Volume 285, July 22 – July 23, 1940

DIARY Book 285 July 22 and 23, 1940 - A - Book Page Allison Engineering Company See Har Conditions: Airplanes Appointments and Resignations Collector of Customs, Louisiana: Maloney (Paul) recommended by Harrison at request of Louisiana Senators - 7/23/40 285 372 Nelson, Donald M.: Resigns as Acting Director of Procurement when appointed Coordinator of Purchases - 7/23/40 332 - B - - Bendix Aviation Corporation (South Bend, Indiana) See War Conditions: Airplanes Bloch-Laine, Mr. See War Conditions: France Business Conditions Small Business Loans: Legislative proposals for - Foley memorandum - 7/22/40 56 a) Conference - 7/23/40 338 Haas memorandum on situation for week ending 7/20/40 150 - C - - China See War Conditions Coast Guard Architecture of new Life-Saving Station in Cleveland enthusiastically endorsed by HMJr - 7/22/40 134 Cochran, H. Merle Kind of material HMJr does not wish at house 275 Commodity Credit Corporation See Financing, Government Curtiss-Wright Corporation See War Conditions: Airplanes Customs, Bureau of Collector of Customs, Louisiana: Maloney (Paul) recommended by Harrison at request of Louisiana Senators - 7/23/40 372 - D - Departure Permits See War Conditions: Export Control - F - - Farben-Industrie, I. G., Aktien-Gesellschaft Federal Bureau of Investigation report 3 - - I - (Continued) Book Page Financing, Government Commodity Credit Corporation: Announcement of offering - 7/23/40 285 392 a) Closing of books - 7/24/40: See Book 286, page 304 b) Subscription figures - - 7/29/40: See Book 287, page 245 c) Final subscription and allotment figures - 8/1/40: See Book 288, page 18 France See War Conditions - G - Germany Operations of the I. G. Farben-Industrie Aktien-Gesellschaft: Federal Bureau of Investigation report 3 Gold See also War Conditions: Vatican Shipments from New York to Fort Knox: HMr says "no publicity" - 7/22/40 143 Great Britain See War Conditions: United Kingdom - H - Housing Cleveland project for single women discussed by HMJr and Foley - 7/22/40 16 - J - Japan See War Conditions: Export Control - L - Lockheed Aircraft Corporation See War Conditions: Airplanes Louisiana Collector of Customs: Maloney (Paul) recommended by Harrison at request of Louisiana Senators - 7/23/40 372 - M - Maloney, Paul See Appointments and Resignations Martinique See War Conditions: Airplanes Merchant Ship Movements See War Conditions: Export Control Mexico Hochschild transmits reports - 7/22-23/40 161,379 Regraded Unclassified - N - Book Page Nelson, Donald M. See Appointments and Resignations Netherlands See War Conditions - 0 - Oil See War Conditions: Export Control - R - - Reconstruction Finance Corporation See War Conditions: Airplanes (Engines, Financing of) Revenue Revision Excess Profits Tax: Probable Yield: Sullivan memorandum - 7/22/40 285 41 Conference with Democratic members of House Ways and Means Committee: Sullivan memorandum - 7/22/40 42 Treasury draft of bill as prepared for presentation to Ways and Means Committee 7/22/40 58 a) National Advisory Commission attorney, Fred Eaton, tells Sullivan accord with Treasury on amortization (Vinson-Trammell Act) feature is important - 7/23/40 264 1) Sullivan states bill may be discussed after it has gone to House Ways and Means Committee and has been printed Conference; present: HMJr, Sullivan, Foley, and Viner - - 7/23/40 265 Stam, of Joint Committee, intimates he was"acting under orders when requesting another week in which to consider Treasury plan" - 7/23/40 331 - S - Ship Movements See War Conditions: Export Control Spain See War Conditions: Export Control Sterling See War Conditions: Exchange market resume Sternberg, Fritz Gaston memorandum on availability for Washington assignment - 7/22/40 20 a) Discussed at 9:30 meeting - 7/22/40 132 Regraded Unclassified - T - Book Page Taxation See Reverue Revision - U - Unemployment Relief Works Progress Administration: Report shows slight increase in