Ask the Scholar

{
    "localId": "28276892",
    "label": "Volume 481, January 1 – January 3, 1942",
    "core": "doc",
    "dtoType": "document",
    "citationUrl": "https://catalog.archives.gov/id/28276892"
}

{
    "id": "28276892",
    "sourceUrl": "https://catalog.archives.gov/id/28276892",
    "contentType": "document",
    "title": "Volume 481, January 1 – January 3, 1942",
    "citationUrl": "https://catalog.archives.gov/id/28276892",
    "collections": [
        "Henry Morgenthau, Jr. Papers",
        "Diaries of Henry Morgenthau, Jr."
    ],
    "iiifBase": "https://s3.amazonaws.com/NARAprodstorage/opastorage/live/92/2768/28276892/content/presidential-libraries/roosevelt/FDR-MORGEN/589213/md0656.pdf",
    "thumbnailUrl": "https://s3.amazonaws.com/NARAprodstorage/opastorage/live/92/2768/28276892/content/presidential-libraries/roosevelt/FDR-MORGEN/589213/md0656.pdf",
    "largeImageUrl": "https://s3.amazonaws.com/NARAprodstorage/opastorage/live/92/2768/28276892/content/presidential-libraries/roosevelt/FDR-MORGEN/589213/md0656.pdf",
    "imageCount": 2,
    "hasImages": true,
    "source": "import",
    "hasTranscription": false
}

{
    "url": "https://catalog.archives.gov/id/28276892",
    "naId": 28276892,
    "levelOfDescription": "fileUnit",
    "recordType": "description",
    "ocrSource": "nara-archive"
}

{
    "seq": 1,
    "pageIndex": 0,
    "type": "document",
    "url": "https://s3.amazonaws.com/NARAprodstorage/opastorage/live/92/2768/28276892/content/presidential-libraries/roosevelt/FDR-MORGEN/589213/md0656.pdf",
    "mediaId": "61f1b2e8eda133a5",
    "ocrText": "DIARY\nBook 481\nJanuary 1 - 3, 1942\nRegraded Unclassified\n- A -\nBook\nPage\nAirplanes\nShipments - british Air Commission report - 1/8/42.,\n481\n398\nAlien Property Custodian\nSccles' telegram to Hopkins endorsing Treasury\nadministration of foreign funds and advocating all\nalien property custodianship be placed in Treasury -\n1/1/42\n174\nHMJr transmite to Budget Bureau Devartment of\nJustice's proposed Executive Order and Treasury's\nproposed Executive Order which embodies agreement\nbetween Biddle, Crowley, HMJr. and Foley - 1/2/42\n227\na) Discussion with Miss Tully - 1/2/42\n248\n1) Miss Tully reports FUN's comment -\n1/3/42\n346\nAppointments and Resignations\nCarroll, Mollie Ray:\nViner considers unsuited for personnel work - 1/2/42,\n193\nMillie-White conversation concerning - 1/2/42\n195\nViner, Jacob: Appointed Special Assistant and\nConsulting Expert - 1/1/42\n114\n- 5 -\nBarth, Alan\nAditorial Opinion on Foreign Affairs: Testament of\nFaith - 1/2/42\n278\nBritish Purchasing Mission\nUnited States takes over aircraft contracted for by\nUnited Kingdom; War Department letter concerning\npayment therefor - 1/1/42\n131\ne) HMJr thanked for \"invaluable nelp\"\n- C -\nCanada\nSee Lend-Lease\nCarroll, Mollie Ray\n3ee Appointments and Resignations\nConsorship, Office of\n\"Mouthpieces\" used discussed by Treasury group -\n1/2/42\n175\nChina\nCounren, D. Merle: Summary of trip - 1/1/42\n135\na) Chen wishes to withdraw from Stabilization\nHoard\nb) Kung's specific proposals\n143\nfinancial aid for Chinese students in United States\ndiscussed in Ireasury letter to Ernest B. Price,\nDirector of International House, Chicago, Illinois -\n1/1/42\n150\nFrese and Taylor: Resume' of 'plane possibilities -\n1/1/42\n153\nRegraded Unclassified\n- 0 - (Continued)\nBook Page\nChurchill, Winston\nThanks HMJr for Christmas greetings and records -\n1/1/42\n481\n130\nCochran, H. Merle\nSee China\nCongress for Industrial Organizations\nProduction lag laid at door of Office of Production\nManagement in Congress for Industrial Organizations\nadvertisement - 1/3/42\n341\na) Murray-HMJr conversation - 1/3/42\n337\nCorrespondence\nMrs. Forbush's resume - 1/2/42\n264\n- à -\nAmanuel, Victor\nPrincipal business Interests - chart\n287\nExchange Market\nRequire's - - 1/2-3/42\n315,429\n- ? -\nFinancing, Government\nJoint statement by Federal Reserve Board on interest\nrates simultaneously with Budget Kessage discussed\nby HMJr, Bell, Morris, and Murphy - 1/1/42\n1\na) Proposed statement\n28,29\nSpecial fund for bomber, gun, etc., discussed by\nHMJr and Foley - 1/2/42.\n253\nDefense Savings Bonde:\nSales since May 1, by months, on basis of issue\nprice - 1/1/42\n122\nComparative statement of sales during October,\nNovember, and December, 1941\n123\nSupply of Series & Savings Bonds in the Field -\nHans memoranda\n126,258\nWomen's Programs - new announcements - 1/3/42\n366\nForeign Funds Control\nEnemy property R$ distinguished from alien: Byrnes\nasks for figures - 1/2/42\n184\na) Foley-Pehle memorandum\n188\nSpain: United States dollar currency held there -\ndisposition of discussed in American Embassy, Madrid,\ncable - 1/2/42\n321\n- G -\nGold\nSee U.S.S.R.\n-\nProgress report - 1/2/42\n262-A\nRegraded Unclassified\n- J -\nBook Page\nJapanese in United States\nWest Coast farm situation - Foley memorandum -\n1/3/42\n481\n392\nJohnson, Louis\nFederal Bureau of Investigation report on\n\"off-the-record address\" in New York concerning\nPearl Harbor attack - 1/1/42\n115\n- L -\nLend-Lease\nCanada: Purchases of completed defense articles -\nWhite memorandum - 1/2/42\n310\nU. S.S.R.: Resume' of requisitions to date -\n1/2/42\n314\nPurchases for week ending January 3, 1942\n410\n- M -\nMaritime Commission\nTodd Shipbuilding facilities - British request\nthat Commission purchase facilities owned by\nBritish\na) White memorandum - 1/1/42\n401\nb) SMJr's letter to Commission - 1/3/42\n400\nc) Land-HMJr conversation: See Book 482,\npage 289 - 1/6/42\nd) HMJr tells Phillips he nas recommended to\nMaritime Commission: Book 484, page 137 -\n1/9/42\nMilitary Reports\nReports from London transmitted by Halifax -\n1/1-2-3/42\n160,324,430\nCoordinator of Information reports:\nIran - a threat to Britain - 1/1/42\n164\nAxis propaganda in the Moslem World - 1/1/42\n165\nRoumanie - financial situation - 1/2/42\n327\nWar Department bulletin:\nGerman entiaircraft artillery in Russia -\nemployment of - 1/1/42\n166\nKamarck summaries - 1/2/42, 1/3/42\n328,433\nkint, Bureau of\nFive-cent coin - elimination of nickel from:\nWhite report - 1/3/42\n381\n- 0 -\nOffice of Production Management\nSee Congress for Industrial Organizations\nRegraded Unclassified\n- P -\nBook Page\nPrice, Ernest B. (Director of International House, Chicago)\nSee China\nProcurement Division\nSteel: Resume' of semi-finished steel requirements for\nthe British - Neck memorandum - 1/2/42\n481\n309,391\n- a -\nRevenue Revision\nFedernl-State-Local Fiscal Relations: Preliminary\nreport submitted by Gulick and Groves - 1/1/42\n30\nBureau of sudget tax program for fiscel year 1943 -\n1/2/42\n263\n- $ -\nSelf Help Cooperatives\nWashington and Richmond: Foley reports on conference\nwith Edy (Federal Works Agency) and Dryden (Work\nProjects Administration) - 1/3/42\n365\nSpain\nSee Forsign Funds Control\nSpeeches by H/Jr\n\"The Job Anead\" - broadcast Jenuary 4, 1942\na) First draft - 1/2/42\n197\nb) Second draft - 1/2/42\n209\nc) Third draft - 1/3/42\n351\nd) Reading copy: See Book 482, page 4 - 1/4/42\nStabilization Agreements\nResume' - 1/1/42\n158\nSteel\nSee Procurement Division\n- T -\nTaxation\nSee Revenue Revision\n- U -\nU.S.S.N.\nSee also Lend-Lease\nGold:\nSale of $20 million of gold for future delivery\ndiscussed by Gromyko and White - 1/1/42\n134\nAgreement between Treasury and U.S.S.R. - 1/3/42\n404\nSoviet Aid Program as provided in Moscow Protocol\nAgreement - re-establishment of assured hy Treasury\nin accordance with FDR's wishes - 1/3/42\n406\nUnited Xingdom\nSee British Purchasing Mission\nRegraded Unclassified\n- V -\nViner, Jacob\nSee Appointments and Resignations\nRegraded Unclassified\n1\nJanuary 1, 1942\n10:40 a.m.\nFISCAL MEASURES\nPresent: Mr. Bell\nMr. Morris\nMr. Murphy\nH.M.JR: All right, sir, I think I can stay away\nfor an hour if you can.\nMR. BELL: You remember that We discussed at\nseveral meetings on the draft of the budget message the\nquestion of putting in the rate, two and a half percent,\nor the limit on rates that we should pay for war financ-\ning.\nH.M.JR: Yes.\nMR. BELL: I don't know what will be in the budget\nmessage, and this will all have to be checked when it\ncomes out, but we thought that we might want to issue\na statement at about the same time that the budget mes-\nsage - a joint statement of the Federal Reserve Board\nand the Treasury on interest rates, and we have worked\nwith Ronald Ransom and Goldenweiser. This statement\nhasn't been cleared with anybody else over there. We\nhave talked to the members of the board in town and\nthey have several suggestion, but the principle of the\nthing is all we want this morning, to see whether or\nnot we can get something on paper that can be issued\nquickly if we want to.\nH.M.JR: Look, have you got a copy there?\nRegraded Unclassified\n2\n- 2 -\nMR. BELL: Yes.\nH.M.JR: Why George Haas doesn't come in when\neverybody else is working today, I don't know. Doesn't\nhe know?\nMR. BELL: He is coming in.\nH.M.JR: But not until one o'clock. I mean, every-\nbody else - he should have asked. Did he ask anybody?\nMR. BELL: Well, I think you said yesterday at\nthe luncheon of the nine-thirty staff meeting--\nH.M.JR: Well, I won't get angry about it.\nMR. BELL: I think that is probably true of a\nnumber of them around.\nH.M.JR: I said I wouldn't call anybody until\nafter one. I will keep my word. Now, starting there,\n\"There is no need in our borrowing\" and SO forth, I\ndon't like that statement, \"There is no need.\" I am\nwilling - I would say this: \"Our borrowing to finance\nis apt to incur--\"\nMR. BELL: \"Should be\" or \"will be\"?\nH.M.JR: \"Should not be conducted at a high rate of\ninterest.\" Is that all right with you? I mean, it\nputs the emphasis different.\nMR. MORRIS: I would like to avoid \"it should not\nbe\" because it sounds like you are not too sure that\nit won't have to be.\nH.M.JR: Well, I am not.\nMR. MORRIS: Well, I am not either.\nH.M.JR: \"There is no need--\"\nMR. BELL: There was some question in the Board\nRegraded Unclassified\n3\n- 3 -\nover there as to whether that whole paragraph shouldn't\ncome out. It is & little argumentative. I think we have\ngot to make it strong.\nH.M.JR: Well, I think if you said the Secretary\nof the Treasury pledges to carry out the policy and so\nforth, and then just add one sentence. It is our joint\npurpose - well, let me give you my idea. The way you\nhad it in that one sentence was satisfactory to me.\nYou remember you went over and over that thing, the\nthing we finally sent over to the Budget on interest\nrates, that very last thing.\nMR. BELL: Well, that is quoted there.\nH.M.JR: Here?\nMR. BELL: Yes, that is quoted.\nH.M.JR: Well, I would say, The Secretary of the\nTreasury has the power to carry out, period. I would\nstop right there.\nMR. BELL: I think we ought to go further.\nH.M.JR: Well, you will have to do a little selling\non me.\nMR. BELL: I think the market and the people ought\nto know that we are going to--\nH.M.JR: Look, Dan, old man, I will go that far,\nand I will say we will do everything in our power to\ncarry out that thing, a low interest rate, just the\nway that is, but I have seen - I worked with the Federal\nReserve Board, and I - my God, they went three days\nafter December 7 and got cold feet.\nMR. BELL: Yes, but they have got to get over\nthat.\nH.M.JR: Have you ever convinced Marriner Ecoles\nRegraded Unclassified\n4\n- 4 -\nof anything fundamental? Have you ever won an argu-\nment with him? Now, give me a yes or no. Have you\never won an argument with him?\nMR. BELL: I suppose not.\nH.M.JR: All right.\nMR. BELL: But I think this is war, and we have\ngot to go to town here.\nH.M.JR: Well, I am willing to stop right there.\nMR. MORRIS: There was one thought, it may not be\na good one, for getting in the other two. It was that they\nwould so commit the Federal that they couldn't get\ncold feet any more.\n(Mr. Murphy entered the conference.)\nH.M.JR: Good morning. Draw up a chair.\nWhen you say, \"The Treasury and the Board of\nGovernors pledge all their power and authority to carry\nout the policy,\"and thus and so, that is saying a mouth-\nful.\nMR. BELL: Yes, but that might mean a rate of two\nand three-quarters, and then your two and a half's would\ngo down to ninety-five.\nH.M.JR: I don't want something like that to hit\nme in the face, I mean the lower part. I will go this\nfar this morning, down to the middle. That is all I\nwill do this morning.\nMR. BELL: The market of course didn't take it\nvery seriously yesterday, apparently, the fifty billion\ndollars--\nH.M.JR: You were wrong on that. You thought\nwhen the budget came out on the big thing, they would,\n5\n- 5 -\nand there was nothing about taxes in this to offset\nit.\nMR. BELL: But I an still 8. little afraid of next\nWednesday.\nH.M.JR: Well, there can't be anything worse.\nMR. BELL: I say it may have discounted this whole\nbudget program, but it may still be a shock, and you\nmay want some pretty strong statement.\nH.M.JR: All right. Well, as of right now, as\nof this morning, I will go half way through, I will\ngo half way through and then I draw a Maginot Line.\nMR. MURPHY: It is half way down the paper, but\nI don't think it is nearly half way through the state-\nment.\nH.M.JR: But Henry, I don't want to sit here a\nyear from today with you three gentlemen and maybe pay\ntwo and three-quarters percent, which wouldn't be so\nGod awful, and then have somebody call me up from the\nWhite House, \"Well, what about that?\" Or Jesse Jones\nor somebody that would like to make trouble for me.\n\"Why don't you carry out your contract?\" That is a\ncontract.\nMR. BELL: No, I don't think that is a contract.\nIt is a commitment of the Treasury to do everything in\nits power. We may spend a lot of money trying to do\nit.\nH.M.JR: That is good enough.\nMR. BELL: We may fail.\nH.M.JR: Dan, you can't get me beyond that.\nMR. BELL: I think it is important.\nH.M.JR: All right. Well, don't let's take too much\nDeeraded\n6\n- 6 -\ntime on that. You can write something else, and I will\ntake another look at it, but as of this morning, half\nway down.\nMR. BELL: Well, I think we ought to have some-\nthing Wednesday.\nH.M.JR: Well, I am here Friday, Saturday, and\nSunday, and so forth and so on.\nMR. BELL: Because if anything should happen, it\nwould be psychologically a good thing if we could issue\nit right after the Budget to show that we were ready on\nthe thing.\nH.M.JR: Now, if you want me to, we have something\nin my Sunday night statement - I am going on the air\nSunday night.\nMR. BELL: Next Sunday night?\nH.M.JR: This Sunday night, on Defense Bonds.\nMR. BELL: That might help.\nH.M.JR: And the time is before it happens. After\nit has happened, it is too late.\nMR. BELL: That is the what, sixth or seventh? Is\nit this coming Sunday? That is before the budget mes-\nsage. We had in mind before trying to put something in\nyour speech of the twenty-seventh.\nH.M.JR: Well, it is three days from now that I am\ngoing on the air.\nMR. BELL: Well, we would have to think about that.\nI don't know whether that ought to come out before the\nbudget message. You might put something in there.\nH.M.JR: Well, I am just throwing that out at you.\nMR. BELL: O.K. The next thing is, you remember\nRegraded Unclassified\n7\n%\nthat Ecoles discussed with you two weeks ago the ques-\ntion of getting the law changed so that the Federal\ncould buy securities directly from the Treasury.\nH.M.JR: I passed my word on that.\nMR. BELL: Yes, you said that is O.K. I think\nmaybe we ought to think about it a little more because\nit might disturb people. We are afraid that we can't\nfinance this war and that we are just laying the\ngroundwork for--\nH.M.JR: Well, I don't agree with you at all, but\nI am perfectly willing to have you argue with Eccles.\nI passed my word, and I don't see anything in it. I\nthink it is good business. I think the way we do now,\nwe just play every time into the hands of the dealers.\nIf you could unsell Ecoles on it, all right, but I\ntold him I would TO along.\nMR. BELL: I am not so sure I want to unsell him,\nbut I think we should talk about it 8, little more, as\nto what effect it tht have on the minds of the people.\nH.M.JR: I can't see it.\nMR. BELL: You don't see it, and you are not\nafraid of it?\nH.M.JR: No. I think it is a mechanism that they\nought to have.\nMR. MORRIS: I think it is a mechanism that they\nought to have, but its having been removed to do it\nat this time is going to scare some people.\nH.M.JR: Well, let them get scared and get over\nit.\nMR. BELL: You and Eceles were voing to see Glass,\nyou know.\nH.M.J3: Well, I talked to him,and Glass didn't\nRegraded Unclassified\n8\n- 8 -\ncome to that Byrd economy meeting.\nMR. BELL: Well, anyway, this ought to be in any\nomnibus bill.\nMR. MORRIS: What it really is, is a mechanical\nproposition.\nH.M.JR: I will bet it will go through and nobody\nwill even write it up.\nMR. BELL: I hope SO.\nH.M.JR: You don't need to worry.\nMR. BELL: All right. The next is the refunding.\nNow the budget message is coming out, I take it,\nabout Wednesday the seventh.\nH.M.JR: Well, I find now that the President is\nonly going up to Congress on Tuesday with his annual\nmessage, and you and I know that he likes two days in\nbetween, so my guess is the budget will be on the\neighth.\nMR. BELL: Normally he comes back from the Capitol,\nfrom the state of the union message, and has a press\nconference, and then the budget message goes un the next\nday at twelve.\nH.M.JR: That is all right.\nMR. BELL: That would be Wednesday. Normally we\nwould offer a refunding issue on Thursday, the eighth.\nH.M.JR: I didn't realize that.\nMR. BELL: Yes. You see we have got a maturity of\nthree hundred million.\nH.M.JR: When?\nRegraded Unclassified\n9\n- 9 -\nMR. BELL: On the fifteenth, for the RFC, and\nthen there is a call issue of two hundred thirty-six\nmillion, I think.\nH.M.JR: How much?\nMR. MORRIS: Two hundred thirty-six, Federal Farm\nMortgage.\nH.M.JR: No, we can't do it that weekend.\nMR. BELL: Well, there is a billion and seventy-\nsix million of which five hundred million, a little\nover, matures on the fifteenth, and there is a hundred\nand thirty-six million, I think, a hundred and three\nmillion that matures on March 1, and four hundred\ntwenty-six million on March 15.\nH.M.JR: Now, wait a minute. Have you got that\nwritten down?\nMR. MORRIS: This is a carbon.\nH.M.JR: That is all right. Henry Murphy has got\neverything in his head.\nMR. MORRIS: It is those four items, totaling &\nbillion and seventy-six.\nII.M.JR: A billion and seventy-six?\nMR. BELL: That is the total refunding that we\nannounced to the press that would be--\nH.M.JR: It is three ten, four twenty-six, two\nthirty-six, and a hundred and three, is that i ht?\nMR. BELL: Yes.\nH.M.JR: A billion and seventy-five?\nMR. MORRIS: Yes. I have left fractions off. It\nRegraded Unclassified\n10\n- 10 -\ndoes come to an extra million.\nMR. BELL: It is a billion seventy-six million\nand sixty-three thousand.\nH.M.JR: You can't do all that.\nMR. BELL: That is what worries us. Now, you\nhave got two of them that come in on the fifteenth.\nH.M.JR: Well, we will just have to--\nMR. BELL: And it is a little difficult to pay\nthem off in cash, because we have announced there is\ngoing to be a refunding. There are some right values\nthere.\nH.M.JR: What did we say? Which one did we say\nwe paid off?\nMR. BELL: We didn't say we would pay any of them\noff. We said we would refund all of them for - early\nin January.\nH.M.JR: Well, refund them into Federal securities.\nMR. BELL: Into Federal securities, that is right.\nII.M.JR: Why can't you do it the week of the\nfifteenth?\nMR. BELL: Well, the week of the fifteenth--\nII.M.JR: Why can't you do it on the twelfth?\nMR. BELL: That is Monday.\nH.M.JR: Yes, rive them certificates.\nMR. BELL: Well, to do it on Monday doesn't give\nyou time to get your securities in.\nRegraded Unclassified\n11\n- 11 -\nH.M.JR: Well, yes it does. You can leave it\nopen for two days.\nMR. BELL: Well, let's see, Wednesday is the\nfifteenth, isn't it?\nH.M.JR: Yes.\nMR. MURPHY: We discussed that at some length\nand it seemed to Mr. Haas and myself that it might be\ndone without even making physical delivery of interim\ncertificates, if that was impossible. There is no\ncash changing hands except an interest adjustment,\nbecause it is merely an exchangeof securities, and we\ncould issue securities the next Monday that would be\ndated back to the fifteenth if necessary, and the--\nMR. BELL: If the people will do that. Most of\nthem will. Your big banks wouldn't care whether they\ngot immediate delivery or not. They don't often\ntake interims anyhow.\nH.M.JR: This is in the hands of the big banks\nanyway.\nMR. BELL: Seventy-six percent of the total is.\nThere is about two hundred twenty-one million out-\nstanding in the hands of the public. We don't know\nwhere it is.\nH.M.JR: I think I would do it on Monday, the\ntwelfth.\nMR. BELL: That means that we would have to make\nup our minds on Saturday.\nH.M.JR: Yes.\nMR. BELL: And announce it over the weekend.\nH.M.JR: Well, nothing can happen over the weekend.\nMR. MURPHY: When you are in war, less can happen\n12\n- 12 -\nover 8. weekend really than in peace.\nH.M.JR: The only thing that might happen, some-\nthing in the Philippines, and certainly by the twelfth\nwe will know - by the tenth.\nMR. MORRIS: It looks now as though that is\ngoing to be over soon.\nH.M.JR: I say by the tenth of January we will\ncertainly know about the Philippines. What? What\ndo you think about the twelfth?\nMR. MORRIS: Well, it is only the mechanical\nend that is troublesome. Certainly from every other\npoint of view, it is better. I don't like doing it on\n8. Monday.\nH.M.JR: Well, I won't do it the week before.\nMR. BELL: I don't know whether we could do it\nFriday. That would only give us one day.\nH.M.JR: We ought to give the market a chance to\nadjust itself.\nMR. MURPHY: It seems to me we ought to give them\ntwo full days since there are two F.F.M.C.'s and there\nare still a substantial number of individual cases of\npersons who took them in exchange for mortgages and\nwho are not hair-trigger operators.\nH.M.JR: What I would do is give it out Saturday\nfor the Sunday papers, so that they would have it\nSunday and that would give them an extra day's notice.\nMR. BELL: Of course, we could leave this open\nright up to the fifteenth. It is a refunding opera-\ntion, and there is nothing much they can do with the\nsecurities except to exchange them.\nH.M.JR: Oh, two days is enough. Sunday's papers\n13\n- 13 -\nwill carry it and that gives them three full days.\nWhat?\nMR. BELL: Yes.\nH.M.JR: Announce it Saturday for Sunday morning's\npapers. What are you worrying about, Dan?\nMR. MORRIS: Then they subscribe Monday and Tuesday,\nand you close the books Tuesday night.\nH.M.JR: Yes.\nMR. BELL: I guess we can do it.\nH.M.JR: All right.\nMR. BELL: We will just have to print up some\ninterims.\nH.M.JR: What are you men thinking about, what\nkind of an issue?\nMR. BELL: Well, we haven't gotten down to details\nyet. We are thinking about 8. short bond due to the\nfact that eighty percent of them are held by banks. I\nthink we ought to have a bond somewhere in the neighor-\nhood of '47 to '51 or '52. We did discuss a little the\nother day about opening the two's at '48-'50.\nMR. MORRIS: Yes, we talked about that yesterday.\nMR. MURPHY: They are up nearly B. half from there,\nbut that doesn't bother me.\nH.M.JR: By the way, did you men decide to put\nsome of these long bonds into - what was that fund we\nnever used?\nMR. BELL: I want to discuss that.\nMR. MORRIS: Social Security.\n14\n- 14 -\nMR. BELL: I want to discuss that a minute.\nH.M.JR: Two's at '48-'50.\nMR. MORRIS: They say they are up a little since\nwe talked about them. They were about one point ten\nat the time we talked.\nMR. MURPHY: They are about twenty-three now.\nThere are two forty-eight fifty's, but these are the\nones with the \"T.\"\nMR. BELL: This would put another billion dollars\nin the two-year call period which I don't like very\nwell, but I wouldn't worry much about it. We are\nprobably going to have to do a lot of filling up be-\nfore this is over.\nH.M.JR: You say it is a little rich?\nMR. BELL: It is a little rich at that price.\nMR. MURPHY: It is really awfully early to say\nwhether it is rich or thin until after the budget\nmessage is out.\nMR. MORRIS: Yes, I was going to say--\nMR. MURPHY: You have to change your views on it\nevery day.\nH.M.JR: Could I see that slip I had on the re-\nfunding? Then we are in - we are all right on refund-\ning until--\nMR. MORRIS: July.\nH.M.JR: That is very nice. You have done B. nice\njob of outlining this.\nMR. BELL: We got very little this year. It is\npretty good.\n15\n- 15 -\nH.M.JR: Yes, we are in nice shape.\nMR. BELL: We have got plenty of cash, though.\nNow, the next thing--\nH.M.JR: How much have we spent to date for\nnational defense? I mean, what was - how much have\nwe spent this month?\nMR. BELL: This month?\nH.M.JR: Yes.\nMR. BELL: We have spent a billion seven hundred\nsixty million.\nH.M.JR: Will it go to two billion?\nMR. BELL: A little over a billion eight this\nmonth, December.\nH.M.JR: What was it last month.\nMR. BELL: Last month it was a billion four fifty.\nIt has really gone way up. Of course last month was a\nshort month.\nH.M.JR: What is the total for the year so far?\nMR. BELL: Eight billion and ninety-seven million.\nIt will go to eight, one, or one fifty.\nH.M.JR: Will they spend - how much will they\nspend in the next six months?\nMR. BELL: Well, according to those estimates\nthat you have got, they ought to spend about fourteen\nbillion dollars.\nH.M.JR: Do you think they will?\nRegraded Unclassified\n16\n- 16 -\nMR. BELL: Which is B. little over two billion\ndollars a month average. They have got to be up at\nbetter than three billion dollars by the end of\nJune to do it.\nH.M.JR: How much?\nMR. BELL: Better than three billion dollars\nfor the month of June to do it.\nH.M.JR: All right, what else have you got?\nMR. BELL: Next thing is investments. If we are\ngoing to support this market like we have been on the\nfifty-fifty basis with the Federal Reserve System, we\nhave got to get some decision on what we are going to\nuse for money, what funds.\nH.M.JR: Yes.\nMR. BELL: Now, we have authority if we want to\njust use the general fund and retire the securities.\n(The Secretary left the room temporarily and\nreturned.)\nMR. BELL: I just started to say that if we are\ngoing to continue to go fifty-fifty with the Fed in\nsupporting the market, we have got to determine as to\nwhat funds we are going to use. Heretofore we have\nused largely the Postal Savings and the Federal Deposit\nInsurance Corporation. Now, we still have special\nobligations in Postal Savings of about sixty million\nand in the FDIC of about the same amount. Now, we\ngot some little amounts in others, but I think we ought\nto keep them, and I think we ought to keep about sixty\nmillion in each of those funds B.S a cushion. If we\nhad a run on those and they needed money quickly in\neither case we could redeem them and give them their\nfunds quickly. As I suggested to you the other day,\nwe could use the Federal Old Age and Survivors Insurance\nTrust Fund which - we have beeninvesting that fund in\n17\n- 17 -\ntwo and three-eights percent, special securities. We\nhave a right to do that under the law. 'We can buy\nsecurities just out of the general fund and retire\nthem.\nH.M.JR: Well, I will tell you, Dan, you spoke\nto me about that before and it gave me a chance to\nthink about it. I think we may have to come to it, but\nI wouldn't like to do it now--\nMR. BELL: Come to what?\nH.M.JR: Using the Old Age Funds. I think we sort\nof subject ourselves to unnecessary criticism.\nMR. BELL: Well, that is Haas' and Murphy's view.\nI don't know why, but what are we going to use then?\nH.M.JR: Well, I would much rather do it under the\ngeneral fund, right out in the open.\nMR. BELL: Then you retire the securities? We\nhave got a sinking fund, of course.\nH.M.JR: Well, what is the matter--\nMR. BELL: But I would hate to use the sinking\nfund to retire securities that you put out last month.\nI think any other securities that have been out some\ntime you can use.\nH.M.JR: Murphy feels the same way I do.\nMR. BELL: They feel that this is a bad time to\nuse that fund, that you might be criticized. I am not\nso sure that the criticism might not go the other way,\nthat here is an opportunity to invest these funds at\ntwo and a half percent, and you are investigating them\nat two and three eighths percent.\nMR. MURPHY: Of course there is a middle ground\nbetween that, Mr. Bell. I think that a question could\nRegraded Unclassified\n18\n- 18 -\nbe raised of why we are only getting two and three\neights on them when issues are available at two and\nA half, but perfectly as a clear cut way of doing it,\nin which you are playing straight as a fiduciary\nthing and avoiding all criticism is to cut them in on\na new issue at par because then they are getting two and\nn halfs in terms customary for two and a half's, but\nthe question that would be raised now could be raised\nvery easily, and we know that almost any questions\nthat even could be raised about the old Age Fund is\nsomething to which people are very sensitive. When\nthese securities were selling for a hundred and three\nor more, why weren't they cut in on them at par then?\nWhy is there only cut in at par at a time when they\nappear to be worth more than par. That is, any\nsecurity which sells at par by virtue of support is\npresumptively worthless. Why should they be taken on\nboard now? The timing is all wrong from a fiduciary\nstandpoint.\nH.M.JR: Your argument is sound, but it doesn't\nhelp Bell solve his problem.\nMR. MURPHY: Of course, we would have 8. different\nsolution to the problem.\nMR. BELL: What he is saying today has been true\nfor eight years in the use of trust funds. We have used\ntrust funds to support the market, and I don't think\nfrom a fiduciary standpoint we had n right to do it at\nall.\nMR. MURPHY: I concur.\nH.M.JR: How much of that last issue have you\nnot unallocated?\nMR. BELL: le have got just under fifty million.\nI have allocated only three or four hundred thousand\ndollars to the Indian Fund.\nH.M.JR: How would you like to allocate that amount?\nRegraded Unclassified\n19\n- 19 -\nMR. BELL: That is the next question on the\nagenda.\nH.M.JR: I will come back to the other thing in\na minute.\nMR. BELL: We haven't got anything available to\ntake up that fifty million dollars except something\nlike this Old Age. That was the next question I\nwanted to suggest.\nII.M.JR: Well, I am willing to put the Old Age\nin. You have got to pick it up. You can't let it\nlapse. I mean, that would be terrible.\nMR. BELL: Oh, yes, we can let it lapse, but it\nwould be better, I think, to pick it up.\nH.M.JR: Oh, that would look bad.\nMR. BELL: Now, let me read you the law on the\nOld Age. It says, \"It shall be the duty of the manag-\ning trustee to invest such portion of the trust fund\nas is not, in his judgment, required to meet current\nwithdrawals.\" Then it tells you that you can invest\nthem in original issues at par or you can issue\nspecials or you can buy them on the market. Now, it\nsays that \"such special obligations shall be issued\nonly if the managing trustee determinesthat the pur-\nchase of other interest-bearing obligations of the\nUnited States or of obligations guaranteed as to\nboth principal and interest of the United States on\noriginal issue at the market price is not in the\npublic interest.\"\nH.M.JR: Say that again.\nMR. BELL: \"Such special obligations - that is\nthe ones you are now issuing to the funds - \"shall be\nissued only if the managing trustee determines that\nthe purchase of other interest-bearing obligations of\nthe United States on original issue at the market price\nRegraded Unclassified\n20\n- 20 -\nis not in the public interest.\"\nH.M.JR: What does that mean?\nMR. BELL: Well, that means the discretion is\nentirely yours, and that you have determined up to\nthis time that the purchase of these securities in\nthe market is not in the public interest and that it\nis in the public interest to keep these funds out of\nthe market. Now, at the meeting of the Board, the\nquestion was raised at this meeting on December 7,\n1939, as to whether the Secretary of the Treasury, as\nmanaging trustee, should be required to 20 into the\nmarket and purchase securities periodically for this\nfund, it will be continually upsetting the Govern-\nment securities market. From the Treasury standpoint,\nwhich is coincidental with the public interest, it\nwould seem advisable to continue the policy of in-\nvesting in special issues and 70 into the market only\nwhen the Secretary determines that it would not upset\nthe Government security market. These factors seem\nclearly in the public interest. The Board members\nacreed that this procedure should be followed.\nH.M.JR: Well, there is no reason in the world\nwhy I shouldn't pick up this fifty million.\nMR. BELL: Not at all. I am in favor of it.\nH.M.JR: So am I. How about you?\nMR. MURPHY: Would there be any record as to the\ntime when it W&S picked up? Would it appear of record\nthat they hadn't been picked up until now or would\nthose allocations all--\nMR. BELL: No, they are all--\n11.M.JR: Do it as of the first of January. What\nis the matter with doing it as of the first of\nJanuary?\nM. MURPHY: I think it is all right. I just\nRegraded Unclassified\n21\n- 21 -\nhad a certain qualm that we didn't pick them up until\nafter they had gone down, but in view of the fact -\nof course picking them up, as I understand, for this\nallocation merely puts more money in the general fund.\nIt doesn't take any off the market. I think I would\nconcur.\nH.M.JR: Well, you would do it as of the first\nof January. \"How did you do it?\" \"Well, we were look-\ning over our situation and they had funds to invest.\"\nWhat?\nMR. MORRIS: Yes. I think it is a little bit\nwishful thinking, but nevertheless it does give you an\nargument at some time if you need it. When you first\nasked me to look into this, I got an opinion from\nFoley's office as to what \"in the public interest\" or\n\"not in the public interest\" meant, and they say that\nit works both ways and that the public interest is so\ntied up with the Treasury that to help make an orderly\nmarket, it is advisable to buy the funds in the public\ninterest.\nH.M.JR: Well, that sounos kind 0: like saying to\nthe lawyer, \"I want to do this. Now give me an opinion\nbacking me up.\"\nMR. MORRIS: That is right.\nMR. MURPHY: It is 8 good law, But I con't think\nit is good public psychology.\nH.M.JR: Isn't that right? \"I want to do this.\nGive me an opinion.\"\nMR. MORRIS: Yes, \"Help me out as much as you can.\"\nPut 1 mean we have that, if you need it.\nH.V.JR: Well, I don't think we will need it.\nIt is all right to have it. I am glad you went into\nit. Well, Dan, let's say on that we pick that up for\nold age and then that still lenves you how much of\nRegraded Unclassified\n22\n- 22 -\nthese special twos? How many special twos have we\nwith Postal and with FDIC?\nMR. BELL: We have got sixty-three million with\nthe Postal, and sixty-five million with the Federal\nDeposit Insurance Corporation, and we have got six\nand a half million with the Government Life Insurance\nfund, and five million with the Federal Savings and\nLoan Association.\nH.M.JR: What is that, 8 hundred and thirty or\nforty million?\nMR. BELL: That is a hundred and twenty-eight,\nthirty-four, about a hundred and forty million dollars\nin that particular fund.\nH.M.JR: Which all could be used?\nMR. MURPHY: No.\nMR. BELL: Yes, they could all be used.\nMR. MURPHY: Well, they physically or mechanically\nall could, but after all, that would mean that if there\nwas any fall-off in Postal Savings, you would have to\nsell securities in the market in order to meet it. It\nseems that there should be some expansion joint left\nin the funds.\nMR. BELL: Well, we could use them. I think there\nought to be a cushion there too as a reserve, but we\ncould use that hundred and forty million dollars.\nH.M.JR: Well, my own feeling as of this morning,\nyou have got that, and then if you need fifty to B\nhundred or two hundred million dollars, the way I feel\ntoday, I would buy them from the general fund.\nMR. BELL: That means retire them.\nH.M.JR: Yes.\nRegraded Unclassified\n23\n- 23 -\nMR. MURPHY: Is it permissible to raise the more\nfundamental question of the desirability of going fifty-\nfifty?\nH.M.JR: Not today. I want to get through the\nbottom of this list, you see.\nMR. MURPHY: I don't want to begin the new year\nwrong.\nH.M.JR: No, no, keep raising it.\nMR. MURPHY: We feel --\nH.M.JR: Go ahead, you feel what?\nMR. MURPHY: We feel it is quite inadvisable.\nMR. BELL: Well, I feel that way, too, but the Sec-\nretary, I take it, feels the other way.\nH.M.JR: Well, --\nMR. RELL: I think we are borrowing money to --\nH.M.JR: Well, I --\nMR. BELL:\nto retire debt --\nH.M.JR: I haven't got any good scientific argu-\nment to answer you with, but as I have explained to\nBell, it is a matter of personal relations between\nthe Treasury and the Board, and you go - as soon AS\nthey buy it all, they immediately get dictatorial.\nThey have done with it. As long as we take half of\nit.\nMR. BELL: I think there is a different attitide\nnow.\nH.M.JR: Well, you have seen --\n24\n- 24 -\nMR. MURPHY: We just haven't got the resources\nto go into any big operation.\nMR. PELL: If it goes to half a billion, we have\ngot to re-examine it, your position.\nH.V.JR: I wouldn't wait that long (laughter).\nI mean, look, Dan, you have seen more of these\npeople than I have. You think that they have got\nreligion.\nMR. PELL: No, not so much that as they will do\nanything you want them to. I think all you have to\nsay is that,\"I want the Federal to\nMR. MURPHY: Goldenweiser says --\nMR. BEIL: And they will do it.\nMR. MIRPHY: Goldenweiser says Ecoles is suffering\nfrom temporary lapse.\nH.V.JR: What does that mean?\nMR. MURPHY: He says Eccles has temporarily\nlapsed into a high interest rate philosophy, but if\nwe give him time, he will come out of it.\nH.M.JR: You dien't explain what the lapse was,\nwhether it was B. lapse of memory or what.\nMR. BELL: There is one other question in con-\nnection with this fifty million. If we were to do\nthat right away, we would have to redeem some of those\nspecial securities in the Federal Old Age Survivors'\nOrganization Fund.\nH.M.JR: I can't get that.\nMR. PETI: The would have to redeem some of the\nsecurities, because there isn't enough cash. During\nRegraded Unclassified\n25\n- 25 -\nthe month of January we ought to get in from the\nOld Age - for the Old Age Fund, about thirty-five to\nforty million dollars, and we ought to increase that\neash, rather than redeeming, but in order to invest\nit all, we would have to redeem some of them. Now,\nwhat we have been doing, and which was approved by the\nRoard when it met in December, '39, was to re --\nis to redeem the three per cent obligations in order\nto make all benefit payments, and invest all funds\ncoming in at the two and a half - new rate. You re-\nmember we discussed the question as to whether we\nshould redeem all of the three percent obligations\noutstanding at that time, and put them in the securities\nfor the new rate. Miss Perkins thought that we would\nbe criticised, but she thought that we could redeem\nthe threes as we go along for current expenditures.\nH.M.JR: I vaguely remember it.\nMR. PEIL: Well, that is in the record.\nH.M.JR: Well, you have been reading the record,\nand you can't expect me to remember it.\nMR. BELL: That is right, and I am telling you.\nH.M.JR: And I am listening. You read it and then\nyou say, \"Don't you remember it?\"\nMR. REIL: That is 8 figure of speech (laughter).\nH.M.JR: Well, anyway, what is your suggestion?\nMR. BELL: I think for this that if we redeem any\nof them, maybe we had better redeem some of the two and\nthree eighths. This is really not a current expenditure\nin the terms that it is used.\nH.M.JR: How many would we have to redeem?\nMR. BELL: We would probably have to redeem twenty\nmillion, because all the funds won't come in by January\n15th.\nRegraded Unclassified\n26\n- 26 -\nH.M.JR: That is too bad.\nMR. MURPHY: Is there any reason, Mr. Bell, why\nthis -- do you think it would -- why this whole amount\nof the two and a halfs has to be allocated? That was\na bogey, that wasn't a commitment, was it?\nMR. BELL: Well, I would have to look up. I don't\nknow whether we said in the press statement it would\nbe allocated within thirty days.\nH.M.JR: Oh, I think it would look very bad to\ndo that. You can't have an overdraft for ten millions\nfor old age.\nMR. PELL: No.\nH.M.JR: Well, look, Dan, when you get down to\nthat end, I will leave it to you three gentlemen.\nMR. PFIL: Well, I will tell you what we might do.\nWe might go to the Unemployment Trust Fund, which is\nabout the same character, and we will get some money\nin there in January, and we might invest that.\nH.M.JR: Well, having decided we want to invest\nit with those funds, how you do that, I will leave that\nwith you.\nMR. BELL: O.K. You are willing to invest anyhow\nthis fifty million in those?\nH.M.JR: Yes.\nMR. MORRIS: Somewhere in the region.\nMR. BEIL: Well, that is all I need.\nH.M.JR: Now, what else have you got?\nMR. BELL: Well, we have got a lot of financing\nto do, and I suppose it is all right for us to go\nRegraded Unclassified\n27\n- 27 -\nahead and work on various types of financing, and we\nmay want to discuss some different types with you\npretty soon. We have got a big --\nH.M.JR: All right. You ask for the time.\nMR. BELL:\n....\nproblem ahead of us.\nH.M.JR: All right. Do you think that is enough\nfor today?\nMR. BELL: I think that is enough. Now, I have\ngot some things on the Bank of America.\nH.M.JR: No, not on New Year's Day.\nMR. BELL: It has been hanging fire for a little\nwhile.\nH.M.JR: Let me just see whether Foley is in,\nbecause I have got a job to do with him. We will have\nmore time on the Bank of America.\nMR. BELL: Yes. Well, I have got a couple of those\nsame kind of cases that I would like to have you go over.\nH.M.JR: Well, I want to see the Comptroller and\nhave him in.\nMR. BELL: He has given me a memorandum on the two\ntypes of cases and you may want to approve them all\nat once, or just one at a time.