Volume 466, November 27 – November 30, 1941

DIARY Book 466 November 27 - 30, 1941 Regraded Unclassified - & - Book Page Appointments and Resignations Paul, Randolph: To be in charge of preparation of new tax bill - HMJr-Paul conversation - 11/28/41.. 466 242 a) FDR notified - 12/10/41: See Book 471, page 82 b) Appointment - 12/13/41: Book 472, page 292 - B - Bank of America First Trust and Savings Bank, Pasadena, California, absorbed - 11/28/41 232 Belgium See War Conditions: Foreign Funds Control BISMARCK See War Conditions: Military Reports Businesses, Small See Financing, Government: Defense Savings Bonds - C - Cerro de Pasco Copper Corporation, Mexico See War Conditions: Silver China See War Conditions: China; Foreign Funds Control Coordinator of Information See War Conditions: Military Reports Correspondence Mrs. Forbush's resume' - 11/28/41 311 Coster, F. D. See McKesson and Robbins - D - - Defense Savings Bonde See Financing, Government - 3 - Eccles, Marriner S. See War Conditions: Inflation Economists For list, see Revenue Revision - ? - Farm Credit Act of 1941 Summary of Treasury letter to Budget Bureau - 11/28/41 272 Farm Mortgage Corporation, Federal See Financing, Government Federal Farm Mortgage Corporation See Financing, Government Regraded Unclassified - 1- (Continued) Book Page Financing, Government Conference; present: HMJr. Haas, Morris, Murphy. Hadley, Bell, and Schwarz - 11/27/41 466 60,97 a) $11 billion wanted by Bell to carry through until February without further borrowing Federal Farm Mortgage Corporation: Bell's letter to President Black on future financing - 11/27/41 123 Excess reserves and interest rates - recent changes in: Hass memorandum - 11/27/41 125 "December Financing: Summary and Conclusions" - Haae memorandum - 11/29/41 260 Defense Savings Bonds: O'Mahoney (Senator, Wyoming) and HMJr discuss priorities' effect on civilian business; "civilian business the goose that lays the golden egg that will pay for the defense program": O'Mahoney - 11/27/41 93 a) Discussion at 9:30 meeting - 11/28/41 222 Progress report - 11/28/41 275 a) Status of State Organizations - map 307 Field Organization News Letter, No. 28 - 11/29/41 308 Comparative statement of sales during first 22 business days of September, October, and November, 1941 378 France See War Conditions: Foreign Funds Control - G - Girard, Marie See McKesson and Robbins - H - Hitler, Adolph See War Conditions: Military Reports - I - Indo-China See War Conditions: Export Control Inflation See War Conditions Irving Trust Company See War Conditions: Silver - L - Latin America Mexico: See War Conditions: Silver Regraded Unclassified - M - Book Page McKesson and Robbins Insurance policies payable to Marie Girard - Foley memorandum - 11/28/41 466 309 Mexico See War Conditions: Silver - o - Office of Facts and Figures Interdepartmental Advisory Committee - personnel of: MacLeish release - 11/27/41 138 O'Mahoney, Joseph C. (Senator, Wyoming) See Financing, Government: Defense Savings Bonds - P - Paul, Randolph See Appointments and Resignations: Revenue Revision Procurement Division Over-all study ... in an attempt better to carry out function of Government procurement - HMJr's memorandum to Mack - 11/27/41 146 a) Mack reply - 11/29/41 310 - R - Revenue Revision Conference: present: HMJr, Kades, Blough, Paul, Sullivan, Groves, Tarleau, Buffington, Heas, Cann, Foley, and White - 11/27/41 3 a) Computation of tax liability on 1940 income under present law for General Motors, Glenn L. Martin, Curtiss-Wright, Coca Cola, American Car and Foundry, United States Steel, and Bethlehem Steel 39, etc, "Speeding up 1942 income tax collections" - memorandum for HMJr - 11/27/41 53 "Tax on increases in income as a means of preventing inflation" - 11/27/41 56 "Number of white-collar salaried persons, 1935-1936".. 59 Тал-ехетрt Organizations: Conference: present: HMJr, Graves, White, Foley, Kades, Sullivan, O'Connall, Odegard, and Gaston - 11/27/41 71 Economists with tax experience - Blough list 132 Paul, Randolph: To be in charge of preparation of new tax bill - HMJr-Paul conversation - 11/28/41 242 Regraded Unclassified - S - Book Page Silesian-American Company See War Conditions: Foreign Funds Control Silver See War Conditions Small Businesses See Financing, Government: Defense Savings Bonds Spain See War Conditions: Foreign Funds Control Sweden See War Conditions: Foreign Funds Control Switzerland See War Conditions: Foreign Funds Control - U - United Kingdom For British film settlement, see War Conditions: Foreign Funds Control - W - War Conditions Airplanes: Shipmente - British Air Commission report - 11/28/41 466 334 China: Stabilisation Board: Taylor 'plane reservation arranged for at Hong Kong - - 11/29/41 381 Exchange market resume' - 11/27/41, etc. 196,359,387 Export Control: Exports to Russia, China, Burma, Hong Kong, Japan, France, and other blocked countries, week ending November 22, 1941 - White report - 11/28/41 341 Exports to Indo-China - British Embassy memorandum concerning - 11/28/41 349 Foreign Funds Control: British film settlement - resume' of - 11/27/41 159 Spain: "Certain generals influenced in actions through monetary considerations" - British Embassy does not wish funds used for this purpose frozen - 11/28/41 248 - V - (Continued) Var Conditions (Continued): Book Page Foreign Funds Control (Continued): Administration of Executive Order 8389, as amended: (See also Books 411, 425, 434, 442, 447, 457, and 459) Meeting - 11/27/41 466 153 a) Discussion of 1) North Africa licenses 2) French Government funds with J. P. Morgan and Company for servicing and amortization of 7% and issues 3) Bank for International Settlements investment of funds held at Federal Reserve Bank of New York in short- term bankers' acceptances Meeting - - 12/5/41: Book 469, page 237 a) Discussion of 1) General Aniline and Film Company a) Homer Cummings quoted on "opinion written by Covington, Burling, Rublee, Acheson, and Shorb that stock could be trusteed and = thus put beyond reach of Alien Property Custodian" - Acheson has no knowledge of this b) Resume' of steps taken to date 2) Belgium: Safe conduct asked for 88 FREDERICK - to come to United States and return with supplies for prisoners of war 3) Switserland: Transfers from account of National Bank of Switzerland to Spanish Exchange Control Institute - charter higher on vessels 4) Sweden: $4 million in Danish dollar bonds and $4 million in Norwegian dollar bonds now in Switzerland; Swedish Legation wants plan worked out for pre-cancellation of coupons before sending to United States and interest paid into Swedish accounts. 5) China: Stabilisation Board allocation of $700,000 for purchase of coal for Shanghai from French Indo-China to be questioned 6) Canadian residents' sale of villa in France with payment to be made out of account of Swiss holding company owned in part by prospective French purchaser questioned 7.) Silesian-American Company: Proposal of trustees to borrow $1,700,000 from Union Bank of Switserland and LaRoche and Company not approved - V - (Continued) Book Page War Conditions (Continued) Inflation: "Tax on increases in income as a means of preventing inflation" - 11/27/41 466 56 Eccles' speech before National Industrial Conference Board on November 25, 1941 107 Press comment - Merillat report - 11/28/41 323 Lend-Lease: British Dollar Position: Relief of strain by making available money from second Lend-Lease appropriation to be discussed by Phillips and Wilson - 11/28/41 333 Conference; present: HMJr, Phillips, Cochran, and White - 12/3/41: See Book 468, page 70 a) Stettinius' willingness to give relief from second Lend-Lease appropriation provided free funds can be found discussed Military Reports: "The War This Week" - 11/20-27/41 - Coordinator of Information report 197 Reports from London transmitted by Halifax - 11/27/41, 11/29/41 198,388 Hitler's G.H.Q. - Coordinator of Information report - 11/28/41 361 Description of destruction of BISMARCK - Kamarck resume' - 11/29/41 368 Summary by Kamarck - 11/28/41 374 Libyan action report - 11/30/41 396 Furchasing Mission: Federal Reserve Bank of New York statement showing dollar disbursements, week ending November 19, 1941 155 Vesting order sales - 11/28/41 336,337 Silver: Cerro de Pasco Copper Corporation, Mexico: Cancellation of contracts entered into by Irving Trust Company - - 11/27/41 168 Mexico-United States agreement: Handy and Harman announce price increase in connection with - 11/28/41 a) Cochran memorandum - 12/1/41: Book 467, page 33 b) Handy and Harman report - 12/1/41: Book 467, page 35 Banco de Mexico renews arrangement concerning newly- mined silver for January 1942 - 12/29/41: Book 479, page 221 Regraded Unclassified 1 November 27, 1941 9:12 a.m. HMJr: Hello. Operator: Mr. Forrestal. HMJr: Hello. James V. Forrestal: Henry, are you booked for the Army-Navy game? HMJr: Am I booked for the Army-Navy game? F: Uh huh. HMJr: No. I don't even know when it's coming. F: Well, that's coming - you can't be BO indifferent to the Service as that, now, Henry. HMJr: What's the matter? F: It's coming Saturday. HMJr: This Saturday? F: Would you want to - would you like to go? HMJr: Jim, I think we're going to the country, but I - our plans are to go to the country. F: I see. Well, do you want to - you probably - do you want to check and let me know, if you and Mrs. Morgenthau would like to? HMJr: Well F: We're going up in the morning - Saturday morning by car HMJr: Yeah. I will check, and I could let you know by early this afternoon. F: That's all right. HMJr: It's terribly nice of you to think of us. F: Well, I haven't seen you in a hell of a while. Regraded Unclassified - 2 - 2 I thought it might be a chance to dicker. HMJr: Yeah. Well, I would like to see you game or no game. F: All right, Henry. HMJr: Thank you. I'll let you know after lunch. F: Okay. Regraded Unclassified 3 November 27, 1941 9:30 a.m. RE TAXES Present: Mr. Kades Mr. Blough Mr. Paul Mr. Sullivan Mr. Groves Mr. Tarleau Mr. Buffington Mr. Haas Mr. Cann Mr. Foley Mr. White Mrs. Klotz. Blough: Here is one of your charts. H.M.Jr: Do you want to stand and explain it? If the others don't see it, they can listen. Blough: These are the same as I had the other day except for different companies. This one is General Motors-- H.M.Jr: Let me see it. I don't care whether they see it. Blough: This one is General Motors, which is a big company. It has three hundred forty-seven Regraded Unclassified 4 - 2 - million dollars worth of income. It had adjustments of eleven million dollars excess profits, credit of two hundred seventeen million, leaving excess profits income of 8. hundred and thirty million dollars. Its excess profits tax amounted to seventy-one million dollars. H.M.Jr: They earned how much? Blough: They earned three hundred forty-seven million dollars. H.M.Jr: Whew! 1 Paul: What year was that, Roy? Blough: This is 1940. H.M.Jr: I am only working with '40. I don't want anything else but '40. Blough: This is the return as filed by them in 1940. H.M.Jr: Somebody in General Motors told a friend of mine the other day that they earned as much in the first six months as they had in all of last year. Blough: That is a lot of money. Down here we have the computation of the normal tax showing sixty- six million dollars normal tax-- H.M.Jr: Did anybody leave the room just now to buy some General Motors? White: We will buy the room and sell it short after we get through. H.M.Jr: The point is, did anybody leave the room? (Laughter) Regraded Unclassified 5 - 3 - Foley: It is too late now, Harry. White: You saw the charts last night, didn't you? Blough: So we have about 8 hundred and sixty-five million dollars worth of taxes altogether, 8. hundred and fifty-five million. H.M.Jr: How much? Blough: About a hundred and fifty-five million dollars worth of taxes. H.M.Jr: How much did they have left over? Blough: They had left over a hundred and ninety million dollars. H.M.Jr: What is that proportion, about? Blough: That proportion of three hundred forty-seven is about forty percent. H.M.Jr: They had about sixty left over? Blough: They had about sixty percent - - a little less than sixty percent left over, between fifty and sixty percent. White: What is their net value, is that there? Blough: That is not on this chart. They didn't report that. Paul: That is about a billion dollars. Blough: We have some figures of our own. It must be at least that. They have been making around twenty-four percent or thirty percent on their invested capital. Now here is 8. case of the United States Steel Regraded Unclassified 6 - 4 - Corporation where they are on invested capital basis, and they haven't made up to their invested capital credit. Their income begins here and goes over here. It is 8. hundred and twenty million dollars. Their excess profits credit is more than their income by fifty-seven million dollars, so that they are going to have an excess of credit to carry over to 1941 which they can use in 1941. They of course have no excess profits tax and merely have the normal and surtax on the regular income of the company, the hundred and twenty million. H.M.Jr: They pay nothing because they have a high capitalization? Blough: That is right. In relation to their low earnings, or low earnings in relation to capitalization, either way. H.M.Jr: I didn't know that was the situation on U. S. Steel. Foley: Are those figures, a hundred and twenty mil- lion and three hundred forty-seven million, net or gross? Blough: Those are net income figures. Foley: After all operating expenses? Blough: After all operating expenses as filed by the company. H.M.Jr: Give me that U. S. Steel again. That amazes me. Blough: U. S. Steel had a hundred and twenty million dollars. In addition to that it had certain adjustments over and beyond their normal tax income. A hundred and two million, I beg your Regraded Unclassified = - 5 - pardon, slight adjustments there. But their excess profit credit was a hundred and sixty- two million dollars, so that they had left over fifty-seven million dollars of excess profits credit. Next year that fifty-seven million will be carried forward as a credit against whatever income they make next year. H.M.Jr: They carry it for one year? Blough: Two years. Sullivan: They have to make two hundred twelve million dollars. The hundred and sixty-five plus the sixty-seven, before they are subject to excess profits tax. Paul: What was their excess profits credit? Blough: A hundred and sixty-two million dollars. Paul: And twelve times that approximately would be their invested capital, wouldn't it? Blough: That is substantially correct, yes. Paul: What would that be, then, a hundred and sixty- two times twelve? Blough: A hundred and sixty-two times twelve would be about a billion nine. H.M.Jr: Well, now, let me ask you this. It is amaz- ing to me. You people might have all known this, but certainly it is an eye-opener to me. Could you do - if you haven't already started, I would very much like to see Bethlehem Steel. Blough: We have asked for that. Foley: That will be just like this one, won't it? Regraded Unclassified 8 - 6 - Blough: It will look very much like this one. Paul: I would like to see one of the smaller steel companies like Inland Steel or Republic Steel or one of those. H.M.Jr: All right. Haas: One of the new ones that don't have obsolete stuff to put in the capitalization. H.M.Jr: Why not just run through the steel and see the difference between one industry? Why wouldn't that be 8. good angle? White: Of course, because the assumption that the U. S. Steel can have such a large capitali- zation necessary to do that business will be shown up when you take some of the other steel companies. H.M.Jr: Well, why not take National Steel and Inland Steel and Republic and then take a little one with a high specialty like Ludlow who makes only these special tool steels? Why not just stick to the steel and show the tremendous difference within one industry? Blough: What we might do is to have three of four charts made up on steel and then have for the rest of the companies the figures so we can say this company is just like this chart. Or would you like 8. chart for every one? H.M.Jr: I would like one for every one. There would only be about eight or ten. Don't you think so? White: Yes, and I think somebody ought to get started in George's shop at once to segregate the group of steel companies that you are pick- ing out to see which of those are sufficiently Regraded Unclassified 9 - 7 - similar to justify the conclusion that the capitalization of the United States Steel does not represent an adequate basis for determining what their profits are. I mean, it would be hardly fair to compare United States Steel with some other corpora- tion that is making high-grade specialties, but it certainly would be fair to compare them with several other steel companies that make the same type of product and which have a far higher proportion of earnings on the basis of their capital. H.M.Jr: Well, Harry, there are ten or twelve steel companies and then let's take a look at it and we can all begin to analyze it, but just before I - I want to get to you - what were the net earnings of U. S. Steel? Blough: U. S. Steel? A hundred and two million dollars. H.M.Jr: And how much federal taxes did they pay? Blough: They paid in federal taxes thirty-one million six hundred thousand. H.M.Jr: Well, now, is it an accident that most of these are paying about & third? Blough: The tax rate is thirty-one percent, which is the reason why it tends to be around a third. Foley: That is without any excess profits? Blough: That is without any excess profits. H.M.Jr: But even these that we have seen, I haven't seen any with excess profits who have paid more than that. Blough: General Motors paid more than a third. Regraded Unclassified 10 - 8 - H.M.Jr: Well, forty percent. Blough: Something over forty percent. H.M.Jr: Why do they keep telling me these companies are paying sixty percent? Blough: We will get you two or three of the war babies in here. They are paying around sixty. They ought to be in tomorrow. H.M.Jr: Don't you think, Paul, it would be a good idea to get a whole industry? Paul: I do. I think we might get two or three industries, though. H.M.Jr: I mean, they can't turn out-- Blough: Some, we can't turn out so many of these. White: Mr. Secretary, some of us are accustomed to looking at figures rather than charts and if it doesn't stop them, what we would like is if somebody would do that with 8 great number of industries just in a column of figures and make as many charts as they can. H.M.Jr: Talk to Roy about it. Blough: Well, we will do that. H.M.Jr: I think I would like to go through, because if we can show the difference within one industry and then after that we can take the airplane industry, if you want to, or the ship building. There are not so many ship building companies. Blough: Not a great many large ones, no. H.M.Jr: I would like to see the airplane industry. Regraded Unclassified 11 - 9 - Blough: We have quite 8 number of airplane ones. H.M.Jr: Why not go through the airplane industry, planes and engines? Blough: We have already asked for four or five or six of those. H.M.Jr: Do that. I think that would be the most - I am simply astonished. Blough: Do you want to look at another chart? H.M.Jr: I would love to. Blough: This is not an individual company. This is statistics for 1940. Paul: Do you have the gross income? Blough: I would have to check that up. Gross receipts or gross income. Foley: Well, gross receipts. H.M.Jr: Well, it certainly would be in the neighbor- hood of two million dollars. It certainly would be at least that, but I would have to check on it. H.M.Jr: But we are going to run through the steel first. Blough: Yes. H.M.Jr: Is that all right with you, Paul? Paul: Yes, indeed. I would like to see the charts on that and see the figures on several industries. H.M.Jr: Well, you can talk to Roy. Go ahead. Regraded Unclassified Rand Seough 12 - 10 - to run too Reta Blough: We can just hang this somewhere. It isn't necessary to go through it in detail. Here we have the income brackets under five thousand dollars, five to twenty-five thousand, twenty-five to fifty and so on, and in this bank here we have the number of companies with excess profits taxes. These are the taxable companies. Practically none of them had less than five thousand dollars of income because they are exempt unless the net income is different from the excess profits tax due to capital gains and losses and dividends or something like that. By far the biggest number was in this five to twenty-five thousand dollar group and then there were nearly four thousand of those. Then they go on down until over five million dollars - we have a very small number of companies. On the other hand, we have in this bank the net income in the pink, whatever that color is, and the taxable excess profits, the amount of excess profits subject to tax in the green for the different size companies also. The pink being of course natural because he is much bigger than the green. And then at the bottom the income taxes and the excess profits taxes paid by these companies, the income taxes in the blue-- H.M.Jr: I don't get it. Start all over again. Blough: It is too complicated, I will agree, but this chart has three banks. Number of returns, amount of income, amount of taxes. Number of returns by the size of the income of the company. Amount of income of those corporations. The corporations with fifty to a hundred thousand dollars of income had this much income and this much subject to the Regraded Unclassified 13 - 11 - excess profits tax. H.M.Jr: What conclusion do you draw from that? Blough: Well, it shows that as usual the largest number of companies are small, but that the big amount of income in excess profits tax are in a few big companies. You could cut off - you could cut a line right down here and out out all companies with less than a hundred thousand dollars of income and you would elim- inate three fourths or more of the companies subject to the tax, but you would still have a very great bulk of the income still subject to excess profits tax. H.M.Jr: Does this show whether We get it or not? Blough: This shows what we get. White: That also is the best reflection of the con- centration of industries in the United States. That is the best picture of the bigness of industry because you notice those extremely few companies in the last two columns in the first bank get a high income in the bank below. Paul: It also shows, does it not, that - in the middle chart the green is the amount of in- come subject to excess profits as I under- stand it and that is a very small proportion of the income of those companies in all examples. Blough: That is correct on the average. These are taxable companies. These do not include companies which were not subject to excess profits tax and the great bulk of them were not. White: Which would accentuate the tendencies in that chart. Paul: Have you any figures showing what percentage of the companies are subject to excess profits tax? Regraded Unclassified 11 - 12 - Blough: There are here around twelve thousand five hundred returns out of five hundred thousand corporations, of which about two hundred thousand had an income. Most of them were eliminated because of their size. Well, I have some other charts, but I think that is enough for today if I may suggest it. H.M.Jr: All right. Roy, let me ask you this question. Is this impression that I have got right as far as we have gone? After all, let's for a minute just forget the inflation angle on the thing, see. Let's just talk revenue for a minute. If you were told that you had to get "X" billions of dollars additional revenue, where would you look for it? Blough: That would depend on the size of "X", Mr. Secretary. H.M.Jr: All right, five billion. Blough: Five billion dollars? H.M.Jr: Yes, Blough: Well, I would know to begin with that I had to go for the bulk of that five billion dollars to the mass of the people, because I would know that that five billion dollars just wasn't left in the hands of a few hundred or B. few thousand people at the top, so that I would have to go to the bulk of the people. H.M.Jr: Let me ask you this way. I will have to lead you (Laughter) How many more billions can you get out of the corporations? Regraded Unclassified 15 - 13 - Blough: How many more billions can you get out of the corporations? Paul: Could we go back a little further and ask what is the total corporate income? Let's start there. H.M.Jr: That is a good point. Blough: Let's see, I am not sure that I can tell you offhand. I think it is around thirteen billion dollars. Paul: Well, the excess profits tax net income under the last act was about five, wasn't it? Blough: Let's take this act. We expect about two billion three hundred million dollars of excess profits tax under this act. Paul: That is on an income of five billion, isn't it? Blough: That is on an - oh, you mean -- yes, it would be around five billion dollars, that is right, in that neighborhood, out of the thirteen billion. Paul: That is five billion out of the excess profits. Now, that seems a large proportion of twelve or thirteen billion total corporate profits. Blough: Well, thirteen billion is, but your total estimated corporate profits for normal tax and surtax purposes and your five billion would be about right for your excess profits estimate. Paul: So that out of the total corporate profits of the United States you have got a little over two billion or one, six. White: What is the five billion figure you are talking about? Regraded Unclassified 16 - 14 - Blough: That is the profit subject to excess profits tax. White: But what you are getting is two billion three out of thirteen billion. Blough: Out of excess profits, that is right. H.M.Jr: You figure that the corporations in the calendar year '41 will earn how much? Don't be afraid, just rough. Blough: It has been estimated at thirteen billion dollars, roughly. H.M.Jr: Of that how much is the United States Government going to collect in taxes? Blough: In surtaxes about three, and the two together about five. Sullivan: Five billion three. H.M.Jr: Five, what? Blough: Around five billion dollars. White: Where did you get that figure of thirteen billion for '41 income? Blough: Nobody told me that figure, but I took the esti- mates and worked back from them and that is the estimate 8.3 of '41. White: What were they in 1940? We already have some indication of the percentage of increase. Do you remember what they were in '40? Blough: No, I don't recall. H.M.Jr: Well, Harry, for my purposes whether it is thir- teen or thirteen and a half -- Regraded Unclassified 17 - 15 - White: No, I thought it was something like sixteen. H.M.Jr: Well, again -- Blough: You see, intercorporate dividends are excluded here, eighty-five percent of intercorporate dividends. White: I will check up on that. H.M.Jr: How much do you think, Roy - make a guess for '42. Blough: That it is going to be in '42? H.M.Jr: Yes. Blough: I would much rather George guessed. He has some basis to guess. I don't. H.M.Jr: All right, George, give us a guess. Haas: It is just wild. H.M.Jr: All right, I love to see you go wild (laughter). White: But not over your figures. Haas: Sixteen. Blough: That is what I would say. That was one of my wildest moments. H.M.Jr: Well, why wouldn't it be reasonable if there was sixteen billion that we took ten of it? Paul: Well, we interpolate one other question there. H.M.Jr: Supposing we took ten of it? Paul: Before we get to that question, Mr. Secretary, could we ask what the corporate profits were Regraded Unclassified 18 - 16 - in, say, 1939? I would like to see how much they brought up in relation to what we pay. White: I can quickly get those figures. Blough: We have them. I just don't have them with me. H.M.Jr: I am starting in with 8 trend of thought. We ought to get what the figures are, going back, say, four or five years, and an estimate next year, how much the Federal Government is taking each year, and the percentage, see, and then supposing we said, "Well, why shouldn't we take two thirds?" I talked about a hundred per cent. Supposing we talk about two thirds. Paul: Well, the more they have gone up on account of the defense effort, the more we are privi- leged to take. H.M.Jr: Well, if we took two thirds and sixteen was right, we would get the extra five billion right there. Paul: That is right. H.M.Jr: I had to answer myself. white: You don't have -- H.M.Jr: Excuse me, just one minute, Harry. You don't have to go down and take it out of the working man's pocket. That is what I was trying to get at. White: If it were properly distributed among corpora- tions, otherwise - and that is the assumption I take it, that is implicit in the very thing you are examining, because you could distribute that additional burden in such 8 way that you would seriously hurt business enterprise and so on. Regraded Unclassified 18 - 16 - in, say, 1939? I would like to see how much they brought up in relation to what we pay. White: I can quickly get those figures. Blough: We have them. I just don't have them with me. H.M.Jr: I am starting in with a trend of thought. We ought to get what the figures are, going back, say, four or five years, and an estimate next year, how much the Federal Government is taking each year, and the percentage, see, and then supposing we said, "Well, why shouldn't we take two thirds?" I talked about 8 hundred per cent. Supposing we talk about two thirds. Paul: Well, the more they have gone up on account of the defense effort, the more we are privi- leged to take. H.M.Jr: Well, if we took two thirds and sixteen was right, we would get the extra five billion right there. Paul: That is right. H.M.Jr: I had to answer myself. white: You don't have -- H.M.Jr: Excuse me, just one minute, Harry. You don't have to go down and take it out of the working man's pocket. That is what I was trying to get at. White: If it were properly distributed among corpora- tions, otherwise - and that is the assumption I take it, that is implicit in the very thing you are examining, because you could distribute that additional burden in such a way that you would seriously hurt business enterprise and so on. Regraded Unclassified - 17 - 19 H.M.Jr: Well, following his chart there, you would only have to apply it to about five per cent of the corporations to get it. White: That is right. H.M.Jr: You could pick up another five billion and not taking it out of the working man's pocket. White: That would still be a far cry from the English practice. H.M.Jr: It would be & far cry from"Six per cent" Morgen- thau, too. Blough: No, you would get more money under that than you would under the "Six per cent" Morgenthau, if you left all under six per cent to the cor- poration. There isn't that much above six per cent. H.M.Jr: You mean I couldn't get five billion on top of six if I left them six? Blough: Well, T would say offhand that if you took six per cent across the board of the corporations of America, there wouldn't be five billion above that. H.M.Jr: Wait a minute, if I took everything above six per cent net -- Blough: I seriously doubt whether you would get five billion dollars. H.M.Jr: What I am asking for is ten, gross. Blough: Well, I mean additional money. White: Well, you are dealing there with facts we can easily check. Regraded Unclassified 20 - 18 - H.M.Jr: Well, I would like to explore that. I would like to explore if we wanted to take sixty- six and two thirds of the net earnings of all the corporations in America, how much would we get, that is proposal number one. Proposal number two, that we left all the corporations six per cent net, how much would we get? White: You see, one of the difficulties and that is the advantage of going through these charts, is that if you use a flat rate of that kind, you severely penalize a company like General Motors, which is very efficient, and you give an inversely proportional break to the United States Steel Company, which has an enormous capitalization, much of which is either in effect water, or inefficiency. H.M.Jr: And the management has been grossly inefficient. White: Well, it is probably that. They claim they have no water in it, but it is a combination. H.M.Jr: No, I am talking about management. White: So that there would have to be some kind of an allowance in some way made for that. H.M.Jr: But Harry, no one has ever given me the figure on my formula. Supposing we took - suppos- ing we took everything over and above six per cent. What would we get? White: Well, they ought to be able to give you that. Blough: Yes. white: Assuming that business remains the same and you didn't interfere with business, initiative and 30 on, it is a simple computation. 