently refrain from interfering with the Collectors in their right to appoint Deputy Collectors who are competent and qualified in every way to perform their duties. or course, the Department has exercised its right to reject any recommendation the consummation of which would be contrary to the best interests of the Government. This prectice has proven to be 8. proper one under the method of appointments prescribed by law for Deputy Collectors. The matter of Senator Tydings' inquiry has been brought to the attention of Collector Megruder. Information has been received from the Collector to the effect that when it became necessary to appoint additional Deputy Collectors for the important work of administering the increased duties imposed upon his office by the Revenue Act of 1940, he did not Invite Senator Tydings to submit recommendations for the appointment of this additional personnel. The Senstor states that he has made no recommendations to the Collector's office si 08 the primary compaign of 1938. The Collector indicates that this is literally true. It 10 Collector Magruder's position that inesmuch ná the \enator submitted Regraded Uclassified 211 -2- recommendations concerning appointments prior to 1938 without invitation from him that no invitation was neces- sary subsequent to that time. The Collector further indicates that he would have been willing to have given consideration to any recommendations submitted by the Senator inasmuch as his first concern was to secure the services of persons properly qualified to perform the duties. Furthermore the Collector states that if the Senator will submit to him the names of properly qualified persons whom he would like to have considered for appoint- ment in the Maryland District he will give appropriate consideration thereto whenever vacancies occur. (Signed) 1. Mergenthau, in Secretary of the Treasury. By Measonder 3 de p.m. File to Mr. Thompson Uclassified 212 WAY 8 0 1941 Memoreadum for the Attorney Generals I send you the attached amoreadus of May 14 oddressed to w jointly by the President asking for the proparation of 4 reply to Semator Tydings* letter of May 7 addressed to the President. I an also sending forward a memorendum to the President, which I have signed, advising with respect to the appointment of deputy collectors of internal revenue. 1 assume that you will prepare a reply to Senstor Tydings" letter covering the appointmento under the jurisdiction of your department and the information contained is my memoradum my be used with respect to deputy collectors of internal revenue. (Signed) H. Morgenthau, Jr. Secretary of the Treasury. Whase Enes: Memo of May 14th and its enclosure copy of Secy's memo to President dated 5/17/41 File to Mr. Thompson By Measenger 4th 4 THE WHITE HOUSE 213 WASHINGTON May 14, 1941. MEMORANDUM FOR SECRETARY MORGENTHAU AND THE ATTORNEY GENERAL: For preparation of reply. F. D. R. 214 - &- 1 1 HYE, DM. - - I - E 1 CABIT 1 1 1 - DISBLE . 1 VY. Mnited States Senate - 1 E COMMITTEE ON 2 - 1 TERRITORIES AND INSULAR APPAIRS \ I I - - May 7,1941 Honorable Franklin D. Roosevelt President of the United States The White House Washington, D.C. Dear Mr. President - Some months ago, Senator Radcliffe and I recon ended to the Department of Justice two men for Assistant United States District Attorneys for Mary- land. The vacancies were occasioned by the call to military service of two men who had been holding these positions. The two men we recommended were those the United States District Attorney for Maryland stated were the best qualified of all the applicants for these positions. These recommendations have been pending in the Attorney General's office for some months. The Dis- trict Attorney for Maryland has repeatedly asked Senator id Geliffe and me to aid him in getting action on these pintments as he neede the additional help to handle the increased work of hie office. From a reliable source, I am advised that Eugene CaBey, one of the White House secretaries, has Asked that these appointments be held up, and that the reason for this 1s because I have endorsed them to the Attorney General. It has likewise been published in the press DI Maryland, that Mr. Casey is handling Maryland patron- e for the White House. The above circumstances lead me to call to attention still another matter, about which I am be you have no previous knowledge. A short while after reâness, the Collector of Internal Revenue for Maryland if trip to Maryland last fall inspecting military pre- Dent word to the Maryland delegation in Congress, exclu- Ivé of me, that there were some fifty deputies to be cinted and he wished recommendations made to him for Regraded Uclassified 215 -2- these places. Several of the Congressmen, knowing I had not been consulted in this matter, offered to give me D art of their allotment. However, for the record, I did not accept their offers as I was not included among those asked to make recommendations to the Collector. Indeed, I cannot recall that I have made any recommendations to the Collector's office since the primary campaign of 1938. Please understand, Mr. President, that I an not making the slightest complaint to you about the above. I an simply stating the facts quite frankly, to ascertain whether or not, now that these matters have been called to your attention, it is your wish for this procedure to continue. My main thought in writing is to request that you kindly advise me what the patronage situation is in Maryland, 60 I may ad- vise those who apply to me accordingly. I regret to bring such a matter to your attention in such troublesome times, and have refrained from doing so until I felt, in justice to myself and those I vas elected to represent, I had no other course. Trusting this finds you in good health, I am Respectfully yours, 1-m Regraded Uclassified 216 Kay 17, 1941 MEMORANDUM To: The Secretary From: Mr. Blough Subject: Excess profite tax proposals of Mr. Eccles and Mr. Henderson 1. Memorandum from Mr. Eccles to the President, April 22, 1941 In this memorandum no figure was given for the desirable increase in tax yield from the excess profite tax. The excess profits credit should be no more than 10 percent or less than 6 percent of invested capital, the exact figure between those limits to be determined by past earnings experience. Rates should be increased as follows: 25 percent on the first $20,000, 50 percent on the next $25,000. and 75 percent on the remainder of excess profits. 2. Testimony of Mr. Eccles before Ways and Means Committee, May 7, 1941 The first source of defense revenue should be the corporation tax and the excess profite tax. Additional revenue of $800 million to $1 billion should be raised from the excess profits tax, in comparison to the Regraded Uclassified 217 - 2 - Treasury recommendation of $400 million. The income method of computing the excess profits credit should be restricted either by reducing the 95 percent average earnings now allowable to 75 percent or by some other method. The invested capital credit should be reduced from 8 to 6 percent. The rates of tax should be in- creased sharply and a maximum rate of 75 percent is not too high. The maximum rate should apply to excess profits at a very much lower level than $500,000. 