\nCOPY\n28\nDRAFT (12-29-41)\nJOINT STATEMENT OF THE SECRETARY OF THE TREASURY\nAND THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM\nThe President's Budget Message, submitted to Congress\non January , 1942, after discussing the necessity for\nadditional taxes, the necessity for allocating and controlling\nall production for defense purposes, and the necessity for\ncurtailing production and consumption of many consumer's\ngoods, made the following statement with respect to financ-\ning the war program:\n\"With adequate funds available for invest-\nment in Government securities and with the effective\noperation of 8. program of allocations and rationing\nwe can finance our war effort without danger of\ndisruptive inflation and without departing from our\nlow interest rate policy.\"\nThe Secretary of the Treasury and Board of Governors of\nthe Federal Reserve System pledge all their power and\nauthority to carry out the policy thus enunciated by the\nPresident.\nWe should clearly realize that the total amount avail-\nable to be borrowed is no greater at a high rate than at 8\nlow one. It is determined only by our willingness to re-\nstrict our expenditures for purposes other than the war\neffort. There is no need that our borrowing to finance the\ndeficits incurred during this period be conducted at a high\nrate of interest.\nOur longest bond issue sold in the week prior to the\nattact on Pearl Harbor pays 2-1/2 per cent. We do not\nintend to pay 8. higher rate for the financing of this war\nexcept for securities especially designed for small savings,\nlike our present Series E Savings Bonds. Furthermore, we\ndo not intend to let the present long-term securities out-\nstanding in the market fall below par.\nRegraded Unclassified\nDRAFT (12-29-41)\n29\nJOINT STATEMENT OF THE SECRETARY OF THE TREASURY\nAND THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM\nThe President's Budget Message, submitted to Congress on January\n1942, after discussing the necessity for additional taxes, the necessity\nfor allocating and controlling all production for defense purposes, and\nthe necessity for curtailing production and consumption of many con-\nsumer's goods, made the following statement with respect to financing\nthe war program:\n\"With adequate funds available for investment in\nGovernment securities and with the effective operation\nof a program of allocations and rationing we can finance\nour war effort without danger of disruptive inflation and\nwithout departing from our low interest rate policy.\"\nThe Secretary of the Treasury and Board of Governors of the Federal\nReserve System pledge all their power and authority to carry out the policy\nthus enunciated by the President.\nWe should clearly realize that the total amount available to be\nborrowed is no greater at e high rate than at a low one. It is determined\nonly by our willingness to restrict our expenditures for purposes other\nthan the war effort. There is no need that our borrowing to finance the\ndeficits incurred during this period be conducted at A high rate of\ninterest.\nOur longest bond issue sold in the week prior to the attack on\nPearl Harbor pays 2-1/2 per cent. We do not intend to pay a higher rate\nfor the financing of this war except for securities especially designed\nfor small savings, like our present Series E Savings Bonds. Furthermore,\nwe do not intend to let the present long-term securities outstanding in the\nmarket fall below par.\nRegraded Unclassified\n30\nMEMORANDUM FOR THE SECRETARY\nINTERGOVERNMENTAL FISCAL RELATIONS\nDURING THE DEFENSE PERIOD\nThe staff in charge of the study of Federal-State-\nlocal fiscal relations submits herewith 6. preliminary\nreport concerning the special problems in its field\narising during the defense period and because of the\ndefense program. The staff has not had sufficient time\nto arrive at final conclusions respecting all of the\nintergovernmental fiscal problems here considered, More-\nover, the rapidly moving events may invalidate certain\nof the observations and recommendations. The report 18\nsubmitted now because of the timeliness of some of the\nproblems involved. The subject will be treated again\nalong with the more traditional problems of inter-\ngovernmental fiecal relations in the final report.\nHarold Groves\nJanuary 1, 1942.\nRegraded Unclassified\n31\n- 11 -\nTable of Contents\nChapter\nTitle\nPage\nI.\nImpact of the Defense Program\non State and Local Finances\n1\nII.\nThe Division of Financial\nResponsibility for Defense-\ncreated Governmental Services\n14\nIII.\nFederal Payments in Lieu of\nLocal Taxes on Federally-\nowned Properties\n22\nIV.\nState and Local Taxation of\nGovernment Contracts\n29\nV.\nFederal and State Use of the\nSame Tax Bases in War-Time\n41\nVI.\nOther Defense-created Inter-\ngovernmental Fiscal Problems\n60\nAppendix A\nFurther Analysis of the Effects\nof Deductibility for Taxes in\nFederal and State Income Tax\nLaws\n56\nRegraded Unclassified\n32\n- 111 -\nINTERGOVERNMENTAL FISCAL RELATIONS\nDURING THE DEFENSE PERIOD\nSummary of Findings\nThis report deals with problems in intergovernmental\nfiscal relations created by the defense program. Its\nprincipal findings are here summarized.\nI. The impact of the defense program on State and\nlocal finances\n1. The finances of State and local governments,\nand especially those of State governments, have improved\nas a result of the national defense program. State tax\ncollections for 1941 are estimated to be 7 percent above\nthose for 1940. Income tax collections rose 17 percent.\nPractically every revenue category showed some increase.\n2. Although welfare loads are declining, wage and\nmaterial costs are increasing and some States are re-\nquired to provide additional services. Some increases in\nState expenditures may be expected but are not yet\nreflected in the State financial statistics.\n3. The fiscal situation of the local governments\nalso appeare to be improving, but three qualifications\nmust be noted:\n(a) The situation is spotty and some\ncities have been adversely affected by the\ndefense program; (b) the local units have\nnot as yet experienced the full effect (in\nfact have hardly begun to experience the\neffect) of the defense taxes upon their\nrevenues; and (c) the possible effects of\ninflation and post-defense readjustments on\nlocal finance are matters of considerable\nand warranted apprehension.\nRegraded Unclassified\n33\n- 1v -\n4. The effect of the war upon automobile traffic\nmay involve a very important loss of revenues from motor\nvehicle taxes (particularly gasoline taxes) to state and\nlocal governments. These taxes are the single most\nimportant source of revenue for states and of considerable\nimportance for local governments. On the other hand,\nhighway expenditures by states and to a lesser extent\ntheir subdivisions, (except where such expenditure is for\nservicing debt), can be and to some degree must be ourtailed,\nStates diverting motor taxes to general governmental ex-\npenditures cannot thus escape the impact.\n5. State and local interest-bearing debt is estimated\nto have declined $31 million during fiscal year 1941. In\nthe near future the volume of State and local borrowing may\nbe expected to decline more rapidly as improved tax collec-\ntions reduce the need for short-term berrowing, as Federal\nloans and grants are supplied to defense areas for public\nimprovements and 8.6 labor and material shortages and price\nincreases result in the postponement of capital expendi-\ntures.\nII. The division of financial responsibility for\ndefense-oreated governmental services\n1. The growth of industrial, military and naval\nactivity incident to the defense program is making it\nnecessary for some local governments in the defense\nareas to provide added public works facilities and to\nmeet added costs of operation and maintenance. The\nresultant financial problems have been especially diffi-\ncult in the communities which have been newly-created as\nthe result of the defense program.\n2. The governmental services required as a result\nof the defense program are largely those which tradi-\ntionally have been locally financed. However, local\ngovernments are frequently unable to meet these defense\ncreated needs promptly because their financial resources\nare limited, State governments in turn are of little\nassistance because many of the functions involved are\ntraditionally considered to be outside the sphere of\nState activity. Moreover, State aids to local unite are\nboth inflexible and slow to reflect sudden changes in\nlocal requirements.\n34\n3. Much of the financial responsibility for\ndefense-created activities must of necessity fall\nto the Federal Government because the extensive\ninterstate migrations of population and the concentra-\ntion of defense activity in some areas is the result of\nFederal decisions and because the availability of\nadequate local public facilities and services is essen-\ntial to the effective prosecution of the war, Congress\nhas recognized & large measure of Federal responsibility\nby appropriating $150 million to be apportioned among\nlocal units to meet these needs.\n4. From present indication further Federal appro-\npriations will be required for this purpose, The pre-\ncise amount required oan not now be estimated.\nIII. Federal payments in lieu of local taxes on\nFederally-owned properties\n1. Federal payments in lieu of taxes on Federal\nproperties located within the boundaries of local govern-\nments presents one of the more difficult and less satis-\nfactorily handled problems in intergovernmental fiscal\nrelations. The problem 18 not new, It, however, has been\naggravated by the defense program and the acquisitions of\nlarge tracts of land for reservations, cantonments, air-\nfields, arsenals, ammunition depots, and other defense\nfacilities. In addition the Reconstruction Finance Corpe-\nration has acquired defense plants and other Federal\nagencies have developed extensive defense housing projects.\n2. Acquisitions of properties by the Federal Govern-\nment affect local finances because they deplete the local\ntax base and because in many instances Federal properties\nmake it necessary for local governments to expand govern-\nmental services. On the other hand, in some cases, the\nlocation of Federal property has probably added indirectly\nto the tax base more than enough to compensate for the\nadditional services involved.\n3. The Federal Government has adopted the practice\nof making payments in lieu of taxes to local unite. How-\never, the practice has been opportunistic and unsystem-\natized. The arrangements have varied with different\nFederal projects.\n35\n4. Local dissatisfaction with payments in lieu of\ntaxes was already in evidence in the pre-defense period.\nIt has been enhanced by recent developments. Local unite\nmaintain that Federal payments are insufficient to com-\npensate for the cost of locally provided services and\nnecessitate large increases in local taxes. The result-\ning irritation in Federal-local fiscal relations encour-\nages resistance to the Government's efforts to improve\nthe tax system,\n5. Those opposing the discontinuance of the issue\nof tax-exempt securities have made a major point of the\nquantity of tax-exempt Federal property. They maintain\nthat the cost of local functions and debt service 18\nincreased at the same time that Federal property pur-\nchases reduce the local tax base.\n6. This matter 18 now under study by the Federal\nReal Estate Board and other agencies. Until the findings\nof these studies are available (in the near future) and\nin the absence of more research, 8. definite recommendation\non 'the subject would be premature. However, a solution\nalong the following lines merits consideration:\n(a) Where services are sold by govern-\nmental agencies to private individuals, as\nin the T.V.A. and housing projects, the\ncommercial element of the property involved\ncould be valued by the Federal Government\nthrough & capitalization of the rental or\nother income. The Federal Government could\nthen pay local taxes on such a valuation\ncorresponding to the taxes that would be paid\nif the property were privately owned; and\n(b) where property held by the Federal Government\ndoes not result in the sale of services to pri-\nvate individuals, the Federal Government might\nbe charged only for the cost of those local\nservices which benefit property as distinct\nfrom those which benefit persons. Such pro-\ncedure would reimburse local unite for the\ncost of fire protection, for instance, but\nnot for the cost of health, education, or\nwelfare services.\nRegraded Unclassified\n- vii -\n36\nIV. State and local taxation of Government contracts\n1. The controversy involved in the taxability of\nGovernment contracts under State and local sales and\nuse taxes has been aggravated by the defense program.\nWhile the controversy pre-dates the defense program,\nit was then of relatively minor quantitative importance.\n2. The United States Supreme Court recently held\nthat in the absence of Congressional declaration to\nthe contrary, the purchases of cost-plus-fixed-fee con-\ntractors engaged on Government contracts are subject\nto State and lecal sales taxes. The matter will probably\nbe the subject of Congressional consideration in the\nnear future.\n3. Several factors suggest the desirability of\npermitting the States to tax these purchases. States\nare entitled to some compensation for services rendered\nto defense industries. Federal consent to State taxation\nof defense contracts is a comparatively desirable form of\nFederal aid to States. Moreover, a liberal Federal policy\nin this respect would strengthen the Government's case\nagainst the continued issuance of tax-exempt securities.\nV. Federal and State use of the same tax base in time\nof war\n1. The need of financing the war has raised the\nquestion whether States should be eliminated from the\ntaxation of incomes, in order to leave the Federal\nGovernment a freer hand in this field. Federal-State\nincome tax duplication is said to deprive the Federal\nGovernment of the most effective use of an important\ninstrument of public policy. The financing of the war,\nit 1s said, will require a maximum fiscal effort,\nincluding the fullest possible exploitation of the\nFederal income tax but the existence of State income\ntaxes with widely varying rates interferes with this\nobjective.\n2. The present provision which permits income taxes\npaid to States to be deducted in computing net income for\nFederal tax purposes and the corresponding practice in\nmore than two-thirds of the income tax States which allows\nFederal tax payments to be deducted in computing net income\nfor State tax purposes, exclude the possibility of the\nviii\n37\ncombined Federal and State tax rates becoming confiscatory.\nThese practices have the further effect of reducing sub-\nstantially the differentials in burdens among taxpayers\nliving in different States. For example, if both govern-\nsents allow the deduction of taxes paid the other, the\ncombined load of an eighty percent Federal and & fifteen\npercent State rate 16 only 80.7 percent (11.3 percent of\nFederal and 3.4 percent State). Even in the absence of\nState provisions for the deductibility of Federal tax pay-\nments, the existing Federal provision allowing the deducti-\nbility of State taxes substantially reduces the variation\nin income taxes paid by taxpayers in income tax States and\nin non-income tax States. While at the lower levels of\nincome the effect of deductibility 18 not 80 conspicuous,\nthe same general relationships apply. At the $5000 income\nlovel, the differential in total income taxes between a\nNew York and non-income tax State taxpayer 16 1.1 percent\nof net income and 14.7 percent of the total tex of the\nlatter taxpayer.\nBecause of the deductibility feature of Federal and\nState income tax laws, the Federal Government can and\nshould feel free to order its war-time income tax schedules\nwithout much regard to the present State levies or possible\nchanges in the latter.\n3. The deductibility provision in the Federal law not\nonly protects the taxpayer but also gives a substantial\nadvantage to income tax States in that the Federal Govern-\nment collects substantially less from the taxpayers of such\nStates than from those with equal incomes (before taxes)\nin other States. The advisability of this \"subsidy\" may\nbe questioned but the deductibility feature applies equally\nto nearly all taxes and may be supported in addition on the\nground that it encourages the States to maintain a progressive\nelement in their tax systems.\n4. Since the adequacy of State revenues and a measure\nof State financial independence is a concern of the Federal\nGovernment, it would be undesirable at least now for the\nFederal Government to pursue a course which would result\nin the abandonment of income taxation by the States. The\nrequirements now in evidence do not appear to warrant such\ndrastic curtailment of State financial independence. More-\nover, the States can be expected to take some account of\nthe Federal Government's revenue requirements for the\nRegraded Unclassified\n38\n- ix -\nprosecution of war and not press their income tax programs\nfurther than absolutely necessary. In the interest of BAI-\nisum Federal revenues, State deductibility for Federal\ntaxes might be encouraged. To be sure, developments not\nnow foreseen may necessitate an alteration in these tenta-\ntive conclusions.\nVI. Other defense-created intergovernmental fiscal\nproblems\nl. The task of financing the war would be facili-\ntated by a more active Federal-State cooperation in tax\nadministration. States already make extensive use of\nFederal facilities. However, thus far, corresponding\nFederal use of State facilities has been negligible.\nSince some States, 8.8 a result of the effective integra-\ntion of diverse local industrial and governmental informa-\ntional sources, are now successfully collecting income\ntaxes from the low income groups, they facilitate the\nTreasury's efforts in the same field. The Treasury should\nattempt to tap the stores of information and experience\nnow available in the States.\nThe cooperation of the States would also be helpful\nin the administration of the newly imposed automobile\nuse tax. The new automobile use tax seemed to furnish\nthe ideal opportunity for Federal-State collaboration in\nadministration. However, the very impressive difficulties\nencountered by the Bureau of Internal Revenue when such\nprogram was contemplated serve principally to demonstrate\nthe fact that such collaboration cannot be improvised\nsuccessfully and would require long planning and careful\narrangements as to detail. More study 18 being given to\nthis as a type case of possible Federal-State administra-\ntive collaboration. But since the tax 16 highly inequit-\nable, since it will be costly to administer, and since it\naggravates Federal-State fiscal relations, it would be\npreferable if this tax were repealed.\n2. As a result of improved economic and fiscal\nconditions, some State and local governments are accumu-\nlating surplus revenues. The disposition of these surpluses\nhas an important bearing on the Government's efforts to\nprevent an inflationary price rise. These efforts would\nbe facilitated if State and local governments converted\ntheir surpluses into reserves and more particularly if\nthey used these reserves to purchase United States Defense\n39\n- X -\nBonds. The development of a non-negotiable bond subject\nto ready liquidation and otherwise adapted to the needs\nof State and local reserve funds would stimulate the use\nof such funds and their investment in Federal securities.\nThe use of surpluses to reduce indebtedness would also\nbe helpful. Conversely, if improved State and local\nfinancial conditions resulted either in tax reductions or\nexpenditure increases, the Federal Government's anti-\ninflation program would be handicapped. State governments\ncan facilitate the war effort also by extending financial\nassistance to the defense-affected cities, which are re-\nquired to provide essential governmental services to defense\nindustries and their workers.\n3. The Government's effort to prevent inflation is\nof vital importance to State and local governments. Exper-\nience during the last war indicated that an inflation can\nseriously disturb the equilibrium of State and local finances.\nToday these governments have even more to fear from infla-\ntion than they had in 1917. Their tax resources are more\nfully utilized and they have less scope for tax increases,\nespecially in the field of property taxation. A severe\ninflation at the present time might render it extremely\ndifficult to sustain State and local governmental services.\n4. While some planning of post-war public works and\nsome effort to build a \"public works reserve\" are already\nin process, a further investment in these directions is\nneeded. It 18 particularly important to have the details\nof the post-war public works program so completely worked\nout that its execution can be launched, on a large scale,\nat any time on short notice. Legislation now before Congress\nwould contribute to this objective.\n- 1 -\n40\nI. Impact of the Defense Program\non State and Local Finances\nIt was expected that the first impact of the defense\nprogram on State and local finances would be favorable.\nThis was reported to have been the case in Canada and\nseemed 8. logical result of heavy Federal defense spending.\nOn balance and on the average, especially in the case of\nState governments, this expectation has been realized.\nA. State governments\nTax collections in the 48 States for the fiscal year\n1941 are estimated to be 7 percent higher than for 1940. 1/\nThese in turn were 7 percent above 1939. Total tax collec-\ntions in 1941 amounted to $4,451 million, compared with\n$4,171 million for 1940. Exclusive of unemployment compen-\nsation taxes, the corresponding totals were $3,570 million\nand $3,327 million.\nSome increases were registered in virtually every\nrevenue category. The greatest relative increase occurred\nin income taxes, which rose 17 percent, composed in turn\nof & 27 percent rise in corporation and an 11 percent rise\nin individual levies. Total income tax collections rose\nfrom $358 million in 1940 to $420 million in 1941, an all-\ntime high. In both years, taxes on individuale represented\napproximately three-fifths of total income tax collections.\n17 U. S. Bureau of the Census, \"State tax collections, 1941\",\nOctober 6, 1941, p. 9.\nRegraded Unclassified\n41\n- 2 -\nThe other tax sources registered varying increases.\nSeverance taxes, including levies on lumber, oil and\nmineral products, rose 13 percent; general sales taxes,\n13 percent; gasoline taxes and liquor taxes, each\n8 percent; and tobacco taxes, 6 percent. Motor vehicle\nlicense receipts rose 7 percent; and unemployment compen-\nsation taxes 4 percent; and inheritance taxes 3 percent.\nMiscellaneous sales taxes, business licenses, and other\nlicense receipts rose only slightly.\nRegraded Unclassified\n1\n42\n-\n- 3 -\nTable 1. Estimated State Tax Collections, 1940 and 1941\n(Amounte in millions)\nType of tax\n:\nCollections\n: 1941 : 1940 : $ Change\nGeneral and selective\nproperty taxes\n$ 254\n$ 263\n- 3%\nSeverance taxes\n59\n52\n+13\nSales taxes:\nGeneral sales\n552\n490\n+13\nGasoline sales\n910\n845\n+8\nAlcoholic beverages\n215\n200\nto +\nTobacco products\n103\n97\n+6\nAll other sales\n16\n14\n+14\nTotal\n1,796\n1,647\n+9\nMotor vehicle licenses\n416\n388\n+ 7\nTaxes on specific businesses\n452\n444\n+ 2\nNet income taxes:\nOn corporations\n157\n123\n+27\nOn individuals\n208\n188\n+11\nUndistributable\n55\n46\n+19\nTotal\n420\n358\n+17\nInheritance, estate, and\ngift taxes\n122\n118\n+ 3\nPoll, hunting and fishing,\ndocumentary and miscellaneous\n51\n58\n=12\nUnemployment compensation 1/\n881\n844\n+ 4\nTotal collections:\nIncluding unemployment\ncompensation taxes\n4,451\n4,171\n+ 7\nExcluding unemployment\ncompensation taxes\n3,570\n3,327\n+ 7\n1/\nContributions to State clearing accounts, obtained\nfrom the Social Security Board.\n43\n- 4 -\nDetailed tax collection data are available for\n31 States. These indicate annual increases in two\nStates 8.8 high as 18 percent. Eleven out of the 31\nStates whose fiscal years ended on June 30, 1941,\nreported increases of 10 percent or more in their\ncollections. The States with conspicuous increases\nappear to be scattered throughout the country.\nTable 2. Percentage Change in the Tax Collections\nof 31 States, Between Fiscal Year 1940\nand Fiscal Year 1941\n:\n:\nLess than 5%\n6 - 12%\nOver 12%\n:\n:\nDelaware\n-0.7\nIdaho\n6.1\nOregon\n13.0\nNew Hampshire\n0.7\nNew Jersey\n6.2\nSouth Carolina 13.2\nOklahoma\n1.6\nVermont\n6.5\nGeorgia\n13.3\nIowa\n2.7\nTennessee\n6.7\nKentucky\n13.4\nMinnesota\n2.9\nMississippi\n7.1\nNorth Dakota\n14.5\nIndiana\n3.0\nUtah\n7.3\nNorth Carolina\n15.4\nConnecticut\n3.5\nMontana\n9.0\nVirginia\n17.8\nNevada\n3.9\nWashington\n9.7\nMichigan\n18.1\nIllinois\n4.0\nWisconsin\n9.8\nKansas\n4.1 California 11.4\nNew York\n4.6\nNew Mexico\n5.4\nColorado\n5.9\n13 States\n10 States\n8 States\nInformation on State expenditures is less complete.\nAt all events, such data would not be indicative of the\neffects of the defense program on State finances, because\nRegraded Unclassified\n44\n- 5 -\nrequirements for additional services, reduced welfare\nloads, rising wage and material costs, and other defense\ncreated factors would not have exerted their full\neffects by June 30, 1941.\nNew York has a $7 million surplus and Illinois\nreported a surplus of $6 million in June, with the balance\nrising to $23 million by September 1941. Some reduction\nof taxes end indebtedness 18 reported.\nB, Local governments\nThe available data on local revenues and expenditures\nare inconclusive regarding the effect of the defense\nprogram on local finances. Distortions in expenditures\nof communities located in defense areas are known to be\ncurrently developing but are not yet adequately reflected\nin the financial statistics. Some cities, particularly\nin non-defense areas are reducing tax rates; others are\naccelerating debt reduction. Receipts and expenditures\nin 1941 were relatively stable. Property tax revenues\nare not sensitive to changes in economic activity and the\ngeneral decline in assessed values is only beginning to\nreverse itself, The tax delinquency situation continues\nto improve. Defaults, never relatively large, are becoming\neven less frequent, Small increases in local receipts of\nRegraded Unclassified\n45\n- 6 -\nshared State taxes were noted but grants-in-aid did not\nincrease materially a8 compared with 1940. Utility and\nother revenues showed increases in most cases.\nLocal expenditures for capital outlays on public\nworks are beginning to decline as a result of defense\npriorities and the movement to conserve materials.\nWelfare expenditures, particularly for relief and W.P.A.,\nare also being reduced. In this case, the picture is\nspotty and somewhat disappointing because large numbers\nof the unemployed are unfitted by age, training, physique,\nor location to participate (at least directly) in the\ndefense program. Some categories of expenditures, partic-\nularly in cities, are showing a general increase, R8 a\nresult of defense requirements, such as an extension of\nfire and police service to protect property against sabotage.\nOutlays for vocational education have increased in many\nareas. \"Of the 900 cities with vocational, trade, or\nindustrial schools, 300 now have their school systems\noperating on a 24-hour basis with the objective of training\nthe 2 million defense workers requested by OPM\". 1/ Some\nadverse effects from the increase in wages and prices have\nalready been felt.\nOn the whole the defense-area increases in expenditures\nwill be more apparent in 1942 operations, a.B. facilities and\n1/ Albert Lepawsky, \"Impact of National Defense on State\nand Local Finances\".\nRegraded Unclassified\n46\n- 7 -\nservices expand to care for large population influxes.\nIn these areas, property tax revenues will be adjusted\nslowly to rising expenditures because of the lag in\nplacing new velues on tax rolls, the lag in assessed\nvalues behind economic activity and the existence of\ntax limitation and tax exemption problems.\nAlthough the fiscal trend in local areas is generally\none of improvement, three qualifications must be noted:\n1. The situation is spotty and some cities\nhave been adversely affected by the defense\nprogram;\n2. The local units have not as yet experienced\nthe full effect (in fact have hardly begun to exper-\nience the effect) of the defense taxes upon their\nrevenues;\n3. The possible effects of inflation and post-\ndefense readjustments on local finance are matters\nof considerable and warranted apprehension.\nWith respect to the impact of the defense program\non governmental costs, cities appear to fall into three\nbroad categories: (a) so-called defense-affected cities\nor boom towns; (b) cities struck by priorities unemploy-\nment; and (c) cities in neither of the above classes.\nRegraded Unclassified\n47\n- 8 -\nThe defense-affected cities are confronted with the\nproblems of transitional readjustment. The defense pro-\ngram is estimated to have caused the migration of at least\n750,000 persons (by June 30, 1942), resulting in radical\nchanges in the population of some communities. The City of\nRadford, Virginia, for example, because of the location of two\nnew ordnance works 5 and 7 miles distant, 1s estimated to\n\"enjoy\" an increase in population from 6,898 in 1940 to 13,000\nin 1942. Charlestown, Indiana, 15 miles north of Louisville,\nwith 936 people \"suddenly found itself the site of & powder\nand bag loading plant to cost $25 million, but which as a\nresult of the added Axis victories and our own skyrocketing\ndefense program, was boosted to a $75 million project before\nits completion. Twenty-six thousand construction workers\nhave moved into the general area of Charlestown beside a good\ncrew of managers, consultants and planners.\"1/ Cities such\nas these are facing problems of rapid expansion in municipal\noutlays for education, sanitation, recreation and other\nservices.\nThe problems of priorities-unemployment cities are\nmore recent. The plight of these cities arises mainly from\ninability to secure materials and, to a. lesser degree tools\nand skilled labor, with which to manufacture durable goods\n1/\nAlbert Lepawsky, \"Impact of National Defense on State\nand Local Finances\", address before National Tax\nConference, 1941 and monograph submitted to the Treasury.\nRegraded Unclassified\n48\n- 9 -\nnot useful for national defense. For example, one Ohio\ncity with a peak factory employment of 13,123 in July,\n1941 and a population of 37,000, anticipated in October\na displacement of 1,360 workers in 60 days and 2,452 by\nearly 1942. Factory employment had risen from 9,582 in\nJuly 1940, and relief cases had fallen from 511 in July,\n1940 to 268 in July 1941. The displacement might tempor-\narily rise to 4,600 as a result of 8. shortage of raw\nmaterials and orders to curtail output. The production\naffected WE.B consumers' electrical appliances, tires and\nrubber goods, stoves, plumbing supplies and other metal\nproducts. A substantial number of other communities\nfaced similar prospects. In these cases, as distinguished\nfrom the defense-affected cities, no provision has been\nmade for Federal financial assistance. However, efforts\nare being made to facilitate a transition which will adapt\nthese resources to defense production.\nMany local government areas, including some urban\ncenters, fall in neither of the above classes. Their\nindustries have not been affected directly by the defense\nprogram. They are reaping the benefits of a general 1m-\nprovement in economic conditions.\nRegraded Unclassified\n49\n- 10 -\nSubstantial reductions in State and local motor vehicle\ntaxes are the most important and imminent threat to State\nand local revenues growing out of the war. Unless the\nsupply routes for rubber imports are reestablished or\nsubstitutes are quickly developed, it is almost certain\nthat civilian use of automobiles will necessarily be\nrestricted. As this situation continues, the effect may\nbe expected to bear down more and more on civilian consump-\ntion of gasoline. There is also a remote possibility that\nincreased war needs for petroleum either by ourselves\nor by our Allies may necessitate reduction in civilian\nconsumption of gasoline, unless refinery capacity can\nbe enlarged. A recent report indicates that refineries\nare operating close to 94 percent of capacity. 1/\nFurthermore, transportation and distribution difficulties\nmay necessitate rationing of civilian consumption in areas\nwhere, for various reasons, gasoline supplies are limited,\nFinally, in a long war priorities on automobiles themselves\nmay out civilian consumption of gasoline on highways.\n1/ Wall Street Journal, Friday, Dec. 26, 1941. P. 2\n- 11 -\n50\nThere are also some possibilities of reduction in\nmotor vehicle license tax revenue. In some States, non-\nuse of automobiles on highways permite owners to completely\navoid payment of the license fee. Many State license laws\nprovide for fees graduated downward with increasing age\nof the automobile. Oklahoma's license tax 1s of this\nnature. Moreover, in many States, automobiles are subject\nto State or local property taxation, or both. These taxes\nare based on value of the automobile and severe cute in\nnew automobile production will tend to cut this tax base,\nthe amount depending on the severity of restriction in\nproduction, and the length of time of such restriction.\nIn 1940, for all States combined, the two most important\nmotor taxes provided over 1-1/4 billion dollars of revenue,\nor 39 percent of State tax collections. Gasoline taxes\namounted to over one-fourth (26 percent) and motor vehicle\nlicense fees to one-eighth of State taxes. These figures\nconceal significant variations in importance of these\nrevenues in particular States. In Massachusetts, these two\nsources accounted for one-fourth (24 percent) of State taxes\nas contrasted to two-thirds (67 percent) in Florida. In\none-fourth of the States, these taxes amounted to over\n50 percent of State taxes. (See Chart I). In Nebraska\nand Florida, gasoline taxes alone accounted for over one-half\n- 12 -\n51\nof State taxes. In New York, however, it accounted for\nonly one-sixth (16 percent). There was even more varia-\ntion in the fiscal importance of motor license fees with\nMississippi obtaining only 1 percent from this source as\ncompared with 26 percent in Vermont. Our economy and fiscal\nsystem have been geared to the automobile more than many\nhave realized,\nStates can partially offset reductions in motor tax\nyields by reduction and postponement of highway construc-\ntion and by outs in maintenance expenditures on the present\nroad plant. With regard to the first, States are already\nfaced with priority problems resulting from the war. New\nhighway materials can be obtained only when projects are\nconsidered essential to the war effort. With regard to\nthe second, less motor travel on highways will permit some\neconomies in maintenance.\nBut not all the effects of declining revenues from\nmotor taxes can be offset 80 easily. Almost three fourthe\nof the States have pledged motor taxes for servicing indebt-\nedness - mostly State and local highway bonds. One extreme\nillustration 16 the case of Arkansas which in 1940 used\ntwo-thirds (68 percent) of its gasoline taxes to service\nbonded indebtedness. It 1s also well to recall that in\n1940 the States distributed $202,956,000 in gasoline taxes\nand $118,115,000 in motor vehicle license fees to local\ngovernments.\n#\n/\nMONTANA\nI\nMORTH DAKOTA\nMINRESOTA\nWISCORSIN\nif\nSOUTH DAKOTA\nWYOMING\nMUCHIGAN\n/\nmich\nUTAH\nIOWA\nINTERNATIONAL\nFEDESYLVANIA\nILLINOIS\nINDIANA\nCHIN\nCOLORADO\nMISSOURI\nVIRGINGA\nKANSAS\nARIZONA\nKENTUCKY\nNEW MEXICO\nMONTH CAROLINA\nOKLAHOMA\nTEXAS\nARKANSAS\nALABAMA\nCommons\nSOUTH CAROLINA\nMISSISSIPPI:\nLOCISIANA\nFLORIDA\nBO 10\nJOTHID\no so sun\n100\n300\n400\nsue WILES\nRegraded Unclassified\n# von - 30YM\n/\nMONTANA\nNORTH DAKOTA\nMINNESOTA\ndel\nWISCONSIN\nFOR\nSOUTH ORKGIA\nYONING\nMICHIGAN\n/\n-\nNEWARA\nDOWA\nUTAH\nINTERNATICS\nPERMISYLVANIA\nILLINOIS\nOHIO\nCOLORADO\nND-\nMISSOURI\nVIRGINIA\nKANSAS\nVIRGINIA\nARIZONA\nRENTUCKY\nNEW MEXICO\nMORTH CAROLINA\nCELAHOMA\nTEXAS\nThis\nARKANSAS\nALABAMA\nCLORELA\nSOUTH CAROLINA\nMISSISSIPPI:\nLOUISIANA\nFLORIDA\nOB 10\n@\nsu 100\n205\n300\nsoo\n300 WILLS\nRegraded Unclassified\n53\n- 13 -\nMotor taxes are also used for non-highway purposes.\nWhen this 18 true the curtailment of the former would affect\nGovernmental functions other than highways. In 1940 the\nPublic Roads Administration reported $192,000,000 of motor\ntax revenues used for non-highway purposes, State and local\ngeneral funde received 72 percent and education 15 percent\nof this \"diverted\" revenues. In 1940 Florida used $8,677,000\nof motor revenues for support of education.\nC. State and local borrowing\nWith regard to borrowing, the Treasury Department's\nannual estimate of the volume of tax-exempt securities\nplace the June 30, 1941, volume of State and local interest-\nbearing debt at $19,860 million, only $31 million below\nthe corresponding figure for June 30, 1940. In recent\nmonths, the volume of State and local financing 18 showing\n& more appreciable drop. This trend can be expected to\ncontinue as (1) improved tax collections obviate the need\nfor short-term borrowing, (2) Federal loans and grants are\nsupplied to defense areas for public improvements, and (3) 8.6\nlabor and material shortages and price increases leed to the\npostponement of State and local capital expenditures. All\nthese factors, however, will have a relatively little and\nslow effect on the total volume of State and local debt,\nbecause of the magnitude of the total outstanding debt com-\npared with the size of current operations.\nRegraded Unclassified\n54\n- 14 -\nII. The Division of Financial Responsibility\nfor Defense-created Governmental Services\nThe division of financial responsibility among\ngovernmental units for defense-created public expendi-\ntures has created difficult and delicate problems in\nFederal-State-local fiscal relations. The growth of\nindustrial, military and navel activity incident to the\ndefense program has exerted heavy pressure on some local\ngovernments in the defense areas to provide added public\nworks facilities and to meet added costs of operation and\nmaintenance. Increases in population and in property to\nbe served have been general in such areas. The resultant\nfinancial problems have been especially difficult in the\ncommunities which have been newly-created as 8 result of\nthe defense program. Naval yards, shipbuilding centers\nand army reservations are examples, Increases in govern-\nmental costs have appeared also in established industrial\ncenters where activities have increased.\nSchool, sanitary, fire, police, road and health\nservices are those most drastically affected by the defense\ndevelopment. The cost of providing these services has\nfrequently expanded beyond the ability of limited local\nrevenue sources to meet it promptly and adequately.\nRegraded Unclassified\n55\n- 15 -\nThe governmental services required as a. result of\nthe defense program are largely those which traditionally\nhave been the responsibility of local governments. In\nthe interest of orderly public administration it would\nbe desirable that they continue to be locally-financed\nas far as possible.\nThe responsibility of State governments must of\nnecessity be limited. State grants-in-aid to local units\nfor capital outlays have always been restricted and such\nmeager funds as have been made available were mainly for\nschool buildings. State grants-in-aid for the operation\nand maintenance of strictly municipal services such as\npolice and fire protection, sewer, water and other sani-\ntary services have also been exceptions. These functions\nare traditionally considered to be outside the sphere of\nState activity.\nThrough grants-in-aid, States have transferred sub-\nstantial amounts to local units for roads, schools and\nwelfare. However, State grants have not met the extra-\nordinary current operating requirements of the defense\ncommunities, even for schools. This is due partly to\nlimitations on the amount of State funds, but more partic-\nularly to the fact that grant-in-aid formulae are commonly\nfixed by statute and that the adjustments in grants lag\n56\n- 16 -\nbehind changes in needs such as those generated by the\ndefense program. The amount of State disbursemente for\ngrants-in-aid 18 usually fixed for the year, and for the\ncurrent fiscal year, budgets were adopted some time ago,\nmany under biennial appropriation, Moreover, the statis-\ntics employed in the formulas designed to measure local\nneeds will not reflect for some time needs arising from\ndefense developments. In the distribution of school\naids, for example, attendance or enrollment figures for\nthe preceding year are used to allocate funds in the\ncurrent year.\nIn the case of those local functions which States\nhave previously recognized as partially their responsibility,\nspecial State assistance toward meeting defense-created\nneede would be desirable. There appears to be a strong\nmeasure of State responsibility in adapting State support\nto rapid changes in local problems.\nCongress has recognized & measure of Federal responsibility\ntoward the local communities seriously affected by the\ninflux of defense workers and military and naval personnel,\nby the passage of the Defense Public Works Act. 1/ Federal\nresponsibility ateme not only from the fact that Federal\ndecisions have produced extensive interstate and intrastate\n1/ Public Law 137, 77th Congress, June 18, 1941.\nRegraded Unclassified\n57\n- 17 -\nmigrations of population and the concentration of defense\nactivity in some areas, but also because many local units\nhave limited financial capacity to meet distorted capital\noutlay expenditures and because States lack funde and\nmachinery for providing immediate assistance.\nThe Defense Public Works Act authorizes an appropria-\ntion of $150 million for grants, loans, or both, to public\nor privete non-profit agencies for public works and equip-\nment. Such public works may also be constructed directly\nby the Government and contributions may be made to local\nagencies for operation and maintenance of any public works\nessential to defense. Qualified public works include\nprimarily schools, waterworks, eanitary and health facili-\nties, recreational facilities and streets and access roads.