employment - 7/23/40 285 381 U.S.S.R. See War Conditions United Kingdom See War Conditions - V - Vatican See War Conditions Vinson-Trammell Act See Revenue Revision - II - War Conditions Airplanes: Bendix Aviation Corporation: Federal Bureau of Investigation report on impending strike 3 Curtiss-Wright Corporation; Lockheed Aircraft Corporation, and Allison Engineering Company progress reports - 7/22/40 182 "Order from chaotic condition now existing" on purchases by Allied Purchasing Mission and United States discussed at conference in Stimson's office; present: HMJr, Knudsen, Purvis, McReynolds, Nelson, etc. - 7/23/40 206 a) Young memorandum on conference 252 b) Purvis and HMJr discuss conference 255 Martinique Planes: Return discussed by HMJr and Bell - 7/23/40 257 a) French Ambassador wants funds involved "free and not frozen" b) Welles and HMJr discuss 295 Engines, Financing of: Reconstruction Finance Corporation authority adequate for lending funds "to manufacturers of articles and materials useful for national defense": General Counsel's opinion transmitted by HMJr to Knudsen - 7/23/40 190 a) Justice Department--Foley conversation on which opinion was based 259 - W - Book Page War Conditions China: Three-way arrangement between U.S.S.R., China, and United States discussed by HMr and Welles; Welles considers time inopportune because of antagonism over freezing Latyian, Estonian, and Lithuanian funds - 7/23/40 285 295 Exchange market resume - - 7/22/40 28 a) Sterling reports 7/22-23/40 26,386 Export Control: Merchant Ship Movements: Resume of cases 7/22-23/40. 56,287 Report on all vessels and cargo destined for Japan 7/20-21-22/40 sent to.FDR, Secretaries of War, Navy, and Interior, Admiral Stark, and Acting Secretary of State - 7/23/40 298 See also Book 286, pages 44,74,255 (7/23-24-25/40); and Book 287, page 222 (7/27/40) Oil: Ickes and HMJr discuss entire situation; HMJr suggests that Ickes advise FDR against all exports 7/22/40 124 Embargo Proclamation: Proposed amendment adding petroleum products transmitted to FDR. - 7/22/40 185 Exports during first six months 1935-1940 336 Exports to selected countries during first six months of 1939 and 1940 294 Japanese ship carrying 84,000 barrels Diesel oil given departure permit - 7/22/40 297 Stimson tells HMJr of a precedent for embargo on oil to Japan that occurred in the last war - 7/23/40 317 a) HMJr tells FDR: See Book 286, page 34 Shipments to Spain discussed by Ickes and HMJr - 7/23/40 368 Strategic Materials: HMJr's telegram to FDR at Hyde Park stating valuable supplies "slipping through our fingers daily"; asks that all licenses issued by State Department prior to July 5th be cancelled 7/22/40 1 a) HMr discusses cancellation with Colonel Maxwell - 7/22/40 120 Scrap Iron and Steel: Stettinius asked to work on justification for embargo - 7/23/40 366 France: Martinique Airplane Situation: See Mar Conditions: Airplanes Bloch-Laine inquires about re-entering United States should he now return to France - - 7/22/40 35 Netherlands: Penetration by Germans and Austrians prior to invasion: Federal Bureau of Investigation report 3 Oil: See War Conditions: Export Control Regraded Unclassified - W - (Continued) Book Page War Conditions (Continued) Purchasing Mission: Haas report on cash disbursements on balances due June 30, 1940 - 7/23/40 285 292 Vesting Order: Official sales of British-owned dollar securities - 7/23/40 385 Strategic Materials: See War Conditions: Export Control Tanks: Chrysler Corporation discusses additional plant facilities with Knudsen: Foley reports to HMJr - 7/19/40 197 U.S.S.R.: Three-way arrangement between U.S.S.R., China, and United States discussed by HMJr and Welles; Welles considers time inopportune because of antagonism over freezing Latvian, Estonian, and Lithuanian funds - 7/23/40 295 United Kingdom: Military Situation: Reports from London transmitted by Lothian - 7/22-23/40 30,271 Vatican: Earmarked gold account with Federal