3. Testimony of Mr. Henderson before Ways and Means Committee, May 7, 1941 The excess profits tax can and should be one of the main pillars of this year's revenue act. Small business should be exempt with perhaps a $25,000 income exemption. A ceiling of 10 percent of invested capital should be provided under the average earnings method and the percentage of invested capital should be reduced to 6 percent of equity capital (eliminating borrowed capital). A five-year carryover of losses should be allowed. The rate of tax ought to be raised (but no rate was suggested). NB Regraded Uclassified 218 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON ( every OFFICE OF THE CHAIRMAN April 24, 1941. My dear Henry: In accordance with our telephone conversation of yesterday afternoon, I am en- closing (1) a copy of the memorandum with re- gard to taxation together with the accompany- ing letter to the President, and (2) the letter and two accompanying memoranda on the bank holding company situation. Marrimer Sincerely yours, Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. enclosures 219 Copy April 22, 1941. My dear Mr. President: At your suggestion, Mr. Sullivan of the Treasury briefly outlined to me the Treasury's tax program. As a result of that conference and of pre- vious extensive studies made of the tax problem, I have prepared a tax program as outlined in the enclosed memorandum. It is similar to the Treasury's proposals both as to its total yield and in the general revenue sources on which it draws. It differs materially, however, in the method of computation of excess profits and the tax rates thereon, the Treasury' 5 proposal, in my opin- ion, being entirely inadequate. The proposals in the attached memorandum call for less revenue from individual surtaxes and cer- tain excise taxes, which are offset by a greater revenue from excess profits tax. Respectfully yours, The Honorable The President of the United States, The White House. Regraded Uclassified 220 April 22, 1941 A TAX PROGRAM Excess Profits Tax - The present statute, falling for short of the in- tention stated in the President's message of July 1, 1940, "to see that a few do not gain from the sacrifices of the many" in the task of arming for national de- rease, should be drastically revised. Labor can not well be asked to moderate its demando if employers are permitted to retain huge profits, After paying taxes reflecting increases already made and in prospect, many individuals will have less money left than they had before the defense program got under way; meanwhile, many corporations are making more money, even after taxes, than they ever made before. In contrast to individual earnings, these corporate earnings escape the full force of the individual surtaxes because they may be retained without penalty. An effec- tive excess profite tax is the best way to make them bear their fair share of the tax load. Specific Proposal - Fix the excess profite base at not more than 10 per cent or less than 6 per cent on invested capital, the exact figure within these Units to be determined by past earnings experience. Retain the present specific exemption of $5,000. On excess profits over this exemption, levy rates as follows: 25 per cent on the first 120,000; 50 per cent on the next $25,000; 75 per cent on the remainder of excess profits. Retain the provisions of the present law pro- viding for special treatment of hardship cases. Special Defense Tax on Corporate Income - Raising the rate of normal cor- relate income tax would increase the value of the tax exemption privilege on Income from over $20 billion of outstanding Federal Government securities. In order to levy spon such income, enjoying immunity from normal tax but not from surtaxes, a fair share of the increased tax burdens which the community at large will be called upon to pay, B defense surtex on corporate income of 6 per cent, in addition to the present normal rite of 24 per cent, is proposed. Personal Income Tax - This is the most equitable of all taxes and should be made the backbone of our tax structure. Up to now, however, we have failed to make the full use of the personal income tax AS other democratic countries have done, with the result that it yields only about 20 per cent of total Federal revenue. Pressures on Congressional Committees have resulted in an income tax statute shot through with inconsistencies, inequities and immunities for minority groups of taxpayers. Specific Proposal - (a) Tax the incomes of husbands and wives as a single income. The privilege of filing separate returns is a tax-avoidance device that in practice is valuable only to wealthy couples, and practically all wealthy couples cake use of it. Professional services of a high order at the Government's disposal Are adequate to remove the legal obstacles to this proposal. (b) Lower the present personal exemption of $2,000 for married persons to $1,400. The revenue thus obtained from the better paid wage-earners, together with existing and proposed consumption taxes paid by this group, will go far toward making good possible losses in excess profits revenue if governmental price-control in com- sinstion with rising wage rates, should restrict the growth of profits. Regraded Uclassified 221 (c) Eliminate the present $4,000 surtax exemption, but continue to allow deduction of personal exemption (reduced as proposed above) and credit for de- condents for surtax purposes. Since an increase in the normal tax would increas the valué of the tax-exempt privilege borne by outstanding Federal securities, increased revenue from the individual income tax should be obtained primarily by increasing the surtex rates. Accompanying upward revision of surtax rates the Defense Tax, amounting to 10 per cent of the tax computed at present scheduled rates, should be eliminated. The proposed schedule of rates is shown in Appendix A. Estate and Gift Taxes - On June 19, 1935, the President said "The trans- aission from generation to generation of vast fortunes by will, inheritance or gift, is not consistent with the ideals and sentiments of the American people. Such in- herited economic power is as inconsistent with the ideals of this generation as in- herited political power was inconsistent with the ideals of the generation which es- tablished our government." The task of bringing law into conformity withpopular ideals, begun in the Revenue Act of 1935, ought to be finished now. 1. Establish a single schedule of rates applicable to the cumulative total of gifts during life plus estate passing at death. Under present practice, gifts sub- feet to tax in the lowest brackets of the gift tax can be used as a means of avoiding taxes in the highest brackets of the estate tax. Great accumulations of wealth can be transmitted by gift as well as by bequest, and a consistent public policy would tax both types of transfer at the same effective rates. Raise the now unduly low rates applicable to estates under $10 million. The proposed schedule of rates is shown in Appendix A. 2, For the present exemptions of $40,000 under the gift tax, $40,000 general under the estate tax, and $40,000 insurance under the estate tax - a total of $120,000 -- substitute a single exemption of $25,000. 