\nThe Federal Works Administrator is given virtually full\ndiscretion, subject to Presidential approval, to meet the\nshortage of public works necessary to health, safety or\nwelfare in defense areas when such works cannot or will not\nbe provided locally, or could be provided only by excessive\nlocal taxation or by exceeding local debt and tax limits.\nExisting facilities are to be used or extended as far 8.8\npossible, and works are to be Federally-operated only 1f\nlocal agencies are unwilling or unable to do 80 with their\nown personnel and under the grante and loans provided.\nRegraded Unclassified\n58\n- 18 -\nThe 2,824 project applications filed by October 13,\n1941, represent a total cost of $815,665,850. Proposed\nlocal sponsor-funds on these applications amounted to\nonly $138,862,062. The entire $150 million appropria-\ntion was tentatively allocated in November and a second\nappropriation of & similar amount 1s now under discussion.\nThe 432 projects which had received actual allotments as\nof October 13 included 175 for Army and Navy recreational\nfacilities; 116 for schools; 100 for water and sewers;\n30 for hospitals and clinics; 5 for roads and streets; 4\nfor fire stations and equipment; and 1 each for incinerator\nand power plant. These allotments involved a total cost\nof $84,953,390, to be covered $24,691,233 or 29 percent\nfrom local sponsors' contributions; $2,902,425 or 2 percent\nfrom Federal loans; and $57,359,732 or 68 percent from\nFederal grants.\nFrom present indications another Federal appropria-\ntion will be required in the near future. The volume of\nvalid applications is large, while a part of the present\nappropriation was allocated to strictly Federal activities,\nsuch as service recreational projects, and only the most\nurgent projects connected directly with camps, housing\nprojects, etc., could be provided for from the available\nRegraded Unclassified\n59\n- 19 -\nfunds. The actual extent of further requirements will\ndepend on the further development of endampments and yards,\nthe continued decentralization of industrial activity\nand the expansion of existing industrial facilities.\nThe Defense Public Works Act provides that the\n$150 million appropriation be apportioned among the several\npurposes and governmental units by the Administrator of\nPublic Works in a discretionary manner. The discretion-\nary basis of apportionment of loans and grants leaves\nmuch to be desired, but under the circumstances was un-\navoidable. The need to facilitate the functioning of\ndefense areas was urgent and no satisfactory apportion-\nment formula was available. Small rural communities\nsuddenly transformed into sizable industrial areas lack\nthe tax base, the borrowing capacity and the personnel\nnecessary to provide needed public works. Even the more\nmature industrial areas may be operating at, or in excess\nof, their legal tax and debt limitations. All of these\nfactors, as well as local willingness to serve housing\nprojects and strictly Federal properties, such as\nreservations and yards, have to be recognized in the\nallocation of Federal aids. The varying interpretations\npossible as to the degree of local benefit and the\n60\n- 20 -\nproportionate allocation of cost between local and Federal\nfunds seem to justify the apportionment on a discretionary\nbasis.\nPreferring to trust the discretion of an administra-\ntor, the Federal Government for several years distributed\nemergency relief funds without prescribing specific formulae.\nA formula could hardly be expected to operate in the present\nmore complex situation. From the standpoint of public\nadministration, discretionary distribution of funds is\nadmittedly very difficult. Such discretionary power re-\nquires the administrator to weigh the numerous factors\ninvolved, resist the pressures, and make decisions destined\nto have important repercussion on local communities. The\nurgency for performance of the work may not permit adequate\ntime for either investigation or bargaining and frequently\ndirect Federal construction must be undertaken without\ndelay, leaving the determination of ultimate financial\nresponsibility to a later date.\nThe question of financial responsibility for local\nservices 1s especially difficult in cases where the local\ncommunities have sought the location of defense industries\nwithin their boundaries. 1/ Some have gone further and\n1/ \"Thousands of business men looking for contracts and\nsub-contracts went to Washington. Hundreds of repre-\nsentatives of local business associations accompanied\n61\n- 21 -\noffered inducements, such as exemption from property taxes.\nThis occurred in a number of communities in Mississippi\nand Louisiana. Further, difficulties are presented when\nthe local communities involved are operating under OI-\ntremely severe property tax and debt limitations pro-\nvisions.\nAn examination of city applications for aid revealed\na number of communities whose difficulties were in part\ndue to the fact that they had frozen their tax systems\nwith legal restrictions. There is some indication that\nthis vas the case with Pascagoula and Tullahoma in\nTennessee and with Loesville and De Ridder in Louisiana.\nThe difficulty seemed to be in the exemption of both\nindustries and new homes, which greatly increased the\nhelplessness of the towns in handling a large influx of\nnew industries and population.\n(cont'd from previous page\nthem to explain the advantages of their communities\nfrom the standpoint of industrial production. Hundreds\nof city officials likewise visited Washington for the\nsame purpose\". (Oweley & Miles, Cities and the Nation-\nal Defense, May, 1941, p. 30)\n1/\nDefense Public Works, Docket No. Miss. 22-106, Tenn.\n40-104, La. 16-101, La. 16-102.\n2/\nThe case of Pascagoula 18 particularly interesting. The\nIngalls' Ship Building Corporation was established at\nPascagoula under the Mississippi Industrial Act.\nJackson County furnished all land upon which the yard\nis located and floated a $100,000 bond issue to carry\nout all necessary dredging and other work. The firm\nwas exempted from taxes for five years. War orders\nhave greatly expanded activities at the yard and in-\ncreased the communities' population by almost fifty\npercent.\n62\n- 22 -\nIII. Federal Payments in Lieu of Local Taxes\non Federally-owned Properties\nFederal fiscal responsibility to lecal governments\nbecause of the ownership of Federal properties within the\nboundaries of such local governments presents one of the\nmore difficult and less satisfactorily handled problems in\nFederal-State-local fiscal relations. It is not a new\nproblem but one that has been aggravated by the defense\nprogram. The Federal Government has acquired large amounts\nof property for reservations and cantonments, artillery\nranges, airfields, arsenals, ammunition depots and the\nlike. In addition, the R. F. C. has acquired defense\nplants and other Federal agencies have developed extensive\ndefense housing projects. Local finances are affected by\nthese developments both because of the depletion of the\nlocal tax base and because the Federal property in most\ninstances requires varying amounts of local servicing.\nOn the other hand in some cases the lecation of Federal\nproperty has probably added indirectly to the tax base\nmore than enough to compensate for the additional services\ninvolved,\nFederal payments in lieu of taxes have been on a more\nor less opportunistic basis for several years and arrange-\nments have differed with different Federal projects. It\nappears to have been difficult to find a consistent\nprinciple to apply. The matter is now under investigation\n- 23 -\n63\nby the Federal Real Estate Board, created by Executive\nOrder in 1939, 1/ and other agencies.\nIn the case of pre-defense housing projects, the usual\npractice was to require local contributions in the form\nof exemption from property taxes. Payments-in-lieu of-taxes\nwere generally nominal, usually not in 0X0088 of 5 percent\nof rentals. Defense housing projects, affected with &\nlarger Federal interest, have usually carried contracts\n(for the emergency only) including contributions up to 15\npercent of rentals and in no case in excess of taxes. The\n15 percent 18 distributed among functions according to a.\nstudy of the service costs for the average city. It contains\nno provision for flexibility among municipalities or with\nchanged conditions. Situations among municipalities differ\nvery substantially and are especially difficult where &\nnew housing project is developed in one community while\nthe factory employing the men housed on the project is\nlocated in another.\nLocal dissatisfaction with \"payments in lieu of\ntaxes\" was already in evidence even before the defense\nera. It was alleged that the arrangements concentrated\nan undue burden on taxable real estate. The dissatie-\nfaction has continued into the defense period. The objec-\ntion is now raised that Federal payments are insufficient\n1/ House Doc. No. 111, 76th Congress, 1st session. Wash, 1939.\n64\n- 24 -\nto compensate for the cost of services provided by the\nlecal units and result in undue additions to the local\ntax rates.\nIn Clark Township, Union County, New Jersey, where\ncertain defense public housing projects were being\nconstructed, attempts were made to exclude the Federal\nproject from the township proper and render it a reserva-\ntion or separately incorporated municipality. A measure\nto this effect passed the Legislature, but was vetood by\nthe Governor. This local resistance was in part traceable\nto the fact that the jurisdiction was small, chiefly resi-\ndential, and the housing project would not add sufficiently\nto the tax base to cover the costs of the added local\nservices. The industrial property is located outside the\ntownship in large urban centers. The excessive subdivision\nof local units long noted in the New Jersey area and\nunusually high tax rates added further to the problem.\nA similar incident in the same State occurred in\nCaldwell Township, a rural community of 6,000 acres with\na population of 1,383. Opposition was raised to & pro-\nposal for centering a 250-house housing project in this\nlocality, although an aircraft propeller plant employing\nsome 1,600 persons had also been located there. The local\nI/\nHearings Before the Committee on Public Buildings\nand Grounds, 77th Congress, lst Session, on H.R. 5211,\nJuly 9-23, 1941, pp. 169-170.\n- 25 -\n65\ngroup cited the alleged fact that complete sewer, water,\ngas and school facilities would be needed, and even if\nall were provided by Federal funds, operation and mainten-\nance would \"probably double the tax rate of the present\ninhabitants\". 1/\nIn a recent report to the House on a bill to increase\nthe appropriation for defense housing by $300,000,000,\nthe Committee on Public Buildings and Grounds has suggested\nthe following change in policy: 2/ Since defense housing\nis designed to serve government personnel and industrial\nworkers who must be considered to be self-sufficient in\ncharacter, there 1s no reason for payments measurably below\nlocal taxes. Payment of annual sums in lieu of taxes\nshould be mandatory and should approximate what would have\nbeen paid if the property had not been tax exempt; allow-\nance should be made for capital expenditures by the Govern-\nment for streets, and other utilities to serve the houses\nin question.\nIn the case of R.F.C. defense plants, the rule\nstemming from the statute creating the Corporation and 1941\nlegislation is that real estate owned by the agency and its\nsubsidiaries 18 subject to local property taxation. Personal\n17 Ibid., P. 212.\nNovember 28, 1941: Report to Accompany H.R. 6128.\n66\n- 26 -\nproperty and other attributes of these Federal under-\ntakings are exempt from local taxes. Reservation\nproperty 18 exempt from local taxation and this is also\ntrue of most Army and Navy acquisitions, including\nhousing developments for personnel. In the latter case,\nsome services are provided directly, others by contract,\nParticularly in the case of school services for the\nchildren of Army personnel, 8. great variety of arrangements\nhave been made.\nBoth pre-defense and defense experience justify the\nconclusion that techniques for Federal payments in lieu\nof taxes are subject to much improvement. Local intelli-\ngibility, flexibility and adequacy are objectives to be\nsought. No easy solution 18 available but improvement\nseems quite possible. Certainly the field 16 worth an\ninvestment for it 18 one which occasions great irritation\nin Federal-local relationships. These irritations, bad in\nthemselves, encourage resistance to the Government's efforts\n1/\nNo uniform Congressional provision 18 made for payment\nfor school tuition of service personnel. This matter\nhas been handled in the past by combinations of\ndirect service provision and maintenance of post\nschools; voluntary support of post schools: tuition\npayments by parents or post exchange and recreation\nfunds to public schools; provision of free tuition\nby State law or by local units; Army transportation;\ncontracts with local units for operation of post\nschools or adjacent schools. State and local units\nhave frequently extended educational services to\nchildren residing on reservation property, although\nFederal jurisdiction is exclusive and there 1s no\nlegal obligation to provide services,\nRegraded Unclassified\n67\n- 27 -\nto improve the Federal tax system. Those opposing the\ndiscontinuance of the issue of tax-exempt securities by\nState and local governments have made a major point of\nthe extent of tax-exempt Federal property, holding that\ncosts of local functions and debt service would be in-\ncreased at the came time that Federal activity is reducing\ntax bases. 1/\nPending the forthcoming report of the Real Estate\nBoard on this subject and further study of the matter,\na definite recommendation would be premature. It seems\npossible, however, that a solution can be reached along\nthe following lines:\n1. Where services are sold by Governmental agencies\nto private individuals, as in the T.V.A. and housing\nprojects, the commercial element of the property involved\nshould be valued by the Federal Government through a\ncapitalization of the rental or other income. The Federal\nGovernment could then pay local taxes on such value corres-\nponding to the taxes which would be paid if the property\nwere privately owned.\n2. Where property held by the Government does not\nresult in the sale of services to private individuals, the\n1/ C. H. Chatters, \"The Case Against Taxation of Govern-\nmental Securities\" in Annals of American Academy,\nMarch 1941, P+ 77-\n68\n- 28 -\nFederal Government might be charged only for the cost of\nthose local services benefiting property 8.8 distinct from\nthose which benefit persons. Such procedure would\nreimburse local units for the cost of fire protection,\nfor instance but not for health, education, or welfare\nservices.\nRegraded Unclassified\n69\n- 29 -\nIV. State and Local Taxation\nof Government Contracts\nThe taxability of government contracts under State\nand local sales and use taxes is one of the defense created\nproblems in intergovernmental fiscal relations. Pending\nthe Supreme Court's determination of the taxability of\ndefense contracts, the Justice Department endeavored to\nobtain suspension of State tax collections. A number of\nStates complied. Objection was raised to such State taxa-\ntion on the ground that the latter would add to the cost\nof the defense program and that the legal status of opera-\ntions of many defense contractors as private individuals\nor agents of the Government was unclear. of particular\nsignificance was the status of cost-plus-fixed-fee\ncontractors. This type of contract is used extensively\nby the War Department, Navy Department, Public\nBuildings Administration, and the Maritime Commission\nIn October 1940 the Buck Act (Pub. No. 819, 76th\nCongress) was passed to authorize States to extend\nsales, use, and income taxes to persons residing on\nor carrying on business in Federal areas and to\ntransactions occurring in such areas. The provisions\ndid not apply to \"authorized purchasers\" (military,\nnaval and civilian employees) from Federal instrument-\nalities. Some attempt has been made to amend the act\nto further clarify Army and Navy authority over reser-\nvations and to extend to Army and Navy personnel\nexemption from State income taxes, but no legislation\nhas been passed to date,\nRegraded Unclassified\n- 30 -\n70\nIt is used also by the Reconstruction Finance Corporation.\nBome one billion dollars in cost-plus contracts was\nawarded by the Quartermaster's Division alone in 38\nStates, involving building construction as well as\nmunitions and supplies.\nSeveral States ruled that the cost-plus contractors\nworking on defense contracts are subject to sales, use,\ngross receipts and similar taxes in the same manner as\nprivate contractors.\nThe Department of Justice took the position that the\ncost-plus contractor 18 an agent of the United States and\nthe assessment of State sales and use taxes on the materials\nwould be direct taxation of the Federal Government, 1/ because:\n1. The cost-plus contractor is reimbursed by the\nGovernment for all expenses and costs of equipment,\nmaterials and labor and then receives a fixed fee for the\nuse of his organization, services and overhead;\n2. The Government supervises all procurement, may\nitself supply the materials, may specify the kinds of\nmaterials, and the Quartermaster approves virtually all\npurchases and receives delivery, and many of the invoices\nare on Federal forms, and because\n3. Title vests in the United States at the site\nof the work.\n1/ 8. 0. Clark \"State Tax Affairs and the Defense Program®\nPaper before Municipal Law Section of American Association,\nSept. 30, 1941 (mimeographed).\nd\n- 31 -\n71\nThe Justice Department did not contest State and\nlocal taxation when the tax 18 actually on the seller\nbut did 80 when the \"legal incidence\" 1s on the buyer.\nTaxes on sales within a State are usually collected from\nthe seller but occasionally are levied on the purchaser\nand more often there is a requirement that the tax be\npassed on to purchasers. In such cases, the Department\nargued, the buyer carries the legal incidence of the\ntax. Use taxes and gross receipt taxes measured by pay-\nments received by the contractor from the Government for\nhis expenditures on materials and labor were held to\ninvolve the same principle as sales taxes. State net\nincome taxes and gross receipts taxes on the contractor's\nfee were not challenged.\nof some 91 separate sales taxes, including motor fuel\ntaxes, a large number offer express exemption to the United\nStates, and some States have extended exemption by adminis-\ntrative ruling. \"In 7 States the administrative construe-\ntion has exempted the cost-plus-a-fixed fee contractor\nfrom excise taxes; in 6 States a qualified exemption has\nbeen granted; in 16 States exemption has been denied; and\nin 8 States there has been no clear administrative construe-\ntion.\" The classification submitted in an appendix to\nthe Government's Brief in the Boozer case is found below:\n1/ Brief for the United States in State of Alabama V. King\n& Boozer, 1941, pp. 108-9.\n- 32 -\n72\nStatus of State Transaction Taxes with Regard to\nthe Taxability of Purchases by Cost-Plus-Fixed-Fee-Contrectors\nGross\nMotor\nSales 15/ Receipts 19 / License 20/ Fuel 21 / Total\nTaxes on vendees\nwith exemption\n6\n3\n1\n23\n33\nTaxes on vendees\nwithout exemition\n9\n11\n5\n16\n34\nTaxes unclassified\nwith exemption\n1\n-\n-\n1\n2\nTaxes unclassified\nwithout exemation\n2\n-\n-\n1\n3\nTotal 22/\n18\n7\n6\n41\n72\nTaxes on vendors\nwith exemption\n-\n-\n-\n6\n6\nTaxes on vendors\nwithout exemption\n4\n1\n-\n50\n13\nTotal\n22\nto\n6\n55\n91\n18, Includes taxes measured by gross receipts from solee of tan ible personal\nprogerty st retail. Use taxes at same retes were not considered sep-\ngretely.\n19 Includes texes measured by gross receivts on account of labor or by\nentire gross receipts less gross receipts on account of tangible per-\nsonal property on which retail sales tax is immosed. Taxes measured\nby TOSS receipts on account of payroll reimbursements to cost-plus-\na-fixed-fee contractors are not, strictly speaking, \"vendor\" or \"vendee\"\ntaxes. They are classified ES \"vendee\" taxes since they are texes\nlevied uoon the contractor directly.\n20 / Includes taxes levied directly on contractors, in A fixed sum or gredu-\nated according to the total amount of the contract. Again the \"vendor\"\nand \"vendee\" terminology is descriptively inexact, but license taxes\nare placed in the \"yendee\" category, since they are levied directly\nunon the contractor.\n21 / Includes taxes levied specifically upon gasoline and other motor fuels.\nThe ineignificance in rate and number of taxes on lubricating oil and\nkerosene, together with the relatively low total value of purchases of\nthese products, mode onission thereof appear advisable. For identical\nreasons gasoline inspection texes were omitted.\n22/ The total of vendees and unclassified taxes 1s teken as the possible\nnumber of the taxes not applicable to cost-nlus-a-fixed-fee contractors.\nRegraded Unclassified\n73\n- 33 -\nThe confusion concerning cost-plus contractors was\ndue to lack of legal precedent and the fact that Congress\ntook no specific action, other than to refuse to include\nexpress immunity in the appropriation act. Two test\ncases have recently come before the United States Supreme\nCourt: U. S. and Dunn Construction Co. V. Curry and\nAlabama V. King and Boozer. 1/ The first case tested an\nAlabama use tax on property purchased for construction\nof a camp. The second involved an Alabama seles tax on\nlumber for the same camp. The Supreme Court of Alabama\nhad upheld the Federal Government in these cases, The\nU. B. Court held that the Alabama taxes were applicable.\nJustice Stone for the Court in the Boozer case stated\nthat the contractors \"were not relieved of the liability to\npay the tax either because the contractors in a loose and\ngeneral sense were acting for the Government in purchasing\nthe lumber or, as the Alabama Supreme Court seems to have\nthought, because the economic burden of the tax imposed\nupon the purchaser would be shifted to the Government by\nreason of the contract to reimburse the contractors.\"\nConcerning this latter point the Chief Justice added: \"The\nGovernment, rightly we think, disclaims any contention that\nthe constitution, unsided by congressional legislation,\n17 Decided, November 10, 1941.\nRegraded Unclassified\n74\n- 34 -\nprohibits a tax exacted from the contractors merely because\nit is passed on economically, by terms of the contract or\notherwise, as a part of the construction cost to the Govern-\nment. So far as such & nondiscriminatory state tax upon\nthe contractors enters into the cost of the materials to\nthe Government, there 1a but a normal incident of the organ-\nization within the same territory of two independent taxing\nsovereignties.\nEstimates of Additional Federal Cost Involved in Allowing\nthe States to Tax Defense Contracts\nThe brief presented by the Government included an esti-\nmate of additional costs which would result from the free\ntaxability of sales. 1/ This involved some elaborate analysis\nand calculations performed with the assistance of the Bureau\nof Labor Statistics, Department of Labor. The calculations\nassumed that States now exempting defense contracts would\ndiscontinue the practice. In this respect the figures\nmust be taken to represent a maximum though it is stated\nthat otherwise the calculations were conservative estimates.\nExpenditures by lump-sum contractors, not at issue, were\n80 far 8.8 possible excluded. In the case of construction\ncontracts the Bureau of Labor Statistics estimated that\nthe margin of error in its estimates was probably less than\n10 percent.\n1/\nBrief for the United States, Alabama V. King and\nBoozer, Appendix B.\nRegraded Unclassified\n- 35 -\n75\nThe estimated sales, gross receipts, and license\ntaxes in connection with the activities of cost-plus-\nfixed-fee contractors and cost-plus-fixed-fee sub-contractors\non 405 construction contracts in effect on June 15, 1941\nand including both actual expenditures and estimated ex-\npenditures to the completion of the projects were\n$15,333,490. Motor fuel taxes on the same contractors\nsimilarly computed were $7,358,290. 1/ On the basis of &\nsample study, sales and gross receipts taxes on 143 cost-\nplus-fixed-ree supply and equipment contracts executed\nprior to September 15, 1941 were calculated at $17,155,684.\nThis makes a total of $39,847,464. These figures include\n548 contracts and an estimated cost of $6,720,929,777.\nThe figures are cumulative and not confined to one fiscal\nyear. Projecting the estimates into the future it was\nfound that the total outlay for fiscal 1942, might be\nabout $54,000,000. A figure was also ventured to cover\nthe possibility that the Government might be held not\nimmune from taxes on any of its purchases. The figure\nventured for fiscal 1942 to cover this eventuality was\n$137,000,000.\nQuestions of Policy and Principle Involved\nTo attempt to draw lines as to what should and should\nnot be taxed in the field of governmental instrumentalities\n1/ This figure, however, 8.8 stated in the report, makes\nno allowance for special state exemption for gasoline used\noff the highways, which might cover about 80 percent of\nthe purchases in 39 states (however, in some cases the\nlower general sales taxes would cover such purchases where\nthe motor fuel tax would not.)\nRegraded Unclassified\n76\n- 36 -\n8.6 a matter of principle and public policy is exceedingly\ndifficult. There 18 first of all the line to be drawn\nbetween the taxation of property and that of sales. Few,\nif any, have seriously contended that the property owned\nby the Federal Government should be subject to State tax-\nation at the will of the States. Of course, this is not\nto say that no payments should be made on Federal property\nin lieu of taxes. No one has contended that Federal purchases\nshould be taxed at the will of the States, either. Congress\nshould retain power to accept or waive direct taxes on its\ninstrumentalities as it 8008 fit. Of course, after the\nBoozer decision it is doubtful if Congress even has the\npower to immunize contractors on their purchases for Federal\ncontracts, But at least it has power to immunize 80 fer 88\nits direct purchases are concerned and perhaps it has this\npower in the case of cost-plus and independent contractors.\nAssuming it has all the power it needs what should be its\npolicy?\nA stronger case can be made for leaving the States\nfree to impose transaction taxes on Government purchases\nthan for following a similar course in the case of property.\nA transactions tax always involves three parties, one almost\nalways private. The economic incidence of the tax as between\nthe vendor and vendee is usually somewhat obscure. A\nproperty tax on Government property involves no third parties.\nRegraded Unclassified\n77\n- 37 -\nThe sales tax is ordinarily nondiscriminatory in admin-\nistration; this 16 often not true of the property tax.\nIf the Federal Government were to allow all of its\npurchases to be subject to nondiscriminatory State sales\ntaxes, could it adopt a similar policy with regard to\nFederal excises on State and municipal purchases? Would\nsuch a program require the consent or be subject to the\ndiscretion of the States? This 1s a question which remains\nto be answered by the Court. On the basis of the present\ntrend in the Court's decisions it seems quite possible\nthat the application of a nondiscriminatory excise even\non direct State purchases with or without the consent of\nthe States or even against legislation to the contrary in\nthe States might be sustained,\nOn principle it seeme that the Federal Government\nmight well go considerable distance toward waiving immunity\nof its purchases from State transaction taxes, In support\nof this position the following considerations are offered:\n1. All transactions of purchase, particularly those\nthrough & contractor, represent economic activity\ncarried on in some State and local environment.\nThey all require the usual amount of State and\nlocal governmental services. Taxes under such\ncircumstances are, to repeat the words of the\nCourt, \"but B. normal incident of the organization\nRegraded Unclassified\n78\n- 38 -\nwithin the same territory of two independent taxing\nsovereignties\". In the defense era this economic\nactivity often represents a substitution for other\neconomic activity which would otherwise be fully\ntaxable. To be sure, State and local territories\nget compensatory benefits from the location of\ndefense industries within their borders. They get\nsimilar benefits from the location of private\nindustries within their borders. It may be \"good\nbusiness\" for these areas to hold out tax induce-\nments to new industries or to retain old ones, Some\ncommunities have thought so. But somebody has to\nbear the costs of government, including the overhead\nleft out of account in such decisions. It seems better\nthat full cost be divided among all of the economic\nactivity. Indirect subsidies are always confusing\nand usually bad policy.\n2. It is true that the imposition of sales taxes on Govern-\nment business will increase the cost of defense. But\nthis 18 not in any sense a dead loss. The extra cost\nto the Federal Government appears again as extra\nreceipts for State and local governments. The same\npublic is involved in supplying the treasuries of both.\nThe Federal Government has much more adequate fiscal\n79\n- 39 -\npowers than the State and local governments. In\nrecognition of this fact it distributes annually\nmillions and in recent years billions of dollars of.\nFederal aid. In fact, it is urged by many to collect\nall of the taxes now jointly used by it and the States,\nMuch of the present distribution involves difficult\nformulae to determine the portion which should go to\neach unit. No formulae are involved in the payment\nof nondiscriminatory State and local taxes, To be\nsure, the State and local governments are showing an\nimprovement in tax collections during the defense era,\nBut many of them have also been subject to a long\nperiod of financial strain resulting in some cases in\nprolonged deficits and a heavy floating debt. If\nthese governments can improve their credit standing\nduring the war period they will be in better condi-\ntion to meet the stresses of the post-defense era and\nto cooperate with any public works program the Federal\nGovernment may then see fit to inaugurate.\n3. The policy of waiving immunity for State and local\ntaxes on Federal transactions would strengthen the\nTreasury's position concerning the elimination of the\ntax-exemption privilege in the application of the\nFederal income tax to the interest on State and local\nbonds. One of the objections commonly urged to such\nRegraded Unclassified\nS0\n- 40 -\naction is that the Federal Government is constantly\nencroaching upon the fiscal resources of the State\nand local governments. Moreover, in defending its\ncase for the elimination of tax-exempt securities\nthe Federal Government makes much of the argument\nthat the income tax 1s a nondiscriminatory tax and\nits application to the interest on Government bonds\nwould be \"but 8. normal incident of the organization\nwithin the same territory of two independent taxing\nsovereignties.\" The position of the Federal Govern-\nment in this issue would be stronger if it showed 8.\ngreater willingness to apply these arguments against\nas well as for itself.\nThese arguments do not finally answer the question\nas to Just what policy Congress should follow and the\nTreasury should indorse concerning the taxability of\nFederal purchases. Some immediate action by Congress\nto clear away the confusion seems likely and advisable.\nIn the light of the above analysis, it 18 concluded\nthat such action should (and perhaps in any event must)\nconcede the taxability of independent and cost-plus-\nfixed-fee contractors. Going further it might allow\ntaxes on all defense purchases. It is perhaps too\nmuch to expect that it will go the whole way, attempting\nto eliminate all immunity on all Government purchases.\nBut even this would, in our opinion, be well within the\nbounds of sound public policy.\nRegraded Unclassified\n81\n- 41 -\nV. Federal and State Use of the\nSame Tax Bases in War-Time\nSeveral problems arise during the defense period\nfrom the use of the same tax sources by both the Federal\nGovernment and the States. These problems are not new.\nThey are aggravated, however, by the Federal Government's\nfiscal needs and the probability that the Federal Govern-\nment must embark upon an \"all-out\" tax program. The\nprincipal problems are:\n1. Will a combination of Federal and State taxes\nprove excessive for the texpayer?\n2. Will the combination unduly embarrass the Federal\nGovernment or the States and result in the impairment of\nmaximum war-time fiscal effort?\n3. In the event the answer to these questions 18 in\nthe affirmative, should an attempt be made to persuade the\nStates to abandon certain revenue sources for the duration\nof the emergency?\nIn view of the extensive and intensive development of\nthe Federal income tax and its probable further develop-\nment, the question of excessive burdens on the taxpayer\n18 especially directed to the possibility of a confiscatory\nor near-confiscatory incidence of a combination of Federal\nand State income tax rates. The present maximum Federal\nRegraded Unclassified\n- 42- -\nTable I\n82\nDeductibility of Federal Income Taxes from Gross Income in\nComputing Net Income for State Not Income Tax Purposes 1 /\n:\nIndividual\n:\nCorporation\nState\n:\nIncome Tax\n:\nIncome Tax\nAlabama\nTea\nYes\nArizona\nYes\nTes\nArkansas\nYes\nYou\nCalifornia\nNo\nNo\nColorado\nYes\nYes\nConnecticut\nNone imposed\nNo\nDelaware\nYes\nNone imposed\nDistrict of Col.\nNo\nNo\nGeorgia\nYes\nYes\nIdaho\nYes\nYes\nIowa\nYes\nYes\nKansas\nYes\nYes\nKentucky\nNo\nYes\nLouisiana\nYes\nYes\nMaryland\nNo\nNo\nMassachusetts\nInterest\nNo\nNo\nDividends\nNo\nCapital Gains\nNo\nPartnerships\nYes\nBusiness income\nYes\nWages and salaries\nYes\nMinnesota\nYes\nYes\nMississippi\nNo\nNo\nMissouri\nYes\nYes\nMontana\nYes\nYes\nNew Mexico\nYes\nYes\nNew York\nNo\nNo\nNorth Carolina\nNo\nNo\nNorth Dakota\nYes\nYes\nOklahoma\nYes\nTes\nOregon\nYes\nNo\nPennsylvania\nNone imposed\nYes\nSouth Carolina\nNo\nNo\nBouth Dakota\nTes\nYes\nUtah\nTes\nYes\nVermont\nTes\nNo\nVirginia\nNo\nNo\nWest Virginia\nYes\nNone imposed\nWiscomsin 2/\nYes\nYes\n1 In general, each State which permite the deduction of Federal income\ntaxes limits such deduction to taxes paid on that part of income\nsubject to its own income tax.\n2/ Applicable to income of 1941 and subsequent years, the deduction is\nlimited to 10% in the case of corporations and 3% in the case of\nnoncorporate taxpayers.\nRegraded Unclassified\n83\n- 43 -\nrate of 80 percent and the maximum State rate of 15 percent\n(North Dakota and California) appear to approach within\na narrow margin of confiscation. But the appearances are\ndeceiving. The deductibility of the State tax in calou-\nlating the base of the Federal tax, together with the\ndeductibility of the Federal tax in calculating the base\nof the State tax in more than 2/3 of the income tax States,\nmake the effective rates considerably less than the nominal\nrates.\nDeductibility of the Federal tax 1s allowed by 21\nStates. (See Table I.) Eight States, including California\nand New York, and the District of Columbia, deny deduct-\nibility. Wisconsin now grants a limited deduction and\nMassachusetts in its classified income tax allows a dedue-\ntion on some types of income. The combination of Federal\nand State tax rates under various assumptions produces\nthe following results:\nTable II\nEffective Rate of a Combination of an 80 Percent\nFederal and a 15 Percent State Tax on that part\nof Income Subject to the Maximum Rate\nAssumption\nEffective Rate\n1. That neither tax 1s deductible in\n95 percent\nthe calculation of the other\nState\n15 percent\nFederal\n80 percent\n2. That the State tax is deductible in\n83 percent\nthe calculation of the Federal (as\nState\n15 percent\npresently provided in the Federal\nFederal\n68 percent\nlaw)\n84\n- 44 -\n3. That the Federal tax is also\n80.7 percent\ndeductible in the calculation\nState\n3.4 percent\nof the State tax (as presently\nFederal 77.3 percent\nprovided in the laws of about\ntwo-thirds of the States having\nan income tax).\n4. That the State has no income tax. 80 percent\nFederal 80 percent\nFrom the above table it can be seen that the combina-\ntion of Federal and State taxes results in an effective\nrate only slightly higher under the third assumption than\nunder the fourth, and not conspicuously higher under the\nsecond assumption than under the fourth. (However, the\ndifferentials are greater than they seem for they should\nbe compared with what the taxpayer has left after taxes as\nwell as with his net income.) Thue, the deductibility\nfeature 1s an insurance against a confiscatory combination.\nA Federal rate of 90 percent and a State rate of 15 percent\nunder the second assumption above would result in a combined\nmaximum effective rate of 91.5 percent; under the third\nassumption 90.2 percent.\nAlthough reciprocal deductibility results in the avoid-\nance of confiscation in the application of the income tax\nto the high brackets and also means the reduction to rela-\ntively small margins of differential tax burdens among\ntaxpayers residing in different States who enjoy the same\nlevel of income, the latter aspect appears not to be true\nRegraded Unclassified\n85\n- 45 -\nfor taxpayers with low incomes and relatively low taxes.\nThus, with an effective rate of 4 percent in both State\nand Federal laws, mutual deductibility would leave 8. total\ntax burden of 7.68 percent in an income tax State as com-\npared with 4 percent in a non-income tax State.\nHowever, the appearances are deceiving once again.\nThe relatively low prevailing State rates and the operation\nof a progressive scale, which causes the deduction to be\napplied at a higher rate than the effective one, lead in\nactual practice to very much smaller differentials than\nthe above illustration suggeste. The difference in tax\nactually payable by a married taxpayer, without dependents,\nwith B. $5,000 income in New York as compared with Pennsyl-\nvania (a non-income tax State) 1e only 1.1 percent of the\nnet income even though New York allows no deduction for\nthe Federal tax. However, in this case 1.1 percent of net\nincome 1s 14.7 per cent of the total income tax in 8. non-\nincome tax State.\nAs to the second question, that of fiscal embarrase-\nment, the answer seems to be that the present arrangements\nare fairly flexible. The third and fourth assumptions\n(Table II), either reciprocal deductibility or State with-\ndrawal from the income tax field, give the Federal Govern-\nment a fairly free hand in the development of an income\ntax rate structure. The second alternative, while less\nfavorable to the taxpayer, leaves more revenue to the States.\nRegraded Unclassifie\n- 46 -\n86\nFurther tables presented below and in Appendix A\nindicate that the benefits of reciprocal deductibility\nextend to taxpayers in all brackets of income and become\nquite sizable at the $100,000 level. The benefits have\nrisen considerably in value as a result of the 1941\nincreases in Federal rates. The benefits of the deducti-\nbility provisions in State laws vary from State to State\naccording to the schedule of rates in each State. The\nmore severe the rate schedule, the more substantial the\nsavings to the taxpayer.\nThe Federal deductibility feature 1s tantamount in one\nsense to a subsidization of the State income tax by the Federal\nGovernment. A portion of the State tax can be said to\nbe offset by a reduction in Federal tax resulting from\nthe deduction of the State tax in the calculation of\nFederal tax, The \"subsidy\" atill holds true, but to & lesser\nextent, where reciprocal deductibility is extended by the\nState to the Federal levy; the Federal Government collects\nless revenue on the same income in a State with an income\ntax than in a non-income tax State. Thus the deductibility\nprovision in the Federal law not only protects the taxpayer\nbut also gives & substantial advantage to the income tax\nStates. The advisability of this concession may be\nquestioned but the deductibility feature applies equally\nto nearly all taxes and may be supported in addition on the\nground that it encourages the States to maintain 8. progressive\n87\n- 47 -\nTable III-a\nPercent of Net Incone Required to Pay Federal and State\nIncome Tax in California, Minnesota, New York and Penn-\nsylvania at selected net income levels on assumption of\nreciprocal deductibility.\nOalifornia\nMinnesota\nNew York\nPennsylvania\nNet Income\n8\n3,000\n4.7\n4.9\n4.8\n4,6\n5,000\n7.8\n8.4\n8.4\n7.5\n20,000\n23.7\n25.2\n25.0\n23,1\n100,000\n53.2\n54.0\n53.7\n52.7\n1,000,000\n74.0\n73.9\n73.7\n73.3\n5,000,000\n79.1\n78.9\n78.8\n78.4\nTable III-b\nPercent of net income *actually required to pay Federal\nand State Income Tax in California, Minnesota, New York\nand Pennsylvania, et selected net income levels.\nCelifornia\nMinnesota\nNew York\nPennsylvania\nNet Income\n3,000\n4.8\n4.9\n4.9\n4.6\n5,000\n7.9\n8.4\n8.6\n7.5\n20,000\n24.2\n25.2\n26.0\n23.1\n100,000\n55.2\n54.0\n54.8\n52.7\n1,000,000\n76.3\n73.9\n74.8\n73.3\n5,000,000\n81.3\n78.9\n79.8\n78.4\nThe taxpayer is a married man without dependents;\ncommunity property law in California disregarded.\nRegraded Unclassified\nINCOME TAX LIABILITY FOR A MARRIED MAN WITHOUT DEPENDENTS.\n88\nUNDER 1941 FEDERAL AND NEW YORK STATE RATES UNDER VARIOUS ASSUMPTIONS\nP E R C E N T\no\n10\n20\n30\n40\n50\n60\n70\n80\n90\n100\nIncome\nNeither the State nor the federal Tax\nin deductable in calculating the other\n$5,000\nState tax is deductable in calculat-\nmg Federal tax; but not conversely\nState and Federal taxes\nare reciprocally deductable\nSTATE\nState has no income tox\nTAX\nFEDERAL\nTAX\n20,000\n100,000\n1,000,000\n5,000,000\no\n10\n20\n30\n40\n50\n60\n70\n80\n90\n100\nPERCENT\nsified\n2\n89\n- 48 -\nelement in their tax systems.\nof the State tax collected on the $20,000 income of\nB married man, without dependents, in Minnesota, a portion\nwill come from the Federal Government in the sense that\nthe Federal Government will collect less from this individual\nthan it would if he lived in a non-income tax State: a\nportion will come from the taxpayer in that his total\nincome tax bill will be greater in an income tax than in\na non-income tax State. Under the 1941 law, the Federal\nshare of the Minnesota State income tax on the $20,000\nincome 16 calculated to be 42 percent and the taxpayer's\nshare 58 percent (Table IV). This means that the Federal\nGovernment has in effect reduced the burden of the State\nincome tax to the taxpayer by nearly half and that the\nState in effect has received this as & differential sub-\nsidy from the Federal Government.\nThe tables also indicate that the encroachment of\nthe new Federal tax upon the State income tax base will\nbe quite substantial in those States which allow the\nFederal tax as a deduction. It will not affect the other\nStates (Table V). Whether or not, in the 0888 of the\nformer, the upward trend of State income tax receipts will\npersist, 1e B. question which cannot now be answered.\nRegraded Unclassified\n89\n- 48 -\nelement in their tax eyetems.\nof the State tax collected on the $20,000 income of\nA married man, without dependents, in Minnesota, a portion\nwill come from the Federal Government in the sense that\nthe Federal Government will collect less from this individual\nthan it would if he lived in a non-income tax State; a\nportion will come from the taxpayer in that his total\nincome tax bill will be greater in an income tax than in\na non-income tax State. Under the 1941 law, the Federal\nshare of the Minnesota State income tax on the $20,000\nincome 16 calculated to be 42 percent and the taxpayer's\nshare 58 percent (Table IV). This means that the Federal\nGovernment has in effect reduced the burden of the State\nincome tax to the taxpayer by nearly half and that the\nState in effect has received this as a differential sub-\nsidy from the Federal Government.\nThe tables also indicate that the encroachment of\nthe new Federal tax upon the State income tax base will\nbe quite substantial in those States which allow the\nFederal tax as A deduction. It will not affect the other\nStates (Table V). Whether or not, in the case of the\nformer, the upward trend of State income tax receipts will\npersist, 18 a question which cannot now be answered.\nRegraded Unclassified\n90\n- 49\nTable IV\nBREAKDOWN of STATE INCOME TAX* THAT WOULD BE PAYABLE IN CALIFORNIA,\nMINNESOTA AND NEW YORK UNDER 1941 AND 1940 FEDERAL RATES INTO POR-\nTIONS PAID BY TAXPAY R AND BY F.D.RAL GOV RIMENT, UNIER ASSUMPTION\nOF RECIPROCAL DEDUCTIBILITY\nCALIFORNIA\nMINNESOTA\nNEW YORK\nCALIFORNIA\nVIOSTUIN\nNEW YORK\nTotal Federal\nTax-\nTotal Federal\nTax-\nTotal Federal\nTax-\nFederal\nTax-\nFederal\nTax-\nFederal\nTax-\nshare\npayer's\nshare\npayer's\nshare\npayer's\nshare\npayer's\nshare\npayer's\nshare\npayer's\nshare\nshare\nshare\nshare\nshare\nand\nshare\n$5,000\n41 retes\n0.1\n0.0\n0.1\n0.3\n0.0\n0.3\n0,2\n0,0\n0.2\n0.0\n100.0\n0.0\n100.0\n0.0\n100.0\n3,000\n140 retes\n0.2\n0.0\n0.2\n0.3\n0.0\n0.3\n0.3\n0.0\n0.3\n0.0\n100.0\n0.0\n100,0\n0.0\n100.0\n5,000\n\"-1 retes\n0.4\n0.1\n0.3\n1.0\n0.1\n0.9\n1.1\n0.2\n0.9\n25.0\n75.0\n10.0\n90.0\n18.0\n82.0\n5,000\n140 reter\n0.5\n0.0\n0.5\n1.1\n0,0\n1.1\n1.2\n0.0\n1.2\n0.0\n100.0\n0,0\n100.0\n0.0\n100.0\n20,000\ntHI reles\n1.1\n0.5\n0.6\n3.6\n1.5\n2,1\n3.3\n1.3\n2.0\n45.0\n55.0\n42,0\n58.0\n39.0\n61.0\n0,000\n110 rates\n1.6\n0.3\n1.3\n4.7\n1,0\n3.7\n4.2\n0.9\n3.3\n19.0\n81.0\n21.0\n79.0\n21.0\n79.0\n100,000\n141 rntes\n1.4\n0.9\n0.5\n4.1\n2.8\n1.3\n3.0\n2.0\n1.0\nQ4.0\n36.0\n68.0\n32.0\n67.0\n33.0\n100,000\n140 retea\n3.1\n1.8\n1.3\n5.5\n3.4\n2,1\n4.0\n2.3\n1.7\n58.0\n42.0\n62.0\n38.0\n58.0\n42.0\n1,000,000\n11.1 reter\n3.5\n2.8\n0.7\n2.8\n2.2\n0.6\n1.9\n1,5\n0.4\n80.0\n20.0\n79.0\n21.0\n79.0\n21.0\n5,000,000\n141 retea\n3.4\n2.8\n0.6\n2,3\n1.8\n0.5\n1.6\n1.2\n0.4\n82,0\n16.0\n78.0\n22.0\n75.0\n25.0\nCable IV breaks down the percentage of the individual taxpayer's income payable to the state as income tax into two portions:\nthe part \"paid\" by the individual texuayer and the part \"psid\" by the Federal Treasury. Literally speaking, all of the state income\ntax 10 ogid by the taxpayer. However, in this context \"payment\" is used in the sense of additional burden to the taxpayer. The latter\nПРУВ that portion of the State tex which equala the excess of his total income tax bill (State plus Federal) over what his income tax\noill would be in a non-income tax state. The Federal Government \"pays\" the remainder.\nThe taxpayer ie a married man without dependents; community property law\nin California dieregarded.\nRegraded Unclassified\n- 50 -\nTable T-8-\nTable P-b\n91\nTable T-c\nPer Cent of $20,000 Income*that would\nPer Cent of $100,000 Income that would\nPer Cent of $1,000,000 and $5,000,000\nbe payable as Income Tax to States of\nbe payable as Income Tax to State of\nIncomes \"that would be payable na Income\nCalliornia. Minnesota and New York under\nCalifornia, Minnesota and New York under\nTax to States of California, Minnemota\n2042 and 1940 Federal Rates on Three Alter-\n1941 and 1940 Federal Rates on Three Alter-\nand New York under 1941 Federal Rates\nnative Assumptions of Tax Deductibility.\nnative Assumptions of Tax Deductibility.\non Three Alternative Assumptions of\nTax Deductibility.\nCallf,\nMinn.\nN. Y.\nColif.\nMinn.\nB. Y.\n1941 1940 1941 1940 1941 1940\n1941 1940 1941 1940 1941 1940\n$1,000,000\n$5,000,000\nEntes Rates Rates Rates Rates Rates\nRates Rates Rates Rates Rates Rates\nCelif. Minn N.T. Calif. Min. N.Y.\nDer\nNo de-\nNo De-\nductibi-\nductibi-\nby\n2.0\n3,0\n5.7\n5.7\n4.9\n4.9\nlity\n7.7\n7.7\n9.1\n9.1\n6.6\n6.6\nlity\n14.0\n9.9\n6.9\n14,8\n10.0\n7.0\ntime INT.\nState Tax\nState Tax\nneti-\nDeducti-\nDeducts\n2.0\n2.0\n5.7\n5.7\n4.9\n4.9\nble\n7.7\n7.7\n9.1\n9.1\n6,6\n6.6\nble\n14.0\n9.9\n6.9\n14.8\n10.0\n7.0\nciuro-\nRecipro-\nRecipro-\nInduc-\ncal Deduc-\ncal Deduc-\nbillty\n1:1\n1.6\n3.6\n4.7\n3.3\n4.2\ntibility\n1.4\n3.1\n4.1\n5.5\n3.0\n4.0\ntibility\n3.5\n2.8\n1.9\n3.4\n2.3\n1.6\nThe taxpayer is a married nan without dependents;\ncommunity property law in California diaregarded.\n92\n- 51 -\nOther considerations supporting the mutual deducti-\nbility of income taxes paid are:\n1. Since most jurisdictions allow most taxes 8.8\ndeductions in income tax laws, it would be difficult\nto justify an exception for net income taxes. To be\nsure, the net income tax deduction provided by the Federal\nlaw amounts in effect to a subsidy to the States. But\nin so far as other taxes are allowed 8.8 deductions to the\nperson who bears their final incidence, the same argument\ncan be made regarding the other taxes.\n2. Net income after taxes 16 the true surplus out\nof which income taxes must be paid. The former is also\nthe feirest base to use in comparing the ability to pay\nof one individual with that of another. For example,\nlet us assume that A and B both have $10,000 incomes\nbefore income taxes but thet A, by some provision of State\nlaw, has to pay a $1,000 State income tax while B does not.\nIt is submitted that 3 has more ability to pay Federal\nincome taxes than A and that most people when confronted\nrith these facts would agree with this conclusion.\nIn so far as a consumer 16 able to deduct the excise\ntaxes levied on the tobacco he smokes, the lew in effect\nallows him an addition to his personal exemption for\nRegraded Unclassified\n93\n- 52 -\nliving expenses. The income tax may be regarded as\n(1) an outlay (like any other professional or business\nexpense) involved in the creation of income; (2) a util-\nization of income; (3) a transfer to provide a better\ndistribution. Whichever of these views is taken, and\nthey all have some validity, it is difficult to see how\nanything is gained by disallowing the deduction. It can\nbe argued, of course, that income before all taxes should\nbe the basis of income taxation. But this contention would\nmake no adequate allowance for genuine differences among\ntaxpayers and it would reduce the equity of the income tax.\n3. It can be maintained that deductibility of income\ntaxes 18 unnecessarily deceiving to the public; that the\nlatter looks only at nominal rates and does not see the\nconsiderably lower effective rates which result from deduct-\nibility. This argument supposes that the public is intent\non having the current nominal rates prevail B.S effective\nrates. Viewing the Federal and State tax systems separately,\nas the public 18 inclined to do, this may be true. But it\n16 not at all clear that if the public were made to Bee\nthe tax structure as one whole that it would not prefer\nthe present combination of Federal and State nominal rates,\nwith deductibility, over the same nominal rates minus\ndeductibility,\n94\n- 53 -\n4. The argument 1s likewise advanced that deducti-\nbility of Federal income taxes in State income tax laws\ntends to make the effective rates of the State laws re-\ngressive. This 18 equivalent to saying that State and\nFederal laws should be viewed and developed without\nregard for each other. It is such disregard which creates\nthe problems of an uncoordinated revenue system.\n5. Alternatives to the recommendation of mutual\ndeductibility are not attractive. Disallowance of deducti-\nbility, particularly by the Federal Government, would\ncreate the two major difficulties mentioned above:\na. It would leave grave dangers of confiscatory\ntaxes;\nb. It would leave very large differentials in the\ntotal net income taxes paid by citizens located\nin different States.\nBoth of these major difficulties were featured by\nthe recent Canadian Report 1/ as reasons for the elimina-\ntion of Provincial income taxes in Canada. Both diffi-\nculties might be mitigated by agreement with the States\nto reduce the top rates of their schedules but this would\ninvolve complicated and uncertain arrangements and the\ndegree of mitigation would probably be slight.\n17 Report of the Royal Commission on Dominion-Provincial\nRelations, 3 Volumes.\nRegraded Unclassified\n95\n- 54 -\nIt can, of course, be argued that the States should\nretire from the income tax fields for the emergency.\nHowever, since the adequacy of State revenue is a\nconcern of the Federal Government, and since there is\nalso an interest in allowing as much fiscal independence\nto the States as possible, there is strong ground for\navoiding a course which would call for the abandonment\nof the income tax by the States. Moreover, it may\nreasonably be expected that the States will take due\naccount of the revenue requirements of the Federal Govern-\nment and press their income tax programs no more than\nnecessary. In the interest of maximum Federal revenues,\nState deductibility for Federal taxes might be encouraged.\nTo be sure, developments not now foreseen may necessitate\nan alteration in these tentative conclusions.\nBecause of the deductibility features of Federal and\nState income tax laws, the Federal Government can and should\nfeel free to order its war-time income tax schedules without\nmuch regard to present State levies or possible changes in\nthe latter.\nThe above discussion relates to the personal rather\nthan the corporate income tax but the relationships found\nin the case of the former apply also in the case of the\nlatter.\n96\n- 55 -\nA somewhat similar situation in Canada has resulted\nin a program under which the Dominion proposes to pay the\nprovinces to stay out of the income tax field for the emer-\ngency. However, the Canadian laws in several conspic-\nuous cases provided no deductibility of taxes and resulted\nin possible confiscation or near-confiscation of income for\nsome taxpayers. While the Canadian program does achieve\nmaximum freedom for the national development of the tax\nin all brackets of income, the gains are quite dearly\npurchased.\nIt is possible that the Federal Government during the\ndefense period may wish to tax tobacco or liquor so severely\nthat the combination of Federal and State levies will prove\nembarrassing either to the industry involved or the consumer.\nBut this prospect does not appear to be an immediately\nserious problem.\n97\n- 56 -\nAPPENDIX A\nFurther Analysis of the Effects of Deductibility\nfor Taxes in Federal and State Income Tax Laws\nTable VI shows the percentage of a given income that\nis paid out as income tax under different circumstances.\nFour principles of classification are applied simultane-\nously:\n1. Income bracket\n2. State residence\n3. Tax deductibility\n4. Government jurisdiction\n1. The incomes chosen for study are: $3,000, $5,000,\n$20,000, $100,000, $1,000,000, $5,000,000. The first\nfour are considered under both the 1941 and 1940 Federal\nrates. Since the 1940 and 1941 rates are about equal at\nthe million dollar leval and above, only one calculation\n1s made in these brackets. Throughout, we have assumed\nthe income recipient to be married, with no other dependents.\n2. The States studied are California, Minnesota, New York\nand Pennsylvania.\na. California has the highest maximum State rate\nof 15 percent. The progression is gradual,\nreaching the top rate at the $250,000 mark.\nThe exemption for a married head of a family\nis $2,500.\n98\n- 57 -\nb. Minnesota has a top rate of 10%, which is reached\nat $20,000. The exemption used is $2,000.\nc. New York has a top rate of 7%, reached at. $9,000.\nThe exemption 1s $2,500.\nd. Pennsylvania is a non-income tax State.\n3. Three conditions of \"tax deductibility\" are considered,\na, No deductibility. Under this assumption, neither\nthe Federal Government nor the State allows the\nincome tax paid to the other jurisdiction to be\ndeducted from its own tax base.\nb. Only the State tax 18 deductible. While the\nFederal Government permits in every instance the\ndeduction of State income taxes from the Federal\ntax base, some States do not accord like treat-\nment to Federal taxes. California and New York\nare examples of such States.\n0. Reciprocal deductibility. The Federal Government\nallows State income taxes to be deducted from the\nFederal tax base and the State allows Federal\nincome taxes to be deducted from the State income\ntax base. Minnesota 18 an example.\nStatutory provisions are as stated. However, it is\nexpedient to study the three States under identical condi-\ntions of tax deductibility, given their respective rate\nstructures and exemptions.\n99\n- 58 -\n4. The percentage of income payable as income tax to the\nState and Federal Government and the total of the two\nlevies are calculated,\nThe computations are derived from the substitution\nof prevailing Federal and State tax rates in B. pair of\nsimultaneous equations: 1/\nF = S, + /I - (PF + S + I, )7r, + /I - (PF + EF + s)7.04\nS = B,, + (I - (Ps + Es + F + I,, )7r,,\nWhen I = Total Income less allowable deductions other than\nFederal and State income taxes paid.\nPF = Federal personal exemption\nPg = State personal exemption\nEF = Federal earned income credit\nI, = Federal surtax net income below top bracket\nI,, = State tax base below top bracket\nS, = Federal surtax on I,\nS,, = State tax on I,,\nr, = Federal surtax rate on top bracket\nr,, = State rate on top bracket\nF = Federal tax\nS = State tax\n1/ Formulae taken from Division of Tax Research Memoranda.\nRegraded Unclassified\n59 -\n100\nPARL TI\n- , - - Ext - as full ST Loss 743.5, FORM ARE STATE,\nla à - TURE, - 1541 AND 1990 MIS,\nTODO DP 24%\n$3,000\n$3,00\n6,000\n45,000\n1901\nFound\nBated\n1940\n$20,000\nPeteral\nlates\n1941 Prierol Extes\n420,000\n1940 Yederal lates\n$100,000\nCale\nA.Y.\n2941 Federal lites\n$100,000\n$1,000,000\n-tas.\nCat.\n1940 Federal Actes\n$5,000,000\nColo\n-Lan.\n...\ncitin.\nS.T.\nCal.\nKtan,\n1941 feieral lates\n5.7.\nCol.\n1940 feiers] Fates\n1941 Fedn Rates\nKtan,\n1941 Fetz Rates\nCal.\nAlan,\nJ.T.\nCal.\nMinne\nE.T.\nCal.\nMar.\nV.T.\nCal. Minn. N.Y.\nCal. Ates. 1.7,\ne\nPatal\nTax\n4)\nvy\n2.\n1.1\nLe\n1,2\nE.O\n1.7\n...\n7,5\n3.2\nis\n3\n27e:\n1/45\n18.4\n15.5\n60.4\n64.8\n59.5\n47.2\n46,6\n45.9\n07.3\n23.2\n80.2\n93+3\n86.4\n65.4\nfor\n4.0\nlive\n--\n0.9\n0.9\n0,9\n7.5\n7.5\nT.5\n2.0\n2.0\n2.0\n23.1\n23,1\n23.0\n10.6\n10.6\n10,6\n52.7\n52.7\n52.7\n30.5\n3945\n39.3\n73.3\n73.3\n73.3\n78.5\n78.4\n78,4\nState\nthe\n0,0\nAd\n0.3\nVA\n0.3\n0.3\n0.5\n1,2\n1.5\n%\n1.2\n1.3\n2,0\n5+7\n45\n2.0\n5.8\n4.9\n7.7\n9.1\n6.6\n7.7\n9.1\n5,6\n14.0\n9+9\n6.9\n14.5\n10.0\n7.0\nDatal\nVE\n5.3\n4.5\n1.1\n1.2\n1,2\n7+9\n45\n1.5\n2.5\n3,2\n3,2\n24.2\n26,5\n26,0\n12.2\nau\ntex\n15.1\n14.4\n55.2\n50.6\n54.8\n12.6\n43,2\n42.1\n76.)\n75.4\n74.5\n81.3\n20.4\n79.8\nThe\nrederal\nTax\nN.C\nLE\n448\n0.3\n0.9\n0.9\n7.4\n7.3\n7.3\n2.0\n20\n1,9\n22.2\n30,0\nwhere\n21.1\n10,7\nis\n3.5\n47.5\n40.5\n48.2\n30.9\n34,1\n35.5\nea.3\n05.5\n67.9\n66.5\n70.4\n73.8\nState\nNo\n0,2\n0.3\n%3\n0.2\n0.3\n0.3\nD.5\nLe\n143\n1.2\n03\n2.0\n5.7\n7,5\n2.0\n5.8\n4.9\nT-7\n9.1\n6,6\nTel\n9,1\n6.6\n14,0\n9.9\n6,9\n14.8\n10.0\n7.0\nZozel\nThe\n77\n4.9\nN.E\n1.1\n1,2\nWe\nT.C\n044\nC.A.\n1.5\nroosi\n3+1\n3.2\n33.7\n25.2\n25.0\n11.9\n14,3\n43.9\n53.7\n54,0\n33.7\n40.8\n41.6\n41.0\n74.0\n73-9\n73+7\n19.1\n70.9\n78.0\nhe\n-\n4.6\n4.0\nU.S\n3\n0.9\n7+4\n7+4\n7.3\n2.0\n2,0\n740\n21.6\n21.7\n10.]\n5.6\n3.7\n51.7\n49.9\n50.7\n37.6\n36.1\n37+0\n70.5\n71.1\n71.8\n75.7\n76.6\n77.2\n.tite\n2xt\n0,1\n0.3\n0.2\n0.3\n3\n0.4\n1,0\n1.1\n4)\nLI\n1,2\n1.1\n3.=\n3.3\nL.6\n4.7\n4.2\n14\n4.1\n+3.0\n3.1\n5.5\n4.0\n3+5\na\n1,9\n3.4\n2.3\n1.6\nRegraded Unclassified\n101\n- 60 -\nVI. Other Defense-created Inter-\ngovernmental Fiscal Problems\nh. Cooperation in tax administration\nIntergovernmental cooperation in the administration\nof overlapping taxes is an important field for future\ndevelopment about which more will be said in subsequent\nreports. Suffice it here to observe that some experimenta-\ntion with intergovernmental cooperation 15 highly desirable\nas B. war measure. Informal arrangemente by which the States\nmake use of Federal income tax facilities and income tax\ninformation are now extensive. The Federal Government might\nwell make some use of the accumulated experience of the\nStates in the administration of the income tex in the very\nlow income brackets. A number of States have succeeded in\nBO integrating diverse local industrial and governmental\nsources of information AB to enable B. comparatively effec-\ntive collection of the income tax from the low income\ngroups. This, admittedly, cannot be said of the Federal tax.\nMore effective income tax collection at the low income\nlevels 1e vitally important in the interest of public\nmorale, especially at this time and the States are in position\nto facilitate the Treasury's efforts in that direction.\nThe new automobile use tax seemed to furnish the ideal\nopportunity for Federal-State collaboration in administra-\ntion. However, the very impressive difficulties encountered\nRegraded Unclassified\n102\n- 61 -\nby the Bureau of Internal Revenue when such program was\ncontemplated serve principally to demonstrate the fact that\nsuch collaboration cannot be improvised successfully and\nwould require long planning and careful arrangements 8.8 to\ndetail. Among the difficulties encountered were different\nState collection dates, possible unwillingness of States\nto cooperate, absence of State and Federal authority for\nsuch arrangement without specific action by Congrees and by\nthe respective State legislatures, decentralized State\nadministration, (in some cases), problem of bonding State\nofficials, State political opposition. It seems probable\nthat the Federal Government cannot rely on State administra-\ntion in a case of this sort without more adequate means of\nholding the States accountable and without being in & position\nto administer the tax directly if the States fail to observe\nstandards. More study will be given this experience 8.8 an\nexcellent type case of possible Federal-State administrative\ncollaboration.\nWith regard to the automobile use tax, an additional\nobservation may be in order. Although the Federal Govern-\nment has prior claim to the right-of-way in taxation during\nthe defense period, it is exceedingly doubtful whether\nFederal invasion of 8. field long occupied by the States\nand their subdivisions and one well adapted to administra-\nRegraded Unclassified\n103\n- 62 -\ntion at the State and local level -- namely the automobile\nuse tax -- accomplishes any useful purpose. This tax\nwill be very difficult and costly to administer at the\nFederal level. Moreover, the Federal Government already\nimposes manufacturers' excises on motor vehicles and\nmotor fuel.\nThe motor vehicle use tax leaves much to be desired\nfrom the point of view of equity as well. Available\ninformation on the estimated distribution of ownership\nof family automobiles by family income groups in 1935-6\nindicates that almost 52 percent of the passenger cars\nwere then owned by families with annual incomes of not\nmore than $1,500. A comparison of the $5 automobile\nuse tax with average 1940 automobile registration fees\nin the States reveals that the $5 Federal use tax 18\nequal to 27 percent of the average State registration\nfee in one State and 195 percent in another.\nRegraded Unclassified\n104\n- 63 -\nAvailable information on the estimated market value\nof passenger cars in use on December 31, 1939, indicates\nthat the average value of the care was then $238 and that\nthe $5 use tax 1s equivalent to 2.1 percent of the average\nvalue of all passenger cars. More than half of the cars\nin use on December 31, 1939, had B. value of less than\n$173.\nData on the distribution of motor vehicles by community\nsize classes indicates that more than half of the burden\nof the $5 use tax will fall on communities with 10,000\npersons or less and that 31 percent of the burden will\nfall on those living on farms and in unincorporated areas.\nThese equity considerations, together with the importance\nof the issue to wholesome Federal-State relations, indicates\nthe desirability of immediately repealing the Federal auto-\nmobile use tax,\nB. Utilization of State and local surplus revenues during\nthe defense period\n1\nAs a result of improved economic conditions, lower\nwelfare and capital expenditures, and reduced tax delin-\nquency, some State and local governments will receive\nsurplus revenues during the defense period. The disposi-\ntion of these surplus revenues has an important bearing\non the Government's efforts to prevent an inflationary\nrise in prices.\nRegraded Unclassified\n105\n- 64 -\nTo the extent that the States and local units con-\nvert their surpluses into reserves, and more particularly\nto the extent they use these reserves to purchase United\nStates Defense Bonds, a volume of purchasing power will\nbe impounded and the inflationary pressure on prices\ncorrespondingly eased. 1/ In part, similar results will\nfollow from the use of current revenues to reduce indebted-\nness. Although such action would return purchasing power\nto bondholders, the expenditures of the latter are not\nlikely to be substantially increased thereby. While many\nmunicipalities are limited in their power to retire debt,\nthey have substantial scope of such action with reference\nto short-term and floating obligations. Under some condi-\ntions, State and local governments may also find it possible\nand advisable to accumulate additional sinking funds for\nfuture bond payments. Such use of surpluses, in addition\nto casing the inflationary pressure on prices, would result\nin a general strengthening of the credit position of State\nand local governments, B. factor which may be of great importance\nin the post-defense era.\nThe development of & non-negotiable bond subject to ready\nliquidation and otherwise adapted to the needs of state and\n1/ The State of Washington has invested $325,000 in Federal\nbonds, circumventing the $50,000 maximum, it 18 said,\nby making the investment cover several independent State\nfunds. It 1e suggested that \"how Texas 18 going to\nhandle its $11,000,000 cash reserve which it is hoping\nto invest in the same patriotic manner 18 B. mystery.\nPerhape it will have to content itself as did rich\nBelleville, New Jersey, the first city to buy Defense\nBonde, with & paltry $50,000 purchase of so-called\nSeries F.\" (Albert Lepawsky, \"Impact of National Defense\non State and Local Finances\")\nRegraded Unclassified\n106\n55 1 I\nlocal reserve funds would stimulate the use of such funds\nand their investment in Federal securities.\nIf the improved financial condition of State and local\ngovernments resulted either in the reduction of taxes or in\nthe increase of expenditures, consumer expenditures would\nbe increased and the problems confronting the Government\nin the prevention of an inflationary price rise would be\nenhanced. A deliberate policy of recucing local expenditures\nto create B eurplus is to be encouraged where the serving\ncan be made through the improvement of administration and\nthe elimination of waste. A reduction in public works\nexpenditure by releasing labor and materials will facili-\ntate defense. Themaintenance of most local services at\ntheir present level, however, is essential in the interest\nof morale and productive efficiency.\nDuring the defense period it will be necessary for\nthe Treasury to borrow on 8. wide scale. In this connection,\nwith a view to maximizing borrowing from individuals, the\nTreasury has promoted the sale of Defense Savings Bonds and\nStamps. Many local governments have cooperated generously\nin this program. Such cooperation is very helpful and\nits continuation and expansion is desirable.\nState governments can facilitate the defense effort also\nby assuming some further responsibility for special or general\naid to the defense-affected cities, many of which have\nappealed to the Federal Government for assistance in providing\nthe necessary services for new defense workers and their\nfamilies,\nRegraded Unclassified\n107\n- 66 -\nC. State and local interest in an anti-inflation program\nAlthough the present danger of inflation and the\nmeasures necessary to prevent it are subjects not directly\nwithin the mandate of the coordination etudy, they are\nindirectly very much involved. This 1s true because\ninflation would greatly upset the equilibrium of State\nand local finances and because the new taxes which have\nbeen and may be insugurated to cope with inflation have\nan important bearing on the present and the future distri-\nbution of the over-all tax load.\nRegarding the effect of inflation on State and local\nfinances, the experience during the last war 18 illumine-\nting. Because of repidly rising prices, State and local\ngovernments found that the materials required for opera-\ntion and construction had become much more expensive.\nEmployees presented well-supported demands for increases\nin pay. Due to these facts (and also to the increase in\nthe volume of services) total gross State and local\ngovernmental expenditures increased 186 percent from\n1913 to 1923. The average increase per year WBB 18.6\npercent. By way of comperison, the increase during the\nexpansionary period of the middle and late twenties\n(1923-1929) averaged 8.2 percent per year.\nRegraded Unclassified\n108\n- 67 -\nState and Local Expenditures, 1913 and 1923\n:\nReported expenditures\n:\nAmount, in millions : :\nPer capita\n:\n1913\n:\n1923\n..\n:\n1913\n:\n1923\nState\n$ 383\n$1,244\n$ 3.97\n$11.14\nLocal\n1,844\n5,136\n19.10\n45.98\nTotal\n$2,227\n$6,380\n$23.07\n$57.12\nSource: National Industrial Conference Board, Cost of\nGovernment in the U.S. 1926-27, New York\n1928, P. 2.\nA large part of the war-period increases in State and\nlocal costs were borne by those paying general property\ntaxes. Between 1912 and 1922, assessed values, property\ntax levies and tax rates recorded the following increases:\n1912\n1922\nIncrease\nAssessed values\nsubject to State\nand local general\nproperty taxes\n(000 omitted)\n$69,452,936\n$124,616,675\n79.4\nAll general property\ntax levies\n( 000 omitted)\n1,349,841\n3,503,725\n159.6\nAverage tex rate\nper $100 Resessed\nvalue\n1.94\n2.81\n44.8\nPer capita general\nproperty tax levies\n13.91\n32.23\n131.7\nRegraded Unclassified\n109\n- 68 -\nChoosing B few States for which date are conveniently\navailable, the increases in property taxation were 98\nfollowe:\nPercentage Increases in State and Local Property\nTax Levies, Assessments and Average Rates for\nSelected States, 1916 - 1921.\nStates\nLevies\nAssessments\nRates\nWisconsin\n104.77%\n40.73%\nNew York\n65.52\n28.74\nIowa\n94.28\n14.5\nWest Virginia\n137.9\n30.6\n82%\nOhio\n-\n1\n54.18%\nSources:\nReport of the Wisconsin Tax Commission to the Governor\nand Legislature - Madison, Wisconsin, 1930, D. 44.\nAnnual Report of the State Tax Commission, New York,\n1923, J. B. Lyon, Albany, New York, 1924, D. 126.\nState Board of Assessment and Review - Annual Report,\nState of Iowa, Des Moines, 1938, pp. 272-4.\n9th Biennial Report of the State Tax Commissioner of\nWest Virginia, Charleston, W. YE., 1922, P. 458.\n11th Annual Report - The Tax Commission of Ohio,\nSpringfield, 1921, D. 15.\n20th Annual Report - The Tax Commission of Ohio,\nSpringfield, 1930, O. 16.\nThus, in two of the above States property tax levies\nmore than doubled in the brief space of six years, and in\nB third the amount nearly doubled. Since assessments did\nnot rise nearly as rapidly as levies, very substantial\nincreases in rates were necessary, involving in one cese\nE more than 80 percent increase. The new rates and levies\nRegraded Unclassified\n110\n- 69 -\ndid not drop to their former level at the close of\nthe War. With some exceptions during the depression of\nthe thirties they continued to increase, although the\nincreases have been more moderate then in the inflation-\nary period of World War I. 1/\n1/\nAvailable data on average ferm real estate taxes\nfor the entire period also serve to illustrate the\nrising trend of general property taxes in the War\nperiod and the failure of these taxes to decline in\nthe poet-war period.\nFarm Real Estate Taxes Per Acre snd Per $100 of Full Value\nFarm Real Estate\nFarm Real Estate\nTaxes Per\nTaxes Per\nYear\nAcre\n8100 of Full Value\n1909-13 Average\n8 .21\n$ .50\n1913\n.24\n.55\n1914\n.24\n.56\n1915\n.26\n.57\n1916\n.28\n-57\n1917\n.31\n.58\n1918\n.33\n.57\n1919\n.41\n.59\n1920\n.51\n.79\n1921\n.54\n.94\n1922\n.54\n.96\n1923\n.55\n1,01\n1925\n.56\n1.07\n1929\n.58\n1.19\nSource: U. S. Dept. of Agriculture - Year Book of\nAgriculture 1935, PP. 688-691 and U.S.D.A. -\nAgricultural Statistics, 1940, op. 587-88.\nRegraded Unclassified\n111\n- 70 -\nIn 1916, the property tax W98 a relatively elastic\nsource of revenue and could stand this increased burden\nwithout undue strain. Pre-war retes were much higher at\nthe beginning of this war emergency than in 1913.\nTax delinquencies were a negligible problem at the\nearlier date since there had been a period of relative\nprosperity, generally rising land values end real estate\ndevelopment. In 1941, although current collection ratios\nare vastly improved, many cities and rural units of govern-\nment still have substantial delinquent tax arrears left\nover from the serious delinquency cycle of the Thirties.\nMany rates are at very high levels and close to legel\nlimits. Other local units have reduced property tax rates\nin the course of depression campaigns for property tax\nrelief and State replacement revenues, but lowered tax\nlimits will restrict flexibility in their use of the\nproperty tax. In other cases, the local base of taxable\nproperty 18 seriously narrowed by homestead exemptions and\nother exemptions, and rates on remaining tsxable property\nare already high. Real estate values have not increased\ngreatly after a long period of depression. Assessed values\nwere slowly reduced in this period and are still relatively\nhigh in many areas. Adjustments to any increase in market\nvalues will be made slowly.\nRegraded Unclassified\n112\n- 71 -\nThe property tax increases of the last war period\nand post-war period were due to a combination of the\nfollowing causes:\n1. continuing upward trend in Governmental services;\n2. lage in values, assessmente, and collection during\nthe inflation period;\n3. inertia of rates and levies during the post-war\ndeflation.\nThus the States and their local unite have more to\nfear from inflation in 1941 than they had in 1917; their\ntax resources are more fully utilized and there is less\nleeway for increases in taxation, particularly property\ntaxation, A severe inflation at the present time might\nrender it extremely difficult to sustain State and local\ngovernmental services. The experience under the inflation\nof the World War period was such as to recommend a preven-\ntion of & repetition of the experience, if possible.\nD. Preparation of a Public Works Program for the\nPost-Defense Era\nAlthough this report 18 devoted exclusively to the\nproblem of Federal-State-local fiscal relations during\nthe present emergency, it seems proper to include 8. problem\nof the post-war period in 80 far as the latter requires\naction before the emergency expires. While the nature\nof the post-defense era 1s difficult to predict, it seems\nRegraded Unclassified\n113\n- 72 -\nhighly probable that it will involve grave problems of\nunemployment attending the transition from 8. war to a\npeace economy. The problem may be augmented both 8.8 to\ntime and degree by the reappearance of those tendencios\ntoward under-inveetment and under-consumption which proved\n80 troublesome during the Thirties. These problems will\nbe discussed in greater detail in later reports but here\nit may be observed that it is of the greatest importance\nto do some advance planning of ways and means to combat\npost-defense unemployment. This advance planning should\ninclude not only such general studies of the problem as\nare now going on but also the accumulation of very specific\nblue prints of projects. The latter 1a exceedingly important\nfor the reason that it takes time to put public works\nprojects into operation and time may be an exceedingly\nimportant factor in reducing post-defense confusion and\ndemoralization. Legislation now before Congress calls for\nan agency and an appropriation \"to prepare, develop, and\nmaintain a. reservoir of projects *** to be ready for\nprosecution when the need arises.\" 1/ While some efforts\ntoward a works reserve have already been made, they are\nfar from adequate. Some legislation of this sort should\nbe enacted soon. The more complete and definite the plans\nwhich can be developed, the greater will be our security\nin the post-war period.\nS - 1833 A Bill to promote the general welfare of the Nation\nby providing work on public projects to persons in\nneed of employment, and for other purposes.\n8 - 1617 To Amend the Employment Stabilization Act of 1931.\nRegraded Unclassified\n115\nSTMENT\nOffice of the Attorney General\nMashington,D.C.\nW\nJanuary 1, 1942\nDear Henry:\nWith reference to Lauchlin Currie's letter of\nDecember 11 with the attached memorandum to the President\nwith respect to Louis Johnson's statement in New York, I\nam enclosing you a confidential memorandum from the Federal\nBureau of Investigation. It seems to me unnecessary to\nmake any further investigation.\nI return the letter and the memorandum.\nSincerely yours,\nfrom amorea\nThe Honorable\nThe Secretary of the Treasury\nCopy to Mr. Currie\nRegraded Unclassified\nCOPY\n116\nVEDERAL BURED OF INVESTIGATION\nUnited States Department of Justice\nWashington, D. C.\nPERSONAL AND\nCONFIDENTIAL\nDecember 30, 1941\nMEMORANDUM FOR THE ATTORNEY GENERAL\nWith reference to the note addressed to the Secretary of the\nTreasury under date of December 11, 1941, by Mr. Lauchlin Currie which\nconcerned an off-the-record address made in New York by Louis Johnson,\nand in accord with your request, I have had 8 most discrest investigation\nconducted for the purpose of determining the source from which Louis\nJohnson obtained the material which he used in this address.\nWhen Louis Johnson was interviewed, under appropriate pretext,\nconcerning this publication he indicated that the material which he\nutilized had not bean obtained by him directly from either the War or\nNavy Departments but represented the \"consensus\" of the best thought\nwhich was current in Washington about the Pearl Harbor attack. For your\nconfidential information Mr. Johnson was approached through an outside\nparty in such a manner as to encourage Johnson to disclose completely\nand fully any and all information in his possession, with particular\nreference to the sources of his information. Johnson talked freely con-\ncerning the material which he utilized in his talk in New York and in-\ndicated that out of the conflicting rumors and reports which were prev-\nalent in Washington generally, he had pieced together certain fundamental\nfacts which appeared sound and had utilized these facts in his address.\nJohnson was encouraged to contribute material to the person\nwho interviewed him in order to carry out certain objectives widch John-\nson indicated were controlling his public addresses and operations. John-\nson indicated that he was particularly anxious to do everything possible\nto speed up production and in the course of the interview conducted with\nhim, it was indicated that the interviewer's fundamental purpose was to\nassist Johnson in his efforts in behalf of speeding up production. John-\nson indicated to the interviewer, however, that he had absolutely no\nsource of information within the War or Navy Departments and had as a\nmatter of fact refrained from making any contacts in those departments\nsince he had left the War Department. Johnson indicated that any infor-\nmation which he might furnish to the interviewer would be predicated upon\ndiscussions, rumore and gossip which reached Johnson and that consequently\nthe interviewer would have to evaluate the information furnished by\nJohnson very carefully in order to determine its accuracy and reliability.\nJohnson indicated further to the interviewer that he would\nparticipate only in any program which was definitely on the constructive\nRegraded Unclassified\n117\nMemorandum for the Attorney General\n2.\nside and that he would not have anything to do with any publication or\nutterance which was critical of the President or ranking officers of the\nArmy and Navy.\nUnless you desire further inquiries in this case, I do not\nanticipate any further action.\nI an returning herewith the letter of December 11, 1941,\naddressed to Mr. Morgenthau by Mr. Currie, together with the enclosure\nreferred to therein.\nRespectfully,\ns/s J. Edgar Hoover\nJohn Edgar Hoover\nDirector\nAttachment\nRegraded Unclassified\n118\nTHE WHITE HOUSE\nWASHINGTON\nDecember 11, 1941.\nDear Mr. Secretary:\nYou may be interested in the attached\nreport on a meeting I attended last night.\nWhat I perhaps should have added is\nthat too many of the business men present\nare still fighting the wrong enemy -- the\nNew Deal, labor, and, obliquely, the President.\nSincerely yours,\nLauchlin Currie\nHonorable Henry Morgenthau, Jr.,\nSecretary of the Treasury,\nWashington, D. C.\nRegraded Unclass\n11º\nDecember 11, 1941.\nMEMORANDUM FOR THE PRESIDENT:\nRes Dissumination of war information by Louis Johnson,\nStacy May and I flew up to New York last eventing to attend a\ndinner meeting of some eighty or ninety important industrialists.\nLouis Johnson was there. He told 21 he was going to give the\nlow-down on Hawaii. I advised him strongly not to. When it came\nto his turn to spenk he and that since it was an off-the-record\nmosting he would comunicate to them what he had learned in\nWashington the day before. He a de the following allegations:\n1. Our losses were three battleships and seven cruisers.\n2. The fleet was bottled up by mines and the West Virginia was\nlost by hitting 4. mine.\n3. Out of sixty PHY's, only two wore left.\n4. The Japs came in after the completion of the dawn patrol.\n5. two Terman battleships were with the Japs.\n6. American bombers flying to Hawaii were shot down over the field,\nsince they tvid grease in their runs instead of ammunition.\n7. Naval supremacy had passed to the Japs.\nHe was followed immediately by a Dr. Stolper, former Budget\nDirector of the German Reichatag, who gave B: completely defestist\nspeech, predicting that both China and Russia would como to en\nagreement with their Axis foes. He even suggested that we had backed\nthe wrong horee in the Far East and that we should have strung along\nwith Japan.\nI got very hot under the coller and went after them both hard\nfor their defeatism, and reminded Johnson in perticular of what\nyou had said shout the dissemination of stories giving assistance\nto the enemy. He retorted that this was a closed meeting and that\npeople had a right to know, and went on to intimate that an import-\nant portion of the German air Neet was now operating in Japan.\nIn view of this performance I feel that something should be\ndone to prevent Johnson's continued access to Information at the\nWar Department.\nLauchlin Currie\nLC: =\nRegraded Unclassified\nTREASURY DEPARTMENT\n120\nINTER OFFICE COMMUNICATION\nDATE January 1, 1942\nTO\nMr. Graves\nFROM\nMr. Callshan\nyou\nIn response to your two questions, there are\napproximately fifteen more citations coming along\nfor participation in the \"Treasury Hour\". When\nthese are signed it will clear up all citations in\nconnection with this program.\nThere will be a continuance of citations for\nthe two programs \"For America We Sing\" and \"America\nPreferred\". These run three or four E week.\nThe citations eΓe awarded (1) to artists who\nvolunteer their services to the \"Tressury Hour\"\nor other Treasury programs, and (2) to persons\nperforming unusual service for the Treasury in\nconnection with radio. In each case there is a\ndefinite contribution on the part of the person\nreceiving the citation.\nRegraded Unclassified\nCOPY\n121\nNew Years Day, 1942.\nUNITED STATES SENATE\nWashington, D.C.\nDear Secretary Morgenthau:\nYes I will cooperate as you request.\nAny time that Mr. Julian Street Jr. finds\nconvenient will suit me. A telephone call\nbefore he starts might expedite our meeting.\nPardon this holiday mode of writing and\naccept my best wishes.