21 - 19 - Blough: Those assumptions, of course, are a little -- White: Of course. Paul: I am B. little puzzled by one thought, why we are 80 afraid of penalizing corporate management when we don't hesitate to penalize individuals. White: Could you expand that? Paul: We put the surtaxes up in accordance with a person's income when he is an individual, irrespective of what -- white: Irrespective of what education and ability he had to begin with. Paul: That is right, presumably on the general average that the more income, the better manager he is, but when we come to corporations, we get strangely tender hearted. White: We treat capital a little bit different than we do human ability. It is a curious phenomenon. H.M.Jr: Well, for me - of course it most likely is boring to you people, but it is the only way I can work. I have opened up another avenue of thought as far as I am. concerned. White: This is going to the fundamentals. It is very significant. H.M.Jr: For me, I am opening up this stuff leaf by leaf. Groves: May I offer a suggestion to think about in connection with this heavier taxes on corporations? H.M.Jr: Please do. - 20 - 22 Groves: It occurs to me that it might have a bad effect from the standpoint of inflation, at least it is something to be considered in two respects. One, that on Government contracts some of the tax comes back to the Federal Government because the bargain of the contract itself and the price of materials in the seller's market I think depend very considerably upon the corporation's cost in which they put some of these taxes. And the figures, I think, will indicate that 89 the tax expands the profit expands, and it keeps 8 jump ahead. Some of it is circular and comes back on the Government. The other thing, particularly if the corpora- tion tax is levied on 8 percentage basis, the corporation gets to have 80 little equity in its marginal dollar that it tends to get indif- ferent a8 to costs, and that is very favorable to an inflationary cycle, and they tend to give everybody what he wants and then add it to the bill, particularly if you are dealing with the Government, both of which tend to aggravate inflation. I don't know how serious they would be. H.M.Jr: Well, let me ask you a question. Let's be specific on this thing. If I understand what you are talking about. I don't know whether you have read the Trammel report on the cost of the Army cantonments. Groves: I haven't, sir. H.M.Jr: Well, I don't know how many here have read it. It is not a very long report. It will take you maybe half an hour. Take that report. As I remember it, the cantonments - this was a year ago last summer, it was early - cost three hundred million dollars more than the estimates. Now, I don't know what form the contract was, Regraded Unclassified 23 - 21 - but it goes into what kind of a contract, whether it was a cost plus or whatever it was. It is all in this Trammel report, and apply this question that you are raising to that. Now, would it have helped or would it have hurt? I mean, they were grossly wasteful, you see, but did the question of taxation enter into the thing? Groves: It would have been more wasteful if there had been higher taxes, is the question. H.M.Jr: What you are getting to is this. I mean, you are 8 tax man, but you also have a broad conception. I just wonder that you are raising this question. Isn't it possibly - I mean, we have never done it, and the Bureau of the Budget hasn't done it, but that doesn't mean that I shouldn't. In all these talks, why shouldn't I raise - if we once made up our mind - the question of the way these Army and Navy contracts are working. Groves: Very good. I think it is very important. H.M.Jr: As a member of Senator Byrd's committee, I have a perfect right to raise that question. You and I can sit here and maybe miss a billion dollars or two, because we are fearful that the Army contractors are going to be wasteful, but after reading the Trammel report, my own feeling - I would like you to read it and come back at me just as hard as you want - please come back just as though we are in cla ss, come back just as hard as you want, but my own feeling is that the tax thing plays 8. very small part in it. Now, I may be wrong in it, but just take that, see, and see that the gross waste - I mean, these Army Engineer people don't seem to have any - they have gone just hog-wild. 24 - 22 - Sullivan: Excess profits wasn't written at the time most of those contracts were awarded. H.M.Jr: All right, read the one in today's newspaper, the Trammel report. White: That is further support. H.M.Jr: Read that one they have done today. They are doing a swell job, but they make their reports and then nothing happens, and the Bureau of the Budget votes six or seven billion dollars to the Army at a time and they keep right on writing the same kind of contracts. Sullivan: Jere Cooper -- White: There is a reason, Mr. Secretary, why you can demand that. Not only because you are a member of the Byrd committee, which I think is secondary, but because you are examining tax programs in which one of the important objections which is always raised is this very real objection which has been raised, that as you reduce the net income that accrues to the companies, they become more wasteful in their expenditures, that they increase wages more easily, spend more in advertising and so on, and isn't the answer to that not the inauguration of 8 tax program so much as the direction which you are suggesting, a more careful examination and more power over the contracts? H.M.Jr: That is what I am saying. What I am saying is this. Professor Groves says, "Well now, wait a minute, Morgenthau, don't do this because of the tendency of making the contractor more wasteful." I say he is 80 wasteful now there is something the matter. There is something rotten in Denmark. Let's take a look at it. If we find they are being wasteful - here we are Regraded Unclassified 25 - 23 - trying to sell 8. billion and a half for the Government and we might be able to save five or ten billion dollars if the contracts were written right. Sullivan: That is right. Ten per cent of your non-defense expenditures is almost nothing. Ten per cent of the other is 8 lot of money. Foley: Have the property supervised. Sullivan: Ten per cent of your non-defense expenditures is about six hundred million dollars, a drop in the bucket. Ten per cent of your defense contracts runs into some real money. Groves: I was just going to say that there has been a lot of talk about saving on non-defense, and very little talk about saving in the defense part of the Budget. I suppose it is hard to gauge where the money is wasted there in definite quantitative terms, but it seems that some of the attention should be given it. I doubt if there is any country in the world that gets less for its military dollar than we do. H.M.Jr: Here is a funny thing. I heard the President of the United States talk about the Assistant Secretary of the Navy Roosevelt and what he did and how he bought when he was Assistant Secretary, and that nobody drove & closer bargain and he keeps telling about this Charles- ton, West Virginia armor plate factory and what it did and how they were able - the Navy can take it over, at the end, grease it up and keep it there until they needed it. But none of the contracts are written that way today. Sullivan: That is right. H.M.Jr: We build a building for them and the company can say at the end, "Well, we would like to have it," or "We wouldn't." For instance, what kind Regraded Unclassified - 24 - 26 of care are they taking of our buildings which the taxpayers paid for, and all the rest of that stuff? Sullivan: I think they are taking pretty good care of it, Mr. Secretary, because when the show is over you are going to find out that they are going to take those buildings over them- selves and junk their old stuff. H.M.Jr: Well, Groves, you have brought up a new line of thought, and I would like to have somebody, John, explore the question of contracts, I mean, somebody who - I should think in Internal Revenue could take a look at how these contracts are written. They must have begun to review them for '40 now, haven't they? Who does that in Internal Revenue? Cann: We are going to read some of them, Mr. Secretary, in the field, but we haven't had any report or any information which would allow us to formulate any opinion about that. H.M.Jr: Could you speed that up a little bit? Cann: Yes, sir. H.M.Jr: Couldn't you concentrate on that? Cann: We will look into that, yes, sir. 27 - 25 - H.M.Jr: Well, how would it be if, for instance, we say we want a report on twelve steel companies? Why couldn't we get their government contracts and how they were written and have the whole picture on one group at a time? Cann: I think we could. H.M.Jr: I mean, if we are going to do twelve steel companies, why not look into their government contracts and the forms of them, you see, and the profits and then what they charged off. You have got their nineteen -- Cann: Well, that information would ordinarily be gone into as part of the regular investigation and might not be recorded, but I mean it would be examined. H.M.Jr: Well, why not, if we are going to do the twelve, let's take a look at their government contracts and particularly as to how much they charge off to unusual - you know what I am after. Cann: Yes, sir. H.M.Jr: And in twelve steel companies you would get Army and Navy, too, wouldn't you? Cann: Yes, sir. H.M.Jr: And Shipping Board. Cann: Yes, we would get the Shipping Board. H.M.Jr: I wish you would do that. Get the names from Blough, which ones they are going to be. And can't you speed that up a little bit? Cann: Yes, sir. Regraded Unclassified - 26 - 28 H.M.Jr: Couldn't I know maybe early next week, something? Cann: Well now, that - I realize what you are after. H.M.Jr: Well, look, you will just have to. How many men have you got who know how to examine 8. corporation income tax return? Cann: We have enough to do that. H.M.Jr: How many have you got? Cann: Several thousand. H.M.Jr: All right, put as many hundred on this as necessary. I don't care how many you put on. Put on & couple of hundred, if necessary. Cann: Of course, we could get out a preliminary report to get the precise information you want. H.M.Jr: But you have got to move fast. Put a couple of hundred men on it. Cann: All right. H.M.Jr: I don't care how many it takes but I am not going to ait around and - I mean, I always get this stuff about two years too late. White: Doesn't that take only one aspect of the case that you are interested in, Mr. Secretary? They only go into their income. But aren't you also interested in the contract to see whether they are overpaid on various things? Do they have men who do that? Do you have men who are able to take the contract -- Cann: I would say our scope of investigation would go into the examina tion of -- White: Whether or not the price they paid for particular Regraded Unclassified - 27 - 29 commodities and 80 on is a fair price under those conditions and whether the labor costs and all the rest are reasonable, whether the advertising costs and all that -- Sullivan: I think Reiling, Herman Reiling of Ed's shop and Charlie Appel of Tim Mooney's shop can give you a pretty good picture of it. Cann: Of course, 80 far it is an element of cost that enters in to the determination of profit and we examine it. H.M.Jr: That is the answer to White. White: What do you mean? Cann: Well, we will examine it, of course, as to the purpose of verifying the amount spent. Now, as to -- White: Let me ask a specific question. Here is steel billed at thirty-two dollars a ton. The arithmetic is all right and you know they paid thirty-two dollars & ton. Cann: That is as far as we go. White: That is right. Do any of your men examine whether that is an inter-corporate arrangement, whether thirty-two dollars is & market price, whether they couldn't have bought it for sixteen -- Cann: If you are saying that, was there any indication of manipulation between affiliated companies, yes, we would be expected to go into that. White: Or whether there was -- Cann: But as to whether that was too great a price or too little a price, that wouldn't be any concern of a revenue agent. Regraded Unclassified - 28 - 30 White: That is why I think they might also have other procurement - there are 80 many angles -- Cann: In other words, Mr. Secretary, if the United States Government elected to buy steel at thirty-two dollars and it should have paid only twenty-eight dollars, the revenue agent wouldn't be concerned in that. H.M.Jr: No, and from my end, if I could get what I want at the start, what White is talking about is something that is 50 broad that I would like to think about it, but certainly you could get a lot and I don't know how we could do it or where we would do it and so forth, but at least I am not putting it aside. I would like to think about it. Groves: Couldn't we get 8. little quantitative information as to how these government contracts are let, by bid or by individual choice, and how much those cost, and profit margins? I would be interested in knowing. White: You see, Mr. Secretary, I happen to know one case at the other end. H.M.Jr: Can you hold your thought a minute? Do you want to say something, John? Sullivan: Yes. H.M.Jr: Hold your thought a minute. Sullivan: We have the report of the Vinson Investigating Committee. It is just about ready for release. It may be out today or tomorrow. They had exactly the thing you are talking about. They had all kinds of men in the field, in the offices of these steel companies and ship building companies, investigating the contracts from the very point of view you are speaking of. I think Regraded Unclassified - 29 - 31 that might be a very good jumping off point and furnish you with excellent leads to pursue. H.M.Jr: Well, let's give it all to Norman. I take it that is what he is here for. Kades, don't burst a blood vessel. (Laughter) Kades: Mr. Secretary, you have a report on the cost of steel, made by the Procurement Division in 1939, a study of about five volumes. My suggestion is that Procurement be asked to bring that up to date. That would show the comparison between the cost in the five years preceding 1939 and now. H.M.Jr: Chuck, write me a letter on that to Cliff Mack and I will sign it. Harry, you had one. White: It is all on those lines. I happen to know somebody who sells some stuff to the government and I know they are selling it at tremendous profits. The percentage of profits would run ridiculous sums, a hundred and twenty-five to fifty percent. The degree of competition is mitigated by the fact that there are certain special characteristics of the thing, but you could examine that income statement and it. is perfect. There is no attempt to defraud or to avoid, but if you once go behind that into what they are doing, that is where you will find a terrific waste, although I do think that also your study might reveal questions of depreciation and obsolescence and salaries and 80 on. H.M.Jr: But Harry, my own guess is, I may be wrong, we will find so much when we take a look at this - now, I am not saying we shouldn't do it. I think we should do it, but I don't want to wait here until next May to get a report. But let's get started on the thing and if you (Cann) are the man to do it - that is what you are here for, Regraded Unclassified 32 - 30 . I take it. Is that right? Sullivan: That is right. H.M.Jr: So anybody that has any suggestions, turn them in. I am not saying, Harry, we shouldn't, but it is just -- White: It is a much larger task. H.M.Jr: Well, I cable to England and I find out what the Inter-Parliamentary Committee in England is doing. They have got & continuous committee sitting there. I want Groves to know about it. I heard they are doing a wonderful job in England on the cost of government, with & continuous committee sitting. I cabled the Treasury man in London to let me know what this committee is doing on all costs so we had this in mind, but to come back to the original thing, what I was asking for is, I don't want to sidestep a corporate tax because I claim that is going to make a company that is already highly wasteful B. little more wasteful. Does that fit in all right with you? Groves: Yes. H.M.Jr: I mean, I think we should do both. Sullivan: I don't think Harold was trying to imply that we couldn't go any further. I think he was raising the point that there is a point beyond which you can't safely go. Wasn't that what you had in mind rather than that we couldn't go any further? Groves: Well, I didn't mean to suggest any definite conclusion but merely that that be weighted in the problem, is all. I haven't made up my mind what we ought to do about the situation. Regraded Unclassified - 31 - 33 I merely raised the point that something should be considered. H.M.Jr: Well now, what we have done this morning, we are going to have Cann go into this thing, and he is going to get the list and anybody that has any suggestions on how to get - the whole question of how much the thing has been padded will send it in to you, see. Cann: All right, sir. H.M.Jr: And you are going to get enough men on these ten or twelve steel companies, on their '40 returns, to see what they are doing. You can use a can opener on them. (Laughter) And I expect results. Klotz: That was a good pun. White: Was that intentional? H.M.Jr: I didn't realize it until I said it. Paul: Mr. Secretary, I think there is another -- H.M.Jr: The best ones are always the ones you don't realize. Paul: I think there is another important aspect of Groves' point which has nothing to do with defense. I am always hearing it said that if the tax is too high, all incentive is gone, and this applies not only to defense but people become wasteful, say, in department stores and completely non-defense businesses. I am wondering if we could get at any data there to check the good faith of that statement, because it doesn't seem to me that people are going to become too terribly wasteful and do so much prestige advertising if the corporate rate is sixty percent. Regraded Unclassified - 32 - 34 H.M.Jr: Well, would you give -- Paul: I don't know how you get at that, but that is the argument that is going to be made all along the line. Sullivan: I would like to bring a man here to do a study on increased corporate advertising. It is perfectly evident that there is & tremendous amount of money being squandered on advertising in ordinary periodicals, purely defense products. You can't pick up the Saturday Evening Post or Collier's or any of those popular magazines without seeing full page ads for Lockheed and Pratt and Whitney. Now, that money is being paid for a hundred cents on the dollar by the War Department and the Navy Department, and I think it ought to be stopped. White: Absolutely. Sullivan: I would like to start a study on that. White: Isn't that the answer to what Groves and Randolph Paul are saying, that these wastes- and there are many of these - should merely encourage the taxer to find ways of eliminating them. It is easy to limit high salaries, limit the amounts of advertising to some figure, in which you block those avenues of waste;and there is just one further point I would like to add. You remember, Mr. Secretary, when you spoke of that six percent tax, one of the important reasons that you advanced in favor of its feasibility was this, that if you did tax everything above six percent, then you could be tough with the question of increasing wage rates and labor, and that is one of the avenues they claim is wasteful. They say, "Oh, well, if & man only gets six Regraded Unclassified 35 - 33 - percent out of it, he doesn't care what he pays for labor," but at that point the government can step in and care because it comes out of its pocket. H.M.Jr: We ought to care now. Cann: Mr. Secretary, isn't it true that the Navy or the Army have their own trained representatives on the job at these particular spots also checking these costs? H.M.Jr: I don't know. Cann: I think they do. H.M.Jr: It was my impression that they are simply there on production, as inspectors. Foley: I think you are right about that. They don't have the same kind of inspectors that we had at PWA, where there was an audit of every cost, and where there was a disallowance of items that were exorbitant. H.M.Jr: I never heard of it. White: Anyway, so many of them joined the Electric Boat Company afterward that they are not -- H.M.Jr: It is the other way around, Harry. You get retired from the Navy and then join the Electric Boat Company. White: So many of them have joined the Electric Boat Company lately that they are sympathetic. H.M.Jr: In this investigation on advertising, just remember that if 8. man spends his money to advertise Defense Savings Bonds, that is exempt. Regraded Unclassified - 34 - 36 Foley: I think they ought to look at expense accounts in advertising too. Paul: That is a good form of prestige advertising. H.M.Jr: And when Bendix goes on the air for the Treasury Hour. Sullivan: Well, there is 8 man in Chicago I have talked with quite a bit on this very thing, and I think I am going to, with your permission, write to him and ask him to come on here and let you have a talk with him and see if we want to take him on. H.M.Jr: That is all right. Well, this for me has been a very profitable morning. If you could continue this conversation -- Sullivan: Do you want to see Ed and Joe O'Connell and myself and Harry White on that regulation now? H.M.Jr: Not now. I have got press. I can see you men at 3:30. Sullivan: Very well. H.M.Jr: When do you want to see me again on this tax thing? When will you be ready? Sullivan and who? Blough: We have a lot of stuff we haven't talked about yet. H.M.Jr: Who is coming? Sullivan: You asked Foley and O'Connell and this morning Harry White said he would like to be heard on it too. H.M.Jr: On which thing? Regraded Unclassified - 35 - 37 Sullivan: The exempt corporations furnishing information on receipts and expenditures. H.M.Jr: Harry is a hard man to keep out. (Laughter) Foley: You ought to have Chuck Kades too, Mr. Secretary. Sullivan: Yes, I think Chuck should be here. H.M.Jr: They are a kind of team over there. Paul: When can we talk about the plan we discussed after the last meeting, or have you talked about that? H.M.Jr: We talked about it but we didn't get very far. Are you going to be here tomorrow? Paul: I can't be tomorrow. I can be all next week but not tomorrow. That is why I wanted to see if we were going to have another meeting on it today. Sullivan: Well, I think we had better because we are not in any position on that to bother the Secretary. I think after this meeting is over we all had better go down to my room and take our coats off and go to work on it. H.M.Jr: Well, this meeting of Sullivan and Foley and all the rest of these fellows shouldn't take more than fifteen minutes, should it? Sullivan: I shouldn't think 80. H.M.Jr: So if you tax boys want to come in after 3:30, I will be available. I will keep it open the rest of the afternoon. I will keep the rest of the afternoon open. Sullivan: All right. Regraded Unclassified - 36 - 38 H.M.Jr: How is that? Sullivan: I don't know that we will have any conclusions 1 for you. H.M.Jr: But I will just hold it open. Sullivan: All right. Computation of tax liability on 1940 income 39 under present law General Motors Corporation Return filed on a consolidated basis, for the calendar year. The income method is used in computing the excess profits tax. Computation of excess profits tax 1. Net income $347,250,183 2. Adjustments in arriving at excess profits net income - 11,172,044 3. Excess profits credit and specific exemption 217,770,012 4. Adjusted excess profits 118,308,127 5. Excess profits tax 70,938,876 6. Balance of net income, after E.P.T., subject to normal tax and surtax 276,311,307 7. Normal tax 66,314,714 8. Surtax 19,341,541 9. Total income and excess profits taxes 156,595,131 10. Total income and excess profits taxes as a percent of net income 45.1% Invested capital credit (Data not available) Average earnings credit $217,765,012 Business: Manufacture and sale of automobiles and parts, etc. Regraded Unclassified 40 COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW GENERAL MOTORS CORP. Income Method Net Income $347.3 mil. Adjusted Excess Profits $118.3 mil. E.P. Credit $217.8 mil. Normal Tax Net Income $276.3 mil. I. Computation of Excess Profits Tax 100% 100% 80% 80% 60% 60% E.P.Credit $217.8 40% Adjustments -$11.2 40% E.P. Tax $70.9 20% 20% 0 0 0 40 80 120 160 200 240 280 320 3473 MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after Tax $190.7 60% 60% E.P. Tax $70.9 40% 40% Surtax $19.3 20% 20% Normal Tax #66.3 0 o o 40 80 120 160 200 240 280 320 347.3 MILLIONS OF DOLLARS Net Income Regraded Unclassified 41 Commutation of tax liability on 1940 income under present law Glenn L. Martin Company Return filed on en unconsolidated basis, for the calendar year. The income (growth) method is used in computing the excess profits tax. Computation of excess profits tax 1. Net income $8,355,138 2. Adjustments in arriving at excess profits net inc. - 500 3. Excess profits credit and specific exemption 5,473,400 4. Adjusted excess profite 2,881,238 5. Excess profits tax 1,682,743 6. Balance of net income, after E.P.T., subject to normal tax and surtax 6,672,395 7. Normal tax 1,601,375 8. Surtax 466,818 9. Total income and excess profits taxes 3,750,936 10. Total income & excess profits taxes as a percent of net income 44.9% Invested capital credit (Data not supplied) Average earnings credit $5,468,400 Business: Aircraft and parts manufacturing Regraded Unclassified :2 COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW GLEN L. MARTIN Co. Income (Growth) Method Net Income $ 8,4 mil Adjusted Excess Profits $ 2.9 mil. E.P. Credit $ 5.5 mil Normal Tax Net Income $ 6.7 mil. I. Computation of Excess Profits Tax 100% 100% 80% Adjustments 80% -$.001 60% 60% E.P. Credit $5.5 40% 40% E.P. Tax #1.7 20% 20% 0 o 0 I 2 3 4 5 6 7 8.4 MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after Tax $4.6 60% 60% E.P. Tax $1.7 40% 40% Surtax $0.5 20% 20% Normal Tor BAD o o 0 I 2 3 4 5 6 7 8.4 MILLIONS OF DOLLARS Net Income Regraded Unclassifie 43 Computation of tax liability on 1940 income under present law Curtiss-Wright Corporation Return filed on an unconsolidated basis, for calendar year. The invested capital method is used in computing the excess profite tax, Computation of excess profits tax 1. Net income $ 26,028,184 2. Adjustments in arriving at excess profits net inc. - 369,117 3. Excess profite credit and specific exemption 7.995.763 4. Adjusted excess profits 17,668,304 5. Excess profits tax 10,554,982 6. Balance of net income, after B.P.T., subject to normal tax and surtax 15,473,202 7. Normal tax 3,713,568 8. Surtax 1,082,874 9. Total income end excess profits taxes 15,351,425 10. Total income & excess profite taxes as & percent of net income 59.0% Invested capital credit Amount of invested capital $113,439,465 $ 5,000,000 at 5% 400,000 108,439,465 at 7% 7.590,763 Total credit 7,990,763 Average earnings credit 2,472,258 Business: Manufacturers of aircraft. Regraded Unclassified COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW CURTISS-WRIGHT CORP. Invested Capital Method Net Income $26.1 mil. Adjusted Excess Profits $17.7 mil. E.P. Credit $ 8.0 mil. Normal Tax Net Income $15.5 mil. I. Computation of Excess Profits Tax 100% 100% 80% 80% E.P. Credit $8.0 60% 60% 40% 40% Adjustments -$0.4 E.P. Tax $10.6 20% 20% 0 o 3 6 9 12 15 18 21 24 26.1 o MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after Tax $10.7 60% 60% E.P. Tax $10.6 40% 40% Surtax $1.1 20% 20% Normal Tax $3.7 o o 0 3 6 9 12 15 18 21 24 26.1 MILLIONS OF DOLLARS Net Income Regraded Unclassified 45 Computation of tax liability on 1940 income under present law The Coca-Cola Company Return filed on an unconsolidated basis, for the calendar year. The income (growth) method is used in computing the excess profits tax. Computation of excess profite tax 1. Net income $35,818,517 2. Adjustments in arriving at excess profite net inc. - .256,558 3. Excess profits credit and specific exemption 30,831.287 4. Adjusted excess profits 4,730,672 5. Excess profits tax 2,792,403 6. Balance of net income, after E.P.T., subject to normal tax and surtax 33,026,114 7. Normal tax 7,926,267 8. Surtax 2,311,578 9. Total income and excess profite taxes 13,030,248 10. Total income and excess profits taxes as a percent of net income 36.4% Invested capital credit (Data not supplied.) Average earnings credit $30,826,287 Business: Manufacture and sale of a soft-drink syrup under trade-mark "Coca-Cola." Regraded Unclassified COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW COCA COLA Co. Income Method Net Income $35,8mil. Adjusted Excess Profits $4.7 mil. E.P. Credit $30,8mil. Normal Tax Net Income $ 33,0 mil. I. Computation of Excess Profits Tax 100% 100% 80% 80% 60% 60% E.P. Credit Adjustments $30.8 $0.3 40% 40% E.P. Tax $2.8 20% 20% o o o 4 8 12 16 20 24 28 32 358 MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after tax $22.8 60% 60% E.P. Tax $28 40% 40% Surtax $2.3 20% 20% Normal Tax $7.9 o o 0 4 8 12 16 20 24 28 32 35.8 MILLIONS OF DOLLARS Net Income Regraded Unclass 47 Computation of tax liability on 1940 income under present law American Car and Foundry Company Return filed on a. consolidated basie, for period ended 4-30-41. The invested capital method 10 used in computing the excess profits tax. Computation of excess profite tax 1. Net income $6,983,751 2. Adjustments in arriving at excess profits net inc. + 16,931 3. Excess profits credit and specific exemption 6,612,535 4. Adjusted excess profits 388,147 5. Excess profits tax 192,481 6. Balance of net income, after E.P.T., subject to normal tax and surtax 6,791,270 7- Normal tax 1,629,905 8. Surtax 475,139 9. Total income and excess profits tax 2,297,525 10. Total income and excess profits taxes as B. percent of net income 32.9% Invested capital credit Amount of invested capital $93,679.072 $5,000,000 at 8% $ 400,000 88,679,072 at 7% 6,207,535 Total credit 6,607.535 Average earnings credit (Data not supplied) Business: Manufacturers of railway CARR, supplies, etc. Regraded Unclassified 48 COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW AMERICAN CAR AND FOUNDRY Invested Capital Method Net Income $6.98 mil. Adjusted Excess Profits $0.39 mil. E.P. Credit $6.61 mil. Normal Tax Net Income $6.79 mil. I. Computation of Excess Profits Tax 100% 100% 80% 80% 60% 60% E.P. Credit Adjustments $6.61 $0.02 40% 40% E.P. 20% Tax 20% 10/9 o o o I 2 3 4 5 6 6.98 MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after Tax E.P. Tax 60% $4.68 $0.19 60% 40% 40% Surtax $0.48 20% 20% Normal Tax $1.63 0 o 0 2 3 4 5 6 6.98 MILLIONS OF DOLLARS Net Income Regraded Unclass fied 49 Computation of tax liability on 1940 income under present law D. 5, Steel Corporation Return filed on a consolidated basis, for the calendar year. The invested capital method is used in computing the excess profite tax, Computation of excess profits tax 1. Net income $102,049,526 2. Adjustments in arriving at excess profite net inc. + 2,791,645 3. Excess profits credit and specific exemption 162,154,284 4. Adjusted excess profits - 5. Excess profits tax - 6. Balance of net income, after E.P.T., subject to normal tax and surtax 102,049,526 7- Normal tax 24,491,886 5. Surtax 7,143,217 9. Total income and excess profits taxes 31,635,103 10. Total income & excess profits taxes as 8 percent of net income 31% Invested capital credit Amount of invested capital 2,315,704,056 $500,000 at 8% $ 400,000 2,310,704,056 at 7% 161,749,284 Total credit 162,149,284 Average earnings credit (Date not supplied) Business: Holding corporation owning stocks and securities of various companies engaged in the manufacture of iron and steel products and the production and transportation of necessary raw materials Regraded Unclassified 50 COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW U.S. STEEL CORP. Invested Capital Method Net Income $102.0 mil. Adjusted Excess Profits -$57.3 mil. E.P. Credit $162.2 mil. Normal Tax Net Income $102.0 mil. I. Computation of Excess Profits Tax 100% 100% 80% 80% 60% 60% Excess of E.P. Credit Adjustments E.P. Credit $162.2 +$2.8 -$57.3 40% 40% 20% 20% o o 20 40 60 80 102.0 -57.3 -40 -20 0 MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after tax 60% $70.4 60% 40% 40% Surtax $7.1 20% 20% Normot Tax $245 o o 0 20 40 60 80 102.0 MILLIONS OF DOLLARS Net Income Regraded Unclassified Computation of tax liability on 1940 income 51 under present law Bethlehem Steel Corp. Return filed on 8. consolidated basis, for the calendar year. The invested capital method is used in computing the excess profits tax. Computation of excess profits tax 1. Net income $ 63,246,906 2. Adjustments in arriving at excess profits net inc. + 5,200,659 3. Excess profits credit and specific exemption 42,273,328 4. Adjusted excess profite net income 26,174,237 5. Excess profits tax 15,462,981 6. Balance of net income, after S.P.T., subject to normal tax and surtex 47,783,925 7. Normal tax 11,468,142 8. Surtax 3,344,625 9. Total income and excess profits taxes 30,275,748 10. Total income & excess profits taxes as a. percent of net income 47.9% Invested capital credit Amount of invested capital $ 603,118,975 $ 5,000,000 at 8% 400,000 598,118,975 at 7% 41,868,328 Total credit 42,268,328 Average earnings credit 19,564,672 Business: Manufacturers of iron and stool products After allowing for payment of $195,561 to U. S. Maritime Commission 6.5 excessive profits. Regraded Unclassified COMPUTATION OF TAX LIABILITY ON 1940 INCOME UNDER PRESENT LAW BETHLEHEM STEEL CORP. Invested Capital Method Net Income $632 mil Adjusted Excess Profits $262 mil E.P. Credit $423 mil Normal Tax Net Income $47.8 mil I. Computation of Excess Profits Tax 100% 100% 80% 80% 60% 60% Pay't. to E.P. Credit $42.3 Maritime Comm. 40% $0.2 40% Adjustments E.P. Tax $15.5 +$5.2 20% 20% o 0 10 20 0 30 40 50 63.2 MILLIONS OF DOLLARS Net Income II. Computation of Income Tax and Balance after Tax 100% 100% 80% 80% Balance after Tax #33,0 60% 60% E.P. Tax #15.5 40% 40% Surtax $3.3 20% 20% 0 0 0 10 20 30 40 50 63.2 MILLIONS OF DOLLARS Net Income Regraded Unclassified 53 November 27, 1941 MEMORANDUM FOR THE SECRETARY Subject: Speeding up 1942 income tax collections. This memorandum 18 intended briefly to outline a method of securing during 1942 additional tax collec- tions which may be required for controlling inflation alternative to the supplementary 15 percent tax. The plan described below incorporates the withholding principle in our present tax structure. The essential 13ea of the plan is to withhold at the source in 1942 (the year in which taxes on 1941 incomes are payable) part of the tax on 1942 incomes. This will mean that in 1942 taxpayers would be paying (1) their 1941 taxes and (2) part of their 1942 taxes, thus increasing tax payments in 1942 and reducing purchasing power; but the additional payments in 1942 would be taxes on 1942 income and would not be a supplementary burden. In other words, these tax payments will be on account of tax liabilities already on the statute books, and will not reflect any additional imposition of tax liability. There are two methods of accelerating tax colleo- tions, 8.8 follows: 1. The first 1s to collect the 1941 tax liabil- ities in 1942 in instalments under present law without change and, in addition, as soon after January 1 as practicable, to withhold at the source a tax of 10 per- cent (the basic combined normal and surtax bracket in the present law) from wages, selaries, bond interest and dividends. Simultaneously efforts would be made to induce the advance payment of 28 much of the rest of the tax B.E possible. In 1943 the withholding would continue and the balance of 1942 tax liabilities would be paid. Regraded Unclassified 54 - 2 - 2. A second plan for accelerating income tax collections would be to collect the 1941 tax liabilities as early as possible in 1942, perhaps in six monthly installments, beginning February 15 and ending July 15. Beginning about July 1, the 10 percent first bracket rate would be withheld on salaries, wages, dividende and interest in the same manner as indicated in the first plan except that it might be found desirable to with- hold at B. higher rate than 10 percent in order to get B, larger proportion of 1942 tax liabilities collected in 1942. The remaining 1942 tex would be collected in 1943. Both of these methods involve an element of discrim- ination in that the recipients of wages, salaries, divi- dends and bond interest would be obliged to pay their taxes many months in advance of the recipients of other types of income and furthermore that the small taxpayer would be forced to pay & greater proportion of his taxes in advance than will the larger taxpayer. It may, there- fore, be necessary to offer an inducement for early pay- ment of that part of the tax liability which is not 001- lected at the source. This may be done by offering B. discount for early payment, perhaps at & level above that paid by the Government on its recent bond issue. A preferable alternative might be to impose an additional tax amounting to perhaps 5 percent of the income tax, such additional tax to be forgiven with regard to the withheld portion of the tax and also with regard to ad- vance payments of the remaining tax. The acceleration of tax collections has several ad- vantages: 1. It constitutes a step in the direction of a system of current income tax collections. Once established, such a system would serve two important purposes. (a) It would make the income tax 8. more flexible and 8. more sensitive instrument of public policy. (b) It would better integrate the income tax with personal budgets. Regraded Unclassified - 3 - 55 2. The acceleration of tax collections would permit the postponement of tax rate increases while providing the higher collections which may be immediately required to dampen the inflationary process. Such a postponement may be desirable because it would furnish a longer period for studying the needs for further taxes, and also because of the hostility of the taxpayers to new, higher tax rates 80 soon after the recent revenue act. 3. The acceleration of tax collections would die- tribute the additional tax burden in accordance with the present progressive income tax, and, therefore, would probably be more equitable than any additional tax (in- cluding a flat 15 percent tax withheld at the source) that might be enacted. 