Reserve Bank of New York - 7/23/40 409 Works Progress Administration See Unemployment Relief i July 22, 1940 TELEGRAM TO THE PRESIDENT HYDE PARK NEW YORK (VIA WHITE HOUSE TELEGRAPH) STRICTLY CONFIDENTIAL VALUABLE STRATEGIC MATERIAL SLIPPING THROUGH OUR FINGERS EVERY DAY. LICENSES ISSUED BY JOE GREEN OF STATE DEPARTMENT PRIOR TO JULY FIFTH. PLEASE INSTRUCT COLONEL MAXWELL TO CANCEL ALL OUTSTANDING LICENSES ISSUED PRIOR TO JULY FIFTH BY STATE DEPARTMENT. HENRY MORGENTHAU JR. 2 July 22, 1940 TELEGRAM TO THE PRESIDENT RYDE PARK NEW YORK (VIA WHITE HOUSE TELEGRAPH) STRICTLY CONFIDENTIAL VALUABLE STRATEGIC MATERIAL SLIPPING THROUGH OUR FINGERS EVERY DAY. LICENSES ISSUED MY JOE GREEN OF STATE DEPARTMENT PRIOR TO JULY FIFTH. PLEASE INSTRUCT COLONEL MAXWELL TO CANCEL ALL OUTSTANDING LICENSES ISSUED PRIOR TO JULY FIFTH MY STATE DEPARTMENT. RENRY MORGENTHAU JR. 3 July 22, 1940 My dear Mr. Hoover: This will acknowledge receipt of the following communications which you have been good enough to send me recently: July 15 - Operations of the I. G. Farben- Industrie Aktien-Gesellschaft; July 16 - Information furnished by Major Van Oesten relative to penetra- tien of Holland by Germans and Austrians prior to the invasion of that country; July 17 - Strike to be called at Bendix Products Division, Bendix Aviation Corporation, South Bend, Indians. Yours sincerely, (Signed) H. Morgestbau, Jr. x. J. Mager Neover, Director, Federal Bureen of Investigation, Weshington, D.C. 4 July 22, 1940 My dear Mr. Hoover: This will acknowledge receipt of the following communications which you have been good enough to send me recently: July 15 - Operations of the I. G. Farben- Industrie Aktien-Gesellschaft; July 16 - Information furnished by Major Van Oosten relative to penetra- tion of Holland by Germans and Austrians prior to the invasion of that country; July 17 - Strike to be called at Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana. Yours sincerely, Mr. J. Edgar Hoover, Director, Federal Bureau of Investigation, Washington, D.C. 5 July 22, 1940 x dear Mr. Hoover: This will scknowledge receipt of the following destions which you have been good enough to send no recently: July 15 - Operations of the I. G. Farben- Industrie Aktien-Gesellschaft; July 16 - Information furnished by Major Van Oesten relative to pemetra- tion of Holland by Germens and Austriems prior to the invasion of that country; July 17 - Strike to be called at Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana. Yours sincerely, Mr. J. Zigar Neever, Director, Federal Barean of Investigation, Washington, D.C. HH EDGAR HOOVER DIRECTOR Frderal Bureau of Investigation United States Department of Busttre Washington, D. C. July 15, 1940 Personal and Confidential The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: Because of the World-wide holdings of the I. G. Forben-Industrie Aktien-Gesellschaft, Frankfort, and its close relationship with various chemical corporations in the United States, I have been endeavoring for some time to maintain a rather accurate and comprehensive check upon the operations of this corporation. I have today received from a source within Germany some data of a general nature concerning the operation of the parent corporation in Germany which I thought might be of interest to you. The financial report of the corporation for the calendar year, 1939, indicates that sales were very satisfactory. The balance sheet indicates that as a matter of fact a sales record has been established probably by reason of armament orders and military preparation. Sales within Germany have increased in synthetic gasoline, artificial fibre, rayons and other substitute products for which the Reich has much need in view of its armament program. of course, because of political developments, exports dropped particularly during the last quarter of 1939. Total exports for the last quarter of the year were however higher than for those of the same quarter in 