\nSincerely,\n/s/ Warren 10. Austin\nRegraded Unclassified\nCONADENTIAL\nSTATES SAVINGS BONDS\n122\nSales Since May 1, 1941, by Months\nOn Basis of Issue Price\n(In thousands of dollars)\n:\n:\n:\n:\nSeries I\n:\n:\n:\nI\nMonth\nSeries 7\n1\nPost\n:\n:\n:\n:\nSeries G\n:\nTotal\nBanks\nTotal\n:\nOffices\n:\n#\n:\n:\n:\nMay\n$ 42,836\n$ 57.745\n$ 100,581\n$ 37,817\n$ 211,420\n$ 349,518\nJune\n40.788\n61,729\n102,517\n28,876\n183,134\n314,527\nJuly\n50,558\n94,717\n145,274\n27,359\n169,498\n342,132\nAugust\n40.725\n76.878\n117,603\n20,318\n127,685\n265,606\nSeptember\n38,117\n67,123\n105,241\n18,099\n108,987\n232,327\nOctober\n41,634\n81,250\n122,884\n22,963\n124,866\n270,713\nNovember\n37.997\n71,478\n109,475\n18,978\n105,035\n233,487\nDecember\n103,154\n237,930\n341,085\n33,272\n154,242\n528.599\nTotal\n$395,811\n$748,850\n$1,144,560\n$207,682\n$1,184,367\n$2,537,210\nOffice of the Secretary of the Treasury,\nJanuary 1, 1942.\nDivision of Research and Statistics.\nSource: All figures are deposits with the Treasurer of the United States on account\nof proceeds of sales of United States savings bonds.\nNote: Figures have been rounded to nearest thousand and will not necessarily\nadd to totals.\nRegraded Unclassified\nWIVED STATES SAVINGS BUNDS\nComparative Statement of Sales During\nOctober, November and December, 1941\nOn Basis of Issue Price\n(Amounts in thousands of dollars)\n:\n:\nAmount of Increase\n:\nPercentage of Increase\nSales\n:\n:\nor Decrease (-)\n:\nor Decrease (-)\nItem\n:\n:\n:\n:\nDecember\n:\nNovember\n:\nDecember\n:\nNovember\n: December\n:\nNovember\n:\nOctober\n:\nover\n:\nover\n:\nover\n:\nover\n:\n:\n:\n: November\n:\nOctober\n:\nNovember\n:\nOctober\nSeries E - Post Offices\n$103,154\n$ 37,997\n$ 41,634\n$ 65,157\n- $ 3,637\n171.5%\n- 8.7%\nSeries E - Banks\n237,930\n71,478\n81,250\n166,452\n- 9.772\n232.9\n- 12.0\nSeries E - Total\n341,085\n109,475\n122,884\n231,610\n- 13,409\n211.6\n- 10.9\nSeries 7 - Banks\n33,272\n18,978\n22,963\n14,294\n- 3,985\n75.3\n- 17.4\nSeries G - Banks\n154,242\n105,035\n124,866\n49,207\n- 19,831\n46.8\n- 15.9\nTotal\n$528,599\n$233,487\n$270,713\n$295,112\n-$37,226\n126.4%\n- 13.8%\nOffice of the Secretary of the Treasury, Division of Research and Statistics.\nJanuary 1, 1942.\nSource: All figures are deposits with the Treasurer of the United States on account of proceeds\nof sales of United States savings bonds.\nNote: Figures have been rounded to nearest thousand and will not necessarily add to totale.\nRegraded Unclassified\nUNITED STATES SAVIDOS BONDS\nDaily Sales - December 1941\nOn Banis of Issue Price\n(In thousands of dollars)\nPost Office\nBank Bond Sales\nAll Bond Sales\nBond Sales\nDate\nSeries E\nSeries Ed\nSeries 3\nSeries G\nTotal\nSeries E\nSeries 7\nSeries G\nTotal\nDecember 1941\n1\n$ 2,976\n$ 3,904\n$ 1,333\n$ 7,220\n$ 12,458\n$ 6,580\n$ 1,333\n$ 7,220\n$ 15,434\n2\n1,229\n2,592\n623\n5.750\n8,964\n3,821\n623\n5,750\n10,193\n3\n1,510\n2,734\n870\n5,269\n8,893\n4,244\n870\n5,289\n10,403\n4\n2,411\n4,036\n726\n7,530\n12,292\n6,447\n726\n7,530\n14,703\n5\n2,015\n4,805\n1,152\n12,357\n18,314\n6,820\n1,152\n12,357\n20,329\n6\n1,001\n2,293\n656\n2,776\n5.725\n3,294\n656\n2,776\n6,726\n8\n3,282\n4,764\n1,011\n3,810\n9,585\n8,046\n1,011\n3,810\n12,866\n9\n1,828\n3,877\n601\n4,996\n9,475\n5.706\n601\n4,996\n11,304\n10\n1,651\n3,566\n491\n2,612\n6,668\n5,217\n491\n2,612\n8,320\n11\n1,909\n4,763\n719\n3,423\n8,905\n6,672\n719\n3,423\n10,814\n12\n2,773\n5,012\n658\n3,768\n9.437\n7.785\n658\n3.768\n12,211\n13\n2,767\n5.030\n584\n2,120\n7.734\n7.798\n584\n2,120\n10,501\n15\n7,185\n11,679\n1,022\n4,462\n17,162\n18,864\n1,022\n4,462\n24,347\n16\n2,113\n3,956\n893\n1,901\n6,750\n6,069\n893\n1,901\n8,863\n17\n4,164\n9.750\n1,180\n6,327\n17,257\n13,914\n1,180\n6,327\n21,421\n18\n5,382\n11,630\n1,337\n6,826\n19.793\n17,012\n1,337\n6,826\n25,175\n19\n5,995\n10,205\n1,172\n5,214\n16,591\n16,201\n1,172\n5,214\n22,586\n20\n4,091\n11,890\n1,270\n5,921\n19,081\n15,981\n1,270\n5,921\n23.172\n22\n10,916\n23,269\n2,490\n8,067\n33,826\n34,185\n2,490\n5,067\n44,742\n23\n4,393\n10,642\n1,972\n6,831\n19,445\n15,035\n1,972\n6,831\n23,838\n24\n3,613\n13,085\n1,629\n8,900\n23,613\n16,698\n1,629\n8,900\n27,226\n26\n9.593\n29,934\n3.536\n10,076\n43,547\n39,527\n3.536\n10,076\n53.140\n27\n3,503\n6,412\n530\n3,255\n10,197\n9,915\n530\n3,255\n13,700\n29\n8,852\n24,247\n3,060\n10,353\n37,661\n33,100\n3,060\n10,353\n46,513\n30\n3,460\n7,283\n1,450\n5.382\n14,115\n10,743\n1,450\n5,382\n17,575\n31\n4,540\n16,571\n2,307\n9.077\n27,956\n21,112\n2,307\n9,077\n32,496\nTotal\n$103,154\n$237,930\n$ 33,272\n$154,242\n$425,444\n$341,085\n$ 33,272\n$154,242\n$528,599\nOffice of the Secretary of the Treasury, Division of Research and Statistics.\nJanuary 1, 1942.\nSource: All figures are deposits with the Treasurer of the United States on account of proceeds of sales\nof United States savings bonds.\nNote: Figures have been rounded to nearest thousand end will not necessarily add to totals.\nRegraded Unclassified\n125\nCONFIDENTIAL\nUNITED STATES SAVINGS BONDS\nComparative Statement of Sales During\nLast Twenty-three Business Days of December, November and October 1941\n(October 6-31, November 1-29, December 4-31)\nOn Basis of Issue Price\n(Amounts in thousands of dollars)\n:\n:\nAmount of Increase\n:\nPercentage of Increase\n:\nSales\n:\nor Decrease (-)\n:\nor Decrease (-)\nItem\n:\n:\n:\n:\nDecember\n:\nNovember\n:\nDecember\n:\nNovember\n: December\n:\nNovember\n:\nOctober\n:\nover\n:\nover\n:\nover\n:\nover\n:\n:\n:\n:\nNovember\n:\nOctober\n..\nNovember\n:\nOctober\nSeries E I - - Post Offices\n$ 97,439\n$ 37,997\n$ 34,894\n$ 59,442\n$ 3,103\n156.4%\n8.9%\nSeries E - Banks\n228,701\n71,478\n70,441\n157,223\n1,037\n220.0\n1.5\nSeries E - Total\n326,140\n109,475\n105,335\n216,665\n4,140\n197.9\n3.9\nSeries F - Banks\n30,446\n18,978\n19,133\n11,468\n-\n155\n60.4\n- 0.8\nSeries G - Banks\n135,983\n105,035\n99,548\n30,948\n5,487\n29.5\n5.5\nTotal\n$492,568\n$233,487\n$224,016\n$259,081\n$ 9,471\n111.0%\n4.2%\nOffice of the Secretary of the Treasury, Division of Research and Statistics.\nJanuary 1, 1942.\nSource: All figures are deposits with the Treasurer of the United States on account of proceeds\nof sales of United States savings bonds.\nNote: Figures have been rounded to nearest thousand and will not necessarily add to totals.\nRegraded Unclass\nCONFIDENTIAL\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\n126\nDATE January 1, 1942\nTO\nSecretary Morgenthau\nFROM\nMr. Haas\nSubject:\nSupply or Series E Savings Bonde in the Field\n1. Attached to this memorandum are (1) a chart\nand table showing the number of days' supply of\nSeries E savings bonds in the field, (2) a table\nsummarizing telegrams received this morning showing\nthe number of bonds requisitioned by sales agents\nthat the Federal Reserve Banks and the Post Office\nDepartment's central office and were unable to fill\nlast night, and (3) a table showing the number of\nbonds delivered each day since December 1 by the\nBureau of Engraving and Printing.\n2. Some progress in liquidating local shortages\nof bonds in the field was made yesterday. A compar-\n1son of the tables attached with the tables submitted\nto you yesterday shows that unfilled requests for\nsavings bonds declined 90,000 pieces of all series.\n3. The situation should improve further tomorrow\nand Saturday due to the fact that the Bureau of\nEngraving and Printing expects to turn out approximately\n400,000 pieces today and tomorrow, while sales reported\non New Year's Day are likely to recuire B. relatively\nsmall number of pieces.\nAttachments\nNumber of days supply of Series E Sav B Bonds on hand, December 1 to date\n(Based on sales of $300 millions per month)\n:\nDenomination\nDate\n:\n$25\n:\n$50\n:\n$100\n:\n$500\n:\n$1,000\n:\n:\n:\n:\n:\nDecember 1\n23.0\n44.1\n29.5\n74.5\n64.0\n2\n23.6\n44.1\n29.8\n76.0\n65.5\n3\n23.9\n44.1\n30.4\n77.6\n67.0\n4\n24.0\n43.8\n31.2\n78.9\n68.3\n5\n24.0\n43.6\n31.9\n78.3\n67.7\n6\n23.8\n43.3\n31.6\n78.1\n67.5\n7\n23.8\n43.3\n31.6\n78.1\n67.5\n8\n23.7\n42.9\n32.2\n77.4\n66.8\n9\n23.4\n42.7\n33.0\n76.9\n66.3\n10\n23.3\n43.2\n33.9\n76.4\n65.8\n11\n23.2\n43.3\n34.6\n76.8\n66.2\n12\n23.6\n42.6\n35.2\n76.1\n71.1\n13\n24.4\n42.0\n34.8\n78.3\n73.2\n14\n24.9\n42.0\n36.6\n87.9\n73.2\n15\n24.3\n40.3\n35.0\n101.5\n71.5\n16.\n24.1\n39.8\n37.6\n101.0\n79.4\n17\n24.1\n38.6\n36.4\n99.8\n106.9\n18\n23.7\n37.1\n34.9\n98.3\n105.5\n19\n23.8\n35.7\n33.5\n96.9\n104.1\n20\n24.3\n36.0\n32.1\n95.5\n102.7\n21\n26.5\n38.4\n32.4\n95.5\n102.7\n22\n25.6\n37.9\n30.1\n92.6\n99.7\n23\n26.5\n39.3\n29.7\n91.3\n98.4\n24\n27.8\n40.5\n28.9\n89.8\n97.0\n25\n30.6\n43.1\n29.8\n89.8\n97.0\n26\n29.4\n41.3\n27.4\n86.4\n93.5\n27\n31.6\n40.4\n27.8\n87.4\n94.5\n28\n34.1\n43.0\n29.3\n89.4\n96.4\n29\n33.8\n43.2\n27.8\n88.4\n95.4\n30\n35.3\n45.6\n28.3\n89.4\n96.3\n31\n36.5\n45.7\n27.9\n89.5\n96.3\n127\nOffice of the Secretary of the Treasury,\nDivision of Research and Statistics.\nRegraded Unclass\nAgente' recuests for savings boxis unfilled at the close\nof business, December 31, 1941\n(In thousands)\n:\nDenomination\n** **\n:\n.....\n:\n$25\n$50\n----\n:\n$100\n:\n:\n:\n.....\n:\n$500\n:\n:\n$1,000\n....\nTotal\n:\nFederal Reserve Banks\nBoston\n48\n17\n32\n4\n2\n103\nNew York\n-\n38\n53\n3\n-\n94\nPhiladelphia\n-\nI\n4\n-\n-\n4\nCleveland\n-\n6\n9\n1\n-\n16\nRichmond\n6\n6\n10\n2\n-\n24\nAtlanta\n6\n2\n3\n-\n-\n6\nChicago\n135\n60\n60\n13\n-\n268\nSt. Louis\n4\n6\n7\n-\n-\n17\nMinneapolis\n-\n5\n-\n-\n-\n5\nKansas City\n27\n19\n18\n4\n-\n68\nDallas\n2\n-\n-\n-\n1\n3\nSan Francisco\n22\n11\n1\n-\n-\n34\nPost offices\n-\n92\n95\n-\n-\n187\nTotal\n250\n262\n292\n25\n3\n829\nOffice of the Secretary of the Treasury, Division of Research and Statistics.\n128\nRegraded Unclassit\nL. S. Initia - Serier €\nNumber of 1eces \\roduce. December 1, 141 to date\n(In thousands)\n:\nDenomine tion\n:\nTotal\nDay\n:\n:\n:\n:\n:\n2500\n:\nall\n325\n50\n100\n1,000\n:\n:\n:\n:\n:\n: denominations\nDecember\n1\n75\n10\n25\n10\n10\n130\n2\n75\n10\n25\n10\n10\n130\n3\n60\n10\n40\n10\n10\n130\n4\n50\n10\n50\n10\n10\n170\nLE\n50\n10\n50\n-\n-\n110\n6\n-\n-\n-\n-\nI\n-\n7\n-\n-\n-\n-\n-\n-\n8\n50\n10\n50\n-\n-\n110\n9\n15\n10\n50\n-\n-\n75\n10\n30\n30\n50\n-\n-\n110\n11\n40\n20\n50\n5\n5\n120\n12\n80\n-\n50\n-\n30\n160\n13\n121\n-\n10\n15\n15\n161\n14\n44\n-\n70\n50\nI\n164\n15\n80\n-\n-\n80\n-\n160\n16\n28\n-\n120\n-\n45\n193\n17\n92\n-\n-\n-\n155\n247\n18\n92\nI\nI\nI\n-\n92\n19\n120\n-\n-\n-\n-\n120\n20\n150\n50\n-\nI\n-\n200\n21\n175\n75\n10\n-\n-\n260\n22\n160\n75\n25\n1\n-\n260\n23\n150\n85\n35\nI\n-\n300\n24\n220\nso\n25\n1\n-\n325\n25\n225\nso\n35\nI\n-\n340\n26\n180\n50\n40\n-\n-\n270\n27\n240\n-\n50\n10\n10\n310\n25\n200\nso\n55\n10\n10\n355\n29\n205\n95\n55\n10\n10\n375\n30\n200\n100\n55\n10\n10\n375\n31\n240\n60\n5F\n10\n10\n375\n129\nOffice of the Secretary of the Trensury,\nDivision of Research and Statistics.\nRegraded Unclassified\nAT THE WHITE HOUSE\nWASHINGTON\nJanuary 1st, 1942.\nthom orr. Morgantham,\nThank you so much for your Christmas\ngreetings, and for sending me such an\ninteresting collection of records which\nI look forward to playing when 1 get back\nto my gramophone at home.\nJune grinf,\nhimhed Unmball\nThe donourable Henry Morgenthau,. Jr.,\nSecretary of the Treasury,\nWashington, D.C.\nRegraded Unclassified\nTREASURY DEPARTMENT\n131\nINTER OFFICE COMMUNICATION\nDATE January 1, 1942.\nTO\nSecretary Morgenthau\nFROM\nH. D. White\nSir Frederick Phillips called at three o'clock\non December 31 at his request. He submitted to\ndr. White a copy of 8. letter which he had received\nfrom Under Secretary of War Patterson informing\nhim that the War Department was going to pay the\nBritish Government cash for the planes it had taken\nfrom the British. No sum was mentioned in the let-\nter and Sir Frederick did not know but thought it\nwould be somewhere between $120 million and $200\nmillion.\nSir Frederick also submitted a memorandum\ndealing with the possible sale of ship-building\nplant incilities for consideration by the Treasury.\nBoth memoranda are appended. Are 14th time\nCown\nMr. White stated that he would take both the\nmatters up with the Secretary and was sure the\nSecretary would be pleased with the letter Sir\nFrederick received from Mr. Patterson.\nThere is also appended a letter from Sir\nPrederick to Secretary Morgenthau, expressing Sir\nFrederick's appreciation of Secretary Morgenthau's\nefforts in the matter.\nAttachments\nRegraded Unclassified\n132\nWillard Hotel,\nWashington, D.C.,\nDecember 31, 1941.\nDear Mr. Secretary,\nWith reference to our conversation\nlast week, I enclose copy of a letter from\n-\nMr. Patterson, and wish to express my hearty\nthanks for your invaluable help.\nYours sincerely,\nHhillips\nThe Honourable\nHenry Morgenthau Jr.,\nSecretary of the Treasury,\nWashington, D. C.\nRegraded Unclassified\n133\nC\n0\nP\nY\nWAR DEPARTMENT\nOFFICE OF THE UNDER SECRETARY\nWASHINGTON, D.C.\nDecember 27, 1941.\nSir Prederick Phillips,\nBritish Supply Council,\nVillard Hotel,\nMashington, D.C.\nthey de:- Sir Frederick:\nI refer to mir recent telephone\nconversation relative to remunerating the United\nKingdom for aircraft contracted for by it and which\nhere recently taken over by the United States.\nAt the moment it seems impossible to\nreach B. definite conclusion as to the notual money\nvalue of the articles taken. This reaction was\nabscribed to by personnel in the Air Corps and in\nthe British Purchasing Commission.\nThis is to inform you that it Is the\ndefinite intention of the War Department to make\nayment at the earliest practicable date in United\ntates dollars for the amount found to be due.\nincerely yours,\n(BGL) ROBERT ? Patterson,\nUnder Secretory or war\nRegraded Unclassified\nTREASURY DEPARTMENT\n134\nINTER OFFICE COMMUNICATION\nDATEJANUSTY 1, 1942\nTO\nSecretary Morgenthau\nFROM\nH. D. White\nMr. Gromyko of the Russian Embassy called on me\nyesterday afternoon at his request, He stated that\nhis Government had instructed him to arrange if\npossible with the U. S. Treasury for a sale of $20\nmillion of gold for future delivery. The terms to\nbe similar to the previous sale, 1.e., gold to be\ndelivered within 180 days. Mr. Gromyko stated that\nthe dollars resulting from the sale of gold were to\nbe used by the Russian Government for purchases in\nthe United States.\nI told Mr. Gromyko that I would take up the\nmatter with the Secretary at the first opportunity\nand would let Mr. Gromyko know.\nThe Russian Government still has to deliver\n$9,800,000 of gold against the previous advance of\n$30 million, The last delivery W&B on December 10.\nFinal delivery against that advance has to be made\nby April 8, 1942.\nMr. Gromyko stated that all their dollar payments\nwhich were due up to B. few days ago have been met or\nprovided for, largely with the aid of a receipt of\n$21 million from the Army and Navy which repurchased\nsome of their old dollar purchases.\nAt the close of business December 31, the cash\nbalances of various Soviet Government agencies in the\nChase Bank, the Federal Reserve Bank, and the Manu-\nfacturers Trust Company, amounted to $34.3 million.\nOf this amount, more than $30.7 million were committed\nagainst orders placed in the past, leaving an unobli-\ngated balance of less than $3.6 million.\nThey need $20 million to pay for goods which they\nare purchasing outside of the Protocol. He says, for\nexample, they are about to purchase 4,000 tractors;\nand other items are constantly coming up. He did not\nknow how long the $20 million would last, but he caid\nthey need some dollars very soon.\nTime\nRegraded Unclassified\n135\nm Cochiana\nTREASURY DEPARTMENT\nvolumenance\nINTER OFFICE COMMUNICATION\nreport sturned\nto Dr white for files his\nDATE January 1,1942\nTO\nSecretary Morgenthau\nFROM Mr. White\nMA\n1. There 18 appended a summary (prepared by Mr. Friedman of\nmy Division) of Mr. Cochran's report on his trip to China.\nThough many portions of the report are either of little\nimportance or out of date because of the war, I think that\nyou ought to read the whole summary.\n2. The points made in Mr. Cochran's report which I believe will\nbe of special interest to you are:\n(a) Mr. Cochran promised the Chinese Government officials,\nincluding the Generalissimo and Dr. Kung, that the\nTreasury would gladly send out further personnel, if\nadditional American assistance was required.\n(b) K. P. Chen in his conversation with Mr. Cochran indi-\noated his desire to withdraw from the Stabilization\nBoard. Mr. Cochran says that he 1s sure that Mr. Chen\nwould really like an invitation to the United States\nin connection with financial transactions which would\ngive him a nice way off the Board and & nice leave-\ntaking from you.\n(c) Mr. Cochran, in Hong Kong and Chungking, emphasized\nthat he believed it was vital for National China to\nmaintain at least existing contacts with Shanghai\nand that the initiative for severing such relations\nshould not come from Chungking.\n(d) Dr. Kung made certain specific proposals on which he\nrequested United States cooperation. These included:\n1. The setting up by the United States Treasury\nof 8. new and separate fund in United States\ndollars to constitute a reserve backing for\nChinese currency.\n2. The consolidation of the last three, or perhaps\nfour, of the American Export-Import bank loans\nto China, extending the term and increasing the\namount.\nRegraded Unclassified\n136\n- 2 -\nDivision of Monetary\nResearch\n3. Providing China with a few airplanes capable of\ntransporting valuable ores from the interior to\nthe coast.\n(e) The Generalissimo in one of his talks with Mr. Cochran\nstressed the need of a definite plan for economic\nassistance to China and said that the assistance should\ncome within three months.\n3. The various proposals referred to in Mr. Cochran's report\nare being studied here and the necessary memoranda are being\nprepared. After these proposals have been adequately ana-\nlyzed and discussed within the Treasury they will be brought\nto your attention.\n4. Mr. Cochran has recommended that copies be given to Messrs.\nBell, Foley, White, Livesey, Knoke and Mr. Pehle, when your\napproval 18 obtained.\n137\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE December 33, 1041\nTO\n77.\nMilto\nFROM\n17. Prindman\nWeb: of Kr. Dochmants remort on do trip to China.\nTrip 13 Hone Konn, Serventor 26 - Ochober 9\nToolaren 20ft Tashington on Senterber 25, 1941. in September 27,\nsrrived of San Prancisco, more he discussed problems of the For East\n15, It's :. Vice President terporarily in charge of the Federal\n*** at Son Trancisco. In con any with 315 Otto Meneyer,\n:, Coclush left For Prencisco on September 20 and terived in Monalulu the\nby day. In Honolulu, Dr. Cochran discussed corrent problems with the\nhere Control staff.\nIN Cochron left on Letcher 4 and errived at Vanila on\notder 5. There, \"r. Cockman discussed technical problems aricing under\nCreatin control and operations of the Stabilization Yoard with the\nheis Control staff and with the zich Comissioner and members of\n41\nstaff. \" Cochran recommended G weekly report of the Control's\nTirst to in Hon- Kone, letober 9 - 15\nto October 9, Mr. Cochran went to Kong Kong. In addition to meeting\nmay people, including Consul Cenaral Southard; Treasury representative\nPholmon; Xr. Grill Royers, Financial Adviser to the Dovember of Tong\n=; the pembers of the Stabilization Deard; IN Saxter, Financial\ncriter 50 Dovernment of Darma, and Sir York Yours, the lovernor-Cemeral,\nInclude riscussed with Yr. For and the other cercero of the Board,\nné with the Tritish visitors, Tr. Santer and Sir isto lieneyor, the new\nin % expersion letreen the United States n Funds Centrol and\nMy result ni checo discussions was B. joint\n- cotton from in. For má Mr. Coolumn to the Treasury dated October 15,\n\"2, The enreept Shanchei crisis vis also discussed and \"r, Cochran\n\"Y\" ended that the Foard show a Meenerous of attitude rather\nthan the necessity to develop for inporters to to into\nin their must for their It was decided that no evocutional\n- be taken it this the\nRegraded Unclassified\n138\n- 2 -\nDivision of Monetary Research\n3. First visit to Chungling, October 16 - 21\nAt Chungking, Mr. Cochran met a number of important officials including\nDr. T. C. Koo and Mr. O. K. Yui, Vice Ministers of Finance; Hollington Tung,\nVice Vinister of Information and Dr. H. H. rung. The Finance Minister asked\nMr. Coohran to thank the officials of the United States Government and\nparticularly Mr. Morgenthau, for the assistance being given to China.\nMr. Cochran told Dr. Kung that the Treasury would gladly send out further\npersonnel, if additional American assistance was required. Dr. Kung then\nspecifically outlined the assistance which he said would be most appreciated,\n4£ it could be provided. He referred to the request for an expert on the\nFederal Reserve system to be sent to China to study and improve the Central\nBank of China. Dr. Kung hoped that someone would come out who could remain\nas long as three years. He hoped that we would approve the idea of his\nsending three apprentices to the United States who could spend some time\nstudying the Federal Reserve Bank, the Board of Governors in Washington and\nthe Treasury system of Foreign Funds Control. Mr. Cochran assured him that\nthis could be arranged. Dr. Kung mentioned that he had asked Mr. Fox to\nserve as Honorary Adviser on Taxation. Mr. Cochran pointed out to Dr. Kung\nthat Mr. Fox had been the American nominee to the Stabilization Board and\nalso was looked on to conduct any economic research which might be required.\nDr. Kung was asked by Mr. Cochran whether in addition to these two tasks\nhe thought Mr. Fox would be in a position to serve also as Honorary Adviser\non Taxation. Dr. Kung replied in the affirmative.\nMr. Cochran says that Dr. Kung definitely stood out head and shoulders\nabove the other Government officials whom he met at Chungking.\n4. Second stay at Hong Kong, October 21 - 22\nOn his return from Chungking to Hong Kong, Mr. Cochran had a talk with\nK. P. Chen in which the latter indicated his desire to withdraw from the\nBoard. Mr. Cochran reminded him that the only condition which Secretary\nMorgenthan interposed when the Stabilization Agreement in China was\ncontemplated was that he, K. P. Chen, should be Chairman of the Board,\nand that the Secretary would be greviously disappointed if the Board should\nlose his services. Mr. Cochren told Mr. Chen that he realized that there\nwas need for greater harmony and strength within the Board's organization\nand that upon his return to the United States he would endeavor to arrange\nfor the sending out of such additional American experts and assistants as\nmight be required to improve the functioning of the Board, Shortly after\nthis talk Mr. Cochran left for Shanghai.\nRegraded Unclassified\n139\n- 3 -\nDivision of Monetary Research\n5. Visit to Shanghai, October 25 - November 2\nIn Shanghai, Mr. Cochran interviewed many representatives, official\nand unofficial, of the foreign community and discussed with them the current\nproblems facing Shanghai. He also spoke B. few worde at a meeting of the\nAmerican Chamber of Commerce at Shanghai on October 27, where he said that\nhe urged that no one should expect profits in Shanghai in these times. He\ndid express the hope that the American concerns would be able to maintain\ntheir foothold. Mr. Cochran pointed out to them that there was no probability\nof the Board being discontinued during the life of the Stabilization Agreement\nand said that he admitted that the Board needed improved technical personnel\nand management, as well as more space. He told them that it was his definite\nplan to send out two or more Americans from the United States shortly after\nhe returned to assist in the technical and office management end.\nIn Shanghai Mr. Cochran also discussed the question of the storage of\nfapi and in his report he expresses his belief that the Stabilisation Board\nof China should arrange with the Minister of Finance to permit the destruction\nof the stored fapi notes, such burnings to take place under Government super-\nvision and the Central Bank being given due credit on its books for the notes\nso destroyed. While in Shanghai, Mr. Cochran suggested to Mr. Lockhart that\nhe utilize increasingly the services of Consul Horace Smith in connection\nwith stabilization and Foreign Funds Control matters.\n6. Third stay in Hong Kong, November 5 - 8\nOn his return to Hong Kong, Mr. Cochran was invited by the Stabilization\nBoard to give the Board the benefit of the observations made on his Shanghai\ntrip.\nKr. Cochran, conscious as he says, of the pressure from certain\nGovernmental circles in China to dimish or even out off foreign exchange\nfrom Shanghai, spoke directly to this point. He told the Board that he\nfound the Shanghai people willing to listen to reason and that he thought\nthat they were genuinely disposed to cooperate in our effort to help China\nand to bring economic pressure on Japan. It was his definite impression\nthat Shanghai considered itself still & part of Old China and that there\nwas no significant element in Shanghai desiring closer ties with Japan. It\nwas vital for National China to maintain at least existing contacts with\nShanghai and the initiative for severing such relations should not come\nfrom Chungking. The Board could afford to go along carrying Shanghai for\nthe present. Vice Minister of Finance, Koo, told Mr. Cochran that he was\nparticularly happy to have the observations of an outside official who had\nvisited Shanghai so recently. Mr. Koo informed Mr. Coohran that he endorsed\nwarraly Mr. Cochran's recommendations with respect to Shanghai.\nRegraded Unclassified\n140\n- 4 -\nDivision of Monetary Research\nAfter the account of his travels, there was a discussion of the new\ncontrol regulations. Mr. Mall-Patch suggested postponement of license\nchanges with respect to trade, and Mr. Tsu Yse Pei endorsed this proposal.\nIT. Fox threstened to 20 home if the Board asked for a delay. Mr. Cochran\nmade the point that the Board had already agreed to the American plan.\nIt was decided not to delay.\nAt lunch on the came day, Mr. Chen said that he hoped that one of the\nAmerican credits to China could be completely paid off during the next\nfest months and that he would like to be in the United States when such\nfinal payment was made. Mr. Chen again urged that Mr. Morgenthau consent\nto his retirement from the Doard at an early date. Mr. Cochran says that\nhe in sure that Chen would really like an invitation to the United\nStates in connection with financial transactions which would give him a\nnice way off the Board and a nice leave-taking from Secretary Morgenthau.\nAt this time 1/7. Cochran and I.F. Chen talked of the necessity of impressing\nupon Chungling that receipts from exports handled by the Chinese Government\nwhich are not required for loan services should be thrown into a common\npool and he made available to the Stabilization Board rather than utilized\nby independent organizations of at political character.\nOn another occasion, Mr. Coohron esys that Mr. Pei informed him that\nhe thought Fr. Taylor's ability could better be employed in None Kong then\nin Chungling but he said that he and his Chinese colleagues on the Board\nwould not feel free to urge It. Taylor's return to Hong Kond, realizing\n17. Toxis antipathy towards his alternate.\n7. Second visit to Chuncking, l'ovenber 8 - 10\nAt the invitation of the Generalissimo, Mr. Cochran paid 8 second\nvisit to Changking. Or November R, 1r. Cochran had an informal meeting\nwith the Generalistino. Generalissimo asked Mr. Cochran his advice as to\nthat the attitude of the Stabilization Board should be towards Shanghai.\nCochran briefly cummarized to him the story which he had told to the\nSoard and -ive him \"guardedly and entirely unofficially, my own observations\n25 to what action the situation warranted on the part of the Board.\"\nConhran said that his conversation with the Generalissimo covered\nseveral current topics of interest, but the serious part was with respect\nto the operations of the Stabilization Board insofar as Shanghai THE con-\ncarned and AS to specific measures which the Chinese Government desired\nto SUS est to him for consideration by the American Government. The\nGeneralissimo stated that he had discussed this latter question with nis\nViniater of Finance and that Dr. Kung would communicate any proposals to\nhim et El luncheon the next day.\nRegraded Unclassified\n141\n- 5 -\nDivision of Monetary Research\nIn the interview with Dr. Kung, Mr. Coohren repeated the remarks\nwhich he made to the Generalissimo regarding Shanghai. Dr. Kung said that\nhe was glad to have his views on Shanghai. At this interview Dr. Rung\ninformed Mr. Cochran that he had learned that the United States Government\nhad no objection to Mr. Fox's appointment and that Chairman Eccles was\nfamiliar with the Ministor's request for the appointment of an export and\nwould receive the Chinese Ambassador in Washington for the discussion of\nthis subject. He spoke highly of the untiring efforts of Mr. Frese and\nsaid that Dr. Taylor had ability and thought that Fox should utilize\nDr. Taylor more directly on political and administrative matters in Hong\nKong rather than at Kunming. Mr. Coohran told Dr. Kung that he hoped after\nhis return to the United States to make recommendations which would provide\nAmerican personnel which could assist in & more orderly organization and\neffective administration of the Board and its business. The Minister then\nreferred to the Generalissimo's statement that the Chinese Government had\ncertain specific proposals to suggest and proceeded to request United States\ncooperation on the following measures. (The exact text of Mr. Cochran's\nreport regarding this ratter are contained in Appendix A.)\n1. The United States Treasury should dry up the supply of United\nStates currency in Shanghai, thus removing this contributing\nfactor from the black market and also prevent counterfeiting\nthereof by the Japanese.\n2. United States Government should help control American exports\nto Shanghai, calling upon the Chinese Consule or other Chinese\nofficials in the United States for assistance if necessary.\n3. The United States Treasury should set up in the United States\na new and separate fund in United States dollars to constitute\na reserve backing for Chinese currency. The British Government\nwould be asked to act similarly if the United States Treasury\napproved of such a plan.\n4. A consolidation of the last three, or perhaps four, of the\nAmerican Export-Import Bank loans to China, extending the term\nand increasing the total amount.\n5. United States should provide China with a few airplanes\ncapable of transporting tungsten from the interior to the\ncoast 50 that the production and marketing of valuable ores,\nespecially tungsten, could be speeded up and the foreign\nexchange receipts of China correspondingly increased. Planes\nof the Condor type would suffice.\n6. That the United States increase its economic pressure on Japan.\nRegraded Unclassified\n142\n- 6 -\nDivision of Monetary Research\nMr. Cochren on this point reiterated to Dr. Kung the new plan for\ncooperation between the United States Treasury and the Stabilization Board\nand ssid that nie only concern was that repercussions micht be felt in\nThanshat. Dr. Kung replied that the Japanese had already taken retalitory\nsetion and that he thought that we should [° shend and take severe neasures,\nInterportive of possible reprisals, economic or otherwise. Durine this\nconversation it. Cochran expressed to Dr. Kung his hope that he would not\nlet the Board be enbarrassed by any intervention by or conflict of duties\non the part of the Foreign Exchange Commission. Dr. Kung assured Mr. Cochran\nthat he would definitely take care of ti is situation. Dr. Yung said that he\n745 dad to have the research work being done by Fox and Adler as well as by\ndie case l'ienoyer and the latter's assistants and he promised to continue to\ntake available to those gentlemen such data as they might require in their\nstudies.\non the same day, lr. Cochran was invited to dinner by the Generaliosimo\nall maints he :ad another talk with him. The Generalissino stressed the need\nof a definite plan for economic assistance to China. ile said that the\nshould come within three months. Ee hoped for a plan of American\naid in the economic field as definite and precise as that bein~ developed in\n(\nthe military field. He was especially concerned over the currency and price\nproblems. 15. Cochran assured the Generalissimo that we are anxious to do\neverything poscible for China, He would present to the Secretary of the\nTreveury upon his return to the United States his report of conditions as\nlie found them and it would be his strong recommendation that everything\npossible be done on our side to sugrent and strengthen the American\npersonnel participating in the Stabilization Doard. After this conversation,\nCochian talked with Itr. Intimore who told him that Mis Chinese friends\nwere very happy over Ir. Cochran's visit and were hopeful that the messages\nwith t.e was taking back to Washington would be welcome and riven careful\nconsideration.\nin the last day of NÃE vicit in Chunghing, Mr. Cochren discussed with\nPir Stic Miemeyor the latter' S views regarding economic conditions in China.\nCAN Ctto and that no thought it was perfectly obvious as to what was siling\nChina 25 all the usual and well-inom symptoms of currency inflation were\n30 clear as day-light. Re succested (a) rigid examination of expenditures,\n(b) increased in taxation, (c) genuine patriotic drive for more loans raised\nfrom real savings.\nCourth and last stay 2n Hong Kong, November 11 - 12\nDuring Dr. Cochran's last visit to Hon- Mone, Dr. Arthor A. Yours,\nManojal Advinor to the Chinece Government, called on him and left with\nkin tre documents discussing Chinese economic problems.\n0. totern tric.\nSochwen arrived in Washington on November 19, 1941.\nRegraded Unclassified\n143\nAPPENDIX A\nProposals made by Dr. Kung to Mr. Cochran\n(1) That the United States Treasury dry up the supply of United States\ncurrency in Shanghai, thus removing this contributing factor from\nthe black market, and also preventing counterfeiting thereof by\nthe Japanese. The Minister suggested that we follow the British\nexample of \"calling currency home\". I told the Minister that we\nhad at various times since the outbreak of the present war considered\npossible licensing control of exports and imports of our currency,\nbut had so far taken no general step of the type of which he spoke.\nI told him that there were various reasons which had 50 far weighed\nagainst such action. For example, the dollar is used as a currency\nof refuge in many countries, including some of those now invaded.\nde should not like to take any action which would cause losses to\nindividuals who had put their confidence in our currency and would\nnot now be in a position to follow regulations for the repatriation\nwithin a. specified time of their United States currency to this\ncountry. Furthermore, the dollar circulates in Cuba, the Philippines\nand certain parts of Latin America. To call home such dollars would\nlikely interfere with commercial business and might even have an\nadverse effect upon certain currencies, particularly the Philippine\npeso. I told the Minister, however, that I was sympathetic with the\nidea that my country should do what it could to relieve the situation\nresulting from dollar currency being so sought after in Shanghai that\nthe yuan depreciated unduly, as nessured against the American dollar\nnotes.\n(2) That the United States Government help control American exports to\nOhina, calling upon the Chinese Consuls or other Chinese officials\nin the United States for assistance if necessary. I replied that\nthe new plan which we were then working on for cooperation between\nthe American Treasury's Foreign Funds Control and the Stabilization\nBoard of China would provide material assistance on our part. The\nTreasury could utilize various of its agencies, particularly its\nCustoms Service, for strengthening and implementing regulations of\nForeign Funds Control. We should not desire to complicate this\nsystem by enlisting the assistance of Chinese Consular or other\nofficials in the United States until we might have an opportunity\nto give our own plan a trial and judge its results.\nRegraded Unclassified\n144\n- 2 -\n(3) That the United States Treasury set up in the United States a new\nand separate fund in United States dollars to constitute B. reserve\nbacking for the Chinese currency. The British Government would be\nasked to act similarly if the United States Treasury approved of\nsuch a plan. Dr. Kung was not able to give any more specific\nsuggestions in answer to my request for details of such a plan. He\nwas simply anxious that we let the world know, and permit him to\nstrengthen Chinese confidence in the yuan through such knowledge,\nthat the United States and Great Britain were determined to maintain\nthe stability of the Chinese yuan, and had set aside certain reserves\nto guarantee this undertaking. The Vinister did not think it would\nbe necessary to utilize such sums, feeling that the psychological\neffect would be sufficient. It was not his idea that such funds\nshould be turned over to the Stabilization Board of China and used\nin the manner now followed with respect to the current assets of the\nBoard.\n(4) That there be a consolidation of the last three, or perhaps four,\nAmerican Export-Import Bank loans to China, extending the term and\nincreasing the total amount. The Minister observed that the Customs\nreceipts of China are pledged for some of these loans, but that the\nJapanese actually control most of the Customs. While the Secretary\nof the Treasury had been responsible for negotiations leading to the\nearly financial assistance to China, I remarked that such consolidation\nдо the Minister now suggested would be a matter for the Export-Import\nBank. I was happy, however, to pass this request on through the\nSecretary of the Treasury. When the Minister spoke of the need for\nnore money for imports, I reminded him that the credits had not yet\nbeen drawn on to their full extent; that much material was being\nprovided China under Lend-Lease; thus reducing the necessity for\ndirect financial credits; and that shipping and priority problems,\nand growing international political difficulties, would also cut\ndown the amount of goods which could be exported to China.\n(5) That the United States provide China with a few airplanes capable of\ntransporting tungsten from the interior to the coast, particularly\nHongkong, so that the production and marketing of valuable ores,\nespecially tungsten, could be speeded up and the foreign exchange\nreceipts of China correspondingly increased. Dr. Kung reminded me\nthat China had five Condor planes which were being used in service\nof this kind. I told him that I had seen some of these in the hangar\nat Hongkong and also had seen the bags of tungsten ore which had been\ntransported by this route. Dr. Kung said that such planes as we\nnight spare for this commercial purpose need not be the latest model.\nSomething of the Condor type would suffice.\nRegraded Unclassified\n145\n- 3 -\n(6) That the United States increase its economic pressure on Japan. I\nreiterated to Dr. Kung that the new plan for cooperation between\nthe United States Treasury Department and the Stabilization Board\nof China should very materially strengthen the economic encirclement\nof Japan. My only concern was that early repercussions might be\nfelt on Shanghai. Dr. Kung said that the Japanese had already taken\nretaliatory action, referring to the embargo which they put upon\nexport of cotton manufactures from Shanghai, and that he thought we\nshould go ahead with our severe measures, irrespective of possible\nreprisals, economic or otherwise.\nRegraded Unclassified\n146\nAPPENDIX B\nList of Enclosures\nEdmire 10. 1\nDraft of cable from Treasury to For, September 29, 1941,\ncontaining proposed China program.\nInclosure 110. 2\nCable of October 2, 1941 from Fox to Treasury, in reply\nto Treasury's cable of September 29.\nReclasure lic. 3\nCoble of October 6, 1941 from Fox to Treasury regarding\nproposed new program.\nTo. 4\nCable of October C, 1941 from Fox to Trensury viving\nChinese reaction to Treasury cable of September 29.\ninclosure No. 5\nMemorandum prepared by Mr. Cochran with respect to the\nAmerican plan for cooperation by Foreign Punds Control\nwith Stabilization Board.\nEnclosure No. 5\nMemorandum of October 12, 19/1 submitted by 12. Noi Te-nou\nregarding Central Bank of China.\nEnclositre No. 7\nLetter from Foreign Exchange Control Commission to\nStabilization Board with respect to the division of\nforeign exchange.\nEnclosure No. 5\nLetter 05 October 13, 1941 from Board to Vice Minister\nY. C. Koo regarding letter of October 7, 1941 from\nthe Vereign Exchange Control Commission.\nSnclomire No. 9\nCable of October 13, 1941 from Consul General Southard\nto State Department regarding hiring of additional\nclerk.\nVaclosure No. 10\nMemorandum of October 13, 1941 prepared by Mr. Tou Yo\nPei regarding the American proposals.\nEnclosure No. 11\nMenorandum of October 14, 1941, prepared by Mr. Cochran\nincorporating the views of the Board, together with the\nAmerican proposals.\nInclosure No. 12\nMemorandum of September 23, 1941 by Mr. A. E. Young\nentitled \"The Price Situation and Financial Policy.\"\nRegraded Unclassified\n147\n- 2 -\nEnclosure No. 13\nRevised draft of Pei's memorandum of October 13, 1941.\nEnclosure No. 14\nCable of October 15, 1941 from Cochran and Fox to\nTreasury containing proposals regarding new China\nProgram.\nEnclosure No. 15\nNewspaper story of October 16, 1941 of press conference\nwith Mr. Cochran and Sir Otto Niemeyer.\nEnclosure No. 16\nCopy of letter from Mr. A. N. Young to Central Bank\nof China regarding the controlling of exports from\nthe friendly foreign countries to China,\nEnclosure No. 17\nLetter from O. K. Yui to Mr. Cochran enclosing letter\nfrom Dr. Kung to Mr. K. P. Chen regarding new China\nProgram.\nEnclosure No. 18\nCable of October 20, 1941 from Cochran to Treasury\ncontaining Dr. Kung's letter to K. P. Chen.\nEnclosure No. 19\nChungking news bulletin regarding visit of Mr. Cochran,\nMr. Baxter and Sir Otto Niemeyer.\nEnclosure No. 20\nThere is no reference to enclosure No. 20, nor is there\nsuch in the appended enclosures.\nEnclosure No. 21\nMeeting of American Chamber of Commerce on October 27,\n1941.