3. Broaden the legal concepts of "gifts" and "transfer at death" so that the estate tax will effectively reach all transfers of property that transmit wealth from one generation to the next. Transfers from life tenant to remainderman are among the widely used devices for avoiding estate tax. 4. Limit the right to make tax-exempt gifts and bequests to educational and charitable institutions either by limiting the amount of such transfers or by requir- the the gift or bequest to be certified as truly in the public interest by qualified expert opinion. Such transfers often merely reflect the whims of the donor and serve no useful public purpose. Excise Taxes - The following excise taxes would fall largely on goods re- quiring the use of scarce materials and skills needed for the defense program. Proposed rate Existing rate (Per cent of manufacturers' price) Passenger automobiles and motorcycles 20 3.5 Automobile parts and accessories 15 2.5 11 5.5 Radio sets 11 5.5 Mechanical refrigerators 25 11 Firearms, shelle, pistols, revolvers Regraded Uclassified 222 - 3 - (Specific rates) Gasoline 2# per gal. 1.5¢ per gal. Tires 3.0¢ per lb. 2.50 per lb. Tubes 5.54 per lb. 4.5¢ per lb. Luxury goods (furs, jewelry, etc.) various rates Revenue Yield - The yield of these proposals on a full year basis may be roughly estimated as follows: (Millions of dollars) 1. Excess profits tax revisions 700 2. Special defense tax on corporate income 600 3. Individual income tax: (a) Tax incomes of couples as a single income 225 (b) Lower married persons exemption to $1,600 100 (c) Raise surtax rates and lower exemption 700 4. Estate and gift tax 500 5. Excise taxes 625 3,450 April 22, 1941 APPENDIX A 223 EXISTING AND PROPOSED SURTAX RATES Surtax net income Rate (per cent) Surtax net income Rate (per cent) (Thousands of dollars) Existing Proposed (Thousands of dollars) Existing Proposed 0 to 2 0 4 50 to 60 44 52 2 to 4 0 7 60 to 70 47 54 4 to 6 4 10 70 to 80 50 56 6 to 8 6 13 80 to 90 53 58 8 to 10 8 16 90 to 100 56 60 10 to 12 10 19 100 to 150 58 62 12 to 14 12 22 150 to 200 60 63 14 to 16 15 25 200 to 250 62 64 16 to 18 18 28 250 to 300 64 66 18 to 20 21 31 300 to 400 66 67 20 to 22 24 34 400 to 500 68 68 22 to 26 27 37 500 to 750 70 70 26 to 32 30 40 750 to 1,000 72 72 32 to 38 33 43 1,000 to 2,000 73 73 38 to 44 36 46 2,000 to 5,000 74 74 44 to 50 40 49 5,000 and over 75 75 EXISTING AND PROPOSED ESTATE TAX RATES Net Estate Rate (per cent) Net Estate Rate (per cent) Exceeding Equalling Existing Proposed Exceeding Equalling Existing Proposed ($000) ($000) 10 2 3 1,000 1,500 32 46 10 20 4 6 1,500 2,000 35 49 20 30 6 10 2,000 2,500 38 51 30 40 8 12 2,500 3,000 41 53 40 50 10 15 3,000 3,500 44 55 50 70 12 18 3,500 4,000 47 57 70 100 14 21 4,000 4,500 50 59 100 150 17 25 4,500 5,000 53 61 150 200 17 25 5,000 6,000 56 63 200 250 20 30 6,000 7,000 59 64 250 400 20 30 7,000 8,000 61 65 400 450 23 35 8,000 9,000 63 66 450 600 10,000 65 67 23 35 9,000 600 750 26 39 10,000 20,000 67 68 750 800 26 39 20,000 50,000 69 69 800 1,000 29 43 50,000 - 70 70 - Note: Under existing law "net estate" is computed by deducting a specific exemp- tion of $40,000; under the proposed law the specific exemption would be reduced to $25,000. Regraded Uclassified 224 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 17, 1941 Secretary Morgenthau TO Herbert Merillat FROM TOO MANY TAX PLANS The semblance of political unity that existed with respect to the 121 billions revenue goal has now disappeared. The anti- Administration press is in full ory, accusing the Administration of demagoguery in not recommending a broader income tax base and in failing to push reductions in non-defense appropriations. Confusion is also evident, resulting from differences between tax plans presented to the Ways and Means Committee. The press tends to snipe at details of the various tax plans without attempting to make constructive suggestions for an over-all tax program. Broadening of the income tax base continues to be the change most frequently suggested, and advocates of this step take heart from Eccles' support. Erroneous statements are frequently made that Henderson, too, urged lower exemptions. Possible changes in the excess profits tax get relatively little attention, probably because that complicated subject is little understood. Altogether the volume of press comment on Federal taxes has slackened perceptibly. Regraded Uclassified 225 - 2 - The Henderson and Ecoles Proposals The Henderson and Eccles proposals were more favorably re- ceived in the press than the Treasury plan, generally on the ground that they recommended lower exemptions from the income tax and less heavy increases on lower-bracket incomes than the Treasury proposed. The press generally predicts that the tax bill to be reported by the Ways and Means Committee will not bear as heavily on lower- bracket taxpayers 18 the Treasury had suggested. Even the liberal papers and journals which spoke kindly of the Treasury plan are in- clined to favor the Hendarson-Eccles plan, because the latter places more emphasis on excess profits taxes and less emphasis on excises. All sections of the press, moreover, are impressed with the Henderson-Eccles attempt to relate taxes to the defense production program. Incidentally, the Henderson-Eccles proposals are widely regarded as representing the Administration's real views on tax policy. The Keynes Plan The arrival of Keynes in this country has revived specula- tion on the possibility of adopting a forced savings plan in this country. Ernest Lindley urges adoption of such a plan. John T. Flynn sees some merit in it as a means of avoiding immediate infla- tion, but fears that inflation would come when the savings were re- paid to taxpayers. Regraded Uclassified UNITED STATES SAVINGS 30NDS AND SAVINGS STAMPS CONFIDENTIAL Daily Sales Since May 1, 1941 On Basis of Issue Price (In thousands of dollars) Post Office All Bond Sales Bank Bond Sales Bond Sales Savings Date Stamps Total Series I Series , Series G Series E Total Series I Series 7 Series G May 1941 1 & 2 * 35,781 $ 5,087 $ 4,678 $ 26,016 $ 4,405 $ 31.377 $ 682 $ 4,678 $ 26,016 $ 1,145 3 30,401 2,593 3,648 24,160 1,310 29,091 1,283 3.648 24,160 106 2 14,969 2,982 2,087 9,900 1,581 13,387 1,401 2,087 9,900 113 14,967 3,845 2,092 9,030 1,607 13,360 2,238 2,092 9,030 91 7 17,802 3,872 2,155 11,775 1,351 16,451 2,521 2,155 11,775 99 8 16,925 4,565 1,210 11,151 1,235 15,690 3,329 1,210 11,151 & 9 15,189 4,011 1,591 9,586 1,156 14,033 2,855 1,591 9.586 81 10 13,800 4,156 1,415 8,229 1,187 12,613 2,969 1,415 8,229 71 12 17,051 4,542 1,578 10,930 1,485 15,567 3,058 1,578 10,930 92 13 19,887 4,374 2,219 13,294 1,220 18,667 3,154 2,219 13,294 92 14 18,019 4,421 1,621 11,977 1,106 16,913 3,315 1,621 11,977 81 15 16,984 4,255 1,952 10,777 1,116 15,867 3,139 1,952 10,777 91 16 17,470 4,062 1,528 11,880 1,054 16,415 3,007 1,528 11,880 102 Total $249,245 $ 52,765 $ 27.775 $168,705 $ 19,814 $229,431 $ 32,951 à 27.775 $168,705 $ 2,246 Treasury Department, Division of Research and Statistics. May 17. 1941. Source: Division of Savings Bonds. The post office figures are estimated by the post office on the basis of actual sales by 100 larger post offices. The bank figures are taken from Federal Reserve Bank reports and include their own sales. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. 