4. Although this plan is simpler than adding a withholding tax, in that only one tax 18 imposed, it 16 flexible in that the withholding rates may be changed upward or downward when needed. 5. Politically, the speeding up of tax collections would probably be more acceptable than the imposition of a corresponding amount of additional taxes. The acceleration of tax collections has several disadvantages: 1. In substance, it 18 merely B. postponement and not a solution of the problem of legislation to withdraw more purchasing power from income recipients. It may leave a bigger tax problem for 1943 if conditions then demand a further drastic reduction in purchasing power. 2. The speeding up of tax collections, coming at B. time when the recent substantial tax increases are be- ginning to be felt for the first time, would not obviate hardships or eliminate adverse public reaction to tax increases generally. Regraded Unclassified 56 November 27, 1941 Tax on increases in income as a means of preventing inflation Several plans for taxing increases in income have been considered, among them the so-called "Paul plan". The merits of a tax on increases in income depend, to a considerable extent, on the specific form of the tax. The following comments relate in the main to the general idea of such a tax. A. Equity 1. Many income increases during the defense period are more or less windfalls to the individual which are not necessary in order to get him to do necessary work. The existence of such windfalls makes people who have not had increased incomes unwilling to have their standards of living cut through taxation as long as they see other persons who have received such windfalls paying no higher taxes on their incomes. 2. In general, however, a family which has been receiv- ing a certain size income over a period of time 1s in at least as good 8. position to pay taxes on that income as a family which has been at 8. lower level of income and has Just received an increase. Furthermore, there are many sit- uations in which increases in income are necessary and de- sirable and should not be subject to tax, among them the following: (a) Where the family has been on relief and the wage- earner has Just gotten a job again. (b) Where receiving the increased wage necessitates moving to a high-cost community, the increase in income may have been offset by increased living expenses. (c) Where B. person has recently graduated from high school or college or 18 just starting up in his profession, increases in income would be the normal expectation regard- less of the defense effort. They may be accompanied by in- creased responsibilities such 28 marriage or the birth of children. Regraded Unclassified 57 - 2 - 3. No way has been found of separating the cases where increases should be taxed and where increases should not be taxed. The existence of a great number of increases that should not be taxed would result in much inequity and hard- ship from a tex on increased income. 4. In general, the tax on increased incomes would fall on younger persons to the relative benefit and advantage of older persons. In view of the fact that the draft also hits younger persons, the imposition of the heavy tax on in- creased incomes may appear to concentrate the burden of the defense effort too much in the younger age groups. B. Effectiveness in offsetting or preventing inflation 1. A revenue yield from the tax on increases in incomes would necessarily be smaller than such increases since other- wise the tax would have to be 100 percent of all increases. Actually, the rate would be much lower than 100 percent and the tax base would be greatly diminished by exempting the lower incomes where it appears the principal income increases are occurring. Accordingly, a tax on increases could not be expected to offset all the inflationary effects of increases in incomes. 2. If inflation became worse and incomes continued to increase, the yield from a tax on increased incomes would rise; thue the amount of the tax would, to some extent, be deter- mined by the seriousness of the inflation. 3. Since the tax on increases in incomes could not be collected as a practical matter before the following year, the effects on inflation might come too late to be of any substantial use. 4. For these reasons, B. tax on increases in income can not be viewed B.6 8 substitute for other anti-inflationary texes. At best, it would be & supplement raising 8. minor proportion of the additional revenue. C. Tax compliance and administration 1. A very simple tax on income increases would not be particularly difficult for the texpayer and would not be an insuperable load added on to the present administrative burden Regraded Unclassified - 3 - 58 on the Bureau of Internal Revenue. A more equitable tax, however, might prove to be too complicated for the tax- payer to compute or for the Bureau to enforce. There is a limit beyond which a tax-administering agency cannot increase its effectiveness within a short period of time regardless of the amount of money available to 1t. D. Anticipated political reaction 1. The tax on increased incomes seems popular because, not having been publicly proposed, we are hearing only from those who would be benefited by having such 8. tax instead of some other form. Once it was publicly proposed, however, the very substantial group which would be hurt by it would oppose it vigorously. Many very serious hardships would be revealed and much public sympathy would be developed for such cases. It should not be expected that such a. tax would be politically more popular than any other form of tax raising the same amount of revenue. Regraded Unclassified 59 November 27, 1941 MEMORANDUM FOR THE SECRETARY Number of white-collar salaried persons The most recent data on the number of white-collar salaried persons appear to be for 1935-1936. In that year, according to the National Resources Committee, there were almost 6 million white-collar salaried fami- lies, 8.6 follows: Clerical families 3,626,200 Salaried business families. 1,112,600 Salaried professional families 989,200 Total 5,728,000 More recent data are contained in the 1940 Census, but are not yet available, except for a few selected States. For 1930, the Census enumerated about 10 million "clerks and kindred workers" and salaried "professional persons." The lower figure shown for 1935-36 does not imply a. corresponding decline in the number of white- collar salaried persons during the five year interval; it 18 partly explained by differences in classification and the fact that the 1930 data are for persons while the 1935-36 data are for families. RoyBlough Regraded Unclassified 60 November 27, 1941 11:45 a.m. RE FINANCING Present: Mr. Haas Mr. Morris Mr. Murphy Mr. Hadley Mr. Bell Mr. Schwarz H.M.Jr: Well, go ahead George, what have you got for me? Haas: Among other things, I don't know if you are interested in this at the moment or not; you asked for another memorandum on excess -- H.M.Jr: No, no, the financing; let's concentrate on that. I am oozing taxes. Haas: Well, we are in a very preliminary stage on the thing. I can point out some of the issues. H.M.Jr: Can't I settle how much money we want? Haas: Well, I talked to Bell and he says & billion and a half. H.M.Jr: How does he get that way? Haas: It is the second question, that is, one or two issues. (Mr. Bell entered the conference) H.M.Jr: Come in, Professor. We can't operate without you. 61 - 2 - Bell: I feel flattered. H.M.Jr: Why do you want a billion and a half? Bell: Well, I would like to go through until February without borrowing any more money. H.M.Jr: Can you on that basis? Bell: Except through Treasury bills. This program contemplates a hundred million dollars extra money in bills on the third and then dropping it to fifty million up to January 21, which completes the thirteen week cycle and then just rolling them over from there, we can consider at that time whether we want to increase that hundred and fifty to two hundred million. H.M.Jr: Say it over again, please. Bell: We get an extra hundred million on the third of December under the two hundred million program. H.M.Jr: Yes. Bell: On the tenth this program contemplates we drop it to a hundred and fifty. H.M.Jr: Yes. Bell: And go with a hundred and fifty until January 21, which completes the thirteen week cycle. H.M.Jr: Yes. Bell: And then we roll them over from there to the hundred and fifty or two hundred or whatever they might be, but we can consider at that time as to whether we want to increase that hundred and fifty million weekly offering to two hundred million, completing the thirteen week cycle on the two hundred million, which would make - 3 - 62 two billion six outstanding. By borrowing a billion and & half in December, we can go out of December with two billion one hundred million and out of January with one billion and 8. quarter. That means we will have to borrow a million and a half dollars in February and then, as I told you yesterday, I would like to skip March because of the tax -- H.M.Jr: Well, you would go out of December with how much? Bell: About two billion one. H.M.Jr: Well, then, this doesn't have to be settled right now, but I would like to drop the bills down to a hundred million, you see, and not go out with 80 much and then pick them up in a month. But I am just throwing that out. I think to go out with two billion one is too much. I would like to start next week with a hundred million borrowing and then keep it a hundred until we need a little more money and we will go up to 8. hundred and fifty or two hundred. I don't care about this cycle business. I am not very good at cycles. Bell: I don't think that is important. H.M.Jr: But I think to go out with two billion one is too big; it is unnecessary, and I am just throwing it out to these gentlemen to drop it from two hundred to a hundred. Bell: I think that will improve your rate immensely and have 8. psychological effect on the short term market. Even the fifty will. A hundred million, I think, will do that much better. We can do that - you probably ought to complete the cycle before February 18, when your first two hundred million dollars matures, because then you can't - you probably won't be in a position to add any from there on in. H.M.Jr: That will be all right, but you could drop it to a hundred and leave it there until -- Bell: Well, in January you can pick it up, the first of January. That is all right. That might be a good thing. 63 - 4 - H.M.Jr: Well, nothing is settled. Of course, this is the first meeting, but I am throwing that out. When do we have to decide that, Monday? Bell: Well, I would like for you to decide it Monday. Of course Tuesday is your open market meeting. I think it would help the market if you would decide it. You threw out a hint today, I see. H.M.Jr: Well, they asked me about the bills. Bell: Did they? H.M.Jr: And I said we would let them know. Your friend Marriner Eccles goes up and makes a speech on taxes and neither John Sullivan nor I have yet seen a copy of it. Bell: Is that this New York crowd again? H.M.Jr: Yes. Bell: Is it off the record? Schwarz: This time they put it on the record, because it broke last time afterward. Bell: He learned his lesson last time, I guess. We are going out of November, Mr. Secretary, I think, if we get our tax note money, with 8. billion three, so that we are now in a position to drop those bills, as you sug- gested. H.M.Jr: Well, let's put - that is the only change to make right now. Bell: And we will go into December 15 with about eight hundred million dollars on that basis. H.M.Jr: December 15? That is plenty. Regraded Unclassified 63 - 4 - H.M.Jr: Well, nothing is settled. Of course, this is the first meeting, but I am throwing that out. When do we have to decide that, Monday? Bell: Well, I would like for you to decide it Monday. Of course Tuesday is your open market meeting. I think it would help the market if you would decide it. You threw out a hint today, I see. H.M.Jr: Well, they asked me about the bills. Bell: Did they? H.M.Jr: And I said we would let them know. Your friend Marriner Eccles goes up and makes a speech on taxes and neither John Sullivan nor I have yet seen a copy of it. Bell: Is that this New York crowd again? H.M.Jr: Yes. Bell: Is it off the record? Schwarz: This time they put it on the record, because it broke last time afterward. Bell: He learned his lesson last time, I guess. We are going out of November, Mr. Secretary, I think, if we get our tax note money, with 8. billion three, so that we are now in a position to drop those bills, as you sug- gested. H.M.Jr: Well, let's put - that is the only change to make right now. Bell: And we will go into December 15 with about eight hundred million dollars on that basis. H.M.Jr: December 15? That is plenty. Regraded Unclassified 64 - 5 - Bell: Yes. That is just before we get our new money and before we get taxes. H.M.Jr: What do you think, Dave, about the bills. Morris: I think we can drop them all right. H.M.Jr- George? Haas: I think it is smart. H.M.Jr: Henry? Murphy: If you can pick up the money fast enough 80 that you won't increase this financing, I think it is O.K. I am just having a little perturbation-- H.M.Jr: A little who? Murphy: I am just a little disturbed that if the bills were dropped it would complicate the problem getting through to February because on bills you have to pick it up again slowly. H.M.Jr: What do you think, Hadley? Bell: I don't have any objection to reducing them. H.M.Jr: We can take it up again tomorrow and we can take it up again Monday. Bell: Tomorrow or Monday? H.M.Jr: Well, the bill thing I would take up again - maybe tomorrow. Bell: Would you like for me to discuss that any with the board and the bank? H.M.Jr: I would like you to discuss it after you leave this room. Regraded Unclassified 65 - 6 - Bell: I see. H.M.Jr: Just because they treat me shabbily is no reason why I should treat them shabbily. Bell: Do you think Eccles is going to make a speech on taxes? H.M.Jr: He did make a speech. Schwarz: Tuesday night. Bell: Oh, he did? That is over. I thought it was next week. Schwarz: He made it. H.M.Jr: He made it. I will find out. I told John to call him up. Schwarz: I should have a copy by now. (The Secretary held an unrecorded telephone conversation with Mr. Sullivan.) H.M.Jr: Well, let him give Eccles hell before lunch, and you (Bell) can come along after lunch and say, "Well, now, look what a nice guy we are. Bell: I will talk to Allan and Bob in New York about it. H.M.Jr: Yes. Well, then I think if everying is sound, all right, and you can check with me. Before I go home we might announce how much the cash is going to be, tonight for tomorrow morning's paper, you see. I would like to do that. The more advance notice we can give the market the better. - 7 - 66 Bell: Yes, because apparently the market is drifting off a little just because of this contemplated financing, isn't it? Hadley: Well, it is sort of wiggling. H.M.Jr: One thing I would like you to do is, Dave Morris brought in a UP statement. I would like you to go into your room and get out a little written statement because they wrote the thing up wrong, what I said in my press conference, if you boys will take five minutes. Bell: Not give out a formal statement but just let Chick tell the boys. H.M.Jr: Yes, just so Chick will understand it. Schwarz: Just make it easy. H.M.Jr: Right. I haven't seen that book yet, Chick. They tell me you are one of the only three good men. Schwarz: Our library is getting it. We accumulated it. H.M.Jr: Somebody has written a book on it. Schwarz: Delbert Clark, that runs the New York Times- Herald. H.M.Jr: He has written a book on it. Press contact man. Schwarz: He had some nice things to say about the Treasury generally, too. H.M.Jr: He probably never has seen it. Schwarz: He didn't have to submit the book to us. H.M.Jr: Is that as far as we can go today? Regraded Unclassified 67 - 8 - Bell: I think 80. H.M.Jrs Has anybody got any bright ideas? Bell: It is good progress. H.M.Jr: Got any bright ideas, Dave? Morris: No, because I think the first thing is to see the size of the issue, or the amount of money, to decide whether we are going to gun for one issue or two. It makes quite a difference. Bell: That is right. H.M.Jr: George, got any bright ideas? Haas: No, sir, I have got one idea that I would throw out at this time. I think if we are going to have a long issue we should put a longer call period on it, maybe ten years. They will like you better twenty years from now, as you like the fellows that put the fifteen-year call on the Liberties. Bell: He says he is going to leave you and I to worry about that. H.M.Jr: Henry, got any bright ideas or long words that I could use? Murphy: Well, I don't have any long words but I have some fine long call periods. I can support them with quite a number of short words. H.M.Jr: That is the way you are going, long call period? Murphy: That is where you are going. That is where I would like to see you go. I think there are some exceptionally good reasons for it. Regraded Unclassified 68 - 9 - H.M.Jr: Hadley, got any ideas? Hadlsy: Well, I have a feeling toward reopening of outstanding issues. H.M.Jr: You boys would have to put me down and strap me down and give me some ether before you could get me to take that. I would hate to tell you what Dan Bell said. I bet you he wouldn't offer to say it again. Bell: Yes, I - that wasn't an offer. I just said we might want to consider it. I am a little scared of getting & lot of money out on the end. H.M.Jr: So am I. Bell: I have to - I realize, though, that the issuing of them at a high premium is a little dangerous. H.M.Jr: So am I, Dan, but don't forget this, and you fellows ought to make & study on this, the fact that the insurance companies have dropped from three to two and a half may make & lot of difference. Haas: We are getting some new figures on their cash. I called them up. H.M.Jr: How much have you got? Haas: Here it is graphically. H.M.Jr: Read it to me, George. Haas: We have got - at the end of August they were about one billion three and - is that what you have got here, Henry? H.M.Jr: You had better let Henry read his own figures. Haas: At the end of August they were one billion one 69 - 10 - hundred twenty million. At the end of September, one billion one hundred thirty-nine. This figure I got over the telephone for the end of October is eight hundred fifteen. That reflects the figures. Bell: '67 - '72. H.M.Jr: Well, we might find out again -- Bell: Reducing their rates would make our two and a half coupon more attractive to them. Hadley: On the other hand, they might not have to get as many bonds. Bell: As long as they have got the cash, they will -- Haas: That is a very sharp reduction. It is unusually sharp. Murphy: It takes them back to about their lowest cash in two years. H.M.Jr: It depends on how fast we get this stuff out and dropping the bills. I would like to know what effect that has on excess reserves. Well, take a look at it. Haas: It wouldn't have any on it. Murphy: It would have no effect as such. H.M.Jr: I mean on the New York banks. I mean, dropping it - I mean, cutting it down from two hundred to one hundred, what effect will it have on the New York City banks, if any? Haas: It will affect the rate. Morris: Affect the rate, and that will affect what they put up for. 70 - 11 - Hadley: What you have got maturing is a hundred million, so it wouldn't change the amount that they are going to have to buy. H.M.Jr: Well, look -- Bell: It would be that much more excess hanging there. H.M.Jr: Sometime tell Fitz that the last thing I do before I go home is to see you gents. Bell: Today? H.M.Jr: Today. And then you get busy and if you go into your office now and write out a little statement to correct whatever this mistake was and we will give out the amount tonight. I would like to give out the amount tonight, & billion and a half, and I would also like it if you fellows could decide on the bill thing, if you are ready. Bell: Yes, I think we can. Regraded Unclassified 71 November 27, 1941 3:30 p.m. RE TAX EXEMPT ORGANIZATIONS Mr. Graves Present: Mr. White Mr. Foley Mr. Kades Mr. Sullivan Mr. O'Connell Mr. Odegard Mr. Gaston H.M.Jr: Well, who is the barrister and who is solicitor here? Sullivan: We are all members of the same bar. H.M.Jr: But there is a difference. Sit up here, Peter, where I can see you. I can't see you that far. Who is going to present the case for the plain- tiff? Foley: John. H.M.Jr: All right, go ahead. Sullivan: Well, as you know, for quite some time we have been working on a Treasury decision that would require all of those corporations that are exempt from the payment of income tax to furnish information as to their receipts and expenditures. As a matter of fact, I understand that this was on the Commissioner's desk last Friday when the discussion took place at the Cabinet, and it came over Saturday morning and we went over it. Herbert was in on that. I don't know whether you want him here now or not, but he was in on that discussion last Saturday Regraded Unclassified 72 - 2 . morning. We made a few minor changes in it at that time. Now, under the regulation as it is now drawn, every tax-exempt organization except churches would be required within sixty days after the approval of this regulation to furnish us with statements of their pur- poses, not only the type of organization they have, but also their receipts and expenditures, and then each year thereafter they would have to give us their receipts and expenditures for the previous year. We had understood that you thought that churches should be included in that, and it was the unanimous opinion of the group that churches should not be in the group. (Mr. Gaston entered the conference). H.M.Jr: Well, why not churches? White: What group? This group does not include me, Mr. Secretary. Sullivan: No, I understand you want churches in, because that will be the end of it. H.M.Jr: End of what? Sullivan: Harry is opposed to the whole regulation. H.M.Jr: Well look, this is the way I feel. I think that this is a very momentous decision for some- body to take, if it is for me, and I don't see that if you are going to move on the front of saying that organizations, even though they are exempt from taxes, should make reports, then I don't see why every organization in the United States shouldn't make one to the United States Treasury. Regraded Unclassified 73 - 3 - Sullivan: Well, I think the attitude of the churches is going to be very hostile, because they will interpret this as the opening wedge of control by the State over the Church. H.M.Jr: Well, it is the other way around. Why should any group of churches -- Foley: They don't look at it logically, Mr. Secretary. They will simply say that this is the first gun, and the next step is taxing them. H.M.Jr: Well, let's get down to brass tacks, inside of this room. Let's get down to the Church of the Little Flower. Now, why shouldn't that organization make a report? Sullivan: You mean Father Coughlin? H.M.Jr: Yes. Sullivan: He not only does, but pays taxes. H.M.Jr: He does? Sullivan: Yes. Gaston: His radio station, you mean? Sullivan: Sure. Foley: The Church doesn't. Odegard: He doesn't pay taxes on the Church of the Little Flower. Sullivan: Not on the Church, no. H.M.Jr: I said on the Church of the Little Flower. White: It is one horse and one hare. The hare goes to the part that pays taxes. Regraded Unclassified 74 - 4 - H.M.Jr: Let's just be impersonal as far as the Treasury is concerned. Let's take the Church of the Little Flower. I don't know how much you know about the thing. Sullivan: I don't know much about it. H.M.Jr: Well, I know quite B. lot, and the money that they take in and the use that they make - if all of the moneys collected are used for church-like purposes, certainly I would be the last one in the world to want to do anything about it, but if by chance they should be used for improper purposes under the guise of & church, why shouldn't some agency know of it? Foley: Are you talking logically or politically? H.M.Jr: I am not talking politically because the way I feel is this. I think - I am using an extreme example. Now, as I understand it, what you are going to do is to ask the A. F. of L. and the C. I. 0. and all the other unions to do it. Now, Foley could ask me, am I going to talk politically, am I going to talk logically. Well, I think from the standpoint of fairness - I don't know whether it is logical or not - that all of these or- ganizations should through the United States Government make a report, and if that is done on a cooperative basis, and not a misuse of funds in the public interest, fine, but if they are - I mean, the argument for the union doing it is, I mean, here in the last ten years these unions have grown up until they have an organization of five million men and they can collect unknown millions and are accountable to nobody. I don't think under Democracy that is right. But the only way I can see that I could face the storm would be if I said, "No institution Regraded Unclassified 75 - 5 - in the United States that collects money should be exempt from making 8 report." Now, if I fall on that, if I fall on that, well then, at least I have fallen - I broke my neck on something that I believe in. Foley: I wouldn't want to see you break your neck, though. H.M.Jr: But I mean, the way I feel - and then I would like to hear some of the others - I can go anywhere and say, "Here are a group of organizations, whether they are religious or whether they are for labor unions or for educational purposes. Some of them collect millions and I believe that those organ- izations should file a financial report so that they can't be used to either undermine the Government or to do anything else. They are secret organizations. And under 8 Democracy - and that is why I want Peter to hear it. He will tell me if I am right or wrong. Under 8. Democracy we shouldn't have any secret organizations, not reporting. I would much rather trip and break my neck than to run around the stone wall. Now anybody else can talk. Odegard: Could I ask what would be the purpose of the regulation? Is the purpose of the reg- ulation to stop up leakages? Regraded Unclassified - 6 - 76 H.M.Jr: Well, you will have to ask them. Foley: Well, that is the way it started, Peter. People came and said there were certain corporations enjoying tax exempt status that had extended their activities way beyond anything that was revealed to the Commissioner when they gained that tax exempt status; and once they got it, they never had to account for their income or their disbursements or their assets or their liabilities. They never had to account for their activities in relation to the exemption that they enjoyed and there were a number of them that were using their fronts against the interests of the Government in these perilous times, that were making absolutely no contribution whatsoever to the Government, and were not being held accountable because the public wasn't given the information as to where their funds came from and how they were employing their funds. That is how the thing started and it started way back a year or more ago. H.M.Jr: Can I go back of that? Foley: Yes, sir. H.M.Jr: Let me get the history right. Let me say the way I remember it. As I remember the thing, when I came in to the Treasury - - and somebody can stop me when I am through and say I am wrong - I compared it - it may sound silly, but when I was Conservation Commissioner and Herbert Gaston was deputy, we went in there and we found that a great many people of undesir- able character had been given a license to carry & gun and they were issued year after year and nobody ever looked at them. Some of them were most undesirable characters. So I said, "From now on that license runs for Regraded Unclassified - 7 - 77 & year, and anybody that wants to carry B. gun and get a license as a deputy game warden has to prove that he is worthy of it." So I applied that same rule to this question of exemptions and I said, "From now on, once a year all of these so-called tax exempt societies have to prove that they are worthy but no longer, once they get the thing, will it run for five or ten years and nobody ever investigate them." I said these people have to prove that every year they are worthy of this particular status. That is the way I remember the thing starting, isn't that right? Foley: Well, that goes back of my experience with it. I am telling you how -- H.M.Jr: But I am telling you when I first came in -- Foley: Yes, well, that goes beyond my time. H.M.Jr: But that is the thing and I told the Commissioner that he must check these things and nobody from now on can have, so to speak, a charter, a tax exempt charter, and these people have to, at a regular interval - I think I said once & year - prove that they are worthy of this thing. Now, this thing here, I understood this thing, this particular thing, had been brought to a head by Morris Ernst. Sullivan: That is right. Foley: Yes, that is what I am talking about. Morris Ernst started discussing it B. year ago. H.M.Jr: Morris Ernst had brought this thing to a head, Regraded Unclassified -8 78 but I don't see, frankly, why this - I don't understand why this has been brought to & - head if Helvering had carried out my orders, namely, that once a year every organization enjoying a tax exempt status had to prove that they were worthy of this particular status. If that was done once a year, why do you have to do this? White: Mr. Secretary -- H.M.Jr: Just one second, Harry. What? Foley: Well, this is to accomplish just what you said. H.M.Jr: Oh. What I said was that the burden of proof must be on the group desiring a tax exempt charter, that they must prove that they are worthy of it. Foley: They must make an annual showing that they are worthy to continue in that status. Well, that is what this would accomplish. H.M.Jr: Four or five years ago I asked for it. Gaston: The thing came up again, you will remember, in connection with the Mellon tax case. The Mellon educational and charitable trust. They were chartered as an institution which Mellon would contribute to and he furnished funds for the education of young men and then it was suddenly discovered that he had given to this educational and charitable trust ninety million dollars worth of paintings not envisaged in the original prupose at all and thereupon the charter was revoked. Sullivan: This goes further than what you asked for, Mr. Secretary, because in addition to proving the character of the organization and the type of 79 -9 - work they are doing, they are obliged to file operating financial sheets to indicate the extent of it and in case of any person being paid & thousand dollars or giving a thousand dollars in any one year, that has to be itemized. Kades: Mr. Secretary, when I was in the Chief Counsel's office in 1938, we were informed that the policy of the Treasury toward tax exempt organizations had changed to the extent that the Secretary wanted a re-examination of tax exempt organizations. As a result of that, a questionnaire was sent to all organiz- ations on our list. There are about twenty-six thousand of them. They filled out their questionnaire and the questionnaire was filed in the Bureau, but that is the extent to which the Bureau carried out instructions that you mentioned. H.M.Jr: My orders were never carried out. (Mr. Graves entered the conference.) Harold, help me out on my memory. Come up closer here. Were you with me when I told Internal Revenue that I wanted every tax exempt organization in the United States to prove that they were tax exempt and that that should be done, the burden of proof was on them and that should be done regularly? Graves: That is right. H.M.Jr: Well, what the hell happened? Graves: Well, they started in, I would say, about the summer of '37 - I am speaking now from memory, -- H.M.Jr: I know. Regraded Unclassified 80 - 10 - Graves: ...to make a re-canvass of every exempt corporation case. I think that re-canvass was still in progress when I left the Bureau in 1939. H.M.Jr: Well, Chuck Kades says it was done and then just filed and nothing ever happened. Kades: Mr. Secretary, some of these returned questionnaires may have been examined, but there was no annual return requirement imposed. The Secretary said, Mr. Graves, that his instructions were that we were to get annual returns in the Bureau. It was my understand- ing that the questionnai re was to go out to re-examine these tax exempt organizations, and that such & questionnaire was sent out. Some of them probably were examined but no annual returns have been required. Graves: I