\nEnclosure No. 22\nLetter of October 30, 1941 from Mr. A. E. Schumacher,\nResident Manager of the Chase Bank, to Mr. Cochran,\nEnclosure No. 23\nMemorandum of October 28, 1941 prepared by Consul\nSmith giving high lights of a discussion of an\neconomic club meeting in the American Club.\nEnclosure No. 24\nCopy of letter of October 14, 1941 from Mr. Mackay\nto Mr. Hart of National City, New York.\nEnclosure No. 25\nMemorandum to Mr. M. R. Nicholson from Mr. Mackay\ndated October 28, 1941.\nDogradod\n148\n- 3 -\nEnclosure No. 26\nMemorandum to Mr. Cochran from Mr. Mackay dated October 29,\n1941.\nEnclosure No. 27\nMemorandum to Mr. Cochran from Mr. Mackay dated October 30,\n1941.\nEnclosure No. 28\nLetter of November 1, 1941 to Mr. Cochran from Mr. Mackay\nenclosing copy of letter to Mr. Fox of September 17, 1941.\nEnclosure No. 29\nSuggestions for modification of the Foreign Exchange\nApplication System made by Mr. As T. E. Shao, sub-manager\nof the Bank of China,\nEnclosure No. 30\nMemorandum on life insurance in connection with the\nStabilization Board and the American Freezing Act\nprepared by Mr. P. M. Anderson, General Agent for China\nof the Occidental Life Insurance Company.\nEnclosure No. 31\nNote regarding imports of Tonkin Authracites in Shanghai\nsubmitted by Mr. P. Dupuy, Director of Hongay Sales, Ltd.\nEnclosure No. 32\nBooklet on Shanghai Power Company. (not with report)\nEnclosure No. 33\nLetter of November 1, 1941 from Mr. Hutchison, Commercial\nSecretary of the British Embassy to Mr. Cochran\nInclosure No. 34\nLetter of October 30, 1941 from Kr. Pruce 11. Smith, a\nmotor car dealer, to Mr. Nicholson.\nReclosure No. 35\nCable from National City in Shanghai to Hong Kong and\nShanghai Banking Corporation, Hong Kong, regarding\ncontemplated issue of a new currency by the Nanking\nBank.\nEnclosure No. 36\nMemoranda and letters addressed either directly to\nto 42\nMr. Cochran from the Chase Bank in Shanghai and Hong Kong,\nor addressed to Mr. Nicholson and handed by him to\nMr. Cochran,\nEnclosure No. 43\nLetter of October 29, 1941 to Mr. Cochran from Mr. N. F.\nAllman, an American attorney in Shanghai.\nRegraded Unclassified\n149\n- 4 -\nEnclosure No. 44\nCable from Mr. Cochran to Treasury with respect to\nthe liaison work of Consul Smith and recommending\nemployment of Miss Miriam Forbes.\nEnclosure No. 45\nCable to Fox and Cochran from Treasury dated October 28,\n1941 regarding Cochran's and Fox's proposals.\nEnclomire No. 46\nCable of November 5, 1941 from Dr. Kung requesting\nMr. Cochran to visit Chungking.\nEnclosures Nos.\nCopies of telegrams of November 6, 1941 to Chungking\n47 - 48\ninforming Dr. Kung of Mr. Cochran's coming visit.\nEnclosure No. 49\nCable of November 6, 1941 from Dr. Kung to Mr. Cochran\nagain requesting him to Chungking.\nEnclosure No. 50\nMemorandum submitted to Stabilization Board by\nShanghai Municipal Council regarding foreign exchange\nneeds.\nEnclosure No. 51\nMemorandum of November 1, 1941 submitted by Mr. Chen\non China's potential exports and on the position of\nAmerican credits to China.\nEnclosure Mo. 52\nCable to Treasury from Fox and Cochran dated\nNovember 6, 1941.\nEnclosure No. 53\nMemorandum submitted to Mr. Cochran by Mr. Tsu Yee-pei\non how the provision of transportation facilities\nunder the Lease-Lend can contribute towards improving\nthe position of the national finance.\nEnclosure No. 54\nCable from Nicholson to Cochran and Fox giving\nTreasury cable on delay.\nEnclosure No. 55\nCable to Treasury from Fox and Cochran on delay sent\nto Nicholson for transmissal.\nEnclosure No. 56\nCable from Treasury to Fox on his appointment as\nAdvisor to the Ministry of Finance.\nEnclosure No. 57\nMemorandum prepared by Mr. Young on the Practicability\nof Chinese Government Borrowing from the Public.\nEnclosure No. 58\nAnalysis of policy regarding the Chinese currency\nsituation dated March 31, 1941 prepared by Mr. Young.\nRegraded Unclassified\n150\n42\nlear Mr. Pricer\nTida is in response to your letter of recember 27, 1941,\nralaing the problem of financial aid for Chinese students in\nthe United States who are deprived of funds from home,\nin YLEW of the circumstances you relate, it new to\n- that the if 4 problem which the overnment of China will\nwast to handle. I do not think that Lend-Lesse funds should\nbe used for this purpose. A decision $ the question of aid\nthrough other American changels eight ml) be post poned Joned until\nthe Chinese authorities have been as reached, and have indica-\nted should or not they can dre the required atd.\nThe Thinese Forei Vinister, 17. Y. V. 0012, ar Le\nintessasor, in. Yu rish, shore you vittien, would sees to me\nto N the authoritter with shop you would went to discuss the\nproblem.\nIf your discussions with the Chinese authorities 20\nnot yimic a autiofactory solution of UA problem, I hope\nthat you will let \" know. : think it important that these\n(riness students who are in the Enited tales should be taken\ncare of, and I will be surgrised If funds appropriate for\nthis purpose were not availatle constrere.\nTimerely,\nstaned) 4. ...\nSecretary of the Treasur,\nis. irnest 8. Pice,\ndirector,\nInternational Kowev,\nChicago, Illinois\nchara file nmc\n12/30/41.\nRegraded Unclassified\nINTERNATIONAL HOUSE\nCHICAGO\n- TAIRPAS Baoc\nTale un PTRASE\nDecember 27, 1941\nPERSONAL\nMr. Henry Morgenthau, Jr.\nTreasury Department\nWashington, D. C.\nDear Mr. Morgenthau:\nHere is a matter on which you may be willing to ex-\npress a personal opinion, without being quoted, or suggest a\nmethod of procedure.\nAs you doubtless know, we have here at The University\nof Chicago and, for the most part, resident at International\nHouse, a considerable number of Chinese students - some twenty-\nfive or thirty. Their position was difficult enough before\nJapan declared war against the United States and Britain, but\nnow with Hong Kong fallen, they are completely cut off from\nany possible source of funds from home. Hitherto we have helped\nthen from funds raised locally, but now the situation has\nreached a point where it seems to me both our Government and\nthat of China must take official cognizance of it.\nWhat I am writing particularly to inquire is whether,\nin your opinion, the Lend-Lease funds made available to China\ncould be used to meet the basic living expenses of Chinese\nstudents now cut off from any source of funds from home and\nphysically unable to return home. If, in your opinion, the\nterms of the credit to China permit its use in this manner,\nhow would you suggest that we proceed to bring this matter in-\nto official channels? I know Dr. Hu Shih personally very well,\nand I also used to know T. V. Soong. 1 did not want to approach\nthem, however, until I had ascertained whether or not Land-Lease\nfunds could properly be used for this purpose.\nI do not know how many Chinese students there are in\nAmerica in the same predicament, but I think the problem repre-\nsented by our group here is a rather large and complicated one.\nUnless the situation is handled pretty promptly, I fear we shall\nhave an embarrassing situation on our hands the country over\nas well as locally.\nRegraded Unclassified\nHenry Morgenthau, Jr., 2\nDecember 27, 1941\nOur local situation is sufficiently serious that I would\nto make a. personal trip to Washington to talk the matter\nneur 90 with the appropriate people, if it would do any good.\nWith best personal regards, I remain\nYours very sincerely,\nEmust B. Price\nErnest B. Price\nDirector\nRegraded Unclassified\n153\nEJ\nPLAIN\nChungking via N, R.\nDated January 1, 1942\nRec'd 5:26 a.m.\nSecretary of State,\nWashington.\n1, First.\nFOLLOWING FOR TREASURY FROM FOX.\nTF-W reference numbers two nine three and\nthree two five. On Monday, DECEMBER Eight, bond\nof CMAC told me Eight places were reserved for\nthe Board if a plane left Hong Kong that night.\nI suggested preference bE given Chinese and hE\nsäätä that Loy Chang of Chinese Customs should\nbe included. Agreed that following should DE\ngiven places: Chen and MIFE, PE1 and Manager of\nSank of China, Hsi Temou and wife, Chi and Lay\nChang. When Loy Chang declined place little after\nnine 9.m. I immediately phoned Frese making place\navailable to him. HE declined saying hE preferred\nto remain with records. At midnight Hsi phoned\nthat hE and wife would not lEAVE that night. As\nthere was no trensportation between Hong Kong and\nKovloon after ten 9.m. and R6 Frese and Taylor\nwere\nRegraded Unclassified\n154\n-2- January 1, 1942, from Chungking via N. R.\nwere on the Hong Kong side the only way to make\nUSE of the three vacant places was for Adler,\nHEWlEtt and me to take them. BEforE leaving I\nGAVE bond priority list with names Frese and\nTaylor first and particularly requested that\nplace bE reserved for Frese on next plane.\nBond subsequently informed me that hE had phoned\nFrese on DECEMBER ninth and that Frese had in-\nsisted that priority bE given to Miss Howkins,\nSecretary to Hall-Patch which Bond refused. HE\nseid that if Frese and Taylor had been on the\nKowloon side Tuesday Evening they could have\nlEft on what transpired to bE the last plane\nout of Hong Kong. There has been no further\ninformation on Frese and Taylor since TF-V.\nRE your 304 of DECEMBER 16 and your 328\nof DECEMBER 27 amendments to licenses noted and\napproved with one further suggestion. While\nthe mechanism for Effecting remittances developed\nin general licenses seventy-five is highly satis-\nfactory, it should bE valid only for remittances\nto free China and remittances to occupied China\nEffected via free China.\nGAUSS\nHPD\n155\nPARAPERASE OF TELEGRAM RECEIVED\nэлон: American Embessy, Chungking, China\nWT: January 1, 1942, 9 seme\n10.1 2\nThis mossage is for the Decretary of the Treasury\nfrom - Manuel Fox.\nThis is 41. (TY-) from the stabilization\n300ml to the Federal Asserve Hank or Now York:\nConcerning Gelugram no. 33 of yours, the Central\nSMR of Unine Building, in Chungking, is the laco of\noperations of the DO rd. The so rd's understanding that\n207 18 the new number effective as of December 20, 1941\n16 morety confirmed.\nIt would to approciated by the Bourd 11 you would\nnotify 16 what amount of dollars (United tates surrency)\ndisbursed by JOL on its account up to and Including the\n6th of December, 1941, and also what amount of disburse-\nment, if NO. which you since cade on its account.\nGAUSS\nRegraded Unclassified\n156\nNMC\nGRAY\nChungking\nDated January 1, 1942\nRec'd 5:36 a.m.\nSecretary of State\nWashington.\n3, Jamuary 1, 11 u.m.\nFOLLOWING FOR SECRETARY OF THE TREASURY\nFROM FOX: STROH-Y\nOnE. A. returned from Kunming yestErday\nafter two WEEKS visit.\nGreatly impressed by cfficisncy of factorits\nin that vicinity but disappointed in Evidence of\ndeflationary policy recently put into Effect.\nConcerned lest it striously affect production\nof all vitally necessary Equipment and products\nwhich otherwise will need to bE imported.\nB. Found concern over very high pricts\nand shortage of goods and over danger to value\nof fapi unltss some basis of support is Established\nand especially for meeting intvitable large deficit\nfor 1942.\nC. Having mode arrangements in Kunming for\nstregthtning Board's\nRegraded Unclassified\n157\n-2- 1/3, January 1, 11 a.m., from Chungking\nstrengthtning Doard's office and provida as Car\nas (?) feculities art (?) for maximum movenent\nof goods into free China from Rangoon. In view\nof limitations of Burma Road and military demands\non Road outlook for flow of goods and price\nsituation not too promising.\nTwo. (?) (4) of your 304 of December 16,\n9 p.m., I shall convey your message to Doctor\nKung at the Earliest opportunity and I am sure\n109 spirit will bE much appreciated. RE has been\nseriously ill and it may not bE possible to SEE\nhim for a few days yet. To avoid embarrassment,\nI should appreciate it if you could notify me what\nhis additional proposals to Mr. Cochran were.\nThree, The Board asks me to transmit the\nfollowing message to you: \"Owing to the loss of\nits records in Hong Kong, the Board is temporarily\nunable to fulfill its obligations under paragraph\n1 (D) of the Sino-American agreement of April 1941.\nThe Board is making EVEry effort to reconstitute\nits records and hopes to bE able to resume the sub-\nmission of its monthly reports to you at the Earliest\nopportunity.\nGAUSS\nPEG\nTREASURY DEPARTMENT\n158\nINTER-OFFICE COMMUNICATION\nDATE January 1, 1942\nTO\nSecretary Morgenthau\nFROM Districh\nSTABILIZATION AGREEMENTS\nOn July 14, 1937. we made an agreement with the Central Bank\nUnina: of ins to purchase yuan the to a total value of 50,000,000 The a_reement has\nbeen reseved each six months and now expires June 30, 1942. At present, ve hold\nsbout 65,000,000 yusa, with & book dollar value of 19,112,500. and this is col-\nlateralized by 19,379,018 in gold 1016 at the Liew York Federal Reserve Bank.\nOn April 1, 1941. we made en agreement with the National\nGovernment of the Republic of China and the Central Bank of Uhina wherein we\nrequired. So far, ye have made no yuen purchases under this agreement. which\nagreed to purchase yuar un to the e-uivalent of $50,000,000, no collateral being\neinires June 30, 1942. The Chinese-Asericen-British Stabilization Board began to\noperate in mid-august, and the Chinese Government banks have furnished their\ncontribution of 20,000,000 to the Joint Stabilization Fund. At the end of\nscember, there vas e belance of 6,750,200 in the .linese Stabilization Fund\naccount nt the /en York Federal Reserve Bank.\nOn July 15, 1937, we made an agreement with the United States\nBratil: of Brazil, which expires on July 15, 1942. We agreed to purchase milreis no to a\ntotal value of 60,000,000, to be collateralized by Cold. At present, ye hold\n160,000,000 milreis, with B. book dollar value of $6,000,000 and collateralized by\n60,000,000 in gold by the United States, suc gold to be enropred for Gramil's\n0.089,092 in gold. The agreement also provides for the sale to Brazil of un to\naccount at the Lew York Federal Reserve Senio: by a molification of Sectember 2.\nis to the eni of December, we had solá Brazil 29,465,771 In (01d, and Bramil had\n1938 Bratil WEB permitted to ship ¿olá here and place it in the surmarked account.\nshirped 11,332,765 in 6016 to New lork: except for the amount set aside as col-\nInteral, mil of this 2012 is under earmark for Brazil nt the Federal.\nDuring December, no change took place under the January 1, 1941\nArgentina: agreement with the Banco Centrol de la Republice .rgentine and the Government of\nArgentine, under vnico we agree to purchase Argentine pesos up to a to:al VI Lue of\n0,000,000, for which no collateral is required. Since tris & reement has not yet\nsoen ratified by the AT entine Legislature, it is inoperative at present.\nAs of November 1, 1941, the Trensury entered into en agreement\nnéxico: the Government of the Republic of Mezico ano the Benco de Mexico, under which\nviti ve to puro 0.86 Mexican Jesos in to 1. total value of 140,000,000, no collateral that\nDein eyree required. This agreement, which expires Oil June 30, 1943, stimulates to\nstall have 180 days' notice and then no additional 180 days in which the re-\nexico aurchase. \"e have not yet received official notification that the action such of\nexition Government «ДС 3an. in enterin to not has been\nresification is necessary for bid agreement to bioth operative.\nRegraded Unclassified\n159\n-2-\nColombia:\nA Stabilization agreement has been discussed with Colombia,\nunder which we would buy Colombian pesos up to the equivalent of $3,000,000, no\ncollateral being required.\nLoundor:\nA Stabilization agreement with Ecuador has been discussed. In\nearly conversations, $5,000,000 was considered as the limit to such an agreement,\nbut from an October 24 meeting with the Ecuadorian Andessador, it was gathered that\nthe maximum amount may be reduced to $3,000,000. and $1,000,000 of this would be\nprovided by Ecuador.\nIn an October 24 discussion with Treasury officiale regarding B.\nBolivia: Stabilization agreement, the Bolivian Minister stated that be thought his country\nwould need between $5,000,000 and $8,000,000 to stabilize its currency.\nIceland:\nDiscussion for B. $2,000,000 Stabilization agreement with Iceland\nbegan about the end of September. Iceland's approval of the agreement as drafted\nhas not yet been received.\nCuba:\nIn the initial report of the American Technical Mission to Cuba,\none of the alternative recommendations yes that Cuba night issue pesos against gold\nobtained on credit from the U. S. Stabilization Fund.\nGOLD PURCHASE AGREEMENT\nmussia:\nOn October 10, 1941, we agreed to purchase from the Russian\nGovernment approximately $31,605,000 in gold for delivery within 180 days, and\ngave Russia an advance of 30,000,000 on October 11. By the end of December, there\nremained $11,866,875 in gola still to be delivered by Russia, end the advance had\nbeen reduced to $9,603,423.\nA\nRegraded Unclassified\n160\nBRITISH EMBASSY\nWASHINGTON, D.C.\nJanuary 1, 1942\npersonal AND\nsecret\nDear Mr. Secretary,\nI enclose herein for your personal\nand secret information copy of the latest\nreport received from London on the military\nsituation.\nBelieve me,\nDear Mr. Secretary,\nVery sincerely yours,\nHalifax\nThe Honourable\nHenry Morgenthau, Jr.,\nUnited States Treasury,\nWashington, D.C.\nRegraded Unclassified\n161\nCopy No. 14\nBRITISH HOST SECRET\n(U.S. SECRET)\nCETEL No. 57\nInformation received up to 7 a.m., 31st December, 1941.\n(I) NAVAL\nHome waters 30th. A photographic reconnaissance of BREST during\nafternoon subsequent to attack mentioned In paragraph 3 below showed the SCRARN-\nHORST and PRINZ EUGEN in dry dock and GREISENAU alongside the torpedo boat\nstation with no apparent damage.\nMEDITERRANEAN. 29th, A convoy ascorted by cruisers and des-\ntroyers arrived at ALEXANDRIA from BALTA. The Force had been several times at-\ntacked unsuccessfully by enemy aircraft,\n12th, One of H.M. destroyers escorting a convey to TOBRUK\nsuccessfully drove off by gunfire two enemy torpedo bombers which attacked her\nNortheast of BARDIA.\nOne of H.M. gun-boats successfully engaged too enemy coastal\ndefence guns in the vicinity of BARDIA, One of H.M. submarines has shelled\nand munk 5 enemy schooners at SUDA BAY and at [ETHONI (Southwest GREECE). She\nalso torpedoed an Italian destroyer inside SAVARINO HARBOUR on the 29rd,\n(II) VILITARY\nLIPXA. It is now known that in the tank battle south of JEDARYA\non 28th we destroyed 22 enemy tanks and severely damaged a further 20. Our\nlosses mere 6 tanks knocked out and 8 more left on the battle field and pro-\nbably lost, No further battle had developed by 8,30 a.n. 30th. At that time\n40 enemy tanks tere reported advancing Northwest from EL HASEIAT (30 miles\nSoutheast of JEDABYA).\nMALAYA. The bridge at KUALA DIPAIG (7 miles north of EMPAR)\nhas been successfully destroyed,\nBURNA. BOKPYIN which was unsuccessfully attacked by our forces\non 27th was evacuated by the Japanese during night 28th/29th and waz occupied\nby our forces on the norning of 30th,\nRUSSIA. l'ein Front, The Russian advance is continuing.\nCRINZA. The Bussians have landed on the KIRCH Penianila and\nhave recaptured KERCH and FEODOSIA,\n(III) ATS FEATHE\nCESTER 30th. 9 Squadrens 67 fighters (Am item I\nare missing) eseccted 2é Balifax in an attack on the marchine it\nRegraded Unclassified\n162\n- 2\nBREST, the results of which 3079 not observed. A.A. fire WHE intense and\naccurate, 3 of our bombers are missing, the crew of one being rescued from\na dingby 50 miles north of BREST. Four fightere destroyed 6 ME 109's and our\nbombers destroyed another, 7 more mere probably destroyed, 30th/31st. 6 air-\ncraft of coestal command attacked the docks at LA PALLICE, Hits are claimed\non the mole and III tanker was possibly damaged,\nMEDITERRANGAN. LIBYA. 29th. 4 squadrons of Blenheims attacked\nenemy positions and the landing ground et JEDABYA, many vehicles and two air-\ncraft were destroyed, Other Blenheims dropped bombe among dispersed motor\ntransports 20 miles south of JEDABYA, 3 squadrons of Blenheims registered\nmany hits on enemy positions at BARDIA, Blenheims attacked energy vehicles in\nthe areas of MISURATA and ZOUARA, 3 small ships and 3 lighters were sighted\nat RAS ETALE (26 miles west of EL AGHEILA). Supplies were apparently being\nlanded at a temporary jetty there and also at RAS LANUF (43 miles Northwest\nof EL AGHEILA). At RAS EL ALI 500 M.T. were seen dispersed around the jetty.\nMALTA. 29th, 5 enemy fighters machine gunned naval units,\nOne ME 109 WSE probably destroyed by Aurricanes, two of which are missing.\n12 bembers attacked LUQA causing some damage to aircraft on the aerodrome.\nNight 29th/30th. 3 enemy aircraft dropped bombs on the island\ncausing a few army casualties. 30th, 3 raids were made during the second (by\n6 bombers escorted by 40 fighters) the serodromes at TAKALI and LUQA and a\ndockyard were attacked, two bombers were destroyed and one probably destroyed\nby our Burricanes,\nFAR EAST. MATAXA- 29th, KUANTAN aerodrome again attacked\nbut no damage caused, P.M. Enemy aircraft made 3 attacks on SINGAPORE\nIsland, details of demage not yet known.\nJOHDRE. 29th, From army sources it is reported that LUANG\nwas bombed and machine gunned.\n(v) HME SECURITY\n29th/30th, Casualties nt NEWCASTIE and in the NORTHUMBERLAND\narea are reported to he 11 Hilled and 32 seriously injured.\nRegraded Unclassified\nTREASURY DEPARTMENT\n163\nINTER OFFICE COMMUNICATION\nDATE January 1,1942\nTO\nSecretary Morgenthau\nFROM\nMr. Kamarck\nsubject: Summary of O.C.I. Bulletine No. 1 and No. 2\n(\"Iran - A Threat to Britsin\": \"Axis Propagenda\nin the Moelem World\")\nBoth of these bulletins have the same theme: The\nArab neobles of the Near East want to be independent\nof foreign control. They have B long history of hatred\nof British imperialism. The Germans have tried and\nhave been able, to some extent, to turn this hatred of\nthe British into sympathy for the Axis in its war on\nthe British. While Iran is now quiet, \"1t 18 the forced\nquiet of 8 conquered country.\"\nThe Axis radio at Zeesen, Germany, plays on the\nArab hatred of the British, the upper-class fears of\nBolshevism, the anti-Jewish feeling resulting from the\npolitical embitions of the Zioniete, and general Moslem\nconservatism. American association with England has\nled the Arabe to believe that we support the disliked\nBritish policies in the Areb world.\nRegraded Unclassified\n164\nBULLETIN NO. I\nRESTRICTED\nCOORDINATOR OF INFORMATION\nIRAN - A THREAT\nTO BRITAIN\nThe recent occupation by force of arms has\ndeepened the long-standing Iranian hatred\nof the British to a point where the Iranians\ncan be depended upon to do everything\npossible to impair the British war effort.\nThrough lack of cooperation, sullen acquies-\ncence, and outright sabotage, they could\nconstitute a threat to the transportation\nroutes which are of vital importance to the\nBritish even if the Germans do not drive\nthrough the Caucasus to the Iranian borders.\nDECEMBER 23, 1941\nRegraded Unclassified\nIRAN- A THREAT\nTO BRITAIN\nAlthough Iran is occupied and officially \"pacified,\"\nthe anti-British feeling of the Iranians is 30 intense\nthat they would do no more to help Britain than to\nhelp Germany. A nation whose people gloated over\nEnglish soldiers being swept into the sea off Dunkirk\nis not likely to prove a willing ally.\nThis hatred of England is traditional. In 1907 the\nfirst partition of Iran into \"spheres of influence\"\nbetween Great Britain and Russia reduced Iran to\nthe equivalent of three vassal states. As a result,\nIranians neglected internal reform and concentrated\ntheir attention on an intense hatred of Russia and\nBritain.\nFurther experience with major powers came to\nIran during the war of 1914-18. Iranian neutrality\nwas repeatedly violated, and Iran suffered all the\nhorrors of war with none of the compensations allowed\nthe victors. After the war, Lord Curzon drew up an\nAnglo-Iranian treaty so one-sided in favor of England\nthat riots took place in Iran and their Assembly\nfailed to pass the bill.\nThis event marked the official shift from the Old\nRegime in Iran to the Iran of Riza Shah, who rode the\nwave of anti-British feeling into the Ministry of War,\nthen into the position of Prime Minister, and finally\non to the throne itself. It supported him throughout\nI\nRegraded Unclassi\nhis regime, for people who disliked Riza Shah still\npreferred him to the British.\nGermany gradually became one of Iran's best cus-\nRussia shared less in this bitter feeling, as at that\ntomers, partly because she needed many things in\ntime she was involved in civil war and had no ener-\nher preparations for war. In 1936 Dr. Schacht made\ngies to waste on Iran. It therefore became habitual\na flying visit to Teheran and negotiated a trade\nfor Iranians to blame the British for any and all\nagreement by which Germany bought heavily of\nmisfortunes.\nIranian agricultural exports. Iranian trade with\nThis feeling was heightened by the fact that the\nother nations almost ceased.\naverage Englishman greatly irritated the Iranian per-\nGerman propaganda agencies were very successful\nsonally. More than other foreign groups, the British\nin exploiting Iranian pride. They accorded Riza\nconsidered themselves \"Sahibs,\" and the Iranians\nShah the honors he expected, and the public was\n\"natives.\" This galled the Iranians so much that\nflattered by stories that the Iranians were pure\nthe word \"Inglise\" came to be an adjective describing\nAryans and closely related to the Germans. So far\nanyone excessively confident and complacent.\nas the war between Britain and Germany was con-\nMeanwhile, the Germans were improving their\ncerned, the Iranians were fervently pro-German.\nstanding with the Iranians as fast as the British were\nThe average Iranian expectantly awaited the thrill\nundermining theirs. The Germans whom the Irani-\nof a vicarious victory over Britain, rising prosperity\nans knew had migrated from Germany during the\nthrough unlimited trade with Germany, and the\ndismal days of the Weimar Republic, often arrived\ncoming of the day when Hitler would recognize\nalmost penniless, and were willing to accept any kind\nTran's independence and give it a more important\nof work. Some bought old truck engines, made\nrole to play. This world of dreams began to fade OD\ndynamos, and set up electrical installations; almost\nJune 22, 1941, and ceased to exist on the morning of\nall lived on an economic level not much above that\nAugust 25.\nof the Iranians. As the new government began its\nHowever, the seizure of Iran by the British and\nprogram of industrialization, these Germans fitted\nRussians was not as easy as is generally supposed,\ninto the picture admirably.\nThe Iranian Army did much more fighting than it\nUntil 1933 the Germans in Iran were politically\nhas been publicly credited with, despite the fact that\nunorganized, but after that no German had any\nresistance was soon crushed. There followed the\nchance to survive in business or to retain his German\nforced abdication of Riza Shah, who was taken on a\ncitizenship unless he became a member of the Nazi\nBritish warship to the remote island of Mauritius,\nParty, Most of the newcomers were trained in all\nwhere a presumably \"diplomatic\" illness doubtless will\nthe techniques of penetration into vital positions.\ndetain him indefinitely. Many Germans fled by way\nIn addition, increasing numbers of Iranian youths\nof Turkey; others, perhaps 500 in all, were interned.\nwere sent to Germany on various pretexts.\nRiza's son, Mohammed Riza, took his place. The\nnew Shah has promised to rule constitutionally and\n2\n3\nRegraded Unclassified\nhas a ministry as nearly pro-ally as the country can\nprovide. The vast system of state monopolies erected\nby Riza for governmental-and personal-profit has\ndisintegrated completely and the expense of the\nState is being carried by the confiscated wealth of the\n\"invalid\" of Mauritius. Since this source of income\nwill hardly prove inexhaustible, \"political\" loans may\nbe expected from London.\nThe country is quiet, but it is the forced quiet of\na conquered country. A military alliance against the\nAxis is being urged upon the new government. Since\nan alliance with Russia would be almost as univer-\nsally unpopular as an alliance with Britain, the gov-\nernment is extremely reluctant to undertake it.\nOne prominent Iranian has summed up the attitude\nof the great majority of his countrymen in these\nwords: \"The Germans seized Norway in order to\nattack Britain. The British and Russians have\ntaken Iran to protect their lines of communication.\nGreat nations think their own independence so\nprecious that to preserve it they may righteously\ndestroy the independence of smaller nations,\"\nSo it is hardly startling that Iranians are comparing\nthe situation of today with that of 1907, and are\nskeptical of the benefits to Iran of \"collaboration\"\nwith any imperial power, whether British, Russian,\nor German.\nU. 5. GOVERNMENT PAINTING OFFICE 452702\nRegraded Unclassi\nRegraded Unclassified\n165\nBULLETIN NO. 2\nRESTRICTED\nCOORDINATOR OF INFORMATION\nAXIS PROPAGANDA\nIN THE\nMOSLEM WORLD\nGerman propaganda in the Moslem world\nexploits hatred of the British, upper-class\nfears of Bolshevism, prevalent anti-Jewish\nfeeling, and Islamic conservatism and prej-\nudice. The British have not succeeded in\ncounteracting this propaganda.\nThe increasing closeness of our relations\nwith Britain is producing a change for the\nworse in the attitude of Near Eastern\npeoples to the United States.\nMOAVNIGNO CRMATION\nDECEMBER 23, 1941\nRegraded Unclassifie\nRegraded Unclassified\nAXIS PROPAGANDA IN\nTHE MOSLEM WORLD\nThe Arab is a born dissenter and a lover of intrigue.\nIn a country as small as Palestine, there have at\ntimes been as many as six different political parties\nfunctioning at once. Under such circumstances,\nthere will always be found groups who will lend them-\nselves to Axis propaganda, if only to spite their\nenemies.¹\nThe Arabs are, however, united in one general\npurpose: To free their world from the domination of\nFrench and British masters. Arabs in Syria, Pales-\ntine, Egypt, and Iraq are apparently blinded to\nItalian imperialism in Libya and Ethiopia and to\nGerman domination of Europe by their anxiety to\nget rid of British control. This arises not only from\na desire to play all European powers off against each\nother but from a naiveté which assumes that anyone\nwho is against Britain is automatically a friend of\nthe Moslems. They fail to realize that, in case of a\nBritish defeat, there would be a substitution of Axis\nfor British imperialism.\nI An example seemi to be the pro-Axis minority among the predominantly\npro-British Druger.\n1\nArab animosity toward foreigners and non-\nMoslems may be discriminated as follows:\nThe Zeesen radio has lately been giving unusual\nA. Anti-British sentiment.\nattention to the exile and persecution of Arab leaders\nby Britain, and this cannot help but have consider-\nDespite the wishful thinking that continues to exist\nable effect upon the Arabs.\nin Britain, dislike and mistrust of Britain are strong\nThe Assyrians who were at one time entirely\nthroughout the Arab world, as well as in Iran and\npro-British now contain a considerable element\nIndia. There are two reasons for this: One is Brit-\nwhich denounces Britain for having let the Assyrians\nish support of the Jews in Palestine and of other\ndown in Iraq.\nminorities for the apparent purpose of dividing and\nThe Arabs are very sensitive and bitterly resent\nruling the Arab states; the other is the reluctance of\nthe attitude of superiority of many Britons whom\nBritain to grant independence to mandated terri-\nthey meet.\ntories. The Arabs place little trust in British prom-\nB. Anti-American sentiment.\nises, which have been often broken in the past. Their\ndistrust of British methods leads them to look for\nThis is of recent growth. It is a result of two\nulterior motives in every move made by Britain. If\nthings: (1) The expression by American public\nanything adverse happens, they automatically blame\nofficials of sympathy with political Zionism (which\nthe British, without bothering to look into the facts\nthey usually misjudge as being purely religious and\nof the case. This makes it easy for Axis propaganda\ncultural) in Palestine. This has resulted in a ten-\nto stir up Arab feeling; how easy is shown by the kill-\ndency in all parts of the Arab world (strongest in\ning of the British Consul Mason at Mosul after Ger-\nPalestine and Syria) to suspect the United States of\nman propaganda had accused the British of being\nsiding with the Jews against the Arabs in Palestine.\nresponsible for the death of King Ghazi. The ac-\n(2) America's increasingly close alliance with Britain\nquisition by Iraq and Egypt of their independence\nhas led the Arabs to believe that we support Britain's\nonly after years of rebellion have convinced the Arabs\npolicies in the Arab world. The attitude of India\nthat force is the only means by which they can\ntoward the United States has taken a very definite\nBritish.\" extract what they regard as their rights from the\nturo for the worse as a result of the promulgation of\nthe Atlantic Charter, from which India was specifi-\ncally excluded. All these factors are being fully\n(Landon), September 1001, pp. 698-70k\nthat see the realistic article, test Nationality and the War, in Round Table\nexploited by the Zeesen radio in broadcasts to the\n, An of the of this attitude is the of the\nNear East and India as evidence of the hypocritical\nin and out of Palmine, of the Multi Hij) Amia, who is the sportle of fotoe\nfaction in Palestine and (le support by the Arab population, look\nattitude of the United States in preaching inde-\nthe Beith What the Aris powers have had la playing up to\npendence and self-determination for minorities on the\nthis of mind PM be judged from the face that the Muhi is new le Borlin.\none hand, while supporting British imperialism on\nthe other.\n2\n3\nRegraded Unclassified\nC. Anti-Jewish feeling.\nforced to accept. Anti-French feeling is relatively\nWhile Palestine is the focus of the problem, anti-\nuseless as an Axis propaganda implement as long as\nSemitism has had an important effect on the Arabs\nGerman-controlled Vichy retains holdings in the Arab\nof Syria and even of Saudi Arabia, within whose\nEast, except under the aspect of anti-de Gaullism in\nboundaries there is hardly a single Jew. There can\nregions which might come under Free French control.\nbe no doubt that the situation created by the Zionist\nMoreover, the setting up by the Free French of an\nprogram in Palestine has caused the position of the\n\"independent\" Syrian state has stolen some of the\nJews to deteriorate throughout the Arab world.\nAxis thunder. Zeesen propaganda blasts concentrate\nDespite what Zionists say abroad for outside con-\non denouncing Taj-al-Din, its head, as merely a de\nsumption, there are too many Jews in Palestine (and\nGaullist-British tool.\nabroad) who adhere to the attitude expressed by\nWilliam B. Ziff in The Rape of Palestine: The Jews\nE. Anti-Bolshevik feeling.\nare entering Palestine by divine right and intend to\nThe educated and propertied classes among the\n\"make the Arabs go back to the desert where they\nArabs, who largely control public opinion, are ex-\ncame from.\" In North Africa there are grounds for\ntremely apprehensive of socialism and more partic-\nanti-Jewish feeling which are separate from the\nularly of a Bolshevik socialist revolution. Through\nPalestinian problem. Ever since the Arab invasion,\nbroadcasts and other means of propaganda, the Axis\nthe Jews there have been a despised element of the\npowers have succeeded in impressing on the Arab\npopulation, and this antipathy has been increased\nworld the belief that they are engaged in saving\nsince the nineteenth century by the undoubted part\ncapitalist civilization from the menace of Bolshevism.\nwhich the Jews have played in facilitating foreign\nPropertied Arabs feel that a Nazi regime would not\ncontrol of both French and Spanish Morocco.\nseriously damage their position, whereas a Bolshevik\nZeesen has recently been reading anti-Jewish pas-\nregime would exterminate them and the system under\nsages from the Koran, emphasizing that the Jews are\nthe \"enemies of Islam.\"\nwhich they are accustomed to live. Ambitious Arab\nleaders tend to conceive of themselves as future heads\nD. Anti-French feeling.\nof states, freed from British or French domination,\neach a miniature Reich with its Fuehrer or Duce,\nThis flourishes in all areas where the French are in\nsubservient perhapa to the Axis, but each with a\ncontrol and existed even before the end of World\nconsiderable measure of \"absolute\" power\nWar I: Witness the testimony of the King-Crane\nreport which expressly states that under no circum-\nF. Moslem conservatism and prejudice.\nstances did either the Syrians or Iraqis want a French\nThis makes an appeal to conservative Moslems\nmandate, a mandate which Syria subsequently was\nthroughout the entire East, from Morocco to India.\n4\n5.\nRegraded Unclassified\nMany approaches can be used to exploit this: Anti-\nChristian bias, xenophobia, concern for Moslem\nminorities, etc. Recently Zeesen has been playing\nup the alleged suppression of the Moslem minorities\nin Russia: another curious anti-British blast from\nZeesen accuses the British of being Pagans like the\npre-Islamic Arabs and thus the natural enemies of\nIslam. It is doubtful whether such ridiculous ap-\npeals to presumed Moslem ignorance are going to\nhelp the Axis cause.\nG. Food shortage and economic ruin.\nThe German radio at Zeesen has repeatedly stated\nthat the food shortage in Morocco (especially in the\nSpanish Zone and Tangier) is being caused by the\nBritish blockade. In German broadcasts to the rest\nof the Moslem world, including Palestine, Egypt,\nSyria, Iraq, and Iran, it is made out that the British\narmy is systematically stripping these countries,\nleaving the population to starve. At present the\nfood situation does not appear to be bad except in\nSpanish Motocco and Tangier, but if it should become\nserious in other Moslem countries, this propaganda\nmight have serious results. The announcement that\nBritain is stripping India of food is often repeated by\nZeesen which adds that Britain means to sacrifice\nmillions of Indian lives in a vain attempt to resist\nthe Axis.\n6\n- - OPPILE. not\n-\nRegraded Unclassified\n166\nMILITARY INTELLIGENCE DIVISION\nINFORMATION BULLETIN\nMAR DEPARTMENT\nNO. 5\nWashington, January 1, 1942\nMID 461\nNOTICE\nThe information contained in this series of bulletins\nwill be restricted to items from official sources which are\nreasonably confirmed.\nThis document is being given an approved distribution,\nand no additional copies are available in the Military Intelli-\n¿once Division. For provisions governing its reproduction, see\nLetter TAG 350.05 (9-19-40) M-B-M.\nEMPLOYMENT OF\nGERMAN ANTEAIRS AFT ARTILLERY\nIN ROSSIA\nSOURCE\nThis bulletin is based on two reports submitted by American\nofficial observers in Berlin. Intended rgandistic effects in the\ntranslated articles, which appeared in Berlin newspapers, should not\nbe overlooked.\nThe extract entitled \"Combat Scene near Smolensk\" is intended\nto portray very briefly some aspects of the Cerman methoda employed\nin river crossings.\nCONTENTS\n1. INTRODUCTION\n2. ANTIAIRCIAFT ARTILLERY AT THE PRONT\n3, COMBAT SCENE YEAR SMOLENSK\n4. CONTENT OF OFFICIAL OBSERVER\nRegraded Unclassified\n167\nEMPLOYMENT OF\nGERMAN ANTIAIRCRAFT ARTILLERY\nIN RUSSIA\n1. INTRODUCTION\nOne of the conclusions reached in the study of the employment\nof German antiaircraft artillery during the year 1940 WSB that this\ntype of artillery would be used increasingly against ground tergets.\nSubsequent events in the North African Campsigns, the Balkan Campaign,\nand the Russian Campaign have proved the soundness of this deduction.\nAntiaircreft fire, with its high muzzle velocity, is very accu-\nrate at short ranges. Because of ense of mechanical manipulation and\naccurate and rapid methods of fire control, it is very effective against\nenemy tenks. with special projectiles, it is deadly against fortifica-\ntions. German commanders, therefore, are using it to en increasing\nextent for direct support.\nGerman antiairoraft artillery is a part of the German Air Force,\nalthough during recent months antiaircraft units have been formed in\nthe German Army proper and in the SS units. These latter, however, are\nonly for local protection and are believed to be armed with only light\n(20-mm.) and medium calibar (37-mm.) gune.\nGerman antiaircraft artillery is organized into regiments, di-\nvisions, and corps. The regiment is a fixed organisation, the exact\ndetails of which are unknown et the present time. The division and\ncorps are task-forco organizations whose composition depends on an BS-\ntimate of the means necessary to accomplish A particular assigned mission.\nThe largest tactical antiaircraft organizations assigned to the\nBerlin defenses are believed to be antiaircraft corps. There are, or\nwere, four panzer armies operating in the east under the command of\nOsnerals Hoth, Hoepner, Guderian, and Fleist. In an article describing\nthe command-post operation of one of these armies, it WAS revealed that\nnn antiairoraft corps was B. part of the command. Considering that much\ndirect-support artillery has been and is being converted to armored\nassault artillery, the defensive fire power thus made ovailable to 8\npanzer army commander is enormous,\nDuring 1940 the standard antitenk caliber in the German Army was\n37-mm. In 1941 the standard antitenk calibor has been increased to 50-\nmm., although, of course, the 37-mm, is still being used, According to\nreliable information, even the high velocity 50-mm. gun will not stop\nall Russian tanks; so the need of larger caliber is obvious. This ex-\nplains the employment so far forward of major caliber entiaircraft ar-\ntillery (BC-mm.). All these large pieces have direct fire sights, and\nsome current pictures show 5. protecting shield, which in open at the\ntop to permit the fun to be elevated to its maximum elevation of 85\ndegrees.\n- 1 -\nRegraded Unclassified\n168\nThe German Air Force has controlled the air in all campaigns\nto date. There are many indications, however, that a part of the\nRussian Air Force still exists, although it is used infrequently. This\nmeans that the German antiaircraft artillery units can be used primarily\nfor antitank and other ground-support uses, especially when defensive\nGerman Air Force units are supporting the operations.\nAll German antiairoraft artillery weapons are equipped with at\nleast two different types of projectiles: 11.3. with sensitive fuzes for\nantiaircraft work, and H.E. with armor-piercing noses and delay fuzos\nfor antitank work. It is not known whether n third type of projectile\nor the normal antiaircraft projectile is used for direct support, but\nit is thought that the regular antiaircraft projectile is used for this\ntype of action. Because of the changes required in the fire-control\ndirector, it in probable that when the armor-piercing projectile is used\nagainst fortifications and tanks at short ranges, each gun operates in-\ndependently, without the use of fire-control data, and uses direct fire\nonly.\nIt should be noted in the article translated below that antiair-\ncraft was used to wipe out machine-gun nests. It is reported that when\nthe advance is halted by 5. considerable concentration of automatic fire,\nassaults are timed to start at dawn or dusk. Small and medium caliber\nantiaircraft cannon (sutomatic fire) are pushed well forward. As the\nGerman infantry attack starts, the hostile machine guns open fire, and\ntheir flashes are plainly visible in the twilight. Automatic cannon\nwith sensitive fuzes then open fire on those revealing flashes with great\ndestructive effect.\nThe tendency to use heavy AT-AA weapons for counterbattery work\nshould not be overlooked. According to this narrative it is even used\nfor interdiction fire.\n2. ANTIAIRCRAFT ARTILLERY AT THE FRONT\n\"The German antiaircraft artillery has distinguishad itself on\nall sectors of the front in the operations against the Russians. Antiair-\ncraft artillerymen have not only heloed to clear the air of Russian planes\nbut have also prepared the way in ground operations for their comrades\nof the infantry. The achievements of one antiaircraft corps employed in\nthe southern sector of the Eastern Front have been unusual, Up to Sep-\ntember 8, 1941, the batteries of this corps have shot down a large number\nof Russian planes, but they have also executed other missions which are\nnot ordinarily thought of as belonging to antiaircraft units.\n\"Since the beginning of operations on June 22, 1941, the words\n'Antiaircraft cannon to the front' have often been heard and the result\nhas been the destruction of many Russian bunkers, tanks, batteries, and\nmachine-gun nests. Single antiaircraft cannons have repeatedly succeeded\nin breaking up Russian forces with direct fire. Numerous attempts by\nstrong Russian units to launch counterattacks have collapsed under the\nconcentrated fire of light and heavy antiaircraft cannons. In all these\noperations the antiaircraft corps have operated successfully against\n- 2 -\nRegraded Unclassified\n169\nvarying units of infantry, cavalry, and artillery.\n\"The rear Russian service units particularly have suffered 50-\nvere losses as a result of the well=placed fire of the German antiair-\ncraft guns, which have succeeded in destroying transport aircraft, horse-\ndrawn vehicles, an ammunition train, and several locomotives, thereby\ncausing severe losses to the Russian supply system. During the opera-\ntions on the Dnieper the gunners carried out daring assaults, sinking\nfive Russian gun boats and destroying a pontoon bridge. Also, a great\namount of Russian ammunition has been captured by this antiairoraft unit.\n3. COMBAT SCENE WEAR SMOLENSK\n\"In the attack the aquada and platoons of the assaulting infantry\nregiments, taking advantage of the terrain, fought their way forward\nfrom one storm position to another.\n\"The artillery and mortars fired at the hostile trenches on the\nother side of the river until they were ready to be assoulted, while\nheavy machine guns kept the enemy pinned to the ground. In the meantime,\nantitank weapons and accompanying infantry cannon were brought into posi-\ntion. Protected by this fire, infantry and pioneer assault troops sprang\ninto pneumatic rafts, crossed the river, and overwhelmed the positions.\n\"After we had established a bridgehead, the Russians attempted\na tank-supported counterattack, which collapsed under the fire of our\nantitank and antiaircraft weapons and our artillery, all of which were\nassisted by a counterattack with our own tanks. At several points along\nthe front these counterattacks lasted 4 or 5 hours. Some fighting was\nat such close ranges that hand grenades could be thrown from one side to\nanother.'\n4, COMMENT OF OFFICIAL OBSERVER\na, The basic principle of German combat methods is a clever adapta-\ntion of fire and movement, with fire power Increasing directly with the\nresistance encountered, Movement is normally from one piece of advanta-\ngeous terrain to another, with maximum fire applied during the movement.\nBoth fire and movements are applied with one purpose in view, and that\nis to attain the unit objective. This principle is applicable to the\noffensive e combat of all units, from squads to armies.\nb. Officers returning from the Eastern Front state that Russian\ncounterattacks launched in & direction parallel to the German attacks,\ninstead of against the shoulders of the Gorman penetration, have caused\nconsiderable trouble. The direction of these counterattacks, however,\nmay have been dictated by the terrain rather than by tactical choice.\nThe schematic diagram below indicates the German embarrassmont caused\nby these Russian methods.\n3\nRegraded Unclassified\n170\nRussian counterattack\nQ\n+)\nX\nX\nRussian holding\nGerman penatrating column\nforce\n%\nat\nJR.\n-\nI\n111\n-\n11\nI\n-\n-\n- W - 11 - 111 - 11 --- 77 - 1/6\nAs the diagram indicates, a successful Ruasian counterattack forces\nthe German attacking force to defend with its \"rear\" held against EL\nswamp or other obstacle and its mechanized elements contained on one\nflank, and its relatively unprotected supply columns on the other\nflank.\n- 4 -\nRegraded Unclassified\n171\nRESTRICTED\n0-2/2657-220; No. 587 M.I.D., T.D. 11:00 January 1, 1942\nSITUATION REPORT\nI. Pacific Theater,\nPhilippines: Following a northward movement throughout the\npast few days, our southern Luzon force has made contact with our\nnorthern Luzon force, thus forestalling a separation of the two forces\nby enemy infiltration from the east, Manila will Le left uncovered\nby this movement, but the previous evacuation of the city by our troops\nhas destroyed Canila's military value. our forces have the entrance\nto Manila Bay entirely covered. Hawaii: A few rounds of gunfire from\nunseen hestile vessels damaged a shed on Hawaii and fired a canefield\non Kauai. No other hostile activities reported. Malaya: Li,ht\nactivity in the east, but no change in the general situation, Enemy\nair raids on Singapore and British lines of communication continue,\nWest Coast: No further confirmed reports of hostile activity.\nII. Eastern Theater.\nGround: The Russians continue to push their advance west\nof Tula and report the capture of Kaluga and Novi Kirishi,\nOn the Crimea the Germana are pressing their Attacks against\nthe fortress of Sevastopol.\nAir: The German High Command reports that German planes in\nthe Crimea have counterattacked Russian troops which recaptured Kerch\nand Feodosiya. It further claims units of the German Air Force attacked\nRussian lines on the Hoscow front.\nIII. Western Theater.\nAir: A very heavy British attack was made on Drest during\nthe day of December 30. According to the Press, two German Wesser-\nschmidts mächine gunned towns along the Sussex coast yeaterday.\nIV. Middle Eastern Theater.\nCround: Fighting continues in the Agedabia area, with Axis\nforces counterattacking to prevent encirclement,\nAir: German High Command reports day and ni ht raids against\nValta, According to the Press, the R.A.F. made low-altitude attacks\nupon retreating Axis motor transports and columns.\nRESTRICTED\nRegraded Unclassified\n172\nTREASURY DEPARTMENT\nFOR RELEASE, MORNING NEWSPAPERS,\nWashington\nFriday, January 2, 1942.\nThe Secretary of the Treasury, by this public notice,\ninvites tenders for $150,000,000, or thereabouts, of 71-day\nTreasury bills, to be issued on a discount basis under competitive\nbidding. The bills of thie series will be dated January 7, 1942,\nand will nature March 19, 1942, when the face amount vill be\npayable without interest. They will be issued in bearer form\nonly, and in denominations of $1,000, $5,000, $10,000, $100,000,\n$500,000, and $1,000,000 (maturity value),\nTenders will be received at Federal Reserve Banks and\nBranches up to the closing hour, two o'clock D. m., Eastern Stan-\ndard time, Monday, January 5, 1942. Tenders will not be received\nat the Treasury Department, Washington, Each tender must be for\nan even multiple of $1,000, and the price offered muet be\nexpressed on the basis of 100, with not more than three decimals,\ne, 3., 99.925. Fractions may not be used, It 1s urged that\ntenders be made on the printed forms and forwarded in the special\nenvelopes which will be supplied by Federal Reserve Banke or\nBranches on application therefor.\nTendere will be received without deposit from incorporated\nbanks and trust companies and from responsible and recognized\ndealers in investment securities, Tenders from others must be\naccompanied by payment of 10 percent of the face amount of\nTreasury billa applied for, unless the tenders are accompanied\nby an express guaranty of payment by an incorporated bank or\ntrust company.\nImmediately after the closing hour, tenders will be opened\nat the Federal Reserve Banks and Branches, following which public\nannouncement will be made by the Secretary of the Treasury of the\nsmount and price range of accepted bide. Those submitting tenders\nwill be advised of the acceptance or rejection thereof. The\nSecretary of the Treasury expressly reserves the right to accept\nor reject any or all tenders, in whole or in part, and his action\nin any such respect shall be final, Payment of sccepted tenders\nat the prices offered must be made or completed at the Federal\nReserve Bank in cash or other immediately available funds on\nJanuary 7, 1942, provided, however, any qualified depositary will\nE9-35\nRegraded Unclassified\n173\n-2-\nbe permitted to make payment by credit for Treasury bills allotted\nto it for itself and its customers up to any amount for which it\nshall be qualified in excess of existing deposits when BO\nnotified by the Federal Reserve Bank of ite District.\nThe income demired from Treasury bills, whether interest or\ngain from the Fale or other disposition of the bills, shall not\nhave any exemption, as 210 LOSS from the sale or other\ndisposition of Theasury shall not have any special treatment,\nas such, under Peasuel the Acts now or hereafter enacted. The\nbills shall be BUDJ9CT to estate, inheritance, gift, or other\nexcise taxes, whether Federal or State, but shall be exempt from\nall taxation now 20 Ver imposed on the principal or interest\nthereof by any Scate, or any of the possessions of the United\nStates, or by any local taxing authority. For purposes of taxa-\ntion the amount of discount at which Treasury bills are originally\nsold by the United States shall be considered to be interest.\nUnder Sections 42 and 117 (a) (I) of the Internal Revenue Code, 88\namended by Section 115 of the Revenue Act of 1941, the amount of\ndiscount at which bills issued hereunder are sold shall not be\nconsidered to accrue until such bills shall be sold, redeemed or\notherwise disposed of, and such bills are excluded from considera-\ntion as capital assets, Accordingly, the owner of Treasury bills\n(other than life insurance companies) issued hereunder need\ninclude in his income tax return only the difference between the\nprice paid for such bills, whether on original issue or on\nsubsequent purchase, and the amount actually received either\nupon sale or redemption at maturity during the taxable year for\nwhich the return is made, as ordinary gain or loss.\nTreasury Department Circular No. 418, as amended, and this\nnotice, prescribe the terms of the Treasury bills and govern the\nconditions of their issue. Copies of the circular may be\nobtained from any Federal Reserve Bank or Branch.\n-000-\nRegraded Unclassified\nA\n6\nP\nH\n174\nT\nR\nE\nDGDEN UTAH JAN 1 1942 412P\nA\nORGENTHAU IR\n1942 JAN 2 AM 7 57\nS\nU\nTARY OF TREASURY\nR\nY\nSTUT OWING TEI EGRAM TO HARRY HOPKINS QUOTE\nT\nDONSIDERATION BEING GIVEN TRANSFER OF\nE\nL\nOF FOREIGN FUNDS FROM TREASURY TO\nE\nIT OF INSTICE STOP FOR PURPOSE OF HANDIN ING\nG\nR\nTREASURY HAS BUILT AN EXPERIENCED ORGANIZATION\nA\nP\nFEDERAL RESERVE BANKS AS AGENTS HAS\nH\nWRING THE PAST YEAR A PRACTICAL PROCEDURE\nIM\n1100 WHICH ARE WORKING ING EFFICIENT Y STOP BECAUSE\nT\nTHE FURTHER FACT THAT THE WORK\nR\nE\nY OF A FINANCIAL NATURE I STRONGI Y\nA\nS\nWHEE BE NO TRANSFER STOP THE CLOSE\nU\nIP UF THE ADMINISTRATION OFFOREIGN FUNDS AND\nR\nY\nW It! PROPERTY MARE SAME ADMINISTRATION DESIRABLE I\nT\nTRONG Y RECOMMEND THAT THE ALIEN PROPERTY CUSTODIANSHIP\nE\nL\n50 (1) TREASURY UNQUOTE WILL BE IN\nTOYOAY MORNING BEST REGARDS\nA\nHER ECOLE\nP\nH\nT\nR\nRegraded Unclassified\n175\nJanuary 2, 1942\n9:40 a.m.\nGROUP MEETING\nPresent: Mr. Thompson\nMr. Morris\nMr. Haas\nMr. Paul\nMr. Sullivan\nMr. Kuhn\nMr. Blough\nMr. Schwarz\nMr. Graves\nMr. White\nMrs. Klotz\nH.M.JR: I am sorry to keep everybody waiting, but\nI got my back to the wall on this alien property trans-\nfer to the Treasury, and that is what I have been work-\ning on all morning. I am not going to - I mean, it\nlooks as though the whole thing was going to be trans-\nferred out of the Treasury, and I have decided to fight\nit, SQ I just had to drop everything. I am not going\nto give in so easily. Herbert?\nMR. GASTON: At a meeting of the Censorship Policy\nBoard on Wednesday they asked if we had any suggestion\nfor the agenda. Have you any ideas?\nH.M.JR: Policy Board of Censorship?\nMR. GASTON: Yes. That is one that you were sup-\nposed to be a member of.\nRegraded Unclassified\n176\n- 2 -\nH.M.JR: The only thing I have rot an idea of is when\nyou (Kuhn) go to the MaoLeish board, I want to know\nwhat, if enything, they are prepared to tell the country\nin case anything should happen to the Philippines.\nM. KUIDV: They talked about it last Monday at\npreat length.\nH.M.JR: What are they doing about it?\nMR. KUIIN: Well, they have not quite B. program\nworked out to show the geographical and strategic\nrealities in the Pacific, for example, to show how\nmany different things--\nH.M.JR: Are they doing anything?\nMR. KUKK: I believe so. I can show it to you in\ndetail on the minutes of last Monday, if you are interested.\nH.M.JR: No, I don't want to see their minutes. I\nwould like to know what is happening, You go there\nnext Monday, don't you?\nMR. KUHN: One thing they are going to do, they\nbelieve in putting these things out through the mouths\nof others, but they are getting out a great mass of\nstuff on the extent of the Havy's commitments, the fact\nthat the Navy has to do jobs in the Atlantic and in\nIceland and so on.\nH.M.JR: Well, I would like to see what they put\nout.\nHR. KUIN: I don't - I haven't seen anything.\nH.M.JR: You TO over there Menday, don't you.\n12. KUITI: Yes.\nH.M.JR: When you 70 Monday, see what they have\ndone.\nRegraded Unclassified\n177\n- 3 -\nMR. PAUL: They must have persuaded Hanson Baldwin\nto write that.\nMR. KUHN: I think they do a lot like that.\nMR. SCHWARZ: I have heard a couple of articles\nemphasizing political objectives rather than military,\ntoo.\nMR. KUHN: They get different people to go to town\non these things.\nH.M.JR: My answer to you (Gaston) is that I have\nnothing.\nMR. GASTON: Yes. There is a rather important\nquestion as to how large the operating board of cen-\nsorship should be, and my impression is that it ought\nto be a small board. They have asked us to make a\nrecommendation as to what financial agency should be\nrepresented. Unless it conflicts with something else\nyou are doing, I would want to recommend that no other\nfinancial agencies except the Treasury be represented\non the operating board of censorship.\nH.M.JR: Well, Herbert, you handle it any way that\nyou think right, will you? It doesn't interfere. I\nmean, it might interest you, but it doesn't interest\nme.\nMR. GASTON: Right. I am planning to go to 8.\nDefense Communications Board meeting at ten-thirty.\nH.M.JR: O.K. Anything else?\nMR. GASTON: That is all.\nMR. SULLIVAN: We are getting inquiries about the\npossibility of extending the date of filing income tax\nreturns from March 15 to 16, because so many people who\nare paid on a two weekly basis get paid on the sixteenth.\nFor your information, since the fifteenth of March falls\nRegraded Unclassified\n178\n- 4 -\non Sunday, the people will be permitted to file their\nreturns at any time on Monday the sixteenth, automatically.\nH.M.JR: All right.\nMR. SULLIVAN: And in the publicity, the Bureau\nis going to stress that.\nH.M.JR: All right.\nMR. SULLIVAN: That is all, sir.\nIncidentally, the fellow who was doing the announc-\ning of the Rose Bowl game yesterday did about the best\njob for Defense Bonds and Stamps I have ever heard,\nand I think we ought to get - I spoke to Harold and\nHerb and Ferdie - I think they ought to get the transcript\nof that. It was perfectly swell, what little I heard.\nH.M.JR: It is interesting. We were at the White\nHouse on New Year's Eve. The President had the radio\nturned on and waiting for the music and the signals.\nAt just eleven fifty-nine they came on with a very good\nannouncement on Defense Savings Bonds. He seemed to\nlike it. It was just the last thing of the year, was\nthis announcement. It was a very good one and a fitting\none. He looked at me and smiled. He seemed to like\nit.\nPaul?\nMR. PAUL: I have just come back to find about nine\nbillion dollars, but in the meantime Roy Blough has\nbeen preparing, scraping around at the bottom. We are\ngoing right into sessions as soon as we get through\nhere.\nH.M.JR: When will you want to see me?\nMR. PAUL: Well, we can see you--\nH.M.JR: Don't hurry, now.\nRegraded Unclassified\n179\n- 5 -\nMR. PAUL: We can see you whenever you want.\nH.M.JR: Are you going to be here tomorrow?\nMR. PAUL: Oh, yes. I think it will be well to -\nfor us to spend the day--\nH.M.JR: Do you want tentatively ten o'clock\ntomorrow?\nMR. PAUL: All right. There is a memorandum I\nwould like to have you read for your information. I\nwouldn't bother you about anything that wasn't - that\nI didn't think quite important, but I have 8. fairly\nlong memorandum which I think you said I was using as\na Bible. I would like to have you look it over, and\nI will have a copy made for you.\nH.M.JR: Will you have it in decent type? If\nyou send it in to Mrs. Klots--\nMR. PAUL: I will have to send it somewhere,\nbecause I only have the small type.\nH.M.JR: Send it to her.\nBy one Gilbert?\nMR. PAUL: It is written by Gilbert, but it is\nauthorized by Henderson who has been over it.\nH.M.JR: What else?\nMR. PAUL: That is enough from me.\nE.M.JR: All right. You look & little work this\nmorning.\nMR. PAUL: Well, I don't feel so weak. Of course,\nI have been two nights on the train.\nH.M.J.: Have you?\nRegraded Unclassified\n180\n- 6 -\nDave Morris?\nMR. MORRIS: Nothing.\nH.M.JR: Ferdie, when are you going to be ready\nwith that speech?\nMR. KUHN: Oh, I can show it to you late this\nmorning or this afternoon.\nH.M.JR: No, this afternoon is out.\nMR. KUHN: Twelve o'clock?\nH.M.JR: No.\nMR. KUHN: Eleven-thirty?\nH.M.JR: What is this, a Chinese auction? Isn't\nit written?\nMR. KUHN: It is, but I want to do it over before\nI show it to you. It would save your time if I do\nthat.\nH.M.JR: Eleven-thirty?\nMR. KUHN: Yes, sir.\nH.M.JR: You are excused now. You had better go\nto it.\nMR. KUHN: All right, fine.\nH.M.JR: Just one thing, who is handling that\nrequest for me from the CIO Automobile Workers of\nDetroit?\nMR. KUHN: I sent them a telegram saying that you\ncouldn't let them know right away.\nH.M.JR: Who has got that?\nRegraded Unclassified\n181\n- 7 -\nMR. KUHN: I have it.\nH.M.JR: Would you send it right in to me now,\nbecause I have got to handle the other - there are\ntwo others. Would you send it in here?\nMR. KUHN: Yes, sir.\nH.M.JR: And then eleven-thirty, Ferdie?\nMR. KUHN: All right.\n(Mr. Kuhn left the conference.)\nH.M.JR: Harold?\nHave you got any follow-ups, Mrs. Klotz? We\nusually have something for Harold. No, this has been\ntaken care of.\nRoy? How is the old stomach?\nMR. BLOUGH: Oh, the stomach is all right.\nH.M.JR: I needn't ask how your nerve is. It is\nall right.\nGeorge?\nMR. HAAS: Here is a list on the four issues.\nH.M.JR: Oh, yes.\nMR. HAAS: The second sheet has the names.\nH.M.JR: Well, that is a little bit early for me.\nMR. HAAS: I can hold it.\nH.M.JR: Yes, I think I would hold it.\nMR. HAAS: Here are your Savings Bonds. And I\n182\n- 8 -\nbrought this organization chart up to date.\nH.M.JR: Did you give Irey a copy of this?\nMR. HAAS: I am going to do that as soon as I get\nback. I have one on my desk.\nH.M.JR: Well, Harold, December is the greatest\nmonth. I congratulate you.\nMR. SULLIVAN: How much?\nH.M.JR: Well, they did five hundred and twenty-\neight million, of which the E was three hundred forty-\none. We are not going to release the figures until\nSunday night.\nMR. HAAS: That is all I have.\nH.M.JR: Harry?\nMR. WHITE: You remember we wrote to the Minister\nof South Africa turning down their request on the\ngold mines and equipment. They wrote back another\nletter in which they are very, very sorry and so on,\nbut they are going to come back at us with their dollar\nexchange position, which is what we wanted, and which\nthey didn't want to tell us before, and here is 8.\nletter for your signature saying that we will be glad\nto consider that as soon as they bring it in. I have\ngot about eight or ten items here which really can't\nwait much longer.\nH.M.JR: Good. Eleven o'clock. What did you do\nabout this Russian protocol thing that the President\nwrote about.\nMR. WHITE: That is one of the things I have. It\nis ready for your signature.\nH.M.JR: Well, I will give you half an hour. We\nUnclassified\n183\n- 9 -\nought to be able to do a lot of business if you are\nready.\nMR. WHITE: We are ready.\nH.M.JR: Anything else?\nMR. WHITE: All of this can wait.\nH.M.JR: Norman?\nMR. THOMPSON: I have just a couple of personnel\nthings.\nH.M.JR: We will do it now. O.K.\n184\nJanuary 2, 1942\n9:41 a.m.\nHMJr:\nHello.\nOperator: The Secretary is on the wire.\nJustice\nByrnes: Hello. Henry.\nHMJr:\nGood morning.\nB:\nWhat proportion of the monies that you have frozen\nare enemy funds, as distinguished from alien funds,\nnot enemy?\nHMJr:\nNow wait B minute. Let me write this down. What's\nthis question you're asking me?\nB:\nI'm ssking you this. That Justice order that I\ntalked with Foley about provides for enemy property\nHMJr:\nEnemy property.\n8:\nas distinguished from alien property.\nHMJrt\nEnemy property R.S distinguished from alien.\nB:\nYeah. Now what I want to know 1s, how much alien\nproperty you have that's not enemy. You've got some\nlike that, I understand.\nHMJr:\nHow much alien property we've got and how much enemy\nproperty we've got.\nB:\nWell, if you just give me the alien property.\nHMJr:\nWell, I can't do it offhand, but I'll get it for\nyou.\ne:\nAll right. Ask them to ring me direct. I thought\nyou might have some 1dea. Your boye are under the\nimpression that all of the property of every nature\nend description, but I was reading the thing that\nnight after they left - night before last - and I\nsaw that this order made the distinction as between\nenemy property and alien.\nHMJr:\nRight.\nRegraded Unclassified\n185\n- 2 -\na:\nAnd I understand you've got gold from some - you've\ngot\nBACK:\nWe've got sbout eight billion collars worth of\nproberty\n:\nIn all.\nBWr:\nin all, yes. And I'll try to have it broken\ndown.\nB:\nWell, just tell them not to 6° to any work, but\njust give me the alten - the amount of the aliene\nthat are not enemies. That will answer it. I can\ndeduct that from the eight, you know.\nYeah.\nFine. How are you?\nMr:\nI'm all right. I've got - I've asked for some help\non this. I got & fellow by the name of B. M. Edwards\nto come up here to advice me.\n8:\nYeah.\nF Jr:\nYeah.\n3:\nWell, he's all richt to edvise on some things, but\nhe doesn't know an alien because he's never had\noccasion to talk to one.\nMJr:\nHe's sitting right here now.\nin\nWell, he knows enemies - he's had some enemies -\nbut he hesn't had any aliens.\nH.Jr:\nWell, I just - well, I needed some advice 80.....\nIt's all right.\nMJr:\nI just wanted to let you know he's in town.\nGive him my regards.\nDJr:\nHe'll be coming to see you.\nRegraded Unclassified\n186\n- 3 -\nB:\nFine.\nH/Jr:\nOkay.\nB:\nGood-bye.\nRegraded Unclassified\n187\nJanuary 2, 1942\nDear Mr. Justice Byrnes:\nAttached is a memorandum giving\nthe information in regard to the amount\nof enemy property in the United States\ncompared with the total amount of property\nunder foreign funds control, which you\nrequested of Secretary Morgenthau over\nthe telephone this morning.\nYours sincerely,\n(Signed) E. H. Folev, To:\nMr. Justice James F. Byrnes\nThe Supreme Court\nEnclosure\nEHF:s 1-2-42\nRegraded Unclassified\n188\nDRAFT (Dictated over the telephone by Miss Dygert - 1/2/42. 3,30 p.m.)\nMr. Foley\nMr. Pehlo\nJustice Byrnes has inquired as to the amount of enemy property\nin the United States compared with the total amount of frozen property.\nThe total amount of property subjected to the freesing control\nis around 7-1/2 billion dollars. This property may be divided into the\nfollowing main categories:\nRarmarked gold\n2.038 billion\nDeposits\n1,954 billion\nSecurities\n1.993 billion\nDirect investments\n.549 billion\nMiscellaneous\n9 hundred million\nIn determining the amount of \"enemy property\" in the United States\nit is necessary to decide which areas are to be included in the concept of\nenemy territory. Under the definitions contained in the Trading with the\nenemy Act and in one of the drafts of the Executive Order prepared by the\nDepartment of Justice, the term \"enemy territory\" would include all terri-\ntory occupied by the military, naval, or police forces of the enemy.\nThe only blooked arvas which fall outside this group are the unocoupied\nportions of China, the Dutah East Indies, Russia, the Free French and\nBelgian colonica, and the four nestral countries in Europe, Portugal,\nSpain, Sweden, Switzerland. A rough estimate of the amount of frozen funds\nheld for these non-enemy blocked areas is two billion.\nRegraded Unclassified\n189\n- 2 -\nThe great bulk of this two billion, 1.0., 1.3 billion, is in\nSwiss assets. Obviously much of the Swise assets are actually enemy\nassets which have been concealed in Swiss names. The same is true to a\nlesser degree of other neutral countries.\nThe only o ther substantial amount of frozen assets which are\nnot clearly enemy assets are the assets of blocked nationals who themselves\nare within the United States. The amount of these assets is roughly\nestimated at 400 million dollars.\nma - 1/2/42\nRegraded Unclassified\n190\nJanuary 2, 1942\n10:34 s.m.\nEWr:\nHow are you?\nHerold\nSalth:\nPretty good.\nHWT:\nHow are you coming alone with the state of the\nnation?\nin\nWELL, I tell you what they did on that.\nYeah.\n3:\nI begen to nose around D. little h1t, And I found\nthat much of the thing that the President WAE\nesking me to do had been done and had been done\nbetter than I could do.\nOWN\nI see.\nAnd what I dic W&E to get WarLeish and Stacy May\ntogether\nMr:\nI see.\nand they had most of the stuff, end it nad\nsome bugs in it and we est some revision of It\nand MacLetsh 1e teking it to - apperently Shervoou\nend Roseman are going to work on this draft.\nI see.\nSo I think - and I called Miss Tully about it to\ntell the President - so I think we've - it least\nI feel I have - discharged my obligation on the\nthing as best T con.\nI EPG.\nWell, he left it 20 un in the nir I\nof\nYeah, didn't he? I wasn't sure whether I had an\nresignment or whether you had one.\n-\n7011, = either, and that's \"PAlly why I\nVAS celling you.\nI felt sure, too, that he had asked somebody else\nRegraded Unclassified\n191\n- 2 -\nto do this and I found that he had asked Nelson\nand the Vice President to get some stuff together\non production, and BO we just improved and added\nto what they had done.\nHMJr:\nWell, I didn't want to get a call from the White\nHouse about midnight tonight and say where was\nsomething?\nS:\nYes.\nHMJr:\nSo you think that's\nS:\nI think it's all taken care of.\nHMJr:\nNow, how's the Budget message coming?\n8:\nWell, we haven't even had 8 chance to talk to the\nPresident about it yet.\nHMJr:\nYeah. Well, if and when that part which affects us,\nor as much as you'd care to let me see of it, I would\nlike to see it.\nS:\nYeah. All right. I think if we can have & chance\nto go - we haven't even had a chance to discuss -\nhe hasn't seen any of it - he hasn't had 8. chance to\ndiscuss the expenditure side with respect to NYA,\nccc, and 80 on. We've got some real problems which\nwe haven't resolved with him yet.\nHMJr:\nWell, the philosophical side 18 what I'm more\ninterested in.\nS:\nYeah, yeah.\nHMJr:\nSo if you felt inclined, why I would appreciate it.\nS:\nYeah. All right.\nHMJr:\nI mean, particularly well, as much ae the - you\nknow.\nS:\nYeah. All right. Well, wait until we get a chance\nto go over it with him once and see what his re-\naction 1s to the whole.\n192\n- 3 -\nHMJr:\nRight.\nS:\nHe'd probably want it revised.\nHMJr:\nAll right.\nS:\nYeah. All right.\nHMJr:\nAnd I've got you down for lunch today.\nS:\nYeah. Okay.\nHMJr:\nFine. Thank you.\nS:\nGood-bye.\n193\nJanuary 2, 1942\n11:13 a.m.\nHOW\nIt's n little bit late, but I could still undo it.\nTr. -noob\nV1-er:\nYes.\nMJr:\nDo you know Mollie Pay Carroll?\nF:\nYes.\nJr:\nVe're thinking of - in fact, we've prectically\nagreed to take her on under Thompson.\n/:\nThat's terrible.\nwith\nHello.\n%\nShe's terrible.\nHyJr:\nShe's terrible?\nI:\nYes. She's high-strung and unstable and gets\ninto rowe.\noh, my Cod. She's terrible, huh?\nV:\nOh, yes. And muddle-headed.\nFMJr:\nOh, God. No 6000 in personnel work?\n**:\nOh, she'd be just impossible.\n\"AJr:\nCh, really?\nV:\nThet's where she'd be worst of all.\nFJr:\nOh, my God.\nShe gete into fights and quarrels and sulks and\n80 on.\nHWr:\nOh, really?\nis\nYes.\nHVJD:\nOh, my God. Well, I'll juet have to undo it.\nRegraded Unclassified\n194\n- 2 -\nAll right. If I could only have gotten you\nfifteen minutes earlier - I just saw her. I\ntried to, but - but in personnel work she'd\nbe terrible?\nV:\nI'm sure of that, because she was - she's had\na record of that sort, of not being able to\nhold a job because of personality difficulties.\nHMJr:\nOh, gee. Well, I'll try to - I'll have to find\nsome excuse and undo it. But that's what - it\nwas in personnel work that I wanted her.\nV:\nOh, no. I'd say not at all.\nHMJr:\nAll right.\nV:\nOf course, this is an impression I have. I've\nknown her a little over the years, for many years.\nHMJr:\nYeah.\nV:\nYes. And it's been one failure after another.\nHMJr:\nOh. Well, I should have called you first. Okay,\nJake. When are you coming down?\nV:\nSunday morning.\nHMJr:\nRighto. Good-bye.\nV:\nGood-bye.\n0\nSTRICTLY CONFIDENTIAL\n195\nTelephone Conversation with Dr. Harry Millis\nNational Labor Relations Board\nJanuary 2, 1942 - 2:25 P. M.\nUr. White: Secretary Morgenthan asked me to get in touch with you.\nJack Viner informed the Secretary that you would know a.\nMiss Carroll, who is applying for & position here in the\nPersonnel Division. The Secretary asked me to call on\nyou and if you would prefer not to discuss the matter\nover the telephone, I shall be glad to come to your of-\nfice but I thought possibly you might feel at liberty to\ntell me over the phone.\nMr. Millis: Viss Carroll? She is now in the Department of Labor.\nMolly Carroll. - What about her? What kind of A job?\nMr. White: I am not certain but I think the position is for a person\nto see what can be done to improve the quality of the per-\nsonnel and possibly to eliminate friction between various\nminority groups and be certain that tolerance, good judg-\nment and complete justice is exercised in the selection of\npersonnel.\nMr. Millis: This woman I knew before she went into greduate work in\nChicago. She was a Y.W.C.A. worker in Kanses, She took\na Doctors degree - wrote a thesis under me, I know her\nhistory.\nI would RBY she is not at all the women for any such\nplace. She does not understand people. She doesn't have\nthat perticular insight into people. I think one reason\nis she does not have the interests found in all sorts of\npeople. She doesn't understand.\nMr. White: That is a quality I believe would be essential for the\nposition the personnel people have in mind -- an under-\nstanding of people.\nMr. Millis: For that particular thing, I should say there must be a\nlot of people better than she.\nMr. White: Thank you very much. I will pasa that on to Secretary\nMorgenthau.\nKr. Millis: I wouldn't want that repeated.\nMr. White: That will be just for his ears, Thank you very much indeed.\nRegraded Unclassified\n196\nJanuary 2, 1942\nHM Jr's pencilled notes on ideas for his speech\ndelivered on 1/4/42.\n[\n]\nvist dola with yourdelf\nlistih\nRegraded Unclassified\n1130\nLeg\n1/2/42\nDRAFT OF SECRETARY MORGENTHAU'S BROADCAST\n197\n\"THE JOB AHEAD\"\nJanuary 4th, 1941\n/\nst\ndroft\nTonight I can give you proof that we remember Pearl\nHarbor. I am happy to report to you that in the month of\nDecember more than five hundred million fighting dollars\nfor fighting men poured into the Treasury from the sale\nof Defense Savings Bonds. Actual cash deposits from\nDefense Bond sales reached the record total of $528,598,000 --\nB. total almost twice as large as the average for the previous\nseven months. Let our enemies take notice. This magnif-\nicent response is just one sample and one foretaste of\nwhat our people will do, in every field of the war effort,\nnow that they are awake and aroused to their country's danger.\nD-A\nRegraded Unclassified\n- 2 -\n198\nIt is especially good news to me, and I think to\nyou, that $341,000,000 of the December total came from\nthe sale of the Series E Bonds, the \"people's bonds\",\nthat sell for 8.S little as $18.75. The sales of Series E\nBonds are almost three times what they have been in previous\nmonths. I can give you no estimate as yet of the sales\nof Savings Stamps in December except that they are far\nahead of any previous monthly figure. All this indicates\nthat great numbers of people with moderate and small incomes\nhave already acquired the good habit of saving for their\ncountry.\nThe rush to buy bonds was SO great this month that\nthere was a period, and there may still be such 8 period\nin some cities, when the supply of bonds ran out. We just\ncouldn't supply the bonds fast enough after Pearl Harbor.\n0-A\nRegraded Unclassified\n- 3 -\n199\nIn Honolulu, while the smoke from Pearl Harbor still\ndarkened the sky, the citizens of Hawaii replied to the\nbombs by buying bonds ten times as fast as ever before,\nand we had to authorize the issuance of receipts in\nplace of bonds to meet the demand. As 8. result of that\nsuperb demonstration, and many others like it throughout\nthe country, we promptly placed the Bureau of Engraving\nand Printing on a 24-hour basis. All night, every night,\nthe presses are at work, and we now have several weeks\nadvance supply of bonds to meet the demand that has not\nyet slackened and I am confident will never slacken until\nthe war is won.\nIt is important, however, to keep a sense of proportion\nin figures as in grand strategy. In the month of December\nyour Government spent four times as much on the war effort\nD-A\nRegraded Unclassified\n4 -\n200\n8.8 you subscribed in Defense Savings Bonds. In the months\nto come it must spend at 8. far greater and ever increasing\nrate. Next Tuesday you will hear Budget estimates calling\nfor such huge expenditures in the coming year that even\nthe half billion record you established in the purchase\nof Defense Bonds in December will seem to be small and\nalmost insignificant. Wars are never cheap, but it's a\nmillion times cheaper to win than to lose. The cost of\nour war effort should frighten no one but our enemies. To\nus, it is just a measure of the size of the job ahead.\nNow that we have embarked on 8. life and death struggle,\nwe cannot compromise, we cannot hold back, we cannot delay\nin supplying our fighting men with the tools of war they\nneed. Nothing short of overwhelming preponderance of\nplanes, of ships, of tanks, of guns will serve to smash\nD-A\nRegraded Unclassified\n- 5 -\n201\nthe combination of enemies that boasts that it will break\nour world, our American kind of world, asunder. We cannot\nproduce those weapons just by waving a. magic wand. We\nshall have to produce them with sweat and muscle; we shall\nhave to pay for them.\nThat is the chief reason why there is a direct\nobligation upon every one of us to buy Defense Bonds and\nto go on buying them, to win the war. But there is another\nsecondary reason that is almost as compelling. We have\nanother war to fight on the home front, the war against\nanother treacherous and dangerous enemy, inflation. It is\nup to us to pay for victory in such B. way as to avert a\nrising cost of living, with all the evils which that can\nbring. If we at the Treasury were to rely only on the\nbanks for our borrowings, or if we were to encourage you\nD-A\nRegraded Inclassified\n202\n- 6 -\nto buy bonds by taking your savings out of the savings\nbanks, we should be encouraging the civilians of this\ncountry to spend their incomes on goods which are urgently\nneeded for the war effort. We should thus be encouraging\na rise in prices, and with that a rise not only in the cost\nof living for every citizen, but a wholly unjustified rise\nin the cost of war to the Government and to the people of\nthis country. Therefore, it has seemed essential from\nthe beginning, and doubly, triply essential now, that we\nborrow B.S much as possible out of the current earnings of\nour people. I want the purchase of Defense Bonds to come\nout of pay checks rather than out of bank deposits. I want\nevery pay day to be bond day from now on, for everyone in\nthis country who receives a regular income.\nD-A\nRegraded Unclassified\n- 7 -\n203\nYou may ask \"What is the Treasury's goal? Can't the\nTreasury give us some figure to shoot at?\" I have had such\nquestions sent to me repeatedly, and I have answered\nrepeatedly that I am more interested in the kind of money\nwe raise than in the amount. But the Treasury does have a\ngoal, and I should like you to regard it as one of your\nsolemn obligations to your country to see that we reach\nthat goal in the shortest possible time. That goal is to\nhave every one of the 35 million men and women who work\nfor regular pay put a part of that pay aside systematically\nevery week, every pay day, for the purchase of Defense\nBonds and Stamps. And when I say \"a part\" I do not mean\na mere token contribution of a few nickels every week,\nor the mere contribution of one percent or two percent\nof the weekly pay check. This is not a token war. It\nD-A\n- 8 -\n204\nis not a two percent war. It is not a war that can be\nwon with spare change. Each of us will have to figure\nout the very most that we can set aside, for our own good\nand for our country's good, 8.8 long as the war may last.\nI suggest that each of us sit down this very evening\nto study our family budget; that each of us decide this\nvery evening, not the least but the most that we can afford\nevery week; that we then translate that amount into a\npercentage of our pay, five, ten, or fifteen percent,\nwhatever we choose, and stick to it by setting that\npercentage aside week after week without fail. The more\nbonds we buy, the more planes will fly. Remember, every\nbond we pledge ourselves to buy will strike a blow at our\nenemies. Remember, also, that every dollar we pledge to\nset aside now will come back to us with interest on that\nbrighter, happier day when victory is ours.\nD-A\n205\n- 9 -\nThe industrial workers of this country are making\na good start. Voluntary pay roll savings schemes are\nnow in operation in thousands of factories, and in most\nof our largest business concerns. Until now 8 very small\nfraction of employees have taken advantage of these plans.\nSince Pearl Harbor the extent of participation has been\nmuch greater, and I am receiving reports already of some\ncompanies in which 90 percent or more of the employees are\nsetting aside a part of their pay each week and are receiving\nDefense Bonds as they accumulate their savings. But the\nresponse from industrial workers SO far is only a beginning.\nThe extent of their participation, and the amounts that they\nsubscribe, must be increased sharply if we are to reach our\ngoal.\nWhat I am saying now applies not only to factory workers\nD-A\nRegraded Unclassified\n- 10 -\n206\nbut to accountants and teachers, to civic employees of\nall kinds, and above all to farmers who are receiving solid\nincome for the first time in many years and who will be\nthe first to suffer if inflation is allowed to get out\nof hand as it did in the years that followed the first\nWorld War. I should like to see all of America lined up\nin a vast army of 130 million, using their dollars to support\nand sustain their fighting men in the front line. Those\nfighting men are looking to us right now. They are looking\nto us from the Philippines and Iceland, from the silent gray\nships that are guarding our shores, from all the posts of\ndanger in all the seven seas -- they are looking to us to\nkeep them supplied and do our part as they are doing theirs.\nI want those men to be able to look back home and see us\nstanding shoulder to shoulder, with all sections, all groups,\nall the old divisions and dissensions swept away in our\nD-A\n- 11 -\n207\nunited resolve to win this war.\nI would not pretend that purchase of Defense Bonds\nis all we need to do here at home to win the war. We\nshall be called upon for all kinds of hardship and sacrifice,\nfor the complete abandonment of our old standards of luxury\nand convenience and ease. But I do say that the buying of\nDefense Bonds is the first thing we can do. It is the first\ntest of our willingness to back up our soldiers and sailors\nand airmen. Let us then resolve to be worthy of those men\nin uniform. Let us prove that we will lend to defend our\nright to be free -- and that we will pledge our lives, our\nfortunes and our sacred honor until victory is won.\nD-A\nRegraded Unclassified\n208\nme Kulu took to\nDeep house\n9 pu 1/2/41.\nRegraded Unclassified\n209\nDRAFT OF SECRETARY MORGENTHAU'S BROADCAST\n\"THE JOB AHEAD\"\nJanuary 4th, 1942\n20st draft\nTonight I can give you proof that the country\nremembers Pearl Harbor. I am happy to report to you\nthat Defense Bond sales in the month of December\nproduced more than five hundred million fighting dollars\nfor fighting men. Actual cash deposits from Defense Bond\nsales reached the record total of $528,500,000\ntotal\nalot\nmuch\nalmost twice B.S. large as the average for the previous\nseven months.\nThis magnificent grand / response is just one sample mt\none foretaote of what our people will do, in every field\nof the war effort, now that they are awake and aroused to\ntheir country's danger. Let the Nazis, the Japanese and\ntheir satellites take notice.\nD-B\nRegraded Unclassified\n- 2 -\n210\nIt is especially good news to me, and T think to\nthat $341,000,000 of the December total came from\nthe sale of the Series E Bonds, the \"people's bonds\",\nthat sell for as little AB $18.75. The sales of Series E\nBonds are almost three times what they have been in previous\nmonths. I can give you no estimate as yet of the sales\nof Savings Stamps in December except that they are far\nahead of any previous monthly figure. All this indicates\nthat the American giant has stirred from his long sleep,\nand that great numbers of people with moderate and small\nincomes have already acquired the good habit of saving for\ntheir country.\nThe rush to buy bonds was so great this month that\nthere was a period, and there may still be such a period\nin some cities, when the supply of bonds ran out. We just\nD-B\nRegraded Unclassified\n- 8 -\n211\ncouldn't supply the bonds fast enough after Pearl Harbor.\nIn Honolulu, while the smoke from Pearl Harbor still\ndarkened the sky, the citizens of Hawaii replied to the\nbombs by buying bonds ten times as fast as ever before,\nand we had to authorize the issuance of receipts in\nplace of bonds to meet the demand. As a result of that\nsuperb demonstration, and many others like it throughout\nthe country, we promptly placed the Bureau of Engraving\nand Printing on a 24-hour basis. We're glad that the\ncountry is pushing us. We like to be pushed. The presses\nare at work all night, every night. We now have several\nweeks' advance supply of bonds to meet the demand which\nhas not yet slackened and which, I am confident, will\nnever slacken until the war is won.\nD-B\n- 4 -\n212\nIt is important, however, to keep a sense of proportion\nin figures just as in grand strategy. In December your\nGovernment spent four times as much on the war effort as\nyou subscribed in Defense Savings Bonds. In the months to\ncome it must spend at a far greater and ever increasing rate.\nNext Tuesday you will hear Budget estimates calling for such\nhuge expenditures in the coming year that even the half\nbillion dollar record you established in the purchase of\nDefense Bonds in December will seem to be small and almost\ninsignificant.\nWars are never cheap, but it's 8. million times cheaper\nto win than to lose. The French, the Czechs, the people\nof a dozen conquered and ravaged countries, can tell us\nwhat it costs to lose. We have made up our minds to win.\nWe have made up our minds to produce and to use such an\nD-B\n- 5 -\n213\noverwhelming preponderance of planes, of ships, of tanks,\nof guns and of trained and fully equipped men, that the\nNazis and Japanese and their kind can never again threaten\nour freedom. The cost of our war effort should frighten\nno one but our enemies. To us, it is just a measure of\nthe size of the job ahead.\nIf this were a different kind of war, I should not be\nspeaking to you in your homes tonight about the job that\nfaces us. But this is 8. people's war. Everything that the\npeople of this and other free countries have won through\ncenturies is now at stake. You will want me, as Secretary\nof the Treasury, to finance this people's war by going to\nthe people themselves for the sinews of war. I am not\ngoing to finance this war by depending primarily on the\nfinanciers. I am depending on you, on each and every one\nD-B\n- 6 -\n214\nof you who may be listening to my voice this evening.\nIn particular, I am depending on the 35,000,000 American\nmen and women who earn regular pay.\nYou may ask \"What is the Treasury's goal? Can't the\nTreasury give us some figure to shoot at?\" I have had\nsuch questions sent to me repeatedly, and I have answered\nrepeatedly that I am more interested in the kind of money\nWe raise than in the amount. But the Treasury does have\na goal, and I should like you to regard it as one of your\nsolemn obligations to your country to see that we reach\nThe Treasury:\nthat goal in the shortest possible time. That goal is\nto make every pay day Bond day -- for everyone. It is\nto have every wage-earner and salary-earner put aside a\npart of every pay check, every week, for the purchase of\nDefense Bonds and Stamps. And when I say \"a part\" I do\nD-B\nRegraded Unclassified\n- 7 -\n215\nnot mean B. mere token contribution of R few nickels\nevery week, or the mere contribution of one percent or\ntwo percent of the weekly pay check. This is not 8. token\nwar. It is not 8 two percent war. It is not a war that\ncan be won with spare change. Each of us will have to\nfigure out the very most that we can set aside, for our\nown good and for our country's good, 8.8 long as the war\nmay last.\nThe industrial workers of this country are making\n8 good start. Voluntary payroll saving schemes are now\nin operation in thousands of factories, and in most of\nour largest business concerns.\nMany of you already know about these payroll saving\nplans. The most popular of them is a method by which you\nor your union can tell your company how much you wish to\nD-B\nRegraded Unclassified\n216\n- 8 -\nset aside from your pay. Your company accumulates your\nsavings for you, and when you have enough to buy a bond\nyour company will deliver the bond to you, registered in\nyour own name. That is all there is to it. Until now\na very small fraction of employes have taken advantage of\nthese plans, and 8. comparatively small proportion of\nemployers have agreed to provide the facilities. Since\nPearl Harbor the extent of participation has been much\ngreater, from labor and from management alike. I am\nreceiving reports already of some companies in which 90\npercent or more of the employes are making good use of\nthis easy road to voluntary saving. We intend to recognize\nsuch participation by giving a flag to every company with\n100 or more employes in which 90 percent or more of the\nworking men and women are saving systematically for their\ncountry.\nD-B\nRegraded Unclassified\n- 9 -\n217\nBut the response from industrial workers 80 far\nis only 8. beginning. If you haven't heard about voluntary\npayroll saving, or if the details haven't been explained\nto you, or if your company has refused to install such\na scheme for you, I wish you would write to me at the\nTreasury Department in Washington. It's the Treasury's\nresponsibility to tell you about payroll saving; our State\norganizations are ready to tell you all about it, and if\nnecessary to send someone to your factory to explain it\nto you.\nI am talking in dead earnest when I say that millions\nmore must take part in these payroll saving plans, and\nmust invest hundreds of millions of dollars more, if we\nare to reach our goal. Our plans at the Treasury for\nfinancing the war are based upon the assumption that the\nD-B\n- 10 -\n218\nAmerican people will want to pay a big share of the\ncost of the war, of their own free will. The response\nto payroll saving will tell us whether that assumption\nis right or wrong.\nIt will tell us whether our war financing program\nwill succeed or fail. I have such faith in the American\npeople that I believe they will want to do the job in\nthe voluntary way -- but it is up to you to prove it\nto\nAnd when I say \"you\" I mean not only factory\nworkers, but accountants, teachers, salaried employes\nof all kinds, and also the farmers who are receiving\nsubstantial income for the first time in many years.\nI suggest, then, that each of us sit down this very\nevening to study our family budget; that each of us decide\nthis very evening, not the least but the most that we can\nD-B\nRegraded Unclassified\n219\n- 11 -\nafford every week; that we then translate that amount\ninto a percentage of our pay, five, ten, or fifteen\npercent, whatever we choose, and stick to it by setting\nthat percentage aside week after week without fail.\nRemember, the more bonds we buy, the more planes will\nfly. Remember, every bond we pledge ourselves to buy\nwill add to the weight of the bombs that will fall on\nTokyo and Berlin. Remember, also, that every dollar we\npledge to set aside now will come back to us with interest\nafter that brighter, happier day when victory is ours.\nis high time For to\nI should like to see all of America lined up in\nour\na vast army of 130 million, using their dollars to support\nour\nand sustain their fighting men in the front line. Those\nfighting men are looking to us right now. They are looking\nto us in our homes and factories, looking from the Philippines\nand Iceland, from the silent gray ships that are guarding\nD-B\n- 12 -\n220\nour shores, from all the posts of danger in all the\nseven seas -- looking to us to keep them supplied and\nto do our part as they are doing theirs. 1 want those\nmeist\nmen to be able to look back home and see us standing\nshoulder to shoulder, with all sections, all groups,\nall the old divisions and dissensions swept away in our\nunited resolve to win this war.\nI would not pretend that purchase of Defense Bonds\nis all we need to do here at home to achieve victory.\nBut I do say that the buying of Defense Bonds is the\nfirst thing we can do. It is the first test of our\nwillingness to back up our soldiers and sailors and\nairmen.\nLet us, then, resolve to be worthy of those men\nin uniform. Let us prove that we will lend to defend\nD-B\nRegraded Unclassified\n- 13 -\n221\nour right to be free -- that we will pour out a mighty\ntorrent of dollars \"to defend life, liberty, independence and\nreligious freedom\nagainst savage and brutal forces\nseeking to subjugate the world.\" At first sight the amount\nof money we have to raise through borrowing and taxes may\nseem impossible, but we in the Treasury have struck the\nword \"impossible\" out of our dictionary. With your help\nwe are going to do the job.\nD-B\nRegraded Unclassified\n222\nJanuary 2, 1942\n11:50 B.W.\nHOSP:\nHello.\nSmith:\nMr. Secretary, this 1s Smith.\nPWM\nGood morning.\nS:\nYou wanted 8 report on the anti-sircreft situation.\nDr:\nYes, I do.\nin\nIt is as followe. The three radio detector sets\nbelonging to this regiment here are in oberation.\nGood.\nis\nThree additional, giving them a hundred per cent\nincrease in their normal table of organization,\nare also here and are being tuned up now and will\nbe in operation in about three or four days.\nENJY:\nYeah.\nis\nThat makes them six. An experienced battery from\nFort Monroe 12 en route here nnd will be here at\nfive b'clock tomorrow night.\nFhJr:\nFive o'clock Saturday night.\n5:\nYes, sir.\nYeah.\n31\nAs soon 85 it gets in, it will take over for one\nof the batteries here, which will then move on\ndown to Monroe by rail or motor and out in its\nlittle firing period down there.\nSNr:\nWould that have haopened 1f you hean't followed\nUD for me the other day?\nit\nIt yould not.\n4%Jr:\nI Dear, let's be honest with each other.\nS:\nNo, it would not.\nRegraded Unclassified\n223\n- 2 -\nHMJr:\nIf I hadn't of called you - when did I call you,\nNew Year's Day?\n5:\nThat's right, sir; it would not.\nHMJr:\nI mean, it would not have happened.\nS:\nI don't think it would.\nHMJr:\nI mean, you got them to do it after I called you\nyesterday.\nS:\nI think that's the answer, Mr. Secretary.\nHMJr:\nWell, I think it's A.....\nS:\nI give them the benefit of the doubt; but I did\nit by telephone, as a matter of fact, yesterday.\nHMJr:\nYeah. Well, now\nS:\nOf course, you've got to give these people credit.\nThey're looking at definite military objectives.\nHMJr:\nWell, what 1s Washington?\nS:\nYou see what they're up against.\nHMJr:\nWell, what's Washington?\nS:\nWell, they don't think much of Washington 8.8 8.\nmilitary objective. They think of the ships and\nthe lading at Hampton Roads, and the naval dry\ndock down there, and things of that sort.\nHMJr:\nWell, how about our President?\nS:\nWell, that's something that probably didn't occur\nto them.\nHMJr:\nYeah. Well\nS:\nHowever, it's done.\nHMJr:\nWell, you and I are together, and I appreciate your\ngetting after them. Now, let me ask you this, if\nI had time Sunday to run and take 8 look at these\nRegraded Unclassified\n224\n- 3 -\nRaders and this battery - it wouldn't take more\nthen an hour, would it?\nS:\nI think it would be nice.\nHMJr:\nWould 1t take more than en hour?\nS:\nNo, it certainly wouldn't. It would take you an\nhour to get around to ell of them, but you don't\nwant to Bee more than one or two of those Radars,\ndo you?\nHMJr:\nNo, I'd like to see one, and see this new battery.\nWould it be in place by - in the morning? Sunday\nmorning?\nS:\nI think it will, yes, sir. I'd have to call up Hawes\nto verify that: out if it comes in tomorrow night,\nI think they would have taken over by Sunday\nmorning.\nHVJr:\nWell, I tell you what I'm going to do. Supposing -\nI'll get in touch with you Sunday morning. It\nwon't be too early, see?\nS:\nWell, I'll be at my office at eight o'clock.\n9Mr:\nYou will?\nS:\nYes, sir.\nHMJr:\nWell, could you slip away for an hour or do you\nhave to prepare in advance.\n8:\nCertainly, I'll be glad to, Mr. Secretary. No, sir.\nHMJr:\nWell, I'll see how I feel Sunday end I'll give you\nE ring, and then maybe we can go around for an hour.\nS:\nAll right, Mr. Secretary.\nHMJr;\nBut I'm certainly - now, let me think what else.\nWell, that's a good day's work.\nS:\nI wanted - I have something here I wanted to read\nto you.\n4Mr:\nYeah.\nRegraded Unclassified\n225\n4 -\nis\nYou were interested in the performance of our\nairplanes.\nBJr:\nYeah.\nin\nThis 1s 8 report from the American Volunteer Coros\nin China, which 1s now being incorcorated into the\nArmy, on their operations.\nHWT:\nCh, from our friend Colonel Chenault.\n::\nChensult, yes, sir.\nTVr:\nI know him well.\n3:\nThey have in the period - I've sent this message\nout - but in the period that be mentioned, I think\ne period of about four weeks\nUr:\nYeah.\nthey had Aestroyed sixteen Japaneee four-engine\nhombers and I think it was twenty-one purpuit planes.\nThey had four nlanes destroyed, and Fix damaged but\n0808ble of promot repair.\n9VM\nThet's wonderful.\n::\nToot's A 5000 record.\nThat's wonderful. When I see you Sundey, I won't\n48% you over the phone, tell me - bring me 20 to\ndate on what the anti-aircraft situation is at\nCorregicor.\nin\nYes, sir. Yell, the anti-aircreft - at Corregidor.\nHIJr:\nCorregidor.\nOn, yes, sir. I vill.\nP 27:\nIt Corregicor.\nYes, fir. I vill.\nI think I know, but I'm going to 00% you when I\nsee you.\nRegraded Unclassified\n226\n- 5 -\nS:\nAll right, sir. I'll tell you the whole story\nabout that.\nHMJr:\nWhat?\nS:\nI can tell you a good deal about Corregidor.\nHMJr:\nYeah. Well, I'd like to - if it's still there,\nI'd like you to tell me about it.\nS:\noh, it's there. It'll be there for about three\nmonths.\nHMJr:\nI hope you're right.\nS:\nOh, I think we're right. We got a pretty good\nestimate yesterday.\nHMJr:\nDid you?\nS:\nI'll show you the radio.\nHMJr:\nThank you.\nS:\nAll right, Mr. Secretary.\nD\n1227\nJanuary 2, 1942\nLear Earold:\nFor your information I an enclosing\ncopy of the proposed \"xecutive Order which\nse discussed at luncheon today.\nThe order embodles an arrangement\nw.len was agreed to at a luncheon hold\nin ey office on December 13, attended by\nAttorney General Biddle, Leo Crowley,\nEd Foley end myself.\nThe order which the Department\nof Justice has prepared does not follow\nthe compromise agreed upon, but in effect\nturns over the entire administration of\nforeign Funds Control to the Department\nof Justice.\nI an also enclosing & memorandum\nwhich discusses the acministration of\nForeign Funds Control in the Treasury.\nSincerely,\n(signed) Henry Morgenthau, Jr.\n..... Marold 1. Smith\nlirector, Sureau of the sudget\nState Department Bullding\naskin ton, 1. C.\nnclosures.\nSlF:mp 1/2/42\nSent by Special Messenger at 5:00 p.m.\n1/2/42.\nRegraded Unclassified\n12-20-41\n228\n12:15 p.m.\nEXECUTIVE ORDER\nVESTING POWER AND AUTHORITY IN DESIGNATED\nAGENCIES PURSUANT TO THE TRADING WITH THE\nenemy ACT, AS amended, AND RELATED MATTERS.\nBy virtue of and pursuant to the authority\nvested in me by the Trading with the enemy Act,\nas amended by the First Mar Powers Act, 1941\n(Public No. 354, 77th Congress), by virtue of all\nother authority vested in me, and by virtue of the\nexistence of a period of unlimited national emergency\nand a state of war involving the United States of\nAmerica, and finding that this Order is in the\npublic interest and is necessary in the interest\nof national defense and security, I, FRANKLIN D.\nROOSEVELT, PRESIDENT of the UNITED STATES OF\nAMERICA, do order and prescribe the following:\nSection 1. There is hereby established &\nForeign Property Control Board (hereinafter\nreferred to as the \"Board\") which shall consist\nof the Secretary of State, the Secretary of the\nTreasury, and the Attorney General or representatives\nRegraded Unclassified\n220\n- 2 -\nappointed by each of them. The Secretary of the\nTreasury or the representative appointed by him\nshall act as Chairman of the Board. The Alien\nProperty Custodian (hereinafter referred to & 8 the\n\"Custodian\") shall sit with the Board, but shall\nnot vote except as the representative of the\nAttorney General.\nSection 2. When directed by the Board, any\nproperty or interest of any business enterprise\ndoing business within the United States and which\nis a. national of a. foreign country designated in\nExecutive Order No. 8389, &8 now or hereafter\namended, and any property or interest in any such\nenterprise of & national of any such foreign country,\nshall vest in the Custodian, as, and upon the terms\ndirected by the Custodian; and such property or\ninterest shall thereafter be held, used, admins-\ntered, liquidated, sold or otherwise dealt with by\nthe Custodian in the interest of and for the benefit\nof the United States upon such terms and conditions\nas the Custodian may prescribe; and the Custodian\nmay perform any and all acts incident to the\naccomn lishment and furtherance of these purposes.\nRegraded Unclassified\n230\n- 3 -\nWhen directed by the Board, the Custodian shall\nalso supervise, manage or otherwise direct or control\nthe activities of any business enterprise doing\nbusiness within the United States and which is\na.\nnational of a foreign country designated in\nExecutive Order No. 8389, as now or hereafter amended;\nand for this purpose the Custodian shall exercise\nsuch powers and authority as are necessary in\nconnection with such direction or control. The\nCustodian shall have access to all reports and\nother information, relating to the activities of\nany such business enterprise, which have been\nobtained by other agencies referred to in this\nOrder; and, where deemed by him necessary, he is\nauthorized and empowered to make investigations\nof the activities of any such business enterprises\neither before or after any vesting order.\nTo the extent necessary for the Custodian to\ncarry out his functions under this section and\nsection 3 hereof, there are hereby elegated to the\nCustodian a 11 powers and authority conferred upon\nme by sections 3(a) and 5(b) of the Trading with\nRegraded Unclassified\n231\n4\nthe enemy Act of October 6, 1917 (40 Stat. 411),\nas amended by sections 301 and 302 of Title III\nof the First War Powers Act, 1941 (Public No. 354,\n77th Congress).\nSection 3. Subject to the provisions of\nSection 2 hereof, any property or interest of any\nforeign country designated in Executive Order No.\n8389, as now or hereafter amended, or national\nthereof shall vest, when directed by the Board in\nsuch agency or person as may be designated by the\nBoard; and such property or interest shall there-\nafter be held, used, administered, liquidated, 5 old\nor otherwise dealt with by such agency or person in\nthe interest of and for the benefit of the United\nStates upon such terms and conditions as such agency\nor person may prescribe; and such agency or person\nmay perform any and all acts incident to the\naccomplishment and furtherance of these purposes.\nSection 4. No property shall vest pursuant to\nthe provisions of this Executive Order unless such\nproperty is owned or controlled, directly or\nindirectly by any one or more of the following:\nRegraded Unclassified\n232\n- 5 -\n(1) The Government of any country with which the\nUnited States is or shall be hereafter at war;\n(2) The Government of any ally of any country with\nwhich the United States is now, or shall be\nhereafter, at war; (3) & person situated in or doing\nbusiness in a country falling within either category\n(1) or (2) above; (4) Any person situated outside the\nUnited States who is acting for or on behalf of any\none or more of the foregoing; (5) any person who is\nnow, or hereafter shall be, interned as an alien\nenemy pursuant to Section 21 of Title 50 of the\nUnited States Code; provided, however, that any\nfinding by the Board that any person falls within\nany of the foregoing categories shall be final.\nSection 5. Subject to the foregoing provisions,\nthere are hereby delegated to the Secretary of the\nTreasury all powers and authority conferred upon me\nby sections 3(a) and 5(b) of the Trading with the\nenemy Act of October 6, 1917 (40. Stat. 411), as\namended by sections 301 and 302 of Title III of the\nFirst War Powers Act, 1941 (Public No. 354, 77th\nCongress); provided, however, that the Secretary of\nthe Treasury shall not extend the provisions of\nRegraded Unclassified\n233\n- 6 -\nExecutive Order No. 8389, as amended, to a ny\nadditional foreign e ountries and nationals thereof.\nAll such powers and authorities shall be exercised\nby the Secretary of the Treasury with the advice\nof the Board.\nSection 6. Any outstanding order, proclamation,\nregulation, ruling, license or instruction issued\npursuant to sections 3(a) or 5(b) of the Trading\nwith the enemy Act, as amended, S hall I' emain in\nfull force and effect, unless and until amended\nor revoked by the Secretary of the Treasury or\nrendered inoperative by & vesting order, issued\npursuant to the provisions hereof.\nTHE WHITE HOUSE,\nJanuary , 1942.\nRegraded Unclassified\n234\nMEMORANDUM FOR THE PRESIDENT\nTHE ADMINISTRATION OF FOREIGN FUNDS CONTROL:\nAPRIL 1940 TO DECEMBER 1941.\n1.\nInception and rapid extension of the Control.\nThe Foreign Funds Control program was initiated in April 1940\nby freezing the assets in this country of Denmark and Norway when\nGermany invaded these two neutral countries, As other countries\nwere invaded or dominated by the Axis, the Control was successively\nextended during the summer and fall of 1940 to the assets of the\nNetherlands, Belgium, France, and the Baltic and Balken states.\nIn June 1941, the Control was extended to Germany and Italy and to\nthe rest of continental Europe. Shortly thereafter Japan and\nChina were also frozen. At present the Control covers over\n$7,000,000,000 of assets and the transactions of 33 countries,\nincluding all of continental Europe (except Turkey), and China\nand Japan, and their nationals. The frozen assets in this\ncountry consist not only of bank deposits, gold and securities,\nbut also e. great number of business enterprises as well as\nmerchandise, patents and other forms of property, The Control\naffects all financial, commercial and trade transactions in which\nthe 33 countries or their nationals have an interest, whether such\ntransactions are purely domestic transactions or transactions in\nforeign exchange or foreign trade.\nRegraded Unclassified\n235\n- 2 -\n2, Purposes and shift in emphasis.\nThe original purposes of the Foreign Funds Control were primarily\nto prevent the assets of the invaded countries from falling into the\nhands of the invaders, and to protect American institutions from\npossible adverse claims arising out of the invasion. As the Inter-\nnational crisis deepened there was a distinct shift in the emphasis\nof the Control from a role of benevolent protection to one of active\neconomic warfare.\nThe inability of the Axis to use the dollar assets of the\ncountries covered by the Control and to acquire other dollar assets\nhas greatly impaired the ability of the Axis powers to finance propa-\nganda, sabotage and other subversive activities in the United States\nand other areas of strategic importance to this country. The Control\nhas prevented the Axis countries and their sctellites from using the\nAmerican dollar, and American banking and financial facilities for\ncommercial and other activities in the United States and other parts\nof the world. Through the Control, we are taking appropriate steps\nto millify or eliminate vicious and undesirable influences in busi-\nnoss enterprisos in this country owned and dominated by the Axis.\nThe Control safeguards the interests of American creditors of blocked\ncountries by preventing those concerns which are able to negotiate\nspecial doals with the Axis from recoiving preferential payments at\nthe exponse of other American croditors.\nRegraded Unclassified\n236\n- 3 -\nThe Control has not been confined to tho regulation of banking\nand financial transactions. It clso is on instrument for control-\nling all exports and imports botwoon the United Str.tos and a large\nportion of the world, For examplo, the Control V28 instrumontel\nin effecting c. complete stoppago of -11 trade, import D.S cll 0.8\nexport, with Japen.\n3. Operation of the Control.\nThe effective conduct of modorn oconomic unrfare requires c\nhighly floxible organization, and = trained, competent, and imagina-\ntive staff capable of rapid adjustment to constantly changing\nproblems, During the courso of the past twonty months the Treasury\nDepartment has built up such en organization thich is not/ offec-\ntively operating on = nationvido scale. The Control is contered in\nand dirocted from Washington, yet it has succooded in delogating\nto its field offices, the twolvo Fodoral Reserve Banks, mcjor sog-\nmonts of the tesk. Since economic mrfare is caschticlly the cf-\nfectivo application of financial controls thich can bo applied only\nthrough the banking system, the Trensury solocted the Foderal\nReserve Banks to not CS its field offices in administoring the\nControl, Through the Federal Roservo Benks the Tronsury is ablo\nover night to roach the banks of the country and to put into effect\nnot regulations 25 repidly changing conditions domend. There has\nbeen established ct each of the Federal Reserve Banks C. compotent\nstaff funilier with the intricato problems foced by the Control,\nRegraded Unclassified\n237\n- 4 -\nexperienced in the handling of complex financial operations, and in\nconstant communication with the financial inatitutions of its\ndistrict, In the Foderal Reservo Bank of Now York this staff\nconsists of approximately 500 persons, thoroes in several of the\nother Foderal Roserve Banks C. relatively small group of persons\nhns been ablo to handle the daily oporations of the Control.\nIn addition to the field offices maintained in the Fodoral\nReservo Banks, Foreign Funds Control maintains personnol in Howaii\nand in the Philippino Islands, ciding in the administration of tho\nfroozing control in these croas. Foreign Funds Control has also\nrepresentatives in Letin Amorica docling with Proclaimed List\nproblems,\nTho Control, in doaling with its meny increasing problems, has\nwhon occasion domanded boon able to call upon the personnel and\nfacilitios of other agencios of the Treasury Department, including\nCustoms, National Bank Examiners, Coast Guard, Socret Service and\nIntornal Revenuo.\n4. Organization of the Control.\nForeign Funds Control is organized clong the following lines:\n(a) Interdeportmental Committoc.\nThe basic policios followed in tho operation of the Control\nhave boon formulated by on Interdopartmentel Committoe,\nconsisting of E. 3. Foloy, Jr., representing the Treasury Do-\npertmont, na chairmen; Doan Achoson, roprosonting tho Stato\nRegraded Unclassified\n238\n- 5 -\nDepartment; and Francis Shen, representing the Department of\nJustice. This committee meets periodically to consider the\nbasic problems confronting the Control and the more important\napplications for licenses.\n(b) Administrative section.\nMr. John E. Pchle, Assistent to the Secretary of the\nTrensury, is charged with directing the administration in the\nForeign Funds Control. Approximately 650 persons are employed\nin the office of the Control in Washington on work of an admin-\nistrativo character. The administrativo staff is divided into\nmejor soctions, each of which specializos in handling problems\nrelating to difforent types of transactions, such 05 Securitics,\nBusiness Enterprises, Foreign Trade and the Proclaimed List,\nTrusts and Estates, Foreign Banks, and Remittances.\n(c) Legal section.\nForty lawyers in a special scetion of the Concrol Counsel's\nOffice handle the logal aspocts of Foreign Funds work, draft\ndocuments, analyze the legal implications in applications, and\nactively participate in the policy determination.\n(d) Economic section.\nThe Division of Nonctory Research maintoins e special sec-\ntion of trained economists, who make studios of the many and\ncomplex economic problems confronting the Control for use in\nmaking policy decisions,\nRegraded Unclassified\n239\n- 6 -\n(ε) Investigative section.\nAn investigative staff with several field offices is hended\nby Kr. Ervin May, former Trensury attache in Berlin. This\nsection employs C. lerge staff of competent investigators fami-\nliar with financial problems, who investigate attempted viola-\ntions and evasions of the freezing control,\n5. Integration with the work of other governmental agencies.\nThe primery medium through which the besic problems of the\nControl have been brought to the attention of the Departments of\nState and Justice has been the Interdepertmental Committee. The\nState Department has been more concerned with and hr.s participated\nmore actively in the solution of the problems confronting the\nTronsury Department in its administration of the #ontrol. Through\ncooporation between the State and Treasury Departments, the Control\nhas born used in an offective way to implement this Government's\nforeign policy, as in the case of Japan.\nOther examples of the effective linison established between\nthe Foreign Funds Control and other government agencies are:\n(a) Strategic material problems have been resolved in\nconsultation with the appropriate defense ngencies. The Con-\ntrol has been able to uncover and direct into defense uses\nmillions of dollars worth of highly stretegic motorials,\nmachine tools, and other materials.\nRegraded Unclassified\n240\n- 7 -\n(b) Cases involving the fueling, chartering, or sale of\nships are cleared with Merchant Ship Control, the Maritime\nCommission, and the State and Navy Departments.\n(c) Proclaimed List problems are handled by a subcom-\nmittee consisting of representatives of the Treasury, the\nState Department, and the Economic Defense Board,\n(d) Securities problems have beon worked out with the SEC.\n(c) Valuable information obtained through censorship\nhas been received by the Control for some time from the British\nand Dominion Governments. Confidential information is exchanged\nwith the FBI, the Office of Naval Intelligence, the Army\nIntelligence, and other governmental intelligence offices.\n6. Major Areas of Operation.\nThe far-reaching character of the Control can best be seen by\nconsidering some of the major types of transactions which can be\neffected only under freczing control licenses. The Control, in\naddition to licensing foreign exchange transactions and a wide\nvariety of other payments and remittances, has exercised control in\nsuch significant areas of economic activity as:\n(a) Business Enterprises.\nApproximately 2,500 business cnterprises in the United\nStates have been operating under licenses issued by the Control.\nThese enterprisos engage in all forms of business activity,\nRegraded Unclassified\n241\n- 8 -\nfrom long-ostablished Axis-owned chemical nonufacturing plants\nto the nowly established American diamond industry. We have\nclosed down a number of Axis firms chose activities have been\ndengorous to the national interests and whose operation mrs\nnot important to the national or local economy. Treasury\nroprosontatives have been placed in over 50 business enter-\nprises which had strong Axis connections end whose continuod\noperation vas considered essential,\nAll firms operating under liconse have been required to\nfilo with the Control affidevits providing detailed informa-\ntion ns to organization, officers and directors, capitel\nstructure, relationships 1th other companies, the nature of\nits operations and principal customers. These firms are also\nrequired to file periodic reports which provide significant\ninformation with respect to their operations. As Γ. result of\nthe operations of the Control in this field, the Treasury now\nhrs in its files organized information -ith respect to the\nstructure, activities, and background of the numorous Axis-\nerned or dominsted concerns, as well 15 concerns controlled\nby nationals of other blocked countries.\n(b) Foreign banks and insurances companies,\nAs each new country THE frozen, many foreign banking\nagencies and insurance conpanios mere brought under the Control.\nSuch onterprises vore permitted to operate under the coreful\n242\n- 9 -\nsupervision of Treasury representatives placed in such insti-\ntutions who inspocted all transactions to assure that the\nrestrictions of the Control were boing strictly observed.\nThe Treasury has obtained the full cooperation of stnte bank-\ning and insurance departments in administering this phase of\nthe Control.\n(c) Securities.\nSecurity accounts of nationale were blocked, and pur-\nchases and sales of socurities for such accounts could be\neffected only under license. Debt service and sinking fund\noperations of blocked countries have been controlled through\na licensing system. In order to provent the disposal of\nlooted securities in this market by the Axis countries, the\nForeign Funds Control early in 1940 prohibited the importa-\ntion into the United States of securities from any foreign\ncountry except under license. Imported securities are held\nby the Federal Reserve Banks until satisfactory evidence 08\nto origin and ownership is forthcoming.\n(a) Foroign Trade.\nThe Control is one of the most important mensures adopted\nby this Government affecting the United States import end ex-\nport trade with foreign countries. Not only is trede with all\nblocked countries subject to the Control, but trade with much\nof the rest of the world is effected by it. For example, the\nRegraded Unclassified\n243\n- 10 -\nblacklisting of Axis end Axis-dominated firms in Latin America\nby the Proclaimed List is designed to promote healthy homisphoric\ntrode and to eliminate the undesirable activities and influence\nof these Axis firms in Lotin America.\n(e) Proclaimed List.\nWhon the Procleimed List WT.S issued, the Control assumed\nn. major part of the administrative work involved. Roproson-\ntativos of the Stato and Tronsury Departments have recently\nvisited the Caribbean countries where Procleimed List problems,\nparticularly those relating to coffee, required impodiate\naction. Also, at the present time, EL group of Treasury and\nState Department personnel is touring South America, consult-\ning with and advising diplomatic missions on Proclaimed List\nproblems.\n(f) Consus of Foreign Property.\nTo further the purposes of the freezing control and to\nassure more offective administration, the Tronsury has ro-\ncontly taken C complete and comprehonsive census of all\nforeign-orned proporty in the United States, irrespective of\n\"hother the owner of such proporty has boon blocked under the\nfreezing control. This consus makes evailable for the first\ntimo precise date n.s to the identity of the foreign interests,\nand the nature and loontion of the proporty.\n244\n- 11 -\nThe worlth of information thus obtrined will be of\nincstimble value to numerous governmental departments end\nagencios, not only in doaling with problems of the immodiato\npresent but nlso in formulating long-range programs for the\nfuture.\n7. Technique of large-scale operation.\nIn view of the wide arons of economic activity which ATO sub-\njoet to the Control, it has boon necessary rapidly to devolop methods\nof operation which would allow tronsnctions not contrary to our\nnational intorost to be effected with a rinimum of interforence.\nThis has boon accomolished largely through the use of general li-\nconses. These general licenses permit wall-defined types of trans-\nnations to be offected without individual licenses, provided they\nare consumented strictly in the monnor and within the limits stipu-\nlated in such liconsus. When nooded, these general liconsos require\nreports which are used to polico the activities conducted under the\nlicenses, to insure compliance with the terms theroof, and as c.\nbasis for restricting or brondening the scopo of the license.\nUndor the 75 general licenses which have been issued, millions of\ntransactions have boon effected without the necessity of individual\napplications boing filod end individual licenses issued. The rc-\nviewing strff of the Control has thus boon able to concentrato upon\nthe more difficult typos of transactions for \"hich specific liconses\nRegraded Unclassified\n245\n- 12 -\nare required, and has been able expeditiously to net upon over\n350,000 specific applications. More than 80 percent of these\napplications are nov being handled directly by the Federal Reserve\nBanks in the field,\n8. Special comment on Axis and Axis-controlled business\nenterprisos.\nIn the twenty year period between 1919 and 1939, German interests\nhave succeeded in organizing within the U nited States another\nindustrial and commercial network centered in the chemical field,\nbut extending also to the electrical and heavy goods industries,\nforeign commerce, and financing. It is unnecosary to point out\nthat these business enterprises constitute F. base of oporations\nto carry out Axis plans to control production, to hold merkets\nin this homisphore, to support fifth-colunn movements, and to wold\nour post-ner economy to Axis plans,\nOne of the primary risons for freezing Axis assets UCS to\ncombat this situction, The problem with which NC are now food,\nis more difficult although somewhat similar to the problem foood\nby us in 1917. The background today is vastly different from that\nthich cristed ir. 1917.\nTer almost fiftein yors the Axie business interests have been\ntaking comprehensive stops to insulate themerlves against an -lien\nproperty custodinnship with its soizure of legal title\nresult of their offorts only - negligible portion of Avis-influcneed\nproperty in this country rould pass into the hands of c. custodian\n\"hore powers are limited to the seizure of \"enony\" title. The\nRegraded Unclassified\n246\n- 13 -\n\"title\" concept enployed in creating the office of Alien Proporty\nCustodian in the first World War 10 now outmoded. The title to\nsome ot the most dangerous of the Axis- nfluonced enterprises is\nSwiss, Dutch, or Panamanian. Other enterprisos are 100 percent\nAmerican, 50 far as title is concerned.\nUnder the broad definition of the word \"national\" the Preezing\nordor has brought under foroign funds control all those organizations\nwhich are actually Amorican and other noutral \"fronts\" for Axis\nactivities. Many of those concerns are related to the Axis powers\nonly through contractual tios, patont licensing aprooments and the\nlike. In somo casos the tios are informal, based largely on\npersonal foalty or family relationships. The Ploxible procedure of\nforeign funds control, developed over the past twenty nonths, makes\nit possible to doal effectively with this type of situation.\nBy intensifying our controls over those business enterprises,\nwithin the franowork of the foreign funds control licensing proce-\nduro, NC can, in most cases, safeguard our national interests nore\noffectively than could be dono under the seizure tochnique.\n9. The record of the Control. The Dopartment has more than\n,7,000,000,000 of frozen assets under its survoillance at the\npresent timo. Only by contrast with the 2500,000,000 of assets\nadministored by the Alien Proporty Custodian during the last world\nTar is it possible to gain somo conception of the magnitudo of the\ntask the Treasury has boon doing during the last twenty months.\nRegraded Unclassified\n247\n- 14 -\nMo) C than 350,000 applications have boon handled by the Control\nand in addition literally millions of other transactions have boen\neffected only on terms proscribed by general licenses. In spite of\nthe highly restrictivo character of the Control and its ruthl ss\nadheronce to the principals of outright oconomic warfaro, not ono\ndocision or ruling of the Control has boon so much as challenged\nin the courts.\nAll of this has been possible only as a result of the confi-\ndenco shown by the mublic in general and the bankins and business\ncommunity in particular in the reasonablencss and intogrity of\nthe Control. This confidence has recently boon re-affirmed in a\nmost striking manner when both Houses of the Congross unenimously\napproved H.R. 6233 which greatly expands the powers of the Prosident\nover this foreign property. Throughout the consideration of the\nbill both in the committoos and on the floor of the liouse and on\nthe floor of the Sonate there 733 not one word of criticism loveled\nat the manner in which the Control has been administered.\nRegraded Unclassified"
}