226 Regraded Uclassified 227 0 0 P I No. 13 (1039/106/41) Safe Hand. BRITISH EMBASSY, WASHINGTON, D. C. May 17th, 1941. Dear Cochran, On the 21st March I sent you a note of the decision reached in London with regard to the purchase by our enemies of dollar bonds and Standstill Claims. Since then the matter has again been under discussion with London in view of complaints received by us from American interests which are concerned to receive some re-payment in respect of what may very well be a wasting asset. London have now asked me to ascertain the views of the U.S. Treasury in this matter, and it seems possible that should the Treasury regard it as desirable that no obstacle should be placed in the way of sales to Germany of bonds and Standstill claims, London would be prepared to re-consider their decision. I should therefore be grateful if you would be kind enough to let me know your views. Yours sincerely, (Signed) R. J. Stopford Mr. Merle Cochran, U. S. Treasury Department, Washington, D. C. da Regraded Uclassified 208 V.T.514/94/41. Safe Hand BRITISH EMBASSY, WASHINGTON, D. C., May 17th, 1941. Dear Cochran, When we were discussing the other day the question of the Banks doing German or Italian business, I did not mention one aspect of this, namely, the transaction of business with firms on our Statutory List, especially in South America. My attention has recently been called by Montevideo to such cases. In the first case, the Second National Bank of Boston at the end of March, issued an irrevocable credit for $6,000.00 in favour of Laheusen & Co. Ltd. of Montevideo for account of Walker & Co. Inc. of Boston, covering shipment of 20,000 pounds of wool to Boston. In the second case, the Bank of the Manhattan Company of New York at the end of March opened an irrevocable credit in favour of Standt & Co. of Montevideo for account of the Cleveland Worsted Milla Company of Cleveland for $50,000.00 shipment of 125 barrels of wool to Cleveland. As you know, the State Department are interested at the moment in this question of the use of enemy firms in South America by United States commercial firms, and I would hope that it might not be an unsuitable moment to attempt to discourage the New York banks from giving credits in such cases. Yours sincerely. (Signed) R. J. Stopford Mr. Merle Cochran, U. S. Treasury Department, Washington, D. C. de Regraded Uclassified 229 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 17, 1941 Secretary Morgenthau TO FROM Mr. Cochran CONFIDENTIAL Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns £9,000 Purchased from commercial concerns £8,000 Open market sterling held steady at 4.03-1/4. Transactions of the reporting banks were as follows: Sold to commercial concerns £9,000 Purchased from -0- In New York, closing quotations for the foreign currencies listed below were as follows: Canadian dollar 12-11/16% discount Swise franc .2320-1/2 Swedish krona .2385 Reichsmark .4005 Lira .0505 Argentine peso (free) .2375 Brazilian milreis (free) .0505 Mexican peso .2070 Cuban peso 2-5/16% discount In Shanghai, the yuan was again unchanged at 5-11/324, and sterling remained at 3.90-7/8. There were no gold transactions consummated by us today. No new gold engagements were reported. July Regraded Uclassified 230 Address delivered at the Citizenship Day Ceremonies in Milwaukee, May 10, 1941 By Lloyd K. Garrison About & hundred years ago B. young German, Carl Schurz, came to this country and to this city in search of democracy. He found it, and later on he summed up his gratitude in these words: "I, born in a foreign land, pay my tribute to Americanism? Yes, for to me Americanism, true Americanism, comprehends the noblest Ideas which ever swelled a human heart with nohle pride." What were these 1deas which in Carl Schurz's mind were the essence of Americanism? First, surely, the idea of freedom: freedom of opportunity, freedom of worship, freedom of speech and press, freedom for the expression of views we hate as well as those we like, freedom from action by government officials save in accordance with the law of the land -- all these and other froedoms, guaranteed by the Bill of Rights of our constitutions, state and federal. Secondly, government 01 the people, by the people and for the poople, subject always to the guarantees of the Bill of Rights. Thirdly, the idea of the worth of a man regardless of race, color or croed; the idea which has given us our groat public school system and has made us strivo in countless ways for the onrich- nont and protoction of the individual life. Thoso were the 1deas which America stood for in Carl Schurz's day. Those are the Ideas which America stands for today. Thése are the ideas which I hope will swell your hearts with pride, as they did Carl Schurz's. These are the Idoas which I hope as citizons you will try to mako come true. For they have nevor wholly come true in practice. There is yot in our country much injustice, inequality, grood and selfishnoss. But we have marched further toward domocracy than any other poople. And the brave mon who wrote the Doclaration of Indo- pendonco, fought the revolution, and created the Constitution of the United States, reared a fabric of government which has sheltored in froedom more people, over S. wider aroa and through a longer stretch of timo, than any other institutions over made by man. So I say that with all our faults we have much to be proud of, and that you who have just become citizons may thank the fato that made you Americans. But we must think of our futuro as woll as our past. Today throughout the land ono thought is uppermost in the minds of everyono; the war and our relation to it. Nowhore clso on earth are free citizons frooly dobating the issue of whether to fight, or to stay at Deado, or to adopt somo middle courso. Wo as citizons have both the right and the duty to decido those issues. In our hands lios the fate of our country, and porhaps the fato of the world. To think through the issues that face us and to take a stand -- that is the task of citizons in a domocracy. On this day devoted to the moaning Regraded Uclassified 231 of citizenship, we can no more avoid discussing these issues than we can avoid thinking about them. The questions before us are not the same as we faced in the last war. The world of 1917 has gone with the men who made and marred it. A new generation of leaders, hardened in war and frus- trated in peace, has seized command in Europe. They have turned their back on the past, on its good 96 well as its evil. They were the first to perceive that war could be waged in peace-time, secretl7, in the heart of an enemy's country. They were the first to perceive that the old tactics of war had been junked by the latost nachines of science. Armed with these machinos they swopt to victory. As at result of the now machino warfare, two gigantic shifts in the distribution of the world's power have alroady occurred, Each vitally concorns us. The first has resulted from the dovolop- ment of swift, wide-ranging and armored bombing planos. This dovol- opmont has permanently decreased the valuo of soa power, on which America and Britain have rolied for defense. Our influence in the world, as woll AS our safety, has depended on sca power; and because of our soa power WC have gotton along without great standing armics, and have boon able to concontrato on puacoful pursuits. But now the now navios of the air have made the navios and merchant ships of the sea woaker and loss offoctivo, This shrinkage in our 308 power has boon mado more serious by the olimination of the Fronch navy, by the uso of the Fronch, Rolgian, Dutch, Danish and Norwogian coasts as naval and air hascs, by the unification of Europe under on ambitious military organization, and by undorstandings betwoon the lattur and the dictators of Asia. As a roaction to those mom tous changes, Great Fritain and America have entored into a naval and military association which coomo destined to continue after the war is over. The dofunee of Canada has boon guarantood by our government; I