don't recall that there was any requirement for an annual return on this. I think he has correctly stated what they did down there. H.M.Jr: My impression was that I said that these people, the burden of proof on them was once a year to prove that they were entitled to it. Graves: That I don't remember. H.M.Jr: But you went all through this, didn't you? Graves: Well, that thing had been begun before you sent me down with the Bureau of Internal Revenue. It was in progress at the time -- H.M.Jr: But you are familiar with it. Graves: Yes, I am. Odegard: Did that apply to churches too at that time? Regraded Unclassified 81 - 11 - Foley: The questionnaire? Kades: I think, Mr. Secretary, that this went only to charitable organizations. H.M.Jr: I don't think it applied to churches. Graves: Well, I think it went to religious associations that were owners of property that had income which might be involved in this question of taxability or non-taxability. Kades: That is right, but wherever the tax exempt status of the organization depended upon what it did with its money, then the questionnaire went out but I don't think the questionnaire went out to something which could be recog- nized as a church or as a labor union. Foley: Political organizations. Graves: My impression is that the questionnaire went out to all of the organizations or associations that were on record at the time in the Bureau of Internal Revenue as having been granted an exempt status. H.M.Jr: That is right. Graves: Some thirty odd thousand, according to my present recollection. H.M.Jr: Well, that would include churches. Graves: Any organization about which there has ever been any question raised. H.M.Jr: Ed, you went through that with me, the question of sending it to the Democratic and National Committees. Foley: Well, that came up in connection with the two percent clubs in Indiana. Regraded Unclassified 82 - 12 - H.M.Jr: And we went through with it, didn't we? Graves: Well, I think the answer to that is this. Wherever any political organization had raised the question, or where we had raised a question -- Foley: You are getting awfully bold, Mr. Secretary. H.M.Jr: Well, I am surprised. It doesn't sound like me. Graves: Wherever the question had been raised -- H.M.Jr: It must have been just before a campaign. (Laughter) Well, Roosevelt is not running again. Go ahead, Harold. Graves: What I was saying was that wherever the question of the taxable status of a political organiz- ation had been raised and the club or organiz- ation granted a non-taxable status, that undoubtedly was re-canvassed along with all the -- Kades: That is right. My recollection is similar to yours. I thought there were twenty-six or twenty-seven thousand, and you said about thirty-six. H.M.Jr: How did we do the political clubs in Indiana and not do the National Democratic and National Republican ones? Graves: Well, that was a special expedition. We ran into that organization as the result of our Indiana investigation. H.M.Jr: But we did do that? Graves: We did that. 83 - 13 - H.M.Jr: Did you get my message about another Indiana? Graves: Yes. H.M.Jr: Well, you (Odegard) ask him some questions. Odegard: Well, this political angle, I assume this would supplement, then, the Corrupt Practices Act, under which they are supposed to file returns as to their income, as far as political organiz- ations. My feeling is, without knowing any- thing about it except what has been said here, that this thing - a general regulation of that kind, unless it is very delicately handled, is full of dynamite, particularly if it applied to organizations that are fearful of control, like churches and colleges and - if the feeling is going to be that Treasury is going to set itself up as 8. great censorship agency and it is going to pass upon the legimitacy of certain activities that are carried on -- Foley: And any time you don't like what one organization is doing, then you immediately crack down on them. Odegard: It would seem to me possible to draw & regulation which would avoid that by setting up certain standards which would be beyond question, but unless that is done it seems to me that there is B. lot of dynamite in it. H.M.Jr: Harry? White: Well, I made quite a speech before I came in here, and I don't want to get started or I am liable to repeat it. (Laughter) H.M.Jr: Are you afraid of meeting yourself coming home? Sullivan: It is very well worth hearing, and I am sure we would all be delighted to hear it the second time. 84 - 14 - White: The hell you would. Foley: When he gets started, Mr. Secretary, you had better open the window 80 they can hear it across the street. White: I think it would be 8 very, very grave error for you -- H.M.Jr: Come up closer, I can't see that far, Harry. White: I thought maybe you could hear me. I think it would be a very grave error if an order of this character, irrespective of its merits, and I have no doubt about its merits, but irrespective of its merits, I think that this is a most inopportune time for an order of this character to be promulgated. It will be interpreted, and correctly so, as having been designed to in some way or other hamstring unions, labor unions. H.M.Jr: Hand or ham? - 15 - 85 White: Hamstring. The proximate cause, the immediate cause of the bringing forth of this order at this time, if my information is correct, was just that, that it was the desire to get at labor unions which prompted the investigation as to whether something can't be done about it and whether the Treasury can't do something about it. That is not the origin of it here in the Treasury. I mean, that is the proximate cause, the immediate cause of its coming forth, so that when labor unions feel strongly sus- picious that this is going to be another crack by this Administration on them, they are not far from wrong because unless it is intended to use this as an instrument to weaken the bargaining power of labor, why is it coming at this particular moment, and it clearly is an instrument which can under improper guidance and improper control and unsympathetic control be used to stop any labor union in the course of a strike. You can always find ninety-nine different things wrong with any accounting procedure of any large organization, and you can stop their funds until such time as they make a reckoning. Now, it is quite true that there are labor organizations and that there are possibly charitable organizations and that there are doubtless some churches here and there whose accounts could not stand 8. careful reckoning, but the bulk of institutions, I don't think, would fall in that category and it seems to me, as you said, that it should be simple enough to determine whether a labor union is a labor union, whether B church is B. church, that sort of information might be possible to obtain through regulations, whether a charitable institution is 8 charitable institution, but when you push Regraded Unclassified - 16 - 86 that further and demand that labor organi- zations, among others, file a report of the sources of their income and their expendi- tures and where there are penalties implicit in it, then I think you are laying a ground- work for an attack against the finance of labor unions and that is exactly where the attack began in France. That is exactly where the attack began in Germany. The way to kill a labor union most quickly is to remove its power over finance. Proof of that is that was the reason why it was asked for, I think, at Cabinet. As I understand it, Madam Perkins, the great Secretary of Labor, said the reason why labor unions strike-- H.M.Jr: Here! Here! (Laughter) Well, Harry, I gather you are against it. White: And how! At this particular time, irrespective of its merits maybe & year ago or more. H.M.Jr: But for the moment you are against it? Sullivan: I think Harry would agree with us that there is no point in publishing any kind of a regu- lation on the other organizations unless labor is included. Foley: No, because you would get it just as bad from the people that are against the labor organi- zations because you left them out. H.M.Jr: And you don't want to do the churches and not do the labor unions? White: I feel that if you do the labor unions, you ought to do the churches, because I am sure if you do the churches you won't do it. 87 - 17 - (Laughter) I was being honest before you found me out. H.M.Jr: Thanks for the compliment. Sullivan: Harry, assuming that we were to do everything except the churches, I mean assuming that we decided that we are wise to go ahead now on the labor unions, would you still think churches should be included? White: Well, I don't feel that it is desirable for Government to go into the revenues and receipts of the churches to that extent. Sure, there are occasions where they are using their funds for subversive influences but we have got to take some of the bad because of the larger good. I think you can determine whether a church is a church with- out finding out where it gets its money and what it does with it, and I think that the dangers of the Government interfering within the internal frame of a church outweigh the advantages, though I should also like to see possibly some restrictions on the ability of the church to interfere with the affairs of government, but that is a horse from a different stable. (Laughter) H.M.Jr: Herbert? Gaston: Well, I have always thought our system with respect to these exempt organizations was very loose. The real problem is not with the regular labor organizations, not with the regular church organizations, not with the regular charitable organizations, it is on the fringes of all those groups. That is as true of the so-called religious organization as it is of the charitable organization, as it is of the labor organization, the racketeering organiza- tions. Regraded Unclassified 88 - 18 - It may be that there is some other way to get at this problem in the way of policing these exempt organizations, looking at the fringes and seeing what ones are open to suspicion and going after them, if we have the authority to require reports when we want a report, when we are suspicious of an organization, but I am very much inclined to agree with Harry that this will now raise & terrific furore that would be very damaging. White: And it goes out under the Secretary's signa- ture, not under the President's. H.M.Jr: What do you think, Joe? O'Connell: Well, I first-- White: I think you are right (referring to note handed to him by the Secretary.) H.M.Jr: O.K. White: I weaken occasionally. The joke is on me. O'Connell: I first learned about this move about & year ago when we were first drafting & T. D. that would carry this into effect. At that time I think I, as well as other people with whom I discussed it, was entirely is sympathy with the idea. I think it is perfectly legitimate on the merits, but I don't think you will ever get to the merits of this case today if you try to require reports of trade associations and unions because it is another way of doing what unions will fight to the bitter end if you do by legislation, and & lot of people are talking about the necessity, Westbrook Pegler and a lot of other people are talking, there is a lot of agitation, to have these fellows put their financial affairs in order and to disclose their affairs. 89 - 19 - I would rather regard the event of a little more development of that as a matter of public policy than to stick our necks out at 8. time when labor people at least are inclined to think that the Administration is drifting away from them and that we are kicking them around a little bit. Maybe they need it, but I would be opposed to doing it at this time. H.M.Jr: Why can't we do what I asked for five or six years ago, simply say - is it too late for this year? - that for '41 any organiza- tion enjoying tax exempt status would have to prove that it is worthy of it, for '41? Is It too late to do that? Graves: Well, you couldn't do that this year. You could make a start on it. But I don't think that gets you where you are trying to go, if I understand where you are trying to go. H.M.Jr: No, wait a minute, somebody else is trying to go somewhere. I didn't start this thing. This is all comparatively new to me. I didn't start this thing. For the time being, I don't know whether there are twenty-six thousand tax exempt organizations, but I would like to go back to where I was and simply say that all of these be canceled for #42, and anybody who wants a tax exempt status for '42 would have to put in an application and prove that he is entitled to it. White: Which means he would have to prove that it is a church or a labor union or a charitable organization and the demonstration of that proof would be a reasonable demonstration that it was & non-profit organization. H.M.Jr: Yes. - 20 - 90 White: I can see that. Gaston: What about the law on that? There are certain classes of organizations that are by law exempt from filing returns and from paying taxes. H.M.Jr: But, Herbert, we make the regulations as to what is exempt. Kades: We require a labor union in the first instance to give us an account. Gaston: Well, I think that would be the answer, to move in on this thing gradually. Sullivan: Another way this can be handled, Mr. Secretary-- H.M.Jr: What do you think of that, I mean for '42 just make them start all over again? Odegard: Of course that won't do what was in mind here. H.M.Jr: I didn't start this. What Morris Ernst wants, Morris Ernst is gunning for America First. Well, it is wrong to set up a - to try to have the whole Treasury organization, Internal Revenue, gun for one organization anyway. You can't do it. White: It has boomerangs. H.M.Jr: You can't do it. Odegard: No, I think that is right. H.M.Jr: If he wants to do it, let him introduce an act in Congress. Sullivan: Well, that can be done. Whenever & question 91 - 21 - is raised about the right of an organization to this exemption, an investigation can be made in that particular case, and I pointed that out to Morris, and he didn't agree with me that that would be sufficient. H.M.Jr: Well, listen, it is very nice for Morris Ernet to sit up in New York behind his desk and have me as a cat's paw, but I wish you would re-examine this thing along the lines that for the year '42 anybody who wants to enjoy a tax exempt status will have to start de novo. I mean, I am not issuing an order. I would like you to consider that. Talk it over with these people in the room and then come back in a couple of days and talk to me about it again. Where would that lead to, you see. Sullivan: That is in this. White: With & lot of other things. Sullivan: Yes. H.M.Jr: But supposing you just did that honestly and nothing else. Sullivan: Is there to be a Cabinet meeting tomorrow? H.M.Jr: No, there won't be any more until - for a week. Sullivan: Well, when this thing comes up, there is another way of accomplishing this. If the feeling is-- H.M.Jr: The President leaves tomorrow and will be gone for & week. Sullivan: If the feeling is that the Treasury shouldn't take sole responsibility for this, everything Regraded Unclassified 92 - 22 - that is set forth in this Treasury decision can also be set forth in 8. statute for the Congress to pass on. H.M.Jr: But they won't pass on it. Sullivan: Well, I don't know. H.M.Jr: Well, look, John, it is past four o'clock and I am no good at this hour. Re-examine it and talk it over with these people. Don't bother Harold. I just brought him in to - but I would like Odegard on account of - you know. There is a big repercussion on the morale of the country on this thing, on the whole question of upsetting these people un- necessarily, getting their minds off building guns and buying defense stamps and so forth and so on, you see. That is why I want you in on it. What? Odegard: Yes, I can see it. Gaston: You will have to consider, I think, too, the physical dimentions of the job, as to when it would be undertaken and whether the Bureau could carry the load, how big a job it is going to be. H.M.Jr: They could do it next year because the burden of proof is on these organizations, Herbert. I mean, simply say, Gentlemen, beginning the first of January, nobody has 8. tax exempt status. You have got to come in and prove that you are worthy of it." Sullivan: I will go over this with the Commissioner in the morning. H.M.Jr: All right. Thank you all. 93 November 27, 1941 4:27 p.m. HMJr: Hello. Senator O'Mahoney Hello, Henry. HMJr: How's Wyoming? O: Fine and dandy. Henry, I sent you a note the other day HMJr: Yeah. O: ..... transmitting a copy of a telegram or the telegram I had received HMJr: Yeah. 0: from the Sturgis Posture Chair Company out in Sturgis, Michigan. HMJr: Well, I've got a backache today. I've got lumbago, 80 it's & good day to talk to me about it. 0: Fine. Well, it's very simple. HMJr: What do they want? 0: They don't want a darned thing. They want to be permitted to stay in business. HMJr: What do they want..... 0: The reason I was sending it to you was this. HMJr: Yeah. 0: They have a factory making metal furniture. HMJr: Yeah. 0: They have orders on hand for eight weeks. They also have on hand the metal with which to fill these orders. HMJr: Yeah. Regraded Unclassified 94 - 2 - : But OPM gave out an order which prevents them from using the metal they have on hand to fill the orders they have on hand; and if they'd obey the order, they'd have to close the factory and throw fifty-four people out of work. And 8. large number of those people are buying defense bonds. Some of them have bought as much as five hundred dollars. HMJr: Yeah. 0: Here's the other case, of a factory at Elkhart, Indiana, which personally - which itself - pur- chased thirty-five thousand dollars worth of defense bonds; and under the same order, it's being crippled. HMJr: Yes. 0: Now, I'm getting reports of this from all over the country. That's why I have said - I said in a broadoast on Tuesday night over the Columbia Broadcasting Company - that civilian business 16 the goose that lays the golden egg that will pay for the defense program. HMJr: Yeah. 0: And if we kill civilian business, we kill the goose. HMJr: Yeah. 0: Now, nobody ought to be more interested in preserving this goose with the golden egga than Henry Morgenthau. HMJr: Yeah. Well 0: Henry, something ought to be done about it, or we're going to catch hell. HMJr: Well, Joe - let - these two companies, I'll have them looked into at once. 0: Oh, well, no. I don't want you to bother with that. Regraded Unclassified 95 - 3 - HMJr: oh, no, no. I'd look into it, because I just - I don't know the status; but let me look into it, because there's another angle that you may not know of where I may be able to be helpful for these two cases. 0: Uh huh. HMJr: After all, we place a lot of business through Procurement. 0: Yeah. HMJr: Maybe we can buy something from these companies. O: Well, by gosh, they're not permitted to ship the damn stuff. HMJr: Well, if O: The OPM orders HMJr: Yeah, but if we buy it, we get priorities for them. 0: Yeah. HMJr: See? O: Oh, yes. Sure. HMJr: I mean, that's another angle. O: That's right. HMJr: Look, I'll have that explored tonight. 0: All right. HMJr: And 0: But the fundamental thing is the thing we must get after, Henry. HMJr: Well, I'm tremendously interested, and I appreciate your calling me. Doaradod 96 - 4 - 0: How are you feeling except for this wrenched back? HMJr: CA, pretty good. I wish things were going better. 0: How's your father? HMJr: oh, he's fine. 0: Give him my best, won't you? HMJr: I'll do that. O: Henry, we can put this thing in ship-shape if we'll only do it. HMJr: Well, I'm interested, and I'll look into this and call you about it myself. 0: Okay. HMJr: Thank you. 0: Thank you. 97 November 27, 1941 4:30 p.m. RE FINANCING Present: Mr. Bell Mr. Haas Mr. Murphy Mr. Hadley Mr. Morris Mr. Schwarz Mrs. Klotz H.M.Jr: All right, Bell, give me a report. Bell: I haven't heard from Mr. Eccles. I didn't know what the situation was until I talked to him. 11-29 H.M.Jr: I have got a letter here, "I would appreciate it if you would tell the Secretary I am sorry, the text did not get to him sooner." I don t know. Bell: Well, I think you can get enough from New York. H.M.Jr: I think whatever we decide, I would call him up on the phone and tell him. Bell: Sproul and Rouse, I talked to them this morning and they considered it and they are going to call me back late this evening. They said they strongly feel that we should not go down to a hundred million, that you decided some weeks ago that you were going to create 98 - 2 - a bill market, and they think you have got a bill market, that you have got good distribution over the country, and that you should keep that, and if you have got too much cash, go out of the month with too much cash, then you should reduce your billion and a half offering. They think if you bring it down to a hundred you will have a less stable market and that you might pull the bills back into New York where you don't want them. They are now pretty well distributed, and they are out there in the country where the excess reserves are. They would like to see you reduce it to & hundred and fifty and complete the cycle and then consider whe- ther or not you want any more bills. H.M.Jr: I won't decide on it tonight, 80 let's just pigeonhole that for tomorrow. What is the next thing? Bell: The billion and & half, they see no objection to announcing tonight that the issue would be not more than a billion and B. half, that is, the offering. I had thought it ought to be that way, not more than a billion and a half. They saw no objection to that. Schwarz: I wonder why they say it like that, not more? H.M.Jr: Why not just say a billion and 8. half? Bell: Well, I did ask them if they had in mind this twenty-five per cent increase that we have been discussing, and they said, "No," that your last statement was it would be more than a billion. H.M.Jr: You want a billion and a half, don't you? Bell: Yes. Regraded Unclassified 99 - 3 - H.M.Jr: I would tell them it is going to be & billion and a half. Morris: Would you want it if you keep up your bills? Bell: Yes. The hundred and fifty million of bills to complete the cycle is in our picture between now and September 15th. H.M.Jr: I am not in a mental condition to argue about anything. I don't have to make up my mind. I would like to get out the billion and a half, though. Bell: All right. We don't have to do the other until -- H.M.Jr: You can come back at me Monday. Bell: Monday you can do it. I just thought maybe it might help a little if we had some reduction in the bills, but at the same time -- H.M.Jr: What? Bell: The market. It might help the market a little. H.M.Jr: I would like to think on that. Bell: But it is all right to let it go over until Monday. H.M.Jr: Well, I can do it tomorrow. Does anybody dis- agree on a billion and a half? They weren't afraid of it? Bell: Sproul and Rouse? H.M.Jr: Yes. Bell: No. Regraded Unclassified 100 - 4 - H.M.Jr: Well, what I would say is, a billion and a half - you (Bell) tell Eccles - I mean, give him five minutes. Go in there, Chick, while he calls up Eccles. You may have to go to sleep for an hour, but let him go in and talk to Eccles -- Schwarz: Eccles talks to him. H.M.Jr: And unless Eccles says "No", I would say a billion and & half. Let's call up Eccles now. Bell: You are taking on something. Klotz: You are taking a lot of punishment today. H.M.Jr: I know. You are going up on the Hill for me tomorrow at ten o'clock. I am not going. Bell: Oh, you are not going? H.M.Jr: No, you are going up. You sit up on the dais there in my place. Bell: It is quite an honor. I can't vote, can I? H.M.Jr: Yes, you can vote. I don't know whether I can vote either. Bell: Oh, yes, you are a member of the committee, by the resolution. H.M.Jr: Well, you go up there. Bell: But there is no provision for a substitute or an alternate. H.M.Jr: I can't go up there without losing my temper and I don't want to lose my temper. Old Bob Doughton will say, "We won't have any more taxes without the billion and a half and 101 - 5 - without cutting out the WPA and he won't say so publicly. (The Secretary held a telephone conversation with Mr. Marriner Eccles as follows): 102 November 27, 1941 4:41.p.m. HMJr: Hello. Operator: Chairman Eccles. HMJr: Hello. Marriner Eccles: Hello. HMJr: Marriner.... E: Yes, Henry. HMJr: we're planning to give out for tomorrow morning's papers next week, barring some un- foreseen international situation - I always want that 8.8 a hedge - that we're proposing to borrow 8. billion and a half cash. E: Yes. Dan called up this morning. HMJr: Yeah, he couldn't get you. E: What is it? HMJr: I - did he talk to you? E: He talked to Piser. HMJr: Yeah. is And then I talked to Piser immediately after. As I understood it, you were going to ask for a billion and 8 half and that's practically all that you've given out, that the terms and..... HMJr: That's all. Just 60 that the market would know the eize. E: and that you're going to discontinue bills - that 18, you're going to take care of the turn-over only, or the roll-over. HMJr: Well, we're not going to say anything about that, because New York wants us to keep on a hundred and fifty; and I'm too tired to argue tonight. Regraded Unclassified - 2 - 103 E: Yeah, well..... HMJr: I thought we'd just say a billion and a half tomorrow. E: Now, as I understand it; we're going to meet HMJr: Tuesday. E: Tuesday at two-thirty; and there'll be no further statement on it, and no decision until that time. HMJr: No, no. We might want to do something about the bills, but I thought E: No, I meant on the billion and a half. HMJr: No, no. There'll be nothing more without - I certainly wouldn't say anything more without calling you up the way I am now. E: Yes. I sent a note over. I don't know whether John Sullivan has seen you. John called me this morning about the HMJr: He gave it to me. E: statement in New York, and I didn't know that you weren't - that you didn't get that. I was out of town. HMJr: I got an awful pounding from the press on 1t, and I just told them I hadn't seen it. E: Yeah. Well, maybe it's Just as well, then. But my note explains the - did you read it? HMJr: He just gave it to me. I haven't read it yet. E: Well, I think you'll find the note explains it. It was just a mistake in the office. I mean, I - they were supposed to send it over - they've had instructions it just wasn't done. And I hope you will at least read that portion of the state- ment that I have marked. HMJr: I will. e 104 - 3 - E: And it's all I said on the tax question and also on the function of banking in relation to the defense program. HMJr: Well, I'll read it, Marriner. E: And if - I'd like to get your reaction. I mean, if you feel there's any..... HMJr: If there's anything, you'll get it - direct. E: I don't think there will be. HMJr: Okay. E: All right, Henry. HMJr: But as we stand now, I just want to know that a billion and a half didn't frighten you. E: No, it doesn't frighten - no, it - how can you get along with less? HMJr: Well, I don't know. E: No, I'm not - I'm not & bit - I think that the easiest part of the defense program is the money end of it. If the labor and the production end was as easy to handle as the money end, I think HMJr: Well, maybe this sounds terribly conceited, but maybe it's because the money end is done well. E: Well, I think that we - I think that the other you're dealing with human nature. I think on the money end, that between the Treasury and the Reserve, we've got most of the trump cards. HMJr: Yeah, but maybe it's because we do it well. E: Well, I think that has something to do with it. I mean that HMJr: But I think the other thing could be done if it was done properly - - the production. E: Well, of course, you're dealing with the human nature problem there, which 10..... 105 - 4 - HMJr: Well, I'm told that the pocketbook 18 supposed to be the most sensitive nerve. E: We've got the control on the money picture - I mean if - I think we have. (Laughs) HMJr: Yeah. Well, anyway, I'll be seeing you; and we'll not make any announcements on the financing unless either Bell or I check with you first. E: Okay. HMJr: Thank you, Marriner. E: All right. Good-bye. 106 - 6 - H.M.Jr: You have control of the money market until it goes sour. Haas: Yes. H.M.Jr: And the Fed. -- Bell: He is relaxed now. The money end of it is the easy part of it. H.M.Jr: Sure, until it goes sour, until the Federal Reserve does something without telling us. Goodnight. Remember, announce a billion and & half, barring -- Schwarz: Unforseen international situations. H.M.Jr: Or another speech by Marriner Eccles. BOARD OF GOVERNORS 107 OF THE (7) B STATE MR FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE CHAIRMAN STATE November 27, 1941. Dear John: I am enclosing copies of the speech that you called me about and regret that they did not get over to you sooner us, of course, I mean to have them sent just 0,5 BOOD 0,5 they are completed and, if possible, in advance of their getting into the press. In this case, I was not making a long speoch and morely wanted to avoid 5. repetition of what happened a year ago when I spoke to the same group and what I said off the record was very badly garbled. I made some last minute changes in the text of this speech so it was not ready until late Tuesday evening. But it ia largely e repetition of what I have said publicly before. I have marked some passages in which you might be interested as to the fact that central banks have properly become the servants of government and as to taxes. With re- gard to the tax picture, I felt that I was backing up the Treasury's position in general, so I think you would have no occasion for criticism. I would appreciate it if you would tell the Secretary that I am sorry the text did not get to him sconer. Sincerely yours, Honorable John L. Sullivan, Assistant Secretary of the Treasury, Washington, D. C. enclosures Regraded Unclassified 108 2-615 p4-5 Teles-pilo etser, ADDRESS AT MEETING OF NATIONAL INDUSTRIAL CONFERENCE BOARD NEW YORK CITY TUESDAY EVENING, NOVEMBER 25, 1941 BY MARRINER S. ECCLES FOR RELEASE IN MORNING NEWSPAPERS OF WEDNESDAY, NOVEMBER 26, 1941 Doaradod 2-615 109 It is particularly gratifying to me to be on the same program with such distinguished speakers as Sir Arthur Salter and Dr. James, for It so happens that the two books which made the deepest impression on me in the deptha of the depression nearly a decade ago camo from their re- spective pens. When I pleaded my inability to measure up to the high oratorical standards of such ominent economists and authors, the arrangers of your program intimated that they wanted me for contrast. As I recell, Dr. Jordan, in introducing no a year ago, said that I had the habit of say- inc the things you did not 11ko to hour. If I succeed in living up to that dubious reputation, I can lay some of the blame at the door of Sir Arthur's "Recovery--The Second Effort" and to Dr. James' "The Road to Rovival". Thoso volumes have been in my office ever since I have boon in Washington, und in glancing back at them = fow days ago, I noted Again peasages which I had murkod nearly ten yours age -- what I think were prophetic words. For instance, Sir Arthur wrote: "The role of finance is to be the hondmaid and servart of sconomic activity", and in recording "The Pass- ing of Luissez-faire", he visualized the development of & "systom in which competition and individual enterprise on the one hund and regulation and general planning on the other will be so adjusted that the abusos of cach will be avoided and the bonefits of oneh retained." And I noted again in Dr. James' book his remark that "the final alm of economic activity is the enriching of human life", and his statement that our industrial potentialities make it "possible, by the redistribution of national income on 6. sounder social basis, to offer to the average man Regraded Unclassified - 2 - 2-015 110 "and woman a standard of living more worthy of economic civilization." I apologize to the authors for snatching these too brief random statuments from their context -- yet they serve to point up what I wish to pay. During the intervening years the democracies have been moving (slowly but, I think, surely) along these paths, seeking to realize these objectives. In 6. recent issue of The Economist, of London, I noted the state- ment that the end of the gold standard also marked "the end of the Financial Age, the failure of the last attempt to restore the dominance of finance over coonomics." And the article added: "The foundations of EL new order of ideas have been laid in the ensuing years, in Britain, in America and in Germany, and the war will cerry the process much further. The world is showing un unmistakeable tendonoy to argue that, if e thing is physically possible, whether it be fighting a war, or removing unemployment, it must not be stopped by considerations of 'sound finance' alone. In wer, finance is manifustly a mero camp follower, and the tendency 1a to reduce it to de- pendent status in peace as well." Sir Arthur's relegation of finance to the role of "handmaid and sorvent" and not the master of our destinios is schood in this comment ten years later from The Economist. Dr. James' vision of the "redistribution of national income on as sounder social basis" is today, even in 8 world at war, much more of E. reality, B.3 evidenced by the trend of social logislation in the democracies and the shaping ef fiscal, monotary and other public policies toward B. wider, more equitable distribution of national income. We propose to save democracy, us we say, but not to repeat the economic mistakes that lie at the botton of so much of the world's discrder. We Regraded Unclassified - 3 - 2-615 111 propose to proserve democracy as the hope of civilized pooples to achieve the oconomic progress that the machine age makes possible. The tragedy is that the world has turned the machine to producing for war instead of for peace. Engulfed in the tide of human madness, we have no choice but to arm. Yet we may well take thought now of the kind of peace we mean to have on earth and the use to which we may turn our industrial and technological might when once we are free again to move on toward the goal of "enriching human life." My own economic philosophy, if I may call it that, is based on the conviction that, if we have the understanding and the will, wo can make our capitalistic democracy produce as fully for peace as for war times -- with vastly fewer complications and enormously greater bonefits for the human race. The experience of the last eight or ten years and even of the present points the way to combine intelligent government regulation and planning with freedom of private enterprise and competition. It can be done without regimentation and without abandonment of representative government, though I agree that it calls for adaptation of our political processes so that there may be far more foresight, far better direction and timing in public policy than has been the case in bygone eras. One does not have to be an easy optimist to believe that a far greater, a much more wide- spread and enduring prosperity -- "a standard of living more worthy of economic civilization" -- will result. While we cannot hope to realize these high aspirations in & world at war, they need to be kept in view 6.8 the ultimate goal and vindication Regraded Unclassified Z-615 - 4 - 112 of the system we monn to defend and proserve. And with these objectives in mind wo can porhaps botter judgo whether changes which have alroady taken place in our economic processos are improvements and not the evils that they may first appoar to be. Not the least significant change is the subordinated role of fi- nance in the world today. Central banks, for example, are no longer the creatures of powerful private groups. They have everywhere become moro and more the servants of government. Whore the color of independence still remains, it is largely a fiction. The interest rato is determined, whether admittodly or not, by governments, not by banking or finance. In Great Britain, and in Canada, and to & lesser extent in our own country, the government hus, in effect, asserted its sovereign power over the supply and the cost of money. Governments no longer deal at arms length with the financial world. They are no longer obliged to finance at the high rates that prevailed in the last war. Govern- ment action and policy are responsible for the rate structure, and with the assumption of this responsibility governments no longer think morely in terms of how good a bargain they can drive in the financial markets, but larger considerations of public policy have to be taken into account. In Great Britain, in Canada, the primary consideration is not how cheaply the war effort can be financod, but whether the rate structure is so adapted as to utilize most effectively the existing money supply and whether the rates are such as will pormit the private credit system to continue its function on an effective basis. It is highly commendable, in my opinion, that these are somo of the considerations which our own government has been weighing in its financing Regraded Unclassified . 5 - 2-615 113 operations. Extremists in all countries will not agree, of course. On the one side are the groups that clamor for the issuance of non-interest bear- ing government securities. While professing to be in favor of preserving capitalism and democratic processes, nevertholess, they would strike at the heart of both by destroying the private credit mechanism. On the other side are the old-line conservativos who measure all things by the departed gold standard. Despito the ovidence in the lato 20's of the ineffectiveness of high interest rates in preventing or oven restraining speculativo excesses, dospite the record since then that low rates are not by thomselves sufficient to bring about recovery, thoy cling to the belief that inflation can be curbod or deflation remedied by the simple dovico of the intorest rato, It is highly unfortunate that orderly coonomic progress cannot be arranged that easily. However, I cannot view with alarm the trond throughout the world to discard such a fallucy. The assumption by governments of responsibility for the supply and cost of money has greatly altored the role of central banking operations. Not only must central banking authorities work in closo cooperation with those responsible for government fiscal and financial policies, but they must be propared to use central banking powers to support and sustain those policies, once they are formulated by the government. Nor do I view this as a backward step. It seoms to me to be wholly in accord with democratic principles that elected governments shall have command over the most important functions essential for successful administration. It can hardly be denied that control of the supply and cost of money is ono of the most vital of all functions. Those of your goneration and mine are hardly in a position to Regraded Unclassified 6 - Z-615 114 argue that governments will be less enlightened, loss capable of successful and proper management of this function than private interests have been. And there is always the redress in a democracy of supplanting any govern- ment that misuses or abuses such vital powers. But beyond this trend -- the subordination of finance to economics -- it seems to me to be significant and fortunato for democracy that the new emphasis is on production. It is, of course, tragio that the world thus far can only gear itself to full utilization of its man power and material resources in the making of war or the implements of war. It will be a world tragedy if, when peace is restored, we revert to the doctrine that we cannot afford to employ our human and matorial resources in full production. Yet there will be such a revorsion unless we prepare now to make the transition back to peace -- unless wo plan to keep the emphasis upon full production -- the maximum that can be called forth by private enter- prise and initiative, but with government prepared to assure usoful employ- mont to all who are ablo and willing to work who cannot find jobs in private activity. Again, I think it significant and fortunate for democracy that the most important political loadors of all parties agroe upon that funda- mental, however much they may disagree about how to apply it. I cannot view with clarm the trond throughout the world toward ongineering rather than finance oconomics as a means to full production. The defeatists are those who say it can't be dono -- that we can't afford it, that democracy can't achieve it. If that wore so, then democracy could not and would not deserve to survive. Surely we are not saving democracy from destruction by war to have it destroy itself in the aftermath. - 7 - 2-615 115 Production is the keynote of economics of peace as well 8.8 of war. We do not ask today whether we can afford full production. We are prepared to make every sacrifice to obtain it. Unhappily, 0.8 I have said, it is production for destructive, not constructive, things, and it is of necessity concentrated upon the industrial sectors of the economy. Our economic problems are not only those of the inflationary side of the cycle, but they are tremendously complicated because we must turn out more and more of the implements of war and less and less for civilian consumption. In peace times there would be no such complications. Since I spoke here to year ago WG have witnessed the gradual evolution of our national policy toward what, in the words of the President, has now become an "unlimited commitment" on the part of the American people that there shall be a free world. In that period we have taken the first stops in the program of all-out production that is necessary to implement that policy. Our effort thus for has been curried on in an economic atmosphore which WELB favorable to the expansion of both military and civilian output, and, for this reason, the public is 0.5 yet inadequately propared for the sacrifices that must be faced if the dofense effort is to be carried to & successful conclusion. Whilo defense expenditures have rison in the past year from 300 million dollars to 1,500 million dollars n. month, national in- como expanded to on annual rate not fur from 100 billion dollars a year and industrial production has increased by about a third. As long LG defense production could be increased without diminish- ing civilian output, little if any sncrifice WLB required. It is true that taxes have boen increased and also that we have had to pay the comparatively Regraded Unclassified 2-615 - 8 - 116 small penalty of 10 per cent increase in the cost of living. But even with these offsets, our population in the aggregate has seen better times than ever before due to greater production, wages and employment. The ironio fact is that until now the defense effort has been a blood transfusion for civilian welfare. We seem clearly to be at the end of the rising curve of civilian output. Although we have not yet exhausted our resources of unused labor and industrial capacity in some categories, we have drawn heavily upon them. The defense program has expanded in total volume far beyond what anyone en- visaged a year ago. It is still impossible to foresee its total cost or to estimate what proportion of our national income it will require at its peak. At the moment, its total cost is scheduled at almost 70 billion dollars. Defense expenditures are currently absorbing about 18 per cent of our national income. While these exponditures have almost doubled since last June, there has been comparatively little change in the physical volume of production, a fact which, while attributable in part to temporary circumstances, suggests that it will be increasingly difficult to maintain the rapid rate of in- croase in output that characterized the period up to last June. In the light of those circumstances it is unlikely that in the future the full requirements of the defense program can be mot by drawing unutilized reserves into the productive process. Resources now devoted to the production of goods and civilian supplies must inevitably be curtailed. I cm speaking not only of consumer requirements but also plant, equipment, and other capital goods available to replace and to expand productivo capacity outside the defense industries thomselves. Regraded Unclassified - 9 - 2-615 117 What I have just said refers, of course, mly to the over-all total of goods for civilian use. There are many items like foodstuffs, various non-durable goods, entertainment and other services which the public can buy in increased volume without using resources needed for defense, but the expansion in these sectors will be balanced and doubtless overbalanced by the contraction in the production of durable goods using scarce raw materials, machine tools and skilled labor. The basic problem is manifestly a physical one, It is one of production -- not of finance, Insofar as it is possible, the expansion of output is the answer to our major difficulties. I boliove that our people ES B. whole confronted with the choico betwoen consuming less or working harder would prefer to minimizo the sacrifico of living standards by doing more work. In terms of the prosont economic situation this moans longor hours of work, maximum utilization of equipment by working as many shifts & day as tochnical considerations will allow, and abandonment of output- restricting practice. It means drawing surplus agricultural labor from forms into factories and it means an increasing number of womon going from house- hold work to commorcial and industrial employment. It means emphasis on industrial training programs and the removal of discrimination against hiring the aged and other groups able to make c. contribution to the nation's productive offort. But with all these oxtensions of effort wo shall not be able to avoid B. temporary reduction in the standard of lifo if we are to dovote our productive resources to defenso to the oxtent already plannod. The reduction we should pormit needs dofinition. On the one hand, there are many Americans Regraded Unclassified - 10 - 2-615 118 whose scale of living is so irreducibly law that no sacrifice can bo demanded in that quarter. Above this lovel reductions must be allocated to all groups. The generally required reduction should be shared on an equitable basis. This means that sacrifices will have to be distributed all along the line in the lower middle brackets, the upper brackets and in the corporate tax structure. We should roach n. condition where no one is ablo to talk piously about sacrifices when he is making none himself and is roally referring to the sucrifices of the other fellow. Moanwhile, government net expenditures will continuo to rise. Aggrogate money incomes will continue to increase. In the absonce of special restraints the people receiving those increased incomes will seek to spend them. The prospect of un increasing flow of money and of a diminish- ing volume of goods available for the civilian market inevitably spolls one thing of which WG have hoard a great deal since I not with you a year ago -- inflation. While it is conceivable that a very large and complex enforce- ment machinery, backed by rigorous penalties, might be able to hold prices steady in the face of the mounting pressure of demand, the task will be made infinitely easier to the extent that the growth of domand is hold in check by taxation and by other functional as well as selective restraints upon the flow of incomos and the expansion of credit. Of all the available rostraints taxation is at once the most offective and most equitable. Since the middle of 1940 we have passed three major rovenue acts, representing in the aggregate well over 5 billion dollars por annum of additional revenue. Measured by past standards, that is 6. very largo tax program and one that has sharply increased the levies upon many Regraded Unclassified - 11 - z-615 119 groups of taxpayers. The normal rate of corporate income tax has been in- creased by about a third and a new surtex has been imposed making the total rate of tax payable in corporate income in general about 63 por cent higher than it was in 1939. We have taken the first steps in the direction of effective taxation of excess profits. We have measurably increased some of our excise taxes. Rates have been increased and exemptions have boen lowered under the individual income tax. As & result of these changes and the rising level of business activity, tax collections can be expected to be about 6 billion dollars greater in the calendar year 1942 than in the current year. The tax structure as it now stands will be an important restraint upon the growth of private expenditures. In addition, of course, other restraints have boen or will be applied in the form of direct price con- trols, priorities and allocations that promote defense but curb civilian production in housing and other durablo goods, regulation of instalment credit, and tho proposed increase in social security taxes. While it is impossible to estimate how far such measures will 80 in preventing demand from outrunning civilian supply, wo know that by the middle of next year defense expenditures will probably be running at an annual rate of somewhat more than 15 billion dollars above the middle of the current year. The conclusion is inescapable, thorefore, that additional taxation must be im- posed and further rostraints applied. So far as further taxation is concerned, I hope that it will first tap the corporate excess profits and the middlo and uppor individual income brackets and close numerous conspiouous loopholes in the corporation, individual incomo, inheritance and gift tax structures. At the same time it Regraded Unclassified - 12 - Z-615 120 is important that Congress anaot an effective price control measure and that some curbs be applied to repeated demands for wage and salary increases, as well as to agricultural prices. Beyond all this, however, I believe it will be necessary ultimately to adopt measures that will tap all incomes, dividends and other such payments at the source, possibly in the form of the so-called withholding tax or such a tax in combination with an enforced diversion of such income payments into government savings bonds redeemable after the emergency is over. From the standpoint of public morale, it is essential that the long purses be tapped first and heaviest in accordance with the equitable princi- ple of capacity to pay, and that there be no attempt to shift the tax burden to the lowest income groups whose standard of living is already down to or under reasonable subsistonce levels. Only when those at the top of the income scale, who have the most at stako and who do not have to make real sacrifices in their supply of food and other necessities, have been made to bear their full share of the tax load can reaching into the shorter purses of those who have the least at stake be justified. The timing 6.8 well as the nature of all measures of restraint is of great importance. Public morale is as vital to defense as the implements of defense. The government has to take account of mass psychology, of the fact that the public is not yet fully awake to the gravity of the inter- national situation and the sacrifices that must be made. So far as the economic front is concerned, our people have the choice either of paying taxes, subscribing to savings bonds and cooperating in other measures to curb price inflation, or of seeing the buying power of their money progressively shrink. The former is the only intelligent choice for anyone who even re- - 13 - 2-615 121 motely understands the evil consequences, now and in the future, of in- flation. I think the situation was admirably summed up in the recent report which the Emergency Board, appointed in September under Section 10 of the Railway Labor Act, made to the President. "The huge incomes disbursed by both defense and civilian industries," said the report, "magnify the de- mend for civilian goods. But the output of civilian goods is not likely to expand significantly, if it expands at all, in the months ahead, This con- dition alone sets the stage for B. dangerous inflation, and the process is boing activated by wage adjustments to rising living costs and price adjust- monts to rising wages -- the familiar vicious circle. No group has more to lose from inflation than the nation's wage carners. To save this nation from the blight and chaos of inflation it will probably be necessary to impose drastic now taxes on the public 8.8 EL whole, immobilize a part of the expanding purchasing power by some organized schome of savings and, most important of all, adopt EL comprehensive plan in rogard to wages, profits, and the prices of both agricultural and industrial commoditios." The government, as the report said, is cognizent of the problem, and the government alone is able to mako a woll formulated and coordinated attack upon the problem. It is fair to say, I think, that the government today shows a far greater awareness and understanding of the problem and a far grouter dotermination to deal with it effectively than was the case in the lust war. And this is attributable partly, at any rate, to that trend I spoke of at the outset -- the incroasing assumption by government of responsibility for economic welfare, With thut rosponsibility goes the obligation to not wisely, fairly, in the interest of the nation as B. whole - 14 - 2-615 122 and not in the interest of any group, class or section of the country. The prophets of disaster we always have with us. And they would have us believo that the only alternatives to a laissez-faire, gold standard world are dictatorships and an end of our oconomic system. I soe no such portents of evil in the broad trends in democratic countries toward re- sponsibility for economic welfaro. And, as c. banker, I recognize that this involves government command over the creation, cost and flow of money in the oconomy. To my way of thinking, these changes are not the forerunners of dictors or other disastors. They are necessary steps in the adaptation of our political and economic processes to moot the challenge of a now day. Regraded Unclassified 123 NOV 88 1941 ky dear Mr. Blacks The present method of financing governmental coryon- tions and credit agencies by issuing cuaranteed obli vicas of the United States is making our financing more complianted as time good on, especially in view of the large Treasury financing requirements usde necessary by the defense program. I propose, with the approval of the President, to undertaks to provide funds to governmental corporations and credit agencies which heretofore have raised funds by the Insuance of name- tood obligations in the market, to cover their current requirements as well AS to refund any obligations now our standing as they acture or are called for redemption. In line with this policy the Transury will be prepared to purchase notes from the Federal 7ara Mortgage Corporation, from time to time as funds are needed. The interest which will be charged on notes purchased by the Transury will be at the rate of 1% per - 20 long as the AVEIAGE interest mis on the outstanding public dobt is 2-1/24 or thereabouts. If the average rate of interest 4a. the outstanding public debt should increase, the Treasury vill reconsider the rate of interest charged on notes of the Federal Tam Nortgage Corporation purchased by 11. It is understood that consideration is now being given to the matter of calling for redemption the Corporation's 35 bonds of 1942-47 which are subject to call for redemption on and after January 15, 1942, and also its 2-3/4% bonds of 1942-47 which are subject to call for redemption on and after March 1, 1942. The Treasury will purchase notes of the Federal Farm Mortgage Corporation subject to the authorisation and approval of the Corporation's Board of Directors, is order to provide 11 with funds for the purpose of redeeming the above-nantioned bonds If they should be called for redemption at their aarliest call date or purchased by the Corporation prior thereto. It is suggested that the Corporation's notes nature June 30. 1942, at which time provision ann be nade for the substitution of any notes them held by the Treasury with a. reseral lesse. Provisions will be made charely the Regraded Unclassified 124 - 2 - Corporation my at its option at any time before naturity pay all or any part of the amount due on the notes issued w 11. This will provide flaxibility and pendit current reseipts is 620000 of the Corporation's requirements to be imediately applied to the reduction of its indebtedness. It is understood that stops will be taken to obtain the associally authorization from the Hoard of Directors of the Corporation to DAITY out this arrangament. Very truly yours. (Signed) D. W. BELL acting Secretary of the Treasury. Honorable A. G. Blook, President, Federal Farm Mortgage Corporation, Washington, д. d. VTH:mib 11-27-41 Regraded Unclassified Prepared by: Nr. Marnett Mr. Foy 125 Mr. Hurnhy Mr. Rass PARTMENT INTER OFFICE COMMUNICATION DATE November 27, 1941. TO Secretary Morgenthau FROM Mr. Hass UA Subject: Recent Changes in Excess Reserves and Interest Rates I. Recent Changes in Excess Reserves In our memorandum of November 13 we pointed out that excess reserves of New York City banks have been much harder hit by the developments of the past year than excess re- serves of all member banks, and that excess reserves in New York City occupy a. critical position in the money market. A pinch in excess reserves in New York City could cause B. sub- stantial rise in short-term interest rates, which might possibly spread to long-term interest rates, even if the re- serve position of member banks outside of New York City were fairly easy. Excess reserves of member banks at New York City amounted to 4773 millions on November 5, the first reporting date after the increase in requirements. This W&B a decline of 79 per- cent from the all-time high of $3,675 millions reached on June 19, 1940. Movements since the outbreak of the war in excess reserves at all member banks and at member banke in New York City are shown in Chart I. In the course of preparing our previous memorandum, we consulted with Mr. Roelse of the Federal Reserve Bank of New York with respect to the probable future course of excess reserves. He estimated that the excess reserves of all mem- ber banks would decline by about $375 millions between November 5 and December 24, the probable date of the seasonal high of currency in circulation. Of this decline, he expected that about $250 millions would occur in New York City. After the seasonal decline of money in circulation (which he ex- pected to be completed by the end of January), Mr. Roelse believed that excess reserves would continue to decline, slowly at all member banke and more rapidly at New York. Regraded Unclassified Secretary Morgenthau - 2 126 In the two weeks between November 5 and November 19 (the last reporting date now available), excess reserves of all member banks have increased by $278 millions. During this period Treasury cash and deposits with the Federal Reserve Banks have decreased by $346 millions. This has the effect of increasing excess reserves by about 80 percent of the amount of the decrease. Except for this one factor, there- fore, excess reserves during the two-week period would have remained almost unchanged. The decrease in the Treasury balance 1s, of course, a temporary factor which will be off- set at the time of the next financing. As this will occur prior to December 24, Mr. Roelse quite properly made no al- lowance for B. decrease in the Treasury balance in making his estimate of changes in excess reserves for the November 5- December 24 period. During the two-week period, November 5 to November 19, money in circulation increased $114 millions and monetary gold stock decreased $10 millions. These changes, which would have caused 6. decrease in reserves of $124 millions, were almost exactly offset by increases of $61 millions in "other Reserve Bank credit" and $7 millions in "Treasury currency" and & deorease of $58 millions in "non-member de- posits and other Federal Reserve accounts". Most of these factors will be of little importance over any considerable period. Unless a considerable volume of funds now frozen in the Federal Reserve Banks are used to purchase securities (which would tend to increase excess reserves via & decrease in "non-member deposits"), the only one of them which 1s likely to exert a continuing influence between now and Christmas is money in circulation. There is no reason, there- fore, on the basis of the experience of the last two weeks, to set aside Mr. Roelse's estimate of the probable decrease of excess reserves of all member banks between now and Christmas. Mr. Roelse estimated that excess reserves of New York City banks would decrease by about $250 millions between November 5 and December 24, Actually, they have increased by $192 millions during the first two weeks of this period. Most of this increase is probably due to the decrease in the Treasury balance during the period, but the proportion due to this cause cannot be estimated with any degree of accur- acy for a portion of the banking syatem. Mr. Roelse's estimate for the entire period to Christmas 1e predicated upon 8 continuation of the outflow of funde from New York which has been going on for over a year. Dur- ing the two-week period, there was sotually an inflow of Secretary Morgenthau - 3 funds to New York, but this may well have been merely a temporary interruption of the long-term tendency. In the case of excess reserves at New York also, therefore, it seems too early to appraise Mr. Roelse's forecast. II. Changes in Interest Rates Short-term interest rates firmed while long-term rates continued to decline between the announcement of the in- crease in reserve requirements and its effective date. Since the effective date, short-term rates have continued to harden, while long-term rates have also risen elightly. This 1s shown in the following table which compares the yields of three Treasury securities of widely varying maturity classes as of September 23, November 1, and November 26, respectively: Changes in Yields of Treasury Securities September 23 - November 26, 1941 Sept. 23 Nov. 1 Nov. 26 (Percent) 2-1/2's of 3/15/56-58 2.15 2.08 2.11 3/4's of 9/15/44 .60 .72 .80 91-Day bills (Average yield .04 .07 .27 of last issue) What will be the future tendency of rates is hard, as always, to predict. If excess reserves at New York follow Mr. Roelse's forecast, it 1s likely that short rates will continue to firm. Whether such a tendency would spread to long rates 1s more questionable. The Federal Reserve Board appears to believe that it will not. It 18 interesting to note, however, that in 1937, when the Board held a similar expectation, long-term bond prices finally broke sharply after continuing strong for three months, during which short-term securities had been acutely weak (Chart II). Attachments Regraded Unclassified EXCESS RESERVES AND INTERBANK DEPOSITS DOLLARS DOLLARS BILLIONS BILLIONS 7 7 6 6 EXCESS RESERVES, ALL MEMBER BANKS 5 5 DOMESTIC INTERBANK DEPOSITS, N.Y.C. BANKS 4 4 3 3 EXCESS RESERVES, N.Y.C. BANKS 2 2 I I 0 0 5 M J M M J $ N J M M J $ N J M 1939 1940 1941 1942 127 Office of the Secretary of the Treasury Division of Research and Statistics F-219 Regraded Unclassifie Cha II EFFECT OF PAST CHANGES IN RESERVE REQUIREMENTS ON TIBLDS OF U.S. SECURITIES 1936 1937 1938 PERCENT M M J. $ N J M M J $ M J M . all $ N. PERCENT (INVERTED) (INVERTED) Jen. 30 2015 Increase .8 Announced May I is 145 Increase Effective 1.0 1.0 3-5 YEAR NOTES 1.2 Mar. 1 1.2 10% Increase Effective April 14 15% Decrease Announced 1.4 Effective 1.4 April 16 July 14 1.6 nos Increase 1.6 Amountion Amg. 16 BOS Incresse 2.4 Effective 2,4 Loss Team - TREASURY Bowns 2.6 2.6 2.8 2.8 3.0 3.0 J M M I J 5 - J M M J $ # J M - J $ # 128 1936 1937 1938 Office of the Secretary of the Trustry I 1 1 , 1 Regraded Unclass 129 CONFIDENTIAL UNITED STATES SAVINGS BONDS Comparative Statement of Sales During First Twenty Business Days of September, October, and November, 1941 (September 1-24, October 1-23, November 1-26) On Basis of Insue Price (Amounts in thousands of dollars) : : Amount of Increase Sales I Percentage of Increase : : or Decrease (-) : or Decrease (-) Item 1 2 : : November : October : November : October I November I October : September : over : over : over $ over : : I : October : September : October I September Series 1- - Post Offices $ 33,438 $ 31,500 $ 30.959 $ 1,938 $ 541 6.2% 1.7% Series E - Banks 62,919 60,050 53,559 2,869 6,491 4.8 12.1 Series 1- Total 96,356 91,549 84,518 4,807 7.031 5.3 8.3 Series 1- Banks 16,206 16,853 13,676 - 647 3,177 - 3.8 23.2 Series G - Banks 91,026 92,986 54,454 - 1,960 5,522 - 2,1 10,1 Total $203,589 $201,388 $182,658 $ 2,201 $18,730 1.1% 10.3% Office of the Secretary of the Treasury, Division of Research and Statistics. November 27, 1941. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States Savings Bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. Regraded Unclassified 130 UNITED STATES SAVINGS BONDS Daily Sales - November 1941 ARMEIRE MMILLIES On Basis of Issue Price (In thousands of dollars) Post Office Bond Sales Bank Bond Sales All Bond Bales Date Series I Series E Series 7 Series G Total Series I Series I Series G Total November 1941 1 $ 1,017 $ 1,750 $ 567 $ 4,201 $ 6,518 $ 2,767 $ 567 $ 4,201 $ 7.535 3 3,377 3,421 1,442 9,092 13,954 6,798 1,442 9,092 17,332 4 1,061 2,818 738 7,205 10,761 3,879 738 7.205 11,822 5 1,175 1,694 744 3,794 6,232 2,869 744 3,794 7,407 6 1,968 3.899 988 6,962 11,850 5,867 988 6,962 13,818 7 2,062 4,278 1,258 9,280 14,816 6,340 1,258 9,280 16,878 5 1,289 3,113 352 1,457 4,922 4,402 352 1,457 6,211 10 2,452 3,383 994 3.459 7,836 5,835 994 3.459 10,285 12 2,181 3,321 936 5,312 9,569 5.502 936 5,312 11,750 13 852 2,115 602 4,145 6,862 2,967 602 4,145 7,714 14 1,249 3,862 547 3,107 7.515 5,110 547 3,107 8,764 15 1,191 2,563 473 2.375 5,412 3.754 473 2,375 6,603 17 2,724 3,840 797 3,259 7,897 6,564 797 3,259 10,621 18 953 2,683 612 4,025 7,320 3,636 612 4,025 8,273 19 1,503 3,285 507 4,811 8,903 4,788 507 4,811 10,405 21 2,497 3,975 1,149 4,542 9,669 6,475 1,149 4,542 12,166 22 1,173 2,803 840 1,987 5,631 3,976 840 1,987 6,804 24 2,332 3,736 753 3.996 8,485 6,068 753 3,996 10,817 25 829 2,638 637 3.387 6,662 3,467 637 3.387 7.491 26 1,553 3.737 969 4,631 9.337 5,290 969 4,631 10,890 Total $ 33,438 $ 62,919 $ 16,206 * 91,026 $170,151 $ 96,356 $ 16,206 $ 91,026 $203,589 Office of the Secretary of the Treasury, Division of Research and Statistics. November 27, 1941. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States Savings Bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. Regraded Unclassifi 131 UNITED TRATION 9313A VETERANS ADMINISTRATION WASHINGTON OFFICE OF November 27, 1941. THE ADMINISTRATOR or VETERANS AFFAIRS Honorable Henry Morgenthau, Jr., The Secretary of the Treasury, Washington, D. C. My dear Mr. Decretary: I have had opportunity to review the economy suggestions you submitted to the Joint Committee on Reduction of Non-Defense Expenditures and I wish to congratulate you upon the excellence of your presentation. I think we all realize the problems before the country at this time in connection with the cost of government and defense and the Veterans Administration is, I assure you, exerting every 11 proper means to maintain economy in administration. Grauls Sincerely T.1 sues yours, FRANK T. HINES, Administrator. Regraded Uncl arthur T. Vanderbilt 132 Chawak, n.f. Street John Templeto Chicago, Du. 133 Eroin growared John maguire Harvard Law School Bernhard Knollenberg yab Unwersity Harry Jill Silverson + Brach 19 Rector that how york Edward S. Reid Perobacot Bldg Detroit Harley Stavens 134 Standard oil Co 225 Bush ST fan Francisco 135 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE November 27 1941 TO The Secretary FROM Mr. Blough The attached list of economists with tax experience in the Federal service (not including those in the Treasury Department) has been prepared in accordance with your request. The list, although compiled on the basis of the Directory of Federal Statistical Agencies and the National Roster of Scientific and Specialized Personnel, as well as personal knowledge, 18 not neces- sarily complete. RB Regraded Unclassified 136 Economists with tax experience in the Federal Service* Barkmeier, Joseph H. - Economist - Department of Commerce Burr, Mrs. S. S. - Senior Economist - Federal Reserve Board Colm, Gerhard - Principal Fiscal Analyst - Bureau of Budget Despres, Emile - Principal Economist - Coordinator of Information Driver, John C. - Senior Economist - Office of Production Management Dulles, Mrs. E. L. - Principal Analyst - Social Security Board Fleming, John W. - Economist - Office of Emergency Management Gilbert, Richard - Division Chief - Office of Price Administration Goldsmith, Raymond - Division Assistant Director - Securities Exchange Commission Hanson, Alvin - Consultant - Federal Reserve Board Higgins, Benjamin - Principal Economist - Federal Works Agency Hynning, Clifford - Senior Economic Analyst - Office of Price Administration Jaszi, George - Associate Economist - Federal Reserve Board Kilpatrick, Wylie - Senior Economist - Bureau of Census Krost, Martin - Senior Economist - Federal Reserve Board Labovitz, I. M. - Senior Economist - Bureau of Budget Lovass, Leslie - Economist - Tariff Commission Musgrave, Richard - Associate Economist - Federal Reserve Board Nelson, Richard W. - Division Chief - U. S. Forest Service, Department of Agriculture 137 - 2 - Rightor, Chester - Division Chief - Bureau of Census Salant, W. S. - Economist - Office of Price Administration Stigler, George J. - Consultant - Securities Exchange Commission Studenski, Paul - Consultant - Social Security Board Sundelson, J. W. - Consultant - Social Security Board Treanor, Richard G. - Senior Economist - - Tariff Commission Woodworth, Leo D. - Economist - Federal Works Agency Wynne, William H. - Senior Economist - Office of Price Administration * Not including those in the Treasury Department. 138 November 27, 1941 Dear Archie: Thank you for your letter of November 26. I assume that your inter-departmental committee is the successor to the one which was formed under Mayor LaGuardia's suspices. of course it is entirely up to you whether or not to issue & press release about the personnel of this committee. The draft which you sent me is perfectly satisfactory to me if you find it necessary to publish it. I appreciate your thoughtfulness In sending it to me. As I told you when Be last discussed the Office of Facts and Figures, I should like you to count on my complete cooperation in this vitally important job which you are doing. Sincerely, (Signed) Benry lion. Archibald MacLeish, Director, Office of Facts and Figures, Washington, D. C. FK/hkb 11/27/41 cc Thompsone Regraded Unclassified 139 OFFICE OF FACTS AND FIGURES WASHINGTON THE DIRECTOR November 26, 1941 My dear Mr. Secretary: It may shortly become necessary to announce the personnel of the inter-departmental advisory committee to the Office of Facts and Figures which we have called "The Committee on Defense Information". Should there be a news "leak" concern- ing the meetings of the Committee, the resulting stories would certainly be inaccurate. It would seem to be preferable, there- fore, to announce the actual situation in advance of any such unauthorized publication. Moreover, since the Office of Facts and Figures was established by the President to provide the pub- lic with fuller information on defense programs and policies, it would seem to me to be appropriate that the Office of Facts and Figures should keep the public informed of its organization. Since, however, the announcement involves your Depart- ment, I should like you to see the proposed release before it is made public. I should appreciate any comments you might care to make as to its form, or any other circumstances in connection with it, and therefore I am enclosing a copy of the proposed statement. May I tell you again how deeply I appreciate your cooperation in this undertaking which seems to me to be one of considerable potential usefulness. Faithfully yours, am hearth Archibald MacLeish Director, Office of Facts and Figures Enclosure The Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D. C. Regraded Unclassified 140 Statement by Archibald MacLeish, Director, Office of Facts and Figures Per Imadists Release Archibald MacLaish, Director of the Office of Facts and Figures, amounced today that an interdepartmental committee to be known as the Committee on Defense Information had been formed to advise the Office of Facts and Figures in its task of extending and improving the country's information on the defense effort. Members of the Committee on Defense Information were designated, in the care of the Departments, by their respective Secretaries) in other cases by the heads of the agencies who have elected in DOISO 18- stances to serve themselves. The personnel is as follows: James C. Dum, Adviser DEI Political Relations to the Secretary of State Ferdinand Kuhn, Special Assistant to the Secretary of the Treasury John J. McCley, Assistant Secretary of War Adlai Stevenson, Special Assistant to the Secretary of the Havy Les N. C. Smith, Special Assistant to the Attorney General Lowell Mallett, Director, Office of Government Re parts Nayne Goy, Liaison Officer, Office for Emergency Management Oscar Cex, General Counsel, Land-Lease Administration Captain Robert E. Kintner, D. 8. A., Board of Office of Facts and Figures Archibald MacLeish, Director of the Office of Facts and Figures, Chairman The Office of Facts and Figures is sharged with the responsibility, under the direction and supervision of the President, for formulating programs designed "to facilitate a widespread and accurate understanding of the status and progress of the national defense effort and of the defense Committee on Defense Information will advise with the Office of Fasts and polisies and activities of the Government". The interdepertmental Figures en ways and means of increasing the amount of public information on defense activities and policies. Regraded Unclassified 141 - 2- Mr. Mac Leish also announced that the following are now engaged in organizing the Office of Facts and Figures: Captain Robert E. Kintner, United States Army Mr. William B. Lowis, Vice President, Columbia Broadcastin System, on leave of absence Mr. John R. Fleming, detailed from the Department of Agriculture Mr. Douglas Meservey, Program Sales Manager, National Broadcasting Company Mr. Rensis Likert, detailed from the Department of Agriculture Mr. George Barnes, detailed from the Department of Agriculture Mr. Alan Barth, detailed from the Treasury Department Mrs. Delia Kuhn dr. Lowell Mellett, Director of the Office of Government Reports has accepted an appointment as a member of the Board of the Office of Facts and Figures. In announcing the organizing staff of the Office of Facts and Figures, Mr. MacLeish said, "The Office of Facts and Figures will operate principally within the government, as an intra-governmental clearing house and adviser on public information on the defense program. Its task will be to obtain additional facts and figures for the average citizen on the defense program." LUEVAN lawl ИОЛ 51 W 25 s 20170 30 Regraded Unclassified 142 NOV 27 1941 Dear Mr. President: I have the honor to recomend the appointment of Honorable Man Wood Honeyman of Portland, Oregon, as Col- lector of Customs for Customs Collection District No. 29, with headquarters at Portland, Oregon, to succeed Judge Fred Fisk whose term of office will expire on April 30, 1942. Mrs. Beneyman is sixty years of age. She was educated in the Portland schools and was graduated from St. Melens Mall and later attended Finsh School in New York. Bbb was elected a Representative to the State Legislature in 1934 and served during the regular and special seccions of 1935. Mrs. Heasyman was elected to the Seventy-fifth Congress representing the Third Congressional District of Oregon and served from January, 1936 to Jamuary, 1938. I as transmitting herewith - nomination for Mrs. Honeyman's appointment. Faithfully yours, (BSamed) 1. Worgesthaw. 32. The President, The White House. n.m.c. Handled by Hompson Regraded Unclassified 143 THE WHITE HOUSE , 194 To the SENATE OF THE UNITED STATES I nominate NAN WOOD HONEYMAN of Portland, Oregon, to be Collecter of Customs for Customs Collection District No. 29. with headquarters at Portland, Oregon, to succeed Judge Fred Tisk whose term of affice will expire on April 30, 1942. Regraded Unclassified 144 NOV 27 1941 by dear Pr. Secretary: Civil aircraft arriving in the United States from a formign port OF place are required by the its Commres Act of 1925, so mended 0.1.0. title 49, and. 177) and the regulations thereunder, to nais the first landing at an airport of entry nalses persiasion to land olse- where 10 obtained in advance tres the Commissioner of Customs, sashington, D. C. The term "civil aircraft does not include aireraft used exclusively in the governmental service of Lhe United States or - foreign country and not carrying - sons or property for commercial purposes. Therefore, military and neval aircraft srriving in the United tates are not subject to the requirement cited. Box- over, merchandise and baggage brought into the United States on such aircraft are subject to customs entry, examination, and payment of duties, if any are due, in the same manner as like merchandise and baggage brought in by other nodes of transportation. In order to assist the customs service of this Department in the enforcement of the laes which it is charged to administer, it is requested that you issue appropriate instructions to the commanding officers at U. 5, air bases and to the operators of nevel and military aircraft under your jurisdiction so that in the event any aerchandies or beggage Sa brought into the United States in military or caval airoraft, the nearest customs officer will be notified immediately and the merchandise or begance held intect until customs inspection and clearance can be hade A similar request 1a being nade of the Secretary of Var. Regraded Unclassified 145 - 2 - This Department would like advice as to any in- structions which you say issue so that the customs officers may be appropriately informed. Your coopera- tion in this matter will be greatly appresiated. Very truly yours, (Signed) Herbert E. Gaston of the Treasury. The Honorable, The Secretary of the Havy. LPJ:me 11/26/41 Regraded Unclassified 146 NOV 27 1941 MEMORANDUM FOR MR. MACK: I understand that in the past few years starts have been made at an overall study of procurement problems and policy, in an attempt better to carry out the function of Government procurement. In- stances of these are (1) A study of steel costs, prices and profits made under the direction of Admiral Peoples in 1936 or 1937; (a) 5 study of Government purchasing activities, prepared for the THEC under Admiral Peoples' direction; (8) An sconomic commentary on Government purchasing, also prepared for the Thec under the direction of Dr. Morris A. Copeland of the Bureau of the Budget (Monograph 19, TNEC); and (4) A special study of special treatment steel prices of the Carnegie- Illinois Steel Corporation (prepared in the Federal Works Agency in November, 1939). The defense program has made these studies obsolete. Starting with these reports, however, it should be possible to assemble essential data on cost and prices without which the Government is in no position to negotiate a contract with a supplier at & reasonable price. I an particularly interested in the steel industry and I should like you to prepare for me as promptly as possible a report on the situation in that Industry with particular reference to its costs and prices. I have also asked Mr. Norman Cann, Assistant to the Commissioner of Internal Revenue to make 6 similar report regarding profits in the steel industry. In addition I should like you to submit a memorandum to me indicating what steps you are taking to meet the problem of purchasing at reasonable prices during this period when, admittedly, we are no longer in 6 position to rely on the forces of competition to protect us on price. (Initialed) H. M., Jr. JJO'C.Jr/Lsw 11-27-41 Regraded Unclassified 147 November 27, 1941 My dear Mr. Hoover: I an writing to acknowledge re- ceipt of your two confidential letters dated November 25th. The informa- tion contained therein has been noted with interest. Yours sincerely, (Signed) 1. Forgenthaus and Mr. J. Edgar Hoover, Federal Bureau of Investigation, Department of Justice, Washington, D. C. Regraded Unclassified 148 11/27/41 Photostatic copies to: Mr. Foley Mr. Pehle Regraded Unclassified JOHN EDGAR HOOVER DIRECTOR 149 Federal Burran of Investigation United States Department of Justice ashtngton, D. C. November 25, 1941 PERSONAL AND CONFIDENTIAL BY SPECIAL MESSENGER The Honorable The Secretary of the Treasury Washington, D. C. My dear dr. Secretary: As of possible interest to you, information has been received from a confidential, reliable source that the Swiss Vinister, E. Traversini, Rio de Janeiro, Brazil, during July, 1941, in discussing methods of payment to effect the liquidation of Swiss frozen credits in Brazil and the proposals of the Swiss Notional Bank and the Bank of Brazil in regard to this matter, said that the Bank of Brazil suggested the liquidation of frozen Swiss credits according to the following plan: 1. In order that the Bank of Brazil can legally clear the drafts which are outstanding, it should be in a position to declare that it has received an amount of milreis corresponding to a similar amount in Swiss francs. Accord- ing to the suggestion of the Swiss National Bank, the Bank of Brazil would pay out from the milreis thus received, a sum equivalent to the required amount in dollars, while for the drawee the question would still remain open as to whether the dollars thus acquired could finally be converted into Swiss francs for an amount great enough to produce the amount in Swiss francs, of the respective drafts. 2. The suggestion of the Bank of Brazil, according to the official information of the Director of Exchange of this establishment, would consist of the following procedure: (a) The Swiss National Bank would place at the disposal of the Bank of Brazil E. sum in Swise francs to the amount necessary to cover the needs corresponding to the accumulated credits of the Swiss exporters. Regraded Unclassified 150 The Honorable - 2 - The Secretary of the Treasury (b) Against these Swiss francs, the Bank of Brazil would place at the disposal of the Swiss National Bank the sum in dollars equivalent to the amount of the Swiss francs converted at a rate of Swiss francs 4.34 to the dollar. (c) The Bank of Brazil would place these dollars at the disposal of the Swiss National Bank wherever the Swiss National Bank wished to draw upon them in the United States. According to the information received, the Swiss Minister feels that there is every reason to believe that the formula for liquidation finally adopted by the two Banks would become the compulsory method of settlement for other banking institutions of the two countries interested in the liquidation of Swiss credits. Sincerely yours, J Le. 2400ver 11/27/41 151 Photostatic copies to: Mr. Foley Mr. Pehle OHN EDGAR HOOVER 152 DIRECTOR Federal Bureau of Investigation United States Department of Justice Washington, D. C. November 25, 1941 PERSONAL AND CONFIDENTIAL BY SPECIAL MESSENGER The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: The Boston Field Division of this Bureau has been advised by Mr. Henry P. Melzer, Assistant Manager of the Foreign Department of the First National Bank of Boston, Massachusetts, that that Bank has been sending to various payees in Norway sums of money for the purpose of supporting families of seamen and others in this country. Mr. Melser stated that he had recently been informed, through the National City Bank in New York, that the Oslo Bank, through which these funds clear, has written that no more money will be paid to the payees when the remitters are seamen, unless the name of the ship of the remitter and the last voyage of the ship be given. Mr. Melzer indicated that this might be a German method of learning the movements of merchant ships. Please be advised that this matter has been discussed with the officials of the War, Navy and State Departments and in the opinion of these Departments the information requested should not be given. The Boston Field Division of this Bureau has been instructed to advise Mr. Melzer of the attitude of the Departments named. Sincerely yours, le. Hover Regraded Unclassified 153 November 27, 1941. MEMORANDUM FOR THE SECRETARY'S FILES: A meeting relative to the administration of Executive Order 8889 was held in Mr. Foley's office at 4:30 P. M. on November 26, 1941, attended from time to time by the following: Messrs. Foley (Chairman), B. Bernstein, Pehle, Dietrich, 5. K. Bernstein and Aikin for Treasury; Messrs. Acheson, Luthringer end Fisher for State; Messrs. Shea and Swidler for Justice; and :. Knapp for the Board of Governors of the Federal Reserve System. Mr. Pehle reported that the North Africa licenses had been revoked and that transactions in respect to trade with that area would henceforth be handled on a specific license basis. J. P. Morgan & Company, New York, according to Henry llexander of that firm, who had been in to see Mr. Pehle, is Lolding $9,784,000 for the French Government in respect to the servicing and amortization of the French Government 7% and 7½ issues, some of which do not mature until 1949. These funds are about sufficient to take care of both issues. Mr. Pehle said that Morgan & Company desire to execute a trust instrument, the effect of which would be irrevocably to set aside these funds for the exclusive purpose of servicing the 7% and 7% issues and paying them on maturity. To maintain their present fiscal agency rrangements with the French Government, Morgan & Company are anzious to execute the trust instrument so that if there is a change in the present French Government no new instructions with respect to the funds which Morgan & Company is holding for the bond issues would be valid. There was considerable discussion but no decision reached as to what Morgan & Company should be advised. The matter will be raised at a future meeting after it has been further considered. Mr. Pehle reported that BIS under license had been investing their funds held at the New York Federal Reserve Bank in short term bankers acceptances. While recognizing the inflationary Aspects of these operations, it was observed that they are presently confined to relatively small amounts, and it was agreed that the BIS should be permitted to continue to invest its funds in this manner. The Monetary Research Division and the Federal Reserve Board will make appropriate recommendations to the committee if at any point it. should appear ndvisable. Regraded Unclassified 154 TREASURY DEPARTMENT Washington FOR INTEDIATE RELEASE Press Service November 27, 1941 No. 28-64 The Treasury Department today issued a general license liboral- izing the freezing control restrictions with respect to certain classes of refugees who have been residing within the United States since June 17, 1940. General License No. 42, issued on June 14, 1941 freed the ac- counts of bona fide refugees who had been both domiciled and resident in the United States since specified dates in 1940. The new General License No. 42A conferred similar privileges on those refugees who could comply with the residence and other requirements of General License No. 42 but could not meet the domicile requirement. The Treasury's decision to make this liberclization was prompted by a special study of the census reports which have been filed on Form TFR-300. It was explained that because of the difficulties con- nected with obtaining immigration visas many refugees had been barred from the privileges of General License No. 42. It was also pointed out that in many other cases there was doubt as to whether the refugee could satisfy the domicile requirements of General License No. 42. It now will be unnecessary to resolve that point because such persons may take advantage of the new General License No. 42A. Attention was called to the fact that while the property of per- aons licensed under General License No. 42 need not have been re- ported on census report Form TFR-300 no such exemption was made under the new General License No. 42A. The new general license expressly states that such reports are required to have been filed. Regraded Unclassified 154 TREASURY DEPARTMENT Washington FOR ILCEDIATE RELEASE Press Service November 27, 1941 No. 28-64 The Treasury Department today issued a general license liboral- izing the freezing control restrictions with respect to certain classes of refugees who have been residing within the United States since June 17, 1940. General License No. 42, issued on June 14, 1941 freed the ac- counts of bona fide refugees who had been both domiciled and resident in the United States since specified dates in 1940. The new General License No. 42A conferred similar privileges on those refugees who could comply with the residence and other requirements of General License No. 42 but could not meet the domicile requirement. The Treasury's decision to make this liberalization was prompted by & special study of the census reports which have been filed on Form TFR-300. It was explained that because of the difficulties con- nected with obtaining immigration visas many refugees had been barred from the privileges of General License No. 42. It W&S also pointed out that in many other cases there was doubt as to whether the refugee could satisfy the domicile requirements of General License No. 42. It now will be unnecessary to resolve that point because such persons may take advantage of the new General License No. 42A. Attention was called to the fact that while the property of per- sons licensed under General License No. 42 need not have been re- ported on census report Form TFR-300 no such exemption was made under the new General License No. 42A. The new general license expressly states that such reports are required to have been filed. 0 155 P Y FEDERAL RESERVE BANK OF NEW YORK November 27, 1941 CONFIDENTIAL Dear Mr. Secretary: Attention: Mr. H. Merle Cochran I am enclosing our compilation for the week ended November 19, 1941, showing dollar disbursements out of the British Empire and French accounts at this bank and the means by which these expenditures were financed. Faithfully yours, /s/ L. W. Knoke, L. W. Knoke, Vice President. Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Enclosure Copy:vw:11-28-41 Regraded Unclassified STATE OF most AND PREMIUM ACCOUNTS (In Millions of Dollars) Week Robed Non BANK OF ENGLAND (BRITISH GOVERNMENT) BANK OF PLACE DEBITS CREDITS DEBITS CREDITS Proceeds of Net Iter. But Day. Gov't Sales of (+) or Gov't Proceeds (+) or Total Expendi- Other Total Securities Other Decr.(-) Total Expendi- Other Total of Gold Other Decr. (-) PERIOD Debite tures(a) Debits Credita Gold (Official)(b) Credita(e in Balance Debita tures (d) Debite Credite Sales Credite in Balance First year of war (8/29/39-8/28/40)* 1,793.2 605.6 1,187.61 ,828.2 1,356.1 52.0 420.1 + 35.0 866.3(e) 416.6(e) 449.7 (1,095.3(a) 900.2 195.1(e) +229.0 War period through December, 1940 2,792.3 1,425.6 1,356,72,793.1 2,109.5 108,0 575.6 + 10,8 678.3 421.4 456,9 1,098.4 900,2 198.2 +220.1 Sacond year of war (8/29/40-8/27/41)** 2,203.0 1,792.2 410.8 2,189.8 1,193.7 274.0 722.1 - 13.2 38.9 4.8 34.1 6.8 - 8.8 30.1 1941 Aug. 28 - Oct. 1 140.9 105.9 35.0 176.2 20.1 2,0 154.1 + 35.3 0.3 - 0.3 0.5 - 0.5 - 0.2 Oct. 2- Oct. 29 109.0 77.3 31.7 150.9 0.3 - 150.1 t 41.9 0.3 - 0.3 0,3 - 0.3 - Oct, 30 - Dec, 3 Des. 6- Dec. 31 1942 ENDED, Oct. 29 23.8 15.4 B-4 108.7 - - 108.7 + 84.9 - - I I - , - Nov. 5 46.5 29.2 17.3 16.2 - - 16.2 - 30.3 0.1 и 0.1 0.1 - 0.1 - 12 20.2 16.0 4.2 16.4 - I 16.4 - 3.8 0.2. - 0,2 0,1 - 0.1 - 0,6 19 29.6 20,1 9.5(f) 25.3(g) - - 25.3(H) - 4.3 15.1 - 15.1(1) I -15.1 Avenue any Expinditures Since Outbreak of Bar Transfers trye British Purchasing Commission to (through June 19,1940) $19.6 Bank of Canada for Prench dolourt England (through June 19,1940) 27.6 million That ended November 19, 1941 - million England (since June 19,1940) 43.0 million Cumulation from July 6, 1960 162.7 cillion *For anothly breakdown tabulations prior to April 23, 1941. enfor monthly breakdown per tabulations prior to October 8, 1941. (See attached shoot for other footestes) Regraded Unclassified (a) Includes payments for account of British Purchasing Commission, Britt 19h Air Ministry, British Supply Board, Minfotry of Supply Timber Control, and Ministry of Shipping. (b) Estimated figures based on transfere from the New York Agepay of the Bank of Montreal, which apparently represent the proceeds of official Brit inh sales of American securities, including these effected through direct nagitiation. In addition to the official aelling, substantial liquidation of securities for private British account occurred, particularly during the early months of the mar, although the receipt of the proceeds at this Bank eannot be 1dem ified with any accuracy. According to date supplied by the British Treasury and released by Secretary Morgentham, total official and private British liquidation of our securities through December, 1940 amounted to $334 million. (a) Includes about $85 million received during October, 1939 from the accounts of British authorized banks with Now York banks, presumably reflecting the requisitioning of private dollar balances. Other large transfers from such accounts since October, 1939 apparently represent the acquisition of proceeds of exports from the sterling area and other currently secruing dollar receipts. (d) Includes payments for account of French nir Commission and French Purchasing Cummission. (e) Adjusted to eliminate the effect of $20 million raid out on June 26, 1940 end returned the following day. (c) Includes $4.6 million transferred to de Javasche Bank account. (g) Includes 9.3 million of "overnight" items received on November 19 but not actually credited until November 21. (h) Includes 33.5 million transferred from Commonwealth Bank of Australia account and $1.0 million from account of Central Bank of Turkey, (1) $15.0 million paid, under license, to New York account. of French Paymaster General to cover exports from Les S, to French possessions in Africa. Regraded Unclassi DEBIT CARDITS Transfers IIIII 111311 to Proceeds franciers for free Official Treatment Official british a in to of 1 Net laer. Total British (+) or official Other Total Gold of For Om Per Prends Other (+) or Debite A/C Dear. (-) Total ritten Debite Credite Sales Other PERIOD Total Gold 4/0 a/c Other Credits in Deer, (-) A/C Debite Credite Sales First year of war Credite in Bulance (6/29/39-8/26/40)* 323.0 16,6 306.4 504.7 412.7 20,9 36.7 30.6 +181.7 3,2 3.9 27.3 War period through 36.1 30.0 6.1 + 4.9 December, 2940 477.2 16,6 460.6 707.4 534.8 20,9 110.7 41.0 +230.2 97.9 14.5 43.4 62,4 Second year of was 50.1 12.3 + 4.5 460,4 - 460.4 462.0 246.2 3.4 123.9 68.5 + 16 R2 10.2 Ave. 28 Oct. 1 23,1 - 23.1 52.2 E.S 21,2 81.2 62.9 18.3 + 9.0 - - 31.0 +29.1 1941 20.7 0.5 10.2 2,8 2.1 0.7 - 7.9 Oct, 2- Oct. 29 37.4 - 37.4 19.7 11.9 - N Oct, 30 - Dec. 3 7-8 - 17.7 8.2 5.5 2.7 8.0 5.9 2.1. + 0,2 Inc. 6- Dec. 31 1942 WEEK ENDED: Oct. 29 16.8 - 16.8 3.9 2.7 - - 1.2 - 12.9 0,2 Il 0,2 Nov. 5 9.0 0.1 0.3 - 8.9 6.1 3.2 0.3 + 0.1 I 4 2.0 - 2.9 2.1 12 8.0 - 8.0 4.5 3.6 . 2.1 0.9 0.5 el - - - 3.5 0.1 0.5 - 1.6 a 0.1 6.2 5.6 19 0.6 12,7 12,7 3.2 2.1 + 6.1 . IN - 1.1 - 9.5 3.5 3.5 AL 0.7 - 0,7 2.8 Weekly Average of Total Debits Since Outbreak of Mar Through November 19, 1941 1 7.5 million # For monthly breakdown see tabulations prior to April 23, 1941, - For monthly bre breakdown see tabulations prior to October 8, 1941. Regraded Unclassified TREASURY DEPARTMENT 159 INTER OFFICE COMMUNICATION DATE November 27,1941 TO Secretary Morgenthau Mr. White FROM Subject: British Film Settlement Appended is the information you requested on the settlement the British Government has made with American film companies operating in England. The following are the outstending points in the agreement: 1. Transfer of scoumulated sterling balances. a. The 8 agreement companies may, as & group, transfer 50% of the blocked sterling held on October 26. The transfer may be made in 2 in- stallments, on October 30, 1941 and on April 1, 1942, the 2 installments to be equal except that the first will be an estimated amount subject to correction in April. Sir Frederick estimates the blocked sterling accounts to amount to $40 million, of which $20 million will be transferred in the 2 installments. b. The non-agreement companies may also transfer 50% of their blocked sterling. Sir Frederick has estimated their blocked funda at $1 million. 2. Transfers of revenues for the film year, October 27, 1941 to October 26, 1942. &. The agreement companies may by means of transfers at the end of each quarter transfer up to $20 million during the year. This amount will be reduced, how- ever, by the agreement made by Warner Brothers, on the occasion of their purchase of British cinema properties, to leave 3. substantial portion of their revenues in sterling. b. The non-agreement companies may transfer that amount of their revenues that will make the propor- tion of transfere to revenues equal for the agreement and non-agreement companies. 3. The companies are to make no substantial change in their arrangements for distributing films. Regraded Unclassified THE BRITISH SUPPLY COUNCIL IN NORTH AMERICA 160 Box 680 TELEPHONE: REPUBLIC 7860 BENJAMIN FRANKLIN STATION WASHINGTON, D. c. PERSONAL 17th November, 1941. My dear White, You asked me the other day for further details about the new Film Agreement. I now enclose copies of correspond- ence between Mr. Winant and SirMingsley Wood, which have just reached me, and which give the whole story, 50 far as I know it. If there is any additional information which you need, you mignt be able to get it from the State Department, who will no doubt have received a report from your Embassy in London. So far as I know the exchange of letters has not been published, and as I do not know whether or not it is intended to make them public, I must in the meentime ask you to treat them as confidential. Yours sincerely, (.T.K, Bewley) Dr. H. D. White, Director Monetary Research, United States Treasury, Washington, D. C. Regraded Unclassified COPY 161 22nd October, 1941. My APAF Ambassador, Thank you for your letter of October 19th informing se that the eight American Film Companies concerned accept the Tressury's proposal. I confirm that the arrangements set out in the first paragraph of your letter also apply to the non- Agreement Companies, except that in their case the amount to be transferred in respect of the 1941/42 Film Agreement year is the amount equivalent to the same proportion of their sterling revenues available for remittance as would be represented by the transfer of 20 million dollars in the case of the Agreement Companies. The procedure (which is of course not quite the same as that in respect of the Agreement Companies) will be similar to that which has 0,7 lied heretofore, it being of course understood that the Companies for their part make no substantial alteration in the general arrangements whereby films are distributed in this country. I approve the terms of the draft Agreement for 1941/42 and, ir it suits Mr. Allport's convenience, it could be signed at the Treasury tomorrow. Perhaps he could be good enough to get into touch with my Private Secretary to let us know what time would suit him. I agree to your suggestion that the Agreement Companies should transfer on October 30th, 1941 an amount representing ne-half of the amount provided for in Article 2 (a) (11) of the Agreement, subject to subsequent adjust- ment if necessary as you progose. The payment to the non- Agreement Companies would be made as soon as the necessary calcul tions can be made, I understand that Mr. Allport will make application to the Bank of England on behalf of the Agreement Companies concerned for the transfer of sterling into dollars, and the Bank of England will make the dollars available to Ar, All port or to such persons as he may designate without delay. I think you KNOW that when Warner Brothers bought their sharebolding in a cinema owning Company in the United Kingdom it was agreed that they would surrender to the Treasury a substantial part of their share of any global dollar allocation which might 00 agreed for the year 1941/ hi, and accordingly the aggregate transfers which will be provided against the global alloction will fall short of 20 million dollars by the amount arranged with Warner Brothers, I note with pleasure that you will be ready to Ciscuss the wider questions of future films policy mentioned st the end of my letter of October 4th. We con return to this at a convenient moment. Finally I should like to say how glan I am that this question has been 50 satisfactorily settled and to express my thanks to you for all the help which you have given to me in bringing the negotiations to a quick conclusion, which is what were both desired. Yours sincerely, (Signed) KINGSLEY WOOD. fis Excellency The lion. J.O. Winant Regraded Unclassified COPY 162 EMBASSY OF THE UNITED STATES OF AMERICA, London, England, (W 12586/37/49) 19th October, 1941. Dear Chancellor, In reply to your two letters of October fourth and eleventh respectively with regard to the new Film Agree- ment for 1941-42, I have received word that the eight American Companies concerned therewith accept the Treasury's proposal that : (a) the transfer of 50 percent of their' blocked sterling as on October 26, 1941, will be permitted In two equal instalments, the first on October 30th next and the second on April 1, 1942, and (b) for the film year from 27 October, 1941, to October 24, 1942, the Agreement Companies will be permitted to transfer $20 million; such transfers to take place at the end of each quarterly period. It is understood that the preceding arrangements also apply to the Non-Agreement Companies, except that in their case the amount to be transferred in respect of the 1941-42 Film Agreement year is the amount equivalent to the same proportion of their resources available for remittance as would be represented by the transfer of $20 million in the case of the Agreement Companies. In accordance with our conversations, the Agreement Companies understand that the text of the new Film Agreement will contain the same provisions as were embodied in last year's Agreement except for the Insertion of the new transfer figures and the required change in dates. For your approval, I am attaching a draft of last year's Agreement with losed) the necessary alterations to conform with the new _ngements 100 agreed upon between us. The amount of the unremittable balances held by a) the Agreement Companies as of October 26, 1941, probably + cannot be finally determined before October 30th next. Might I, therefore, suggest that the Agreement Companies be permitted to transfer, by October 30, 1941, in one lump sum, an amount representing one quarter of their estimated 1939-41 unremittable funds. If it was subsequently found that the total sum thus transferred was less than the amount the Companies were permitted to transfer by October 30, 1941, an immediate transfer of the difference could be made, leaving the remaining quarter of their balances - unremittable prior to October 26, 1941 - to be trans- ferred on April 1, 1942. I have suggested to the Companies that their estimate of the total emount for transfer on October 30th next should be calculated conservatively so that there would be no danger that the October 30th transfer will exceed the proportion of the total sum upon which we have agreed. Should this procedure meet with the Treasury's approval, arrangements could be made to obtain from the Agree- ment Companies here the sterling equivalent of an estimated sum representing one fourth of their unremittable monies for the film years November 1, 1939, to October 25, 1941, inclusive; the dollars representing this lump sum could then be transferred under the authority of the Bank of England to such recipient in the United States as may be requested by the Companies, In view of the brief time before the end of this month, I would appreciate any assistance you may see fit to give to ensure that the permit for transfer is obtained to enable the dollars to reach the Companies by October 30th next. /In The Right Hon. Sir Kingsley Wood, M.P. The Treasury, Whitehall, S. W.I. Regraded Unclassified 163 In accordance with the arrangements followed in the past two years in respect to the form- lities connected with the acceptance by the Companies of the new Agreement, Mr. F. W. Allport, Foreign Represen- tative of the Motion Picture Producers and Distributors of America, Incorporated, will be prepared to sign the Agreement on behalf of the eight Companies, as soon as the Treasury indicates an agreeable time for this final procedure. I hope the suggestions outlined above will meet with your approval. In connexion with the last paragraph of your letter of October 4th, I shall, of course, be glad to discuss with you, at your convenience, the diffi- culties which you envisage. I also want to take this opportunity to let you know hom much I have really appreciated your co-operation and your readiness to meet the view advanced by my Government. Yours sincerely, (Signed) JOHN G. WINANT. Regraded Unclassified 164 COPY (W 12285/37/49) Treasury Chambers, S.W. 1. 