1938. In order to replace overseas markets, exports in Europe have been pushed with Russia being the most importance purchaser. Through its far-flung and interwoven corporate structure, the parent corporation has encouraged its subsidiaries to build up stocks of merchandise in overseas countries in order to permit the subsidiary units to maintain the markets which they have established. The production of colors and accessories has reached a record with a pronounced increase in exports 7 The Secretary of the Treasury - 8 - particularly to Russia. The sale of by-products for use in the manufacture of textiles has been very large. Special attention is at present being given to cleaning products which reduce the use of fats. There is also an increase in the sale of chemical, pharmaceutical and photographic products; of rayon, artificial fibres, st cetera. The production of a fibre made of coal and chalk (PeCc) has commenced. The production of asote is larger than at any time in the past and the corporation has denounced its international contracts with other producers of azote in Europe. The following figures on the balance sheet at: the close of business for the calendar year, 1939, may be of some interest to you. All figures are in millions of Rm. Assets 1939 1938 Real Estate 624.8 605 Merchandise 186.- 203.5 Shares of other companies 12.2 11.4 Sundry debtors 207.- 184.2 Debts of affiliated companies 269.9 168.9 Sundry properties 6.1 5.05 Stocks in Treasury 68.- 0 Money in bank 54.8 46.9 Liabilities Bonds 307.- 182.7 Social obligations 58.7 53.6 Supplies 84.1 76.5 Credits of affiliated companies 66.9 31.6 Bank loans 57.6 48.3 Sundry creditors 107.6 94.4 Regraded Unclassifie 8 The Secretary of the Treasury - 3 - Profit and Loss 1939 1938 Expenditures: Salaries and social expenditures 386.2 363.1 Amortization on bonds, 1928 1.6 0.3 Interest 13.- 9.9 Taxes 171.4 125.- Various reserves 7.- 2.2 Retirement fund 5.- 5.- Statutory reserve 5.7 2.3 Amortization, including 3.5 on holdings 171.2 135.7 Net Profit 56.1 55.1 Increase in net profit 18% 25% Receipts: Gross profits 786.3 667.2 From affiliated companies 24.7 19.6 Interest 2.3 8.3 Sundry receipts 8.7 3.6 Sundry receipts probably include profits on bonds sold from the treasury. The capital was increased in 1939 by 11 million Rm. against a total authorized increase of 80 million Rm. At present the capital is 691 million Rm. 08 against 680 million at the end of 1938. The bonds sold plus discount were 102 million Rm. The total of the obligations is now 643 million Rm. against 449 million Rm. at the end of 1938. This shows the enormous financing for new armament installations. The 9 The Secretary of the Treasury - 4 - net profit appears to have been adjusted at exactly the amount to maintain the dividend of 8% on the increased capital. The company has bought the whole stock (8 million marks) of the A. G. Carbidwerke Deutsch-Matrei in Vienna. The Fubrique de peudre Skodawerke Wetzler Vienne now controls the Donau Chemie AG and has increased its capital to 12 million marks. The Bruckdorf AG Halle (lignite works) has been incorporated in the I. G. Furben. The Societe Internationale pour Entreprises Chimiques, allied with the I. G. Furben, showed for 1939 a profit of 10, 10,395,935 francs and will pay 8% dividend against 8 1/2% last year. with expressions of my highest regards, Sincerely yours, J. Hoover By Special Messenger N EDGÁR HOOVER 10 DIRECTOR Federal Burrau of Investigation United States Department of Justice Washington, B. C. July 16, 1940 PERSONAL AND CONFIDENTIAL The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: Major Van Oosten of the Royal Netherlands Indies Army has just furnished advice to this Bureau that, prior to the invasion of Holland, approximately 100,000 Germans and Austrians had peacefully penetrated the Netherlands. These persons were engaged as common labor- ers, domestics, and employees in munition factories which were built in the