assume that VC are propared also to dofund Australia and Now Zoaland; Con ross by overwhelming majorities hns doclared the defense of Britnin to be n vital concern of America; 170 are Civing and landing to Britain all manur of planos, munitions and ships; the arc exchanging military secrets; WC are manufacturing Juns, sholls, motors and the like accordin- to common specifications; WC are oporating our ships and RAV11 Vessols according to D. common plan; and we have acquired and 276 fortifying ninoty-nine year navel hases on British islands in the Atlantic and on the Canadian short. It 900119 to no almost cortain that under these circumstances our collaboration for defense will be perminent. This colloboration has been a perfectly natural develop- ment. One: the position of the BCA power democracies had boon reclared by the now air forces of the land powers, it was inovitable that the 808 power democracios should draw together in somo form of issociation for mutual defonse. This drawing together was facilitated by a common language, by common ways of thought, and by truat in one mother's purposes. The second great shift in the distribution of power has resulted from the mochanization of armios. The modern tank and plane have put the foot soldior and the fort out of business, with the consoquence that military Comination no longer turns on numbers of DCD and fortifications, but on the capacity to manufacture tanko :nd Regraded Uclassified 232 The further consequence is that Germany, as the greatest the The can no longer be challonged within to ourselves, has become the military Europe. It be challenged by attacker? from outaide. It is sleast certain to be permanent unless destroyed from outside. Mother it can be destroyed or not from the outside no one can surely 197. Those who are strongest for war believe that 1f America went in sil the way, air superiority over Germany could finally be won, and that that would and the Nazi power, I do not know whether this could happen or not. I only know that the last war continued four years wIth all the world against Germany, and that now the German position, both economic and military, seems to be much stronger than it was before. And I know that war has a way of deluding men's minds and filling them full of false hopes, so that they are all the time believing that somehow victory lies just around the cornor, when in fact it is far away and to be had only after such hideous suffering that when it finally comes it is more like defoat than victory. I an convinced that mankind would in the end be the loser if we were to try to carry through to the bitterost and the reconquest of Europe. And I say this as one who hates the Nazi creed to the dopth of his being. I believe that the foreign policy of America ought to be haped on a recognition of the two world changes which I have just described, namoly (1) the docline of sea power, and the consequent drawing togethor of the soa power democracies for mutual protection, and (2) the military dominance in Europe of the dominant manufacturing country. If my conviction is right that, as a result of the decline in sea power, WG have embarked on an association with the other sea power domocracies which is destined to be permanent, the sooner wo realize that fact and the sooner we lay our plans accordingly, the botter off wo shall be. I think we should plan not only for the present -- as in fact we are now doing -- but, so far as possible, for the future, when poace returns. For our association can and should have objects broador than that of mutual solf-dofonso. It should be designed to promoto the froest possible interchange of Foods and services and capital and people. It should be dosigned to avoid trado rivalries in the markets of the world. It should be doolghed to oncourage all offorts toward maintaining the peace of the world. Such an association need involvo no loss of American sover- cignty; and in its councils wa would have a controlling voice by right of our size and population. Australia, How Zoeland, Canada, South Africa, Iroland, Groat Britain, the United Statos -- those soa power democracios, teamed together, could be B potont force not only for defunso, but for building a botter world in 20800. Many people have boon brou ht up on the Idoa that Amorica must at all costs stand alono in the world and attend to hor own business. I realize the strongth of that idoa and the sincerity of those who bolieve in 1t, What I have triod to suggest is that, whother WC like it or not, that idoa has boon buried under the hombs of the new air floots and that no have alroady in fact become part of Regraded Uclassified 233 now Grouping of nations. our job as intelligent citizens is to accept that fact, and to turn it to good ends, both for ourselves and for mankind. Secondly, if my conviction is right that Gorman dominance in purope chn be destroyed, if at all, only by of struggle which will also destroy what littlo is loft of western civilization, it follows that the policy of the associated 308 power domocracies sucht to be 701107 of dafanse only. They (and by they" I include America) should jointly declare that their object is not to reconquer Europo by force of arms, but to dofond thoir shores, their bases and their island possessions now and hereafter. They should jointly declare that they will vigorously oppose attempts by the totalitarians to scize further portions of the carth's surfaco. They should doclaro themselves roady to join with the dictators in an Inmediate cossation of the signature. Such action would not require the domocracies to make 11 DUDOC treaty with the dictators. Wars are now bogun without formal doclarations, and they can ba unded thout formal treatics. The two sidos would simply agree to stop fighting and to stay where they wore, pending the nogotiation of a pormanent truaty later on. Some minimum and immodiate adjustments of torritory would of course be necessary. But this could be dono without a dotailed treaty, and without acknowlodging that what had been done in Europe was approved. When the irreparable waste of fighting is stopped, powerful forces in Europe, kept down in war, will bogin to assort thomsolves. The pressure of all the conquered countries for local solf-government will every day be folt. The political difficultion of administering so vast and varied a torritory, with so many diverse racos and tra- citions, will multiply with ponce. And within the ranks of the victors profound psychological and moral reactions, long supprossed ind stiflod, are likely to occur. Ultimatoly a government or Bovern- monts should ovolvo which the western world could trust and approve, and with which a final ponco tronty could be mnde. If it were necessary to wait some timo for this, the 283001- etid democracies could wait. Bandod together in ponce, they could muild plano for plano and ship for ship and defond thomselvos against the possibility of further attacks. A definitivo peace treaty, when finally nogotiated, should to dooply into such questions ns colonies, discrmment and collective security. Negotiated in n timo of calm, it might bo ablo to bring about what the Troaty of Vorsaillos in a time of hato failed to bring about, namely, a true international now order. It would sock to romovo inoqualities and injusticos, to rostore wrongly takon possos- sions, and to build agencios for improving the lot of mankind and for sottling disputos between nations. I realizo that the more suggestion of stopping fighting and loaving the dictators in command of Europo 1s abhorront to those who can think only in torms of crushing the mon who have wreaked 50 much cruclty upon others, To stop short of that goal is called appoasement and defontism) I nm na anxious na anyone to rid civill- sation of the men who have trimplod on its hoblost 16c:1st but I as: Regraded Uclassified 234 that those very men are at their strongest in war and that in peace they are loss likely to survive, The genius of faacism is in war and not in peace, just as the genius of democracy 1s in peace and not in war. And that is why I want the sea power democracies, America, Canada, Australia, New Zealand, South Africa, Ireland, Great Britain, to declare that they are banded together for defense only, for Deace now, for the long pull hereafter, for the building of a happier, safer and more fruitful world. If in the face of such B. declaration the totalitarians were unwilling to stop fighting, they be serving notice publicly and undistalreably that their aim was nothing less than the conquest of the world. In that case there would be no other course but to go on fighting them. And it would then seem to me wholly In the interesta of America, and in the interests of mankind, for us to join the struggle with every naval and air resource at our command, In suggesting this program I am acutely conscious of my own limitations of knowledge. I know how hard it 1s for even the best informed and most expert judges to 900 clearly in the midst of 30 much rapid change and so many unprodictable events. But of one thing I am absolutely suro. We need desperately at this very moment to be discussing our ultimate goals and the kind of post-war world we wish to bring about. For the danger is that before we have thought through those matters and decided exactly where we are going and why, we shall drift or be drawn actively into the war, and that once the war fever grips us we shall lose altogether the capacity to think clearly. In the state of mind which war induces we shall blind our eyes to all realities, let looso in our souls the vials of hato and fear, and persecute in the name of patriotism all who stand aside from the univorsal frenzy. And in that state of mind wo shall carry the war forward to the bittorest end, with bonbings and sinkings and over more bombings and sinkings, and the crumbling to bits of onco noble cities, and the indiscriminate sleughter of mon, women and children, and the slow starvation of many, and the poisoning of the minds of a whole generation of fighting men on noth sides, until at last somohow the struggle will end and the stage be set for social convulsions the world over and for all the terrible aftermath of war - the docline of morals, the corruption of government, the dissolution of standards and traditions, the riso of demagogues, and the dostruc- tion of overything which is precious to the spirit of man. All this I fear if we ambark nnon war with no other object than that of crushing Gormany. If in the end WO wore to succood, 1f by fire and sword WO were to bring about at last the collapse of the Nazia, noither the British, half dostroyed themselves in the process, nor oursolves, confronted with appalling problems hero at home, would have the energy or will to organizo a now order of things in Europe; and the sholl-shocked people WO had fought to liborato from the Nazi acain. yoke would either find new dictators or be at each other's throats Regraded Uclassified 235 ⑉6⑉ And now I leave you with this final word. Whatever the outcome of the present struggle, the strains which our Government will have to face when it 1a over will exceed any that have ever get been placed upon it. We shall surely have to make crucial and continuous decisions in matters of foreign policy as well as in domestic. We shall emerge as the dominant partner in the English-speaking world, with all the immense responsibilities that that implies. With the deflation of war production, we shall have, unless we act with extreme boldness, an econonomic crisis perhaps more formidable than any in the past. As happened after the last war, men will ask how It is that the economic machine can function at full blast for pur- poses of destruction but can operate at only half speed for purposes of construction. And we shall have to answer that question at our peril. The upshot of all this is that upon you, fellow citizens, the hoaviest dutios will be laid. For citizenship, as I have said, consists not only of rights but of duties; and the duty to vote and the duty to boar arms are by no moans all that is expected of you. You are under a duty to loarn, to think, and to speak up. You are under a duty to keep cool, and not lot yourself be swopt by the gusts of passion and projudice. You are under a duty to judgo mon and actions by the otornal tests of truth, honor, justico, deconcy, and mignanimity. For the foundation of national well-being is in these virtuos, and not in sticks and stonos. And now I charge you: stand up; acquit yoursolves as free- mon in this the greatost democracy the world has over known; be mastors of your fate; and lift up your eyes to the horizon, for & botter day is dawning 1f only you will rend the clouds that darken it. Dearadod 5/18/41 Runday at 12 mond Reey's house STATEMENT OF JOHN L. SULLIVAN, ASSISTANT SECRETARY OF THE TREASURY, BEFORE THE COMMITTEE ON WAYS 236 AND MEANS OF THE HOUSE OF REPRESENTATIVES, MONDAY, MAY 19, 1941 ***** My purpose today is to discuss with you the problem of corporate taxation in the present emergency. What I shall have to say is supplementary to the state- ment made by Secretary Morgenthau when the current hearings were opened and to the suggestions laid before you subsequently on behalf of the Treasury Department. The Treasury is called upon to meet expenditures greater than have ever been made in the nation's peacetime history, and probably greater than at any period in our history, in peace or war. At such a time we cannot expect to rely on normal sources of revenue or be content with revenue in normal amounts. We must adopt extraordinary measures to deal with our extraordinary situation. Your Committee is now formulating changes in our tax system, both to provide the revenues needed to finance the defense expenditures that we are committed to make, and also to assist in maintaining the economic health of the nation. Our people know that 237 - 2 - great sacrifices must be made and they are prepared to make them. They rely upon you so to plan our financial program that, however severe its burdens may have to be, they will rest fairly and justly upon all individuals and all businesses. The tax program which you will propose will necessarily consist of many elements. Any one tax, viewed by itself, may appear to be stringent. All must be viewed, however, as parts of a whole. This is an emergency. Taxes that would not be proposed in normal times are a necessity now. I have been asked particularly to discuss the excess profits tax, first enacted in the fall of 1940. Our experience with it is still limited, for many of the returns of the largest corporations have not yet been filed. Enough have been filed, however, to convince Treasury officials in charge of tax admin- istration that important changes in the law must be made in the interests of fairness. We are collecting large sums by means of this tax, but the profits of a good many business firms are not being touched by the tax, Regraded Uclassified 238 - 3 - although some of those profits are excess profits by any reasonable standard. Here is certainly a place to broaden the base. Surely the skill of this Committee and its experts is adequate to the task of bringing within the tax the known cases of corporate excess profits. I want first to outline the principles which I believe should govern the taxation of excess profits; second, to indicate respects in which the present law fails to accord with those principles; and third, to suggest possible remedies which the Congress may wish to consider. I - - Principles Under present conditions some kinds of profits may be appropriately subjected to heavier taxation than other kinds. This may be necessary in order to distribute the burden fairly and to avoid unfavorable economic effects that might result if the revenue were raised in other ways. 1. Defense profits The first type of profits which, in a period of this kind, should be subjected to special taxation comprises the profits which may be reasonably Regraded Uclassified 239 - 4 - attributed to the defense program. Such profits are being made out of the sacrifices of the people as a whole and should be returned to the people in taxes, insofar as may be possible without destroying necessary incentives to produce defense goods. In many cases it is not possible to identify with precision the additional profits due to the defense program. The effects of defense spending are diffused throughout the whole economic system. It is necessary, accordingly, to assume that in general, increases in profits during this period are due to defense. Inability to measure defense profits precisely should not dis- courage us from subjecting them to special taxation even at the risk of hitting some income not derived from the defense program. 2. Profits in excess of a necessary normal return on invested capital The other kind of profit that can properly be sub- jected to special taxation comprises profits in excess of a necessary normal return on invested capital, Regraded Uclassified 240 - 5 - even if this return was being earned in the years prior to the defense program. The existence of such profits, while often due primarily to good management, is in numerous cases due to monopoly, imperfect competition, or fortunate circumstances, and not to any outstanding service to the public. When the im- perfections of our economic machine have permitted such excess profits to be made, it is equitable and desirable that they be subjected to special taxation. Furthermore, at a time when heavy taxes must be imposed they should be levied where they will assist best in maintaining a well-functioning economy. To take an additional share of the profits in excess of a normal return on invested capital will not cause any companies to go into bankruptcy or withdraw from business. I am aware that the anticipation of extraordinarily large profits may in many cases have put security prices well above & figure that would represent invested capital. The imposition of these special taxes may seem harsh to individuals who have purchased those Regraded Uclassified 241 - 6 - securities at such levels. We must remember that no legislation is ever passed and no progressive step is ever taken which does not disturb expectations of some people. We submit that established expecta- tions of high profits are entitled to no more pro- tection than an individual's expectation of a continued large salary which is now to be subjected to a much heavier tax. This is an emergency, and changes must be expected. I am also aware that the application of the principle of taxing profits in excess of a necessary normal return on capital involves difficulties of both principle and technique. These difficulties should not be underestimated, but I feel sure that we should not allow them to stand in the way of our seeking to attain the main objective. II - - Defects of the present law In the light of the principles just stated, let us now examine the excess profits tax law passed last year, to see in what respects, if any, it fails to correspond to them. Regraded Uclassified 242 - 7 - 1. Failure to reach large parts of defense profits The Excess Profits Tax Aot of 1940 was 8. clear expression of Congressional intent that profits growing out of the defense effort should be subject to excess profits tax. The law, however, has not achieved that objective. Many corporations that are the principal beneficiaries of the defense effort and that hold large government contracts are paying little or no excess profits tax. In the absence of complete excess profits tax returns an examination has been made of published financial data for certain corporations. One company whose profits in 1940 were more than 3,000 percent larger than in 1939 is subject to no excess profits tax whatever on 1940 earnings and this is a company which has thus far received over $70 million of defense contracts. A large industrial company which has received over $250 million of defense contracts and had earnings in 1940 of nearly 200 percent larger than in 1939 will pay no excess profits tax. It appears that only 5 out of 12 large integrated steel companies will be subject Regraded Uclassified 243 - 8 - to excess profits tax on the income of 1940, although steel companies have in general received huge amounts of defense orders. These companies pay little or no excess profits tax because they are allowed 8. minimum credit of 8 percent of invested capital. 2. Failure to tax profits in excess of 8. necessary normal return Another serious shortcoming of the 1940 excess profits tax law is that profits in excess of 8. necessary normal return on invested capital are not subject to the tax unless such profits also represent an increase over the profits of the base period. Companies which earned during the base period an average of 30 percent, 50 percent or even more on their present invested capital will be free from the excess profits tax on income in any year equal to approximately these percents and will be taxable only on increases in their incomes. This failure of the law to reach a large portion of excess profits is due to the provision of 8. credit for every corporation equal to 95 percent of its base period earnings, regardless of the size of those earnings in relation to its invested capital. Regraded Uclassified 244 - 9 - III - - Remedies Revisions of the excess profits tax to be con- sidered adequate, must reach the two kinds of profits which I have been discussing. The tax can reach a much larger proportion of defense profits if there is a reduction in the 8 percent credit on invested capital. Profits in excess of a necessary normal return can be reached by taxing all profits above a stated percentage of invested capital, regardless of average base period earnings. These were the basic elements of the Treasury excess profits tax proposal of 1940, and it is this plan, with modifications dictated by experience, that we suggest. In that proposal corporations were to be allowed free of the excess profits tax an amount of earnings equal to their earnings during the base period, but not more than 10 percent of invested capital. How- ever, they were granted 8. minimum credit of 4 percent of invested capital with 6 percent allowed on the first $500,000. Thus, under that plan a concern which earned 7 percent during the base period would be allowed to continue to earn 7 percent free of tax. A concern which earned only 2 percent during the base period would Regraded Uclassified 245 - 10 - be permitted to earn 4 percent free of tax. A concern which earned 15 percent during the base period would be allowed to earn 10 percent free of tax. Under the 1940 Treasury proposal it was recognized that if business is to expand and investors are to put money into new corporations, an opportunity must be allowed to earn an adequate rate of return on new capital. The plan allowed an 8 percent return on new capital, with B. 10 percent return up to $500,000, regardless of the earnings experience during the base period on old capital. If the plan submitted by the Treasury last year had been applied to the examples previously presented, the tax results would have been quite different. For example, one corporation which had a 40 percent return on its invested capital in the base period would have paid excess profits tax on about half of its 1940 income instead of on about one-twentieth as under the present law. The large industrial company which received over $250 million of defense contracts would have paid excess profits tax on over one-third of its income and the other company with poor earnings in the base period would have paid on Regraded Uclassified 246 - 11 - about one-fifth of its income instead of both companies being entirely exempt. Even this plan, however, would have failed to reach substantial amounts of defense profits received by corporations which had especially poor earnings during the base period. To meet this defect we would suggest revising the 1940 proposal to provide that where the average earnings of the base period were less than the minimum of 4 percent, the excess profits tax should be applied at a low flat rate, possibly 10 percent, to that part of the current profits that is in excess of the base period earnings but not in excess of 4 percent of invested capital. For example, if & corporation earned during the base period an average of $100,000 8. year, while 4 percent of its invested capital amounts to $300,000, the first $100,000 of profits in the current taxable year would be entirely exempt from excess profits tax, the next $200,000, representing the difference between the $100,000 average earnings and the $300,000 credit on invested capital, would be taxed at 10 percent and any earnings over $300,000 would be subject to the regular excess profits tax 247 - 12 - rates. This minimum rate of tax would subject all increases in profits during the defense period at least to some excess profits taxation without unduly burdening concerns whose increased earnings are not truly defense profits. We would suggest also that the rate allowed on new capital be the same as that originally suggested, namely, 8 percent, with 10 percent up to $500,000. Any maximum return on capital must be a somewhat arbitrary figure because businesses differ widely in the degree of risk they face. Accordingly, it is desirable not to set too low a maximum rate of return. Similarly, it would be desirable to keep the tax rate low on that part of profits which is immediately above the credit. To this end we suggest that tax rates be graduated in accordance with the rate of return on invested capital starting with a moderate initial rate. Moreover, with this new broad excess profits base, it would be possible to adapt ourselves quickly and Regraded Uclassified 248 - 13 - much more easily to B. need for still larger revenues if the emergency should so require. The future is especially uncertain during an emergency period, and we might have to act quickly. It is better to have a broad excess profits tax base carefully worked out while we still have the time than to patch up the present law and take the risk of finding ourselves confronted with the necessity of improvising such a base on short notice at a later date. Thus far I have outlined the principles of excess profits taxation which in our opinion should be followed in this emergency period and have indicated ways in which the existing law fails to carry them out. If you share our belief in these principles, I believe you will agree that & plan like the one I have outlined is the logical method of putting the principles into practical operation. Variation in details is not a matter of concern, 80 long as the plan adopted taxes both defense profits and excess profits, which the present law does not do. IV. Possible alternative If these principles are not to be the guide for taxing corporations during the emergency period, it Regraded Uclassified 249 - 14 - would be well to bear in mind the disadvantages of the tax in its present form, which involves the administra- tive difficulties inevitably accompanying excess profits taxation but fails to tax large amounts of profits that it properly should reach. A simpler, more easily admin- istered plan would, of course, be to abandon the excess profits tax and to increase the corporation income tax by enough to produce the desired revenue. With such an increase in the corporation income tax there should, in my judgment, be coupled a provision for reducing the tax when the earnings of the corporation are immediately made subject to the individual income tax. This kind of a plan would be in harmony with the idea of integrating the corporation and the individual taxes, placing chief reliance on the taxation of income of individuals. Profiting from our experience with previous plans of this general character, many diffi- culties previously met can very likely be avoided and equitable taxation of profits to the individual stock- holder provided. I do not set forth this plan as one that carries into effect the principles which I previously discussed. It is based on principles of its own and is suggested as an alternative, not a substitute. Regraded Uclassified 250 - 15 - When I first appeared before the Committee in executive session and discussed this tax program with you generally, I told you that I thought there were certain types of durable commodities, such as electric refrigerators, automobiles, watches, clocks, and cameras, the reduced consumption of which would be helpful to national defense, not only because the plants are adaptable to defense work, but also because the materials used in these commodities are used in defense articles and the workmen who manufacture these things are possessed of the very skills that are needed in many of our defense plants. During those discussions different members of the Committee intimated they thought that taxes on some of these articles should be higher than were recommended and I assured them that we would not object to some increases on these particular articles. Since that time there has been so much dis- cussion about various excise taxes that I think I should repeat to you what I said before -- that I do believe that these articles are the type that it is doubly desirable to tax. Regraded Uclassified 251 - 16 - We cannot expect to devise a painless tax bill, The situation calls for sacrifices. As Secretary Morgenthau has already told you, we have had umnistakable evidence that the people are willing to make sacrifices according to their ability. Outside the tax field greater sacrifices are being asked and cheerfully made. There is no basis for comparing the sacrifice of those who are asked to exchange the security of a job and a home for a soldier's pay and a soldier's hardships with the sacrifice of those who are asked to pay even drastically higher rates of tax. Regraded Uclassified