11th October, 1941. My dear Ambassador, With regard to the two points you raised with me about my letter of the 4th October on films; (1) I readily agree that the first of the two equal instalments referred to in the first paragraph of my letter should be paid on the 30th October 1941 instead of on the 1st November 1941. (2) In view of what you said to me, I agree to withdraw the suggestion made in the third paragraph of my letter of 4th October. I ought also to take the opportunity to explain that the first paragraph of the letter was intended to provide for 50 percent of the blocked sterling being transferred to the Agreement Companies as a whole, and not as entitling individual Companies to transfer in each case 50 percent of the balance accumulated by that Company. I understand that in the case of the Agreement Companies the sterling balances vary from something very small to very considerable sums and it is essential that the arrangements should be interpreted as applying to the Agreement Companies as a group and not to each individual Company. Yours sincerely, (Sgd.) Kingsley Wood. His Excellency The Honourable J. G. Winant. COPY 165 TREASURY CHAMBERS, 4th Dotober 1941. My dear Ambassador, Films. I have promised to put into writing the settlement which WO have discussed. My proposal in that both the Agreement and the non-Agreement Companies should be entitled to transfer 50% of the blocked sterling as on October 26th, 1941, in two equal instalments, the first on 1st November, 1941, and the second on the 1st April, 1942. AB regards the Film Agreement year 27th October, 1941, to 26th October 1942, the Agreement Companies would be entitled to transfer up to $20 millions and the non-Agreement Companies to transfer the same proportion of their resources available for remittance BD would be represented by the transfer of 320 millions in the case of the Agreement Companies. Transfer would take place at the end of each quartarly period. Sterling not available for transfer under this arrangement would be placed in separate banking accounts in the name of the Companies, the operation of which will be subject to Treasury permis- sion, it being understood that such permission will normally be granted without question for payments in the normal course of business of the Companies. Not contingent on these paymente but as BL separate matter I hope that it will be possible to discuss the wider questions of future Films policy about which I spoke to you. AB you know, I feel strongly that in the true interests of both parties there should be co-operation in an attempt to frame a constructive policy designed both to build up an efficient British film industry and to develop in our Gommon interests by mitual help the aggregate market for English speaking pictures. AS you know, the offer which I am making to you imposes a serious charge on our very limited dollar resources, while the large and growing business which the American Companies are doing here seems likely to create a post-wer liability which you and we will find outbarrassing. These are matters which I should like to discuss further with you in due course. In the meantime I have thought it right, despite those facts, to put forward my offer now in view of the importance attached by the President and the Secretary of State to a speedy adjustment of the immediate situation. the Yours sincerely, 1001 von (38d.) KINGSLEY WOOD. file street Inc. winant. Regraded Unclassified THE BRITISH SUPPLY COUNCIL IN NORTH AMERICA 166 Box BRO TELEPHONE REPUBLIC 7860 BENJAMIN FRANKLIN STATION WASHINGTON. a c. 22nd October, 1941. My dear Dr. White, I promised to send you a line on the subject of the settlement with the U.S. motion picture Industry. I have not got any very up to date figures but I gather the receipts of the companies in the U.K. have passed a figure of $50 millions a year, and that the amount they expend in sterling in various ways is equal to about $15 millions, leaving a balance of upwards of $35 millions. In the year to October 1940 we allowed them to remit $18 millions, and the year to October 1941 we allowed them to remit $12.9 millions, but promised that they should have a better deal later on. In the recent discussions with Mr. Winant the Chancellor of the Exchequer agreed that in the year to the 26th October, 1942, the agreement companies would be entitled to transfer up to $20 millions, and the non-agreement companies to transfer the same proportion of their resources available for remittance as would be represented by the transfer of $20 millions in the case of the agreement companies. The transfer would take place at the end of each quarterly period. The non-agreement companies are not very important and I think probably $20.5 millions in all would cover the amount to be remitted under this part of the agreements. Sterling not available for transfer under this arrangement will be placed in separate bank accounts in the name of the companies, the operation of which will be subject to Treasury permission. AS a result of the working of the agreement since the outbreak of war there is some 610 millions accum- ulated in the hands of the companies. The Chancellor of the Exchequer agreed that he would allow the companies to transfer Dr. H. D. White, Director of Monetary Research, United States Treasury, Washington, D. C. Regraded Unclassified 167 -2- 50% of this across the exchange in two equal instalments, one on the 1st of November 1941, and the other on the 1st of April, 1942. Yours sincerely, Hhillips 1681 150 - - 168 foreiber 87. 1941. Federal Recorre Balk of Sev Term, 33 Liberty street, Yes York, Bev Terk, dentlement Attention: Mr. L. 5. Easts Inference to made to year letter of November 26, 1941. enclosing copies of letters of the Irving trust Company, Sev York, the Carro de Passe Dayper Corporation, Today s Serves and Trust Company of Nev Terk, all of which relate to the emmellation of the fellowing contracts catered tate w the Irving treet Company, covering the yes. chase of silver free the Carve 4a Pages Copyer Corporation, yourself se authorizations received from the Federal Reserve Bank of Sev Terk, as fissel agest of the United States: Date of Purchase Authori- Renker of Purchase settes I Relivery 7/29/41 D 910 100,000 8/1/41 D 911 200,000 200,000 . 5/1/42 D 922 8/1/42 D 913 100,000 - . 5/1/h1 D 925 200,000 . 8/19/41 , 917 100,000 900,000 M leaty & Karnen 10 is and of the silver to order to place 11 at the disposal of the Guaranty trust Company of New York for estange yeryears, the Treasury, to view of the statements usle is the letters of Ready a form, Decreaty Trast Company of You Term at Cerre de Passe Coppor Corporation, is agreeable to the consollation of the above contioned contracts. the Toteral Reserve Bank of New York, no fissal agent of the Valted States Le hereby authorized to caseel the above mentioned contracts. Regraded Unclassified 169 - 2 - In competion with the consollation of outh contracts there so enclosed a draft of & Letter which you are authorized to mid to the Irving Trust Company. Very truly years, (Signed) D. W. TELL Secretary of the Treasury. FD:dm:11/27/41 but FD. FH- VFC-ESS.MNT Regraded Unclassified 170 carry I Invoice 15, 1941. Phone Irving trast Company, few Tesk, N. 1. Street 1 á I I "mit i 1 I = I E Intere s 1 s BL I enclosed a one of the letter of the - date from term de Paste degues Corporation, New York city. to m end 6 orgy of a letter dabed Devember a. 1941, from Mady & New York, to Carve " Passe Capper Corporation, and to the letter of November 26, 1941, from Marky 6 - w this bank. is your letter you request w be informer to arreage too the time of sentrate vhich you mis yourself to authorizations tree this both as fincel agest of the United States, with Serve " Passe Copper Corpora- tim for the delivery in I and Incomber, 1942, of 900,000 - of cilver -999 fine as failows: Purchase - r I 7/29/41 D October-Sevember 5/1/41 3 I 6/1/01 D 1 # 8/1/41 3 5/1/41 3 e 5/19/91 9 state 10 appears tree the my of the letter dated Devember n, 1981, and free the letter of November 25, 1941. from Heady a Issues that 10 to in urgent ased of silver for delivery w - of the United States size to fill 6 cotange order for a frically masson, and will pay the comissious - to brobers and basks is respont of the original contracts and will - - silver only to neet the requirements of its coinage order at as addre prodit, and state 11 appoars tem the lotter dated November a. 1941, from Caree to Passe Copper Corporation that 10 will sail the silver to Mady 4 threen at the price of 39 conts per - -999 fine the delivery in Inventor and 1 x é 3 $ I i a Provent tracts. Acceptingly, we, as fiscal agent of the United states, authorise and request pen to effect the concellation of - extracts. Very truly yours, Copyromk:11.87.41 Regraded Unclassified 171 Treasury Department Division of Monetary Research Date 12/6/41 19 To: Miss Chauncey I think the Secretary might take a quick glance at the appended letter to Secretary Hull (top page) merely for his information. MR. WHITE Branch 2058 - Room 214 \ 172 TREASURY DEPARTMENT WASHINGTON DIVISION OF MONETARY RESEARCH November 27, 1941 Dear Mr. Secretary: I an sending to you herewith, for transmission to the Cuban Government, the first renort of the American Technical Mission to Cuba. This report deals only with certain immediate problems. The Mission's recommendations concerning Cuba's long-term monetary and banking requirements will be the subject of a later report now in prepara- tion. Sincerely yours, /s/ H. D. White H. D. White, Chief, American Technical Mission to Cuba. The Honorable The Secretary of State. Enclosure FORDEFENSE BUY UNITED STATES SAVINGS BONDS ARD STAMPS Regraded Unclassified 173 American Technical Mission to Cuba FIRST REPORT TO THE CUBAN GOVERNMENT November 26, 1941 Personnel of Mission G. A. Eddy, Treasury Department W. R. Gardner, Board of Governors of the Federal Reserve System F. Á. Southard, Jr., Treasury Department H. R. Spiegel, Treasury Department G. B. Vest, Board of Governors of the Federal Reserve System H. D. White, Chief of Mission, Treasury Denartment Regraded Unclassified CONFIDENTIAL 174 AMERICAN TECHNICAL MISSION TO CUPA The American Technical l'ission to Cuba is bleased to submit the following report. The :ission wishes, before presenting concrete pronosals, to ex- nress its avoreciation of the generous assistance extended it by those persons with when it worked, and to cite their contribution to the new program. During its sojourn in Cuba, the Mission was impressed by the understanding and constructive attitude of Cuban Government officials - narticularly in the Department of Finance - and of a number of private individuals and organizations in Cube, regarding Cuba's financial problems and possible means of solving them. In this initial report to the Cuban Government, the Mission under- takes to deal only with measures designed to meet the immediate situztion, most of which were discussed in the meetings of October 30 and 31; 1941, in Habana. The suggestions which it offers at this time for considera- tion by the Cuban Government are not intended to foreshadov or govern in any way the mein report which the llission will presently subrit with regard to measures of 2 more permanent character. While it is believed that the neasures proposed in the present report will all ten! to facilitate adoption of the long-term program, some of them may have to be considerably modified or eliminated entirely when the permanent machinery is set up. The numoses of the sugrestions for immediate consideration are: (1) To accumulate an official reserve of foreign exchange by utilizing the growing strength of the neso; Regraded Unclassified 175 - 2 - (2) To supply sufficient Deso currency to meet the needs of Cuban circulation during the coming sugar-grinding season without the reintroduction of dollar currency; and (3) To increase the banks' capacity to lend nesos in order to enable them more adequately to meet Cuba's growing credit needs. If no stens are taken in time, it seems likely that the present very small discount on the Deso may disappear within the next few months, as a result of the foreign exchange demand for Desos, and that dollars will be drawn into internal Cuban circulation. The Mission believes that it would be preferable for any dollar currency which is brought into Cuba to be accumulated in an official peso stabilization reserve than to be dissipated into general cublic circulation. An official reserve of gold or dollars would be most helpful in the initiation of any long-run program of Cuban monetary reform. Such a reserve would heln stimulate public confidence in the peso and enable the Government to aid in maintaining stability of neso exchange. The following detailed suggestions for obtaining the above objec- tives are submitted for immediate consideration. (1) The Mission recommends that the Cuban Government undertake to maintain & slight discount on the peso (or, conversely, a slight premium on the dollar) by ourchasing gold or dollars at some appropriate price. The oremium on the dollar should be only large enough to mind- mize the use of dollars for internal Cuban circulation yet not so large as to disturb confidence in the neso. It is tentatively suggested that Regraded Unclassified 176 - - this premium may be set at some noint between 25 cents and two dollars per 100 dollars. It is possible that the desired exchange premium on the dollar could be naintained merely by withholding from the market an conropriate amount of dollars received by the Cuban Stabilization Fund from sugar exports. If it should be necessary to acquire more dollars than are available to the Fund in this manner, they could be purchased in the exchange market, Methods of obtaining pesos for these operations are discussed in section (2). The legal authority for the Government to buy, hold, pledge and sell gold and dollars should of course be clearly established. Sale of the gold or dollars accumulated in the reserve should be made solely for the purpose of aiding in maintaining the stability of the neso in the foreign exchange market. The task might be made easier by public announcement of this nolicy. The precise level at which, and the circumstances under which, the neso will be supported should not be announced at this time. Appropriate policies to nursue in promoting stability of the meso will be discussed further in the Mission's final report. In the interim, should the Cuban Government desire any further consultation regarding such policies, the Lission will be glad to be available. (2) The pesos to be used to Day for the dollars accumulated in ac- cordance with section (1) may be obtained in several possible reys: (a) The Cuban Government might borrow pesos from the banks in Cube, offering the accumulated dollars as collateral for these loans. Regraded Unclassified - 4 - 177 A relaxation of reserve requirements, as recommended in section (3), should facilitate such loans. On the basis of preliminary discussions, it is believed that at least some of the banks in Cuba would be willing to consider such loans. Since the collateral consists of dollar balances, it is assumed that the rate of interest should be low. The number of dollars purchased with the borrowed pesos would, of course, be less than the number of Desos by the amount of the premium on the dollar. Should the banks insist upon having the loans completely teralized, the Cuban Government could, if it wished, make un the very small margin in either of two ways: (i) Make some of the proposed purchases of dollars with Treasury neso funds other than those borrowed from the banks for this nurpose and pledge the dollars as additional collateral; (11) Keen nort of the Treasury's Deso working balances on doposit in the lending banks. The non-borrowed funds required would be about the same under either method and would be relatively insignificant, cmounting to the 1/4 to 2 percent of the Deso bank loans which would not be covered, dollar for peso, by the purchased dollars. The amount borrowed from the banks would be slightly less under the first method. It should be noted that the arrangement suggested in this section could be put in effect without waiting for new currency. (b) The Government might issue peso currency & goinst & full- value reserve of gold or dollars. Regraded Unclassified 178 - 5 - The precise amount of pesos to be issued might correspond either to the par value of gold or dollars accumulated by the Government, or to the premium price at which the dollars are purchased in accordance with section (1) above. In the first case, 100 Desos would be issued against 100 dollars or the equivalent amount of gold at 035 per fine ounce. In the second case, 100.25 to 102.00 Desos would be issued against 100 dollars or the equivalent amount of gold, depending unon the price selected in section (1). If nesos are issued against dollars or gold only at their par value, a smaller amount of pesos will be issuable against the accumulated reserve than will have to be paid for the gold or dollars at the premium price, Whether greater confidence would be created by having the reserve in actual gold rather than in dollars is a matter which the Cuban officials are better able to decide than is the American Mission. Any dollars accumulated by the Cuban Government can be used to purchase gold from the United States if the Cuben Government complies with the United States regulations regarding gold. The United States Government, however, charges 1/4 of one percent for purchases or sales of gold. If it would facilitate the issue of nesos against gold for the purposes outlined in this section, the United States Stabiliza- tion Fund would be willing to sell gold to the Cuban Government on credit provided that the aggregate amount of gold for which payment has not been mede does not exceed $5 million at any one time, and provided that the Cuban Government issue no notes against this gold in excess of the cost thereof. The United States Stabilization Fund Regraded 9 I I 179 would assume that the dollars purchased with the pesos issued against such gold would, as soon as practicable, be used to pay for the gold. Whenever it is considered advisable to sunnort the peso on the foreign exchange market, the Government should use such part of its reserve of gold or dollars as seems appropriate to buy Desos, thereby aiding in stabilizing the foreign exchange value of the neso. The pesos received by the Government in this process should then be applied to reducing the bank loans incurred under section (2)(a) and to retiring beso currency issued under section (2)(b), Power to issue new currency for the purchase of gold or dollars is c desirable alternative device for the Government to nossess. It should, however, be employed in such manner as to avoid creating unnecessarily large bank reserves. (3) The Mission recommends that the Treasury, pending further developments, reduce from 56 percent to a nominal figure the percentage of their legal reserves which the banks must hold in pesos, and also that consideration be given to making balances abroad in specified banks eligible as reserves. The purpose of these recommendations is to enable neso currency now irmobilized in the banks to be used to meet the seasonal demand for currency during the coming sugar season and to increase the capacity of the banks to expand their naso loans and to carry larger deposits in either dollars or nesos. How great the withdrawals of currency from the banks will be next winter is, of course, impossible to fore- cast with certainty. The Mission has received tentative estimates Regraded Unclassified - 7 - 180 that run as high as 20,000,000 pesos. While this would be extremely large in relation to any previous seasonal increase it annears to be at least a possibility in view of the anticipated increased value of the coming sugar croo. In addition, if deposits continue to grow CS they have for the nest year, the required reserves of the banks will be increased. Since dollars are to be kent out of circulation, both the withdrawals of currency from the banks and the increase of required reserves will reduce the 7,000,000 of excess neso reserves renorted held by the banks in Cubn on Sentember 30, 1941. It is clear that this 7,000,000 besos, some of which the banks must hold for their own working purposes, may be quite inadequate to neet the seasonal demands unless legal reserve requirements are reduced or new currency is issued in adequate volume. In the absence of such measures the banks might be forced to take restrictive action. The Mission believes that the Government will find it possible to finance its purchases of dollars by utilizing the existing Deso resources of the banks only if it frees neso reserves in sufficient volune to meet the winter demands with ease, If, on the other hand, the Government were to rely almost wholly on new note issues to finance its nurchases of dollars it is possible that bank reserves, increased by the new issues, might be large enough to meet the winter demands without a reduction of existing reserve requirements. This would not necessarily be the case, however, and the Mission therefore recormends that as a first ston, and until the situation has developed more clearly, reserve requirements should be relaxed. - 8 - 181 Reduction of the 56 percent requirement alone might prove unovniling if the banks were unwilling to transfer dollar currency from New York to Habana. Most of the reserves in Habana, as the attached tables show, are already needed to complete the required reserve of 25 percent against total peso and dollar deposits. There are at present only about 2,000,000 of free dollar reserves in Habane; hence elimination of the 56 percent requirement without importation of dollars by the banks nould add only 2,000,000 DESOS to the existing 7,000,000 of excess peso I'U- serves, making 9,000,000 posos in all. If the banks cro pronered to bring dollars to Habena, it is esti- mated that a maximum of 10,000,000 pesos could be freed, over and above the 9,000,000 mentioned above. This is based on information offered the Mission to the effect that banks would deem it advisable to hold working peso cash reserves of about 15 percent of peso deposits (or about 11 million nesos) even in the absence of legal requirements. Some of the banks, however, might be reluctant to move lorge anounts of dollars to Habana. For this reason and because of the cost of shipping large mounts of currency, the !lission suggests the possibility of re- defining legal reserves so L5 to include balances in banks abroad snecified by the Cuban Government. The excct Deso reserve requirement to be specified in the nov. ruling is, in the view of the Mission, properly left to the ducision of Cuban officials. In order, however, to provide the maximum of freedon to the banks in their use of their present peso reserves the Mission considers that the peso reserve requirement should be nominal Regraded Unclassified - -9- 182 even though the banks would apparently want to hold 10 to 15 percent of their peso deposits in readily-available peso cash for their own protection. It would be helpful in encouraging the banks' expansion of loans if definite indication were given by the Government to the banks that the new reduced requirements would not subsequently be revised unward until adequate notice had been given them by the Government. (4) A considerable supply of neso currency should be ordered from the printers immodiately. Net additional amounts of notes are needed for the measure suggested in (2)(b). Fresh currency (but not & new addition) is also needed to renlace the excessively worn notes now in circulation and to make change for larger denomination notes. It is understood that the Cuben Government now has ovailable only 4 million of unissued notes. However, the new notes obtained for these two purposes should not exceed the amount estimated to be necessary during the period before the new program can be put into effect. Khether or not the currency issued under (2)(b) can be of the same type as that used to replace worn notes is D. question which should be given early consideration by the Cuban Government. There is conended to this report & note setting forth in some detail certain facts relating to the provision of new currency notes. There tre also attached some statistical tables which have been compiled from material mde available to the Lission. It has not been possible to verify all of those data but the figures cited in certain portions of the report have been in large part drewn from the tables and they are therefore added CS of nossible interest to the Cuban Government. rded i - 10 - 183 In concluding this report we wish to point out that the recommenda- tions subritted can in almost all cases be modified to meet particular Cuben conditions, but choice among the possible alternatives and supges- tions as to modifications can best be made by Cuban officials familier with the local problems and conditions. The lission would be most willing to discuss the recommendations and possible changes in then whenever the Cuban Government desires in such place and manner as can be nutually agreed upon. Furthermore, the Mission would be glad to work out jointly with the Cuban Government any mutually satisfactory statement to be published under the name of the American Mission, the Cuban Government, or both, if the Cuban Government feels it would be desirable in introducing the program to the Cuban public. November 26, 1941 184 AMERICAN TECHNICAL MISSION TO CUBA Provision of New Currency Notes (Addendum to report of November 26, 1941) Secret Service and banknote engraving emerts agree thrt badly- worn osper currency offers the ensiest opportunity to counterfeiters. Counterfeiters have great difficulty in producing new notes of sufficient quality to pass for the genuine. In the case of well-worn notes, however, only experts may be able to detect counterfeits. Most counterfeitors are said to nut out well-worn paper. Accordingly it would seem desirable for the Cuban Government to proceed immediately to improve the condition of the notes circulating in Cuba to prevent counterfeiting, if for no other reason. In the United States, paper currency of $1 donomination is replaced on the average every nine munths. There is said, however, to have been little replacement in Cuba since silver certificates were first issued seven years ago. The recommendation in section (4) of the report involves the technical tasks of holding stocks of unissued currency, of accounting for retirements, and of destroying currency after retirement. In this regard it is understood that the Cuban Treasury has set un records of each note by number. The United States does not keep such records, having found them unnecessary as well as excessively burdensone, No official use is now made of the numbers on United States currency, other then for occasional Socret Service work. The American Lission is prepared to go into the question of these procedures in nore detail if the Cuban Govern- ment desires it to dn 30, 185 - 2 - The United States Government is willing to give a Cuban order for paper priority over its own orders from the one company which produces it. The paper used for Cuban currency is identical with that in United States money except for the omission of the blue threads. Three weeks are required to make the paper if it is to have maximum durability. The Bureau of Engraving and Printing has in stock only 22,000 sheets, which make 12 notes each, of the paner purchased for the previous issues of Cuban pesos. The United States Treasury will proceed to order paper from the paper company upon the receipt of a definite order from the Cuban Government. An carly order is recommended. The cost currently is slightly under $10,000 for 1 million sheets. At the present time, all private American banknote companies are said to be operating at capacity and unable to take on now jobs. Even if they accepted a new commission, it is believed that it would take nearly & year to produce new dies. If the Bureau of Engraving and Printing is comissioned to use the original dies from which the previous issues of Cuben pesos were produced, with only minor changes, notes could be printed within a few weeks. The original dies have been preserved and there has been no deterioration in then. The two engraved signatures on the face of the notes could be changed in about three weeks after the receint of the new facsimile signatures. Shinnent of notes could begin at the end of an additional three weeks for printing. linor changes in the other wording on the notes would require a month or more to make. A new note or a new portreit or border would take as much E.B a year to produce. Official estimates of the cost of each process are now in process end will be forwarded within a few days. Regraded Unclassified 186 - 3 - Notes will last longer if they are aged from three to four menths after printing before being placed in circulation. It seems clearly desireble to nInce immedicte orders for enough silver cortificates to replace the present worn circulation, to supply more flexibility among different donominations, and to keen L reserve stock un hand for future replacement. Whether or not the present silver cortificate plates can also be used for the notes to be issued under (2) (b) is c. question for Cuban official determination and one on which the llission does not feel qualified to make E. specific recommendo- tion. It is recognized that the logend concerning c. reserve of silver nesos would not be correct. At the same time, it is known that a snr.ll amount of silver certificates have already been issued against gold. A law night conceivably permit the use of silver certificates backed by dellars or gold during the present emergency, it being expressly provided that coined Desos need not be kent in the Treasury to the extent that dollars or gold are held às reserve. If such law is not feasible it night be nossible to obtain legislation authorizing in issue of Cuben silver certificatos against United States silver dollars. The Massion believes that consideration night well be given to a large initial issuo of 100-peso notes. This would provide & form of currency suitable for bank clearings, which would be more convenient for the banks than betches of smill denomination notes. The Bureau of Engraving and Printing could turn out a given value nore quickly in 100 nuso notes then in notes of small denomination. These notes would not only finance Governmental nurchases of dollars end facilitate Regraded Unclassified 187 - 4 - clearing operations but they would automatically release the small denomination currency now immobilized by law in bank reserves. It would not be appropriate, however, for the banks to acquire more than a few million pesos of the new clearing notes until they were assured that the Government was in a nosition to convert them into smaller denomination currency in case of c. run on the banks or other withdrawals of an abnormal character. For this reason and in order to meet the needs of active circulation it is important that the Government should proceed to take the additional stens required to obtain an adequate supply of fresh small denomination notes. Table 1 JUSITION or HAMES IN 0 LA 3% VARINGE AS JE SEPTEMBER 30, (In thousands) Available reserves Excess pean reserves Deposita Togel reserves in Havanu Required 5% Assuming 50% requirement sue- Dollor of total re- reservest pended, but 15% of peso de- Bank balances 25% of quired reserves posits needed in peso cash abroad Total In pesos D. dollars total in pesose and for working purposes* In posos In dollars (August deposits counting only Counting only Counting doller 31) Inral reserves logal reserves balances abroad in Sevana in havana in reserves Royal Bank of Canada 51,088 30,380 20.707 10,229 4,300 6,042 12,772 Bank of liove Scotia 1,757 1,757 5,672 12,277 0,163 6,114 3,001 1,613 4,801 3,069 Canadian Bank of Commorce 1,362 1,025 2,477 2,157 1,156 1,320 518 428 4 619 171 National City Bank 327 30,479 331 13,415 17,084 5,331 3,595 6,635 7,625 First Mational Bank of Boston 1,061 1,301 18,407 9,561 3,319 8,846 4,002 2,468 5,260 4,602 Chase National Bank 1,425 8,254 1,868 2,568 2,939 5,315 1,954 947 1,164 2,064 H. Golats y Cia. 798 837 22,792 6,128 16,664 1,513 3,503 3,201 3,580 5,698 312 Danco del Comercio 1,086 2,047 1,187 860 2,584 517 423 365 512 Buneo Comercial 230 140 339 123 339 17 114 1 2 35 10 Banco Nuffes 10 12 2,593 2,492 101 768 138 70 618 258 258 328 Total 150,574 73,544 77,028 27,047 17,194 28,223 37.644 7,384 9,408 18,823 Insofer na dollar reserves uro insufficient to meet the runninder of the 25 por cent total requirement, pesos must make up the deficiency and count 0.5 required, rither than ca EXCUSS, reserves, 188 Regraded Unclassified Table II RESERVE POSITION OF BANKS IN CUBA OL VARIOUS ASSUMPTIONS AS OF SEPTEMBER 30, 1941 (In thousands) Total Assuming 56% requirement suspended, hut 15% of peso deposits required Assuming 56% of total required needed in peso cash for working purposes* reservest reserves in peace* and counting Counting only legal Counting dollar belances Bank 25% of only legal reserves in Pavana reserves In Havana abroad in reserves total Required Excess Required Excess Required Excess deposite Pesos Dollars Fecos Dollars Pesos 1/ Dollars Pesos Dollars Pesos 2. Dollars Pesos Dollars Royal Bank of Canada 12,772 8,472 4,300 3/1,757 o 6,472 4,300 1,757 0 4,557 8,215 5,672 2,127 Bank of Nove Scotie 3,069 1,719 1,350 1,362 263 1,456 1,613 1,625 D 924 2,145 2,167 4,269 Canadian Bank of Commerce 619 347 272 171 156 191 428 327 o 187 432 331 o National City Bank 7,625 4,270 3,355 1,061 240 4,030 2,595 1,301 0 2,012 5,613 3,319 4,617 First National Bank of Boston 4,602 2,577 2,025 1,425 443 2,134 2,468 1,869 0 1,434 3,168 2,568 4,560 Chase Nations] Bank 2,064 1,156 907 798 40 1,117 947 837 0 441 1,623 1,513 768 N. Gelats y C10, 5,698 3,191 2,507 312 774 2,417 3,281 1,086 o 919 4,779 2,584 2,082 Banco del Comercio 512 287 225 230 198 178 334 339 89 178 334 339 454 Banco Comercial 35 34 1 10 o 34 I 10 o 32 3 12 o Banco Runez 648 510 138 3/258 0 510 138 258 0 440 208 328 0 Total 37,844 22,563 15,080 7,384 2,114 20,539 17,105 9,408 89 11,124 26,520 18,823 18,897 Insofar 8.8 dollar reserves are Insufficient to meet the remainder of the 25% total requirement, pesos must cake up the deficiency and count as required, rather than 8.6 excess, reserves, Except in the case of the Banco del Comercio, ell peso cash listed in this column for individual banks must be held to meet the 26 per cent legal requirement, which requires more peso cash then the 15 per cent of peso deposits assumed to be needed for working purposes. All the peso cash listed in this column for individual banks represents only the 15 per cent of peso deposits assumed to be needed for working purposes, except that more peso cash must be held by the Canadian Bank of Commerce, the Banco Comercial, and the Banco Nuñer to meet the 25 per cent legal requirement. By transferring dollers from abroad to Havona, 1,481,000 additional peace could be released ne follows, Royal Bank of Cenade, 1,220,000 189 Banco Comercial, 14,000; Bando Nunez, 147,000. Regraded Unclassified 190 Table III PESO MONEY BY DENOMINATIONS: 1 TO 100 PESOS AS OF SEPTEMBER 30, 1941 (In millions of posos) New notes In circulation Total held by In Por cent of Donomination Fiscal In banks net issue Trocsury Amount total net Commission 2/ 2/ issuo 1 poso coins 4.2 --- * 3.3 1.0 23 1 poso notos 11.3 1/2.3 .1 2.8 6.1 53 5 " If 25.5 1,8 .1 7.7 15.8 62 10 If " 12.9 --- - 3.0 9.9 77 20 " n 13.9 --- * 4.6 9.4 67 50 If # 9.0 --- - 2.1 6.8 76 100 " " 11.0 --- 1,8 9.1 83 Total 87.8 4.2 .3 25.4 58.1 66 * Loss than 50,000 posos. 1 Excluding 1.4 million posos destroyed by the fire in the vaults, The total of 25.4 million pesos "in banks" includes .1 million posos listed by throo banks 0.6 "unclussified", but is less by 1.3 million than the total given in the monthly roport to the Treasury for the same date. Possible reasons for the apparent incompleteness of the banks' roports to tho Mission by donominations are suggested on page 2 of the Explanatory Note. Sinco bank holdings are slightly undorstated in this table, money in circulation outside the banks is slightly overstatod. Regraded Unclassified 191 Explanatory liote to Tables Required reserves of the banks can be computed 80 as to release for order purposes a maximum of peso currency or 6. maximum of dollars. In Tables I and il the computation has been so made as to releaso the masimum of peso currency since it is in this type of currency that there Is most likelihood of is shortage. In computing excess peso reserves the basic assumption is that 25 percent of total deposits must be held in pesos or dollars. This is the legul requirement that has been in effect since 1885, and it is regarded wa unchanged throughout the computations. Within this framework several assumptions LS regards other features of reserve requirements are made, In Table I it is first assumed that the Treasury maintains its present ruling that 56 percent of total required reserves must be held in posos. On this Lasis the banks had 7,384,000 pesos in excess of legal requirements on Sentember 30, 1941. It is next assumed that the 56 percent requirement is suspended and that so far as the law is concerned the banks are free to pay out all their pedus, providing they maintain a reserve in dollars in Havana equivalent to 25 percent of their total deposits. The banks did not have on September 30, 1941, however, enough dollars in Havana to free more than B. small portion of their peso reserves. Even without the 56 percent requirement they would Lave had to continue to apply the greater part of their pesoa to meeting the 25 percent requirement. Hence their pesos in excess of logal require- nents on this assumption rise only to 9,408,000. A further assumption has been made in this second oase, which is, Loweyer, practically without effect under the conditions of Suptember 30, 1941, It is assumed that even if the banks could legally free all their pesos they would have to keep some working reserves, What those reserves must You la a matter for each bank to determine; but the Mission WEB told by the banks that they would for their own protection have to keep an amount of paso nesh equivalent to 10 to 15 percent of their peso deposits even if Under were no logal reservo requirements. The assumption has therefore been made in this second case that, while the 56 percent requirement is suspended, the banks cannot let their peso cash fall below 15 percent of their peso deposits. As n. matter of fact, on the basis of September 30 figures, all the banks except the Banco del Comercio would have been forced by the requirement that 25 percent of total deposits must be held in dollar or peso reserves to hold more in pesos than 15 percent of their peso depos- its. Kence the assumption that 15 percent of peso deposits must be held in pago cash is without appreciable effect in this second CASE, In the third case, however, it is the governing assumption. The essumptions are the stame in the third as in the second case except that instead of counting only dollar reserves in Havana it is assumed that dollar bulances abroad are also included in reserves. This could be achieved without S. change in the present definition of reserves if the banks moved their dollars from abroad to Havana. Or it could be achieved by extending the present definition of reserves to includo dollar balances abroad. What- VIII the method of introducing dollars sbroad into reserves, it would, on Regraded Unclassified 192 Explanatory Notes to Tables - continued the basis of September 30 figures, set free virtually all the peso reserves of the banks were it not for the assumption that they must hold peso cash equivalent to 15 percent of their peso deposita for their own working pur- podes. The 18,823,000 pesos shown as excess reserves in the final column of the table are all in excess of this 15 percent. The contrast between this excess of 18,823,000 pesos in the third caso and the 7,384,000 and 9,408,000 pesos in the first and second cases is really greatur than it suems, In both the first two cases the banks, if they used up their so-called oxcess reserves, would be down to their legal minimums (on the 56 percent basis in the first case, and on the 25 percent basis in the second). In the third case they would be down only to their disoretionary working reserves. While the banks can dip bolow their legal minimums without penalty and have often done so, they must nevertheless plan their businoss so that such deficioncies will not become chronic. Hence they would not fuel comfortable in paying out all the GX- abss reserves shown in the first two casos. In the third cuso the whole amount of 18,823,000 pusos could bo withdrawn and still leave the banks with normal working reserves and plenty of dollars to meet the 25 percent requirement should they from time to time have to dip into their working reserves. The only banks vithout sufficient dollar balances abroad to onable them to take full advantage of the conditions assumed in this third 0480 are the Canadian Bank of Commerce, the Banco Comorcial, and the Banco Nuñoz, all of them small. A more detailed analysis of the reserve position of the banks is contained in Table II. In this table the reserve position of the banks in each of the three cases is developed in four columns instead of one. Required, 58 well as excess, reserves are shown both in pesos and in dollars. The absence of excess dollars in the second case and their abundance in the third are sharply brought out in this table. In Table III the peso cash of the banks is unalyzed by denomina- tions of from 1 peso to 100 pesos. This is to test whether the banks! holdings are suitable for general circulation. The table shows that they are. The banks' holdings are largest in the small denominations that are in sctive circulation. They are least in the 100-peso notes, the demon- inations most suitable for clearing purposes. The Banco Comorcial, which held only 41,000 pesos of cash on Sop- tomber 30, 1941, did not supply figures by denomination to the Mission, and data for the other banks were supplied at Д. time when they could not be chocked against the reports of indi vidual banks to the Treasury DE of Suptember 30, 1941. The total of all denominations for the nine banks reporting to the Mission is 1,300,000 pusos less than the aggregate shown In the regular reports to the Treasury. It may be that several of the banks in reporting denominations to the Mission failed to cover cash in tellers' tills or in branches. The proportions in the different denominations, howover, cannot have boon materially altered by the omissions. Regraded Unclassified 193 TELEGRAM S.NT DAS PLAIN November 27, 1941 AVERICAN CONSUL SHANGHAI, (CHINA) vic II. R. 1052, twenty-ocventh Your 1762, November 24 You will bE guided by the following reply from the Treasury Department. QUOTE. RE instructions of November 11, 1941 relating to General License 58 and invoices certified thereunder and re your 1762 of November 24. Philippines are included in term quote United States unquots na defined in Section 5 (b) of Executive Order 3389. Special certifi- cation procedure is applicable on invoices for Philippints. You should nots in connection with shipments from China to the Philippines that for local Philippine customs duty purposts merchandise is fraquently invoiced in starlin although pay- lents are to bE made in United States currency. This rectice is not (repent not) disapproved of, You art, Regraded Unclassified 194 -2- #1052, November 27, to AMERICAN CONSUL SHANCHAI, (CHINA) via 36. R. You are, therefore, authorized to place the special certification on invoices relating to such merchandist provided that all requirements stated in the instructions have been complied with and notwithstnnding the fact that invoices presented for certification are in terms of sterling rather than United States currency. Care should DE EXERCISED to BEE that state- NENDS from appointed banks in fact relate to the transcotions covered by invoices certified by you. In 30 doing you should ascertain that the starling values notually correspond to the dollar payments authorized. Repeat to =11 orders in China. UNQUOTE. HULL (FL) FE Regraded Unclassified o P. Y 195 BS PLAIN Tientsin via N.R. Dated November 27, 1941 Rec'd. 4:15 a.m., Dec. 1st Secretary of State, Washington. 150, Twenty-seventh. Yokohama Specie Bank circular dated November 26 notifies exporters on behalf of Federal Reserve Bank that export of local products from North China to United States of America Britein Netherlands India Hong Kong and other designated countries will be permitted from now forward provided that the corresponding import covers foodstuffs sugar oil gur products mineral goods and any other essential commodities which have already been or will surely be incorted into the northern ports in reply to en incuiry by this office the Federal Reserve Bank stated that the issuance of permits for exports to designated countries suspended since the freez- order will be resumed for non-embargoed goods except bristles and furs provided exchange has been settled against export of the above listed articles. This will allow exporters to clear shipments direct to ultimate destinations rather than to Shanghai for reconsignment as has been done since the freezing order. Sent to the Department. repeated to Chungking, Peiping and Shanghai. KIP GALDWELL ehicopy 13-2-41 Regraded Unclassified TREASURY DEPARTMENT 196 INTER-OFFICE COMMUNICATION Chaunces, DATE November 27, 1941 TO Secretary Morgenthau FROM Mr. Dietrich confidential Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns £58,000 Purchased from commercial concerns £112,000 of the latter amount, £100,000 were reported an representing the proceeds of machinery exports. Open market sterling remained at 4.03-1/2, and there were no reported transactions. The Uruguayan free peso advanced another 50 points (1/2) to close at a new high of .5025, The free peso is now quoted at a level 6# higher than the rate of October 1, when the current upward movement began. In New York, closing quotations for the foreign currencies listed below were an follows: Canadian dollar 11-1/4% discount Argentine peso (free) .2390 Brazilian milrois (free) .0515 Colombian peso .5775 Mexican peso .2070 Venesuelan boliver .2580 Cuban peso 1/8% discount There were no gold transactions consummated by us today. No new gold engagements were reported. In London, spot and forward silver remained at 23-1/2d, equivalent to 42.67#. The Treasury's purchase price for foreign silver was unchanged at 35$- Handy and Harman's settlement price for foreign silver was also unchanged at 34-3/44. We mede no silver purchases today. D Regraded Unclassified 197 SECRET COORDINATOR OF INFORMATION THE WAR THIS WEEK No. 7 November 20 - 27, 1841 No. 25 Secretary Regraded Unclassified Coordinator of Information THE WAR THIS WEEK SECRET No. 7 November 20 - 27, 1941 The crescendo of German military and diplo- matic offensives during the past week strongly suggests the hope of high Nazi circles that a last great effort will level the barriers to the con- struction of a German Europe. Russian resistance is to be broken, or seriously compromised, by the renewed offensives in north and south. The oust- ing of Weygand appears to be only the prelude to the "coordination" of France with the German system and the possible occupation of French North Africa. Seven new states have been forced to sign the Anti-Comintern Pact, among them much battered Finland. - 2 - - 3 - These initlatives have doubtless been timed the operation of the North African economic accord with the Kurusu Mission to dissuade the Japanese (in response to the ousting of Weygand), has made from any compromise unfavorable to the Nazis. lease-lend aid available to the Free-French, and Finally, the Germans are gradually unvelling the has despatched troops to strategic Dutch Guiana outlines of the "New Europe," and there are rumors from which this country draws seventy per cent of that after the new year the states of the Conti- its total bauxite requirements (1940). nent will be convened in Congress at Vienna to consecrate that system. THE GERMANS ADVANCE IN RUSSIA The new German drive against Moscow has ANGLO-AMERICAN OFFENSIVE thrown out prongs from Kalinin in the north and This broadly concelved German bid for vic- Tula in the south with the apparent object of tory on the Continent has met sharp rejoinders encircling the capital. With the forces of the from the enemy. The long prepared British offen- Nazis reported within a few miles of the city, the sive in Africa has lashed out to the west in an decision in the Battle for Moscow may be only a attempt to encircle and destroy the Axis forces In matter of hours now. the desert. The American government has suspended In the southern battlefield, despite a ter- rific Russian counter-offensive north of Rostov, Regraded Unclassified - 4 - - 5 - the Germans are still in possession of the city availability of even a notable proportion of this and have cut the main oil-transport artery between oil would give the Germans a supply for a war of the Caucasus and the heart of Russia. An immedi- almost indefinite term. The conquest of these ate danger is that the Germans will strike south- fields might be a major disaster for the Allies. eastward from Rostov and possess themselves of the Urgent Anglo-American representations were Maykop and Grozny oil fields, which lie north of ] made to the Russian government on November 21, the Caucasus mountains and are militarily far more pointing out the importance of immediate measures accessible than the fields to the south of the to prepare for the prompt eventual destruction of moûntains. the wells in these fields and offering to supply These two fields produce together some five Russian oil deficiencies during the war and the million tons of oil a year or about a third of the period of reconstruction and to provide machinery total product now available to the Axis. It is desired for replacement on at least as favorable a doubtful whether Soviet destruction could deprive basis as to other states resisting aggression. the Germans of this oil for many months, and there NAZI PLANS FOR RUSSIA Is reason to believe that even refineries could be German plans for the eventual disposition replaced within a year. In the last analysis the of occupied Russia and the Baltic countries are } Regraded Unclassified - 6 - - 7 - still veiled in secrecy but the statements in the } ideologist and Russian-speaking Balt, who becomes press suggest that Russia is to be eliminated once Reich-minister for the occupied east area. and for all as a factor in the power politics of FINIS WEYGAND Europe. In a lecture by one Professor Schuessler, After weeks of rumor and speculation, widely publicized by the German press, Communism General Weygand was removed from the African scene and Czarist imperialism are declared to be sub- ] with undramatic ease. The final blow was the stantially the same thing, and it is baldly stated result of a German ultimatum, according to Petain, that Germany contemplates the complete elimination but it reflected also opposition to Weygand in of European Russia and the control of her economic Paris and Vichy, the General's personal aide resources. declares. The head of the Vichy regime states The German press also lauds Hitler for the that he was menaced with German occupation of all reconstruction of the "scorched earth" in Russia France and military penetration of French Africa, and compares this vast task in the east to the if he failed to yield. "ploneering" of the Teutonic Knights. The immedi- Weygand himself insists that nothing is ate problem of reconstructing the administration changed, and both he and certain of his associates has been entrusted to Alfred Rosenberg, Nazi urge that American economic aid to French North ] Regraded Unclassified - 8 - - 9 - Africa be continued. But others take a different situation has suggested to some observers that ant view. One of Weygand's immediate entourage the title is being reserved for a: active col- declares that Vichy had ample means for resist- laborationist. ance, if It had wanted to use them, and that con- General criticism of Petain in government cessions have been made to the Nazis for the mill- circles is reported from Algiers, and one official tary use of Tunisia and possibly of all North resigned and tore up a picture of the Marshal in Africa. (Some color is lent this statement by the the presence of his colleagues, to whom he de- appearance of uniformed members of the German clared roundly that he would no longer serve a Armistice Commission on the streets of Casablanca six-starred mummy who was taken out of the frig- and by the landing by air of fifty uniformed and idaire by the Germans every time they needed him. fully armed German soldiers at the same place on There is no substantial reason to believe that November 22.) It is perhaps noteworthy that this is not a fair appreciation of Petain at this Weygand's exact title, Delegue General, has not time or that he will not weakly yield to the next been conferred upon either of the two new and most German demands for concessions. Indeed it le important appointees, Juin and Chatel. This reliably reported that the Marshal will soon go t. occupied France for a conference with a "hig German personage." Regraded Unclassified - 10 - = I . THE NAZIS' "NEW EUROPE" Industry by slowing down the sending of stocks and Rumors of a German peace offensive have bonds from unoccupled France to Paris. The been general for some time, and preliminary Germans have now compelled them to withdraw these "feelers" by Petain and Darlan were noted in last measures and German buying goes on busily. The week's analysis. With Russian power in Europe theory is widely held on the Continent as well as shattered, the time would be ripe for the making in London that Hitler will propose a peace and of a continental peace, and it is reported that offer to withdraw from many conquered areas, among Berlin is preparing a meeting about the first of them France, as soon as this process approaches the year In Vienna at which the new order would completion. be created. Less subtle moves toward the "New Order German insurance companies, industrial also are In evidence. By allenating opinion in corporations, and banking Institutions are stead- the United States, the ousting of Weygand has ily expanding In all the occupied countries. So already made Vichy more dependent on Germany. is German buying of industrial stocks. In France There are stories that French business is to be the Vichy Government ventured upon some weak meas- decoyed into collaboration by suggestions that it ures to counteract the German buying of French will be allowed to participate in the reconstruc- Regraded Unclassified - 12 - - 13 - tion of the industry of the Ukraine. Finally the will be numerous. German planes are probably addition of seven new "states" to the Anti- available also in the Balkans, Crete, and Italy Comintern front is to be viewed as another pre- for this purpose. paration for the closer knitting of the conti- The long-run effects of a British victory nental system under German hegemony. The scene is would be more important. It would lift the Axis gradually being prepared for the realization of menace from Egypt and provide bases for concen- the most grandiose imperial scheme since the days trated air attack on Italy and on Axis convoys when the Napoleonic Empire sprawled over most of bound for Africa. The results, so far as Italy the Continent. is concerned, might be disastrous. Such a victory COUNTER-STROKE IN LIBYA would presumably also free British troops for As a counter-blast to Nazi initiatives the action elsewhere in the Middle East. Libyan campaign promises to be more spectacular THE KURUSU MISSION than immediately significant. Some German planes Latest reports are that the Kurusu negotia- may be drawn off from the eastern front, thus tions are threatened with collapse as the result relieving the Russians, but it is doubtful if they of the arrival in Indochina of fresh Japanese Regraded Unclassified - 15 - - - 14 - forces. Even in its Inception the Kurusu Mission not yet committed to all-out association with Germany. Although he signed the Three Power Pact appeared to pose the old problem of the irresist- while Ambassador to Berlin, he Is reported to have Ible force and the immovable object. The policies been personally opposed to it, and both rumor and of both sides were clear-cut and apparently record suggest that he is not enthuslastic over Irreconcilable. Japan's association with the Axis. Kurusu, said the Tokyo radio, will stay "as Kurusu's wife is an American, he has strong long as necessary, but not too long." Both the American associations, and his attitude toward Japanese press and radio continue to maintain that this country is reported to be friendly. The fol- war or peace depends on the United States and that lowing factors may have contributed to his ap- both official and press opinion in this country do pointment to the present mission: his good rela- not conduce to optimism. tions with Foreign Minister Togo and consequent Saburo Kurusu is now one of Japan's senior ability to transmit the views of the new Tojo career diplomats in active service. He is re- Cabinet, his reputation as an experienced and ported to be on good terms with former Foreign thoroughly reliable diplomat, his superior command Minister Hirota and with the Army--presumably with of the English language, and his extensive expe- Army leaders, such as General Sugjyama, who are rience in commercial negotiations. Regraded Unclassified - 14 - - 15 - forces. Even in Its inception the Kurusu Mission not yet committed to all-out association with Germany. Although ha signed the Three Power Pact appeared to pose the old problem of the irresist- while Ambassador to Berlin, he is reported to have ible force and the immovable object. The policies been personally opposed to it, and both rumor and of both sides were clear-cut and apparently record suggest that he is not enthuslastic over Irreconcilable. Japan's association with the Axis. Kurusu, sald the Tokyo radio, will stay "as Kurusu's wife is an American, he has strong long as necessary, but not too long." Both the American associations, and his attitude toward Japanese press and radio continue to maintain that this country is reported to be friendly. The fol- war or peace depends on the United States and that lowing factors may have contributed to his ap- both official and press opinion in this country do pointment to the present mission: his good rela- not conduce to optimism. tions with Foreign Minister Togo and consequent Saburo Kurusu is now one of Japan's senior ability to transmit the views of the new Tojo career diplomats in active service, He is re- Cabinet, his reputation as an experienced and ported to be on good terms with former Foreign thoroughly reliable diplomat, his superior command Minister Hirota and with the Army-presumably with of the English language, and his extensive expe- Army leaders, such as General Sugiyama, who are rience in commercial negotiations. Regraded Unclassified 198 BRITISH EMBASSY WASHINGTON, D.C. November 27th, 1941. PERSONAL AND SECRET Dear Mr. Secretary, I enclose herein for your personal and secret information a copy of the latest report received from London on the military situation. Believe me, Dear Mr. Secretary, Very sincerely yours, Halifax The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D.C. Regraded Unclassified 199 TELEGRAM RECEIVED FROM LONDON NOVEMBER 26TH, 1941, NAVAL. H.M.A.S. "Sydney" six days overdue at Presmantle she was returning from escort duty. Believed she sank an enemy raider but definite news of "Sydney's" fate uncertain. British tanker has picked up German seemen from a raft, others have been sighted in lifeboats two of which reported came ashore in Western Australia, Indications are that Sydney was on fire when last seen by Germans. 2. H.M.S. Dunodin in Central Atlantic has not answered signale for 36 hours, may have been torpedoed as Germans claim torpedoing H.M.S. "Dragon" in that area. 3. H.M. drifter Fishergirl has been sunk in Falmouth harbour by near miss bomb. 4. R.M.S. Cornwall intercepted French merchant ship of 1129 tone northbound southeast of Cape Guardaful carrying food and rum. Prise crows taking her to Aden. 5. H.M.S. Kenya with 2 British and 2 Russian destroyers bombarded fort and batteries at Vardo Varanger Fjord at 07.31/25. Results not observed. 6. H.M. Submarine "Sea Wolf" during the night of 21st./22nd. northwest of Vardo mank with one and possibly two hits 3000 ton tanker in unescorted convoy. During night of 23rd./24th "Sea Wolf" attacked 4 ships in convoy in came area and scored one hit on a merchant ship which probably sank. MILITARY./ Regraded Unclassified 200 MILITARY 7. German advance east of Tula and Oral continues to make progress. ROYAL AIR PORCE. 8. United Kingdom. Day 25th. 6 Blenheims bombed Marlaix aerodrome and sprtfires machibe-gunned aircraft on the ground on Calais Marck aerodrome. N1ght of 25th/26th, Attacks made on Cherbourg (17) where results reported most successful and Brest (18) where bombs included 45 of 2000 lbs. 9. Libya. Between night of 23rd./24th and night of 24th/25th inclusive. Attacks made on dispersed aircraft on Senina and Berce aerodromes and near Benghazi Concentrations of enemy tanks and M.T. and A.P.V.'s attacked in 31 Adem area near Sirte and disurate. Near El Adem hite claimed on at least 12 tanks and on many M.T. vehicles and near Misurata hits with bombs claimed on 22 petrol lorries. 20 tons of H.E. dropped on Benghasi where railway workshops customs house and military H.Q. claimed hit. Regraded Unclassified 201 RESTRICTED 0-2/2657-220; No. 554 li. I. D., W.D. 11:00 A.M., November 27, 194 SITUATION REPORT I. Eastern Theater. Ground: The German forces are driving hard in a northeasterly direction north and south of Moscow. East of Tula the Germans have reached Mikhailov and Skopin; north of Moscow they have crossed the Moscow-Kalinin railroad southeast of Klin, On the Orel-Kharkov front, the German advance continuer slowly. The Germans claim to have stopped the Russian counter- attack in the area east of Artemovsk. Air: Yesterday's communique from Kuibyshev reported that American and British fighter planes had gone into action on the Hoscow front. II. Western Theater. Air: The British claim to have renewed their attack on Germany with raids on Enden and other targets in northwestern Germany. Ostend was also bombed. Nazi raiders operated over the coast of South Wales. III. Middle Eastern Theater. Ground: In Libya according to Axis communiques fighting is continuing unabated. The British say that heavy fighting continues in the Resegh area. Contact has been made between the British attacking face and the Tobruk garrison. An Axis raid across the Egyptian frontier near Sidi Omar has apparently been driven back. British capture of Gialo Oasis is confirmed. Airt The British today claimed continued air superiority although they admit that Germany is rushing air reinforcements to this theater. RESTRICTED Regraded Unclassified 202 TREASURY DEPARTMENT FOR RELEASE, MORNING NEWSPAPERS, Washington Friday, November 28, 1941. The Secretary of the Treasury, by this public notice, invites tenders for $200,000,000, or thereabouts, of 91-day Treasury bills, to be issued on a discount basis under compe- titive bidding. The bills of this series will be dated December 3, 1941, and will mature March 4, 1942, when the face amount will be payable without interest. They will be issued in bearer form only, and in denominations of $1,000, $5,000, 310,000, $100,000, $500,000, and $1,000,000 (maturity value). Tenders will be received at Federal Reserve Banks and Franches uo to the closing hour, two o'clock P. m., Eastern Standard time, Monday, December 1, 1941. Tenders will not be received at the Treasury Department, Washington. Each tender must be for an even multiple of $1,000, and the price offered must be expressed on the basis of 100, with not more than three decimala, e, E., 99.925. Fractions may not be used. It is urged that tenders be made on the printed forms and forwarded in the special envelopes which will be supplied by Federal Reserve Banks or Branches on application therefor. Tenders will be received without deposit from incorporated banks and trust companies and from responsible and recognized dealers in investment securities. Tenders from others must be accompanied by payment of 10 percent of the face amount of Treasury bills applied for, unless the tenders are accompanied by B.f. express guaranty of payment by an incorporated bank or trust company. Immediately after the closing hour, tenders will be opened at the Federal Reserve Banks and Branches, following which public announcement will be made by the Secretary of the Treasury of the amount and price range of accepted biús. Those sub- mitting tenders will be advised of the acceptance or rejection thereof. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and his action in any such respect shall be final. Pay- ment of accepted tenders at the prices offered must be made or completed at the Federal Reserve Bank in cash or other immediately available funds on December 3, 1941, provided, however, any qualified depositary will be permitted to make payment by credit for Tressury bills allotted to it for itself and its customers up to any amount for which it shall be qualified in excess of existing deposits when EG notified by the Federal Reserve Bank of ite district, The income derived from Treasury bills, whether interest or gain from the sale or other disposition of the bills, shall not have any exemption, as such, and loss from the sale CF other disposition of Treasury bills shall not have any special treat- 28-62 Regraded Unclassified 203 -2- ment, as such, under Federal tax Acts now or hereafter enacted, The bills shall be subject to estate, inheritance, gift, or other excise taxes, whether Federal or State, but shall be exempt from all taxation now or hereafter imposed on the prin- cipal or interest thereof by any State, or any of the possessions of the United States, or by any local taxing authority. For purposes of taxation the amount of discount at which Treasury bills are originally sold by the United States shall be consi- dered to be interest. Under Sections 42 and 117 (a) (1) of the Internal Revenue Code, as amended by Section 115 of the Revenue Act of 1941, the amount of discount at which bills issued here- under are sold shall not be considered to accrue until such bills shall be sold, redeemed or otherwise disposed of, and such bills are excluded from consideration as capital assets, Accordingly, the owner of Treasury bills (other than life insurance companies) issued hereunder need include in his income tax return only the difference between the price paid for such bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return 16 made, as ordinary gain or loss. Treasury Department Circular No. 418, as amended, and this notice, prescribe the terms of the Treasury bills and govern the condition of their issue. Copies of the circular may be obtained from any Federal Reserve Bank or Branch. -000-