Netherlands in close proximity to the German border. Substantially all of the persons so em- ployed remained entirely loyal to Germany and refrained from obtaining citizenship in the Netherlands. At the time of the invasion of the Netherlands there were 300 German citizens employed by the German Lega- tion. It is alleged that it was through this group Nazi activities were so well organized and for this reason Nazi domination over the Netherlands was facilitated. Major Van Oosten disclosed that plans for sub- duing the Netherlands were so complete and methodical that it was possible to dominate the Rotterdam Airport within twenty minutes from the time the first parachute troops arrived. He further disclosed that the German Legation in the Netherlands was located across the street from the Dutch Military Headquarters and that after the siege of Holland had been commenced it was learned a tunnel had been 11 The Secretary of the Treasury -2- prepared between the German Legation and the Dutch Military Headquarters in order that the latter might be destroyed. I thought you would be interested in receiving this information. Sincerely yours, J. le Hoover BY SPECIAL MESSENGER Regraded Unclassified EDGAR HOOVER 12 DIRECTOR Federal Burrau of Investigation United States Department of Justice Washington, D. C. PERSONAL AND CONFIDENTIAL July 17, 1940 BY SPECIAL MESSENGER The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: I am transmitting herewith, as of possible interest to you, a copy of a statement dated July 16, 1940, containing information with regard to a strike to be called at the Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana, at ten o'clock on the morning of July 17, 1940. In view of the information set forth in the attached statement concerning possible sabotage occurring at this plant, I am causing inquiry to be made for the purpose of ascer- taining whether a matter within the investi- gative jurisdiction of the Federal Bureau of Investigation is involved. Sincerely yours, J. J.edyan Hoover Inclosure 13 July 16, 1940 Information has been received that Mr. I Products Provided I Division, Bendix Aviation Corporation, South Bond, Indiana, has indicated ⑉ hundred Commission - players in this plant have agreed to stage am - strike at 10 c'aleck a the moveling of July 27, 1960. - Saidh has allegedly - weter the Importion of Nevel Materials Service that these ⑉ hundred employees be discharged. Mr. Holds has also allegedly indicated that on insident believed possibly attributable to enhalage cocurred at the plant yesterday, July 19th. we 14 July 22, 1940 12:18 p.m. Secretary Frank Knox: Hello, Mr. Secretary. H.M.Jr: How are you? K: I'm fine. I'm having lunch with you today. H.M.Jr: Wonderful. K: Where? H.M.Jr: Right in the Treasury in my office. K: All right, fine. Now how are you fixed for tomorrow night? Are you tied up? H.M.Jr: Well, I tell you, I'm going to that movie, "The Ramparts We Watch." K: Oh yes, I see. All right then. How about Wednesday night? H.M.Jr: Well ..... X: I'm thinking of dinner down on the boat and go down the river and have a little talk. H.M.Jr: Can I talk to you about it at lunch? I would love to go either Wednesday or Thursday whichever you were free. K: Well, Thursday I promised to go down and inspect some of the Navy installations down the river. H.M.Jr: Can I take & rain-check on Wednesday? X: Yeah. Will you? H.M.Jr: Yeah. K: All right. That'll be fine. H.M.Jr: Are you bringing Stark with you? 15 - 2 - K: Bringing whom? H.M.Jr: Stark today? K: Yes, I thought I would. H.M.Jr: Good. K: What about Johnny Sullivan? Would you like to bring him? H.M.Jr: No. I meant today at lunch. K: Oh, today at lunch. All right. H.M.Jr: No, there'll be just you, Stark and I. K: All right then. Stark - I left him up at the Capital but I think he'll be in for lunch all right. H.M.Jr: Well. Now today has nothing today with taxes, I hope, at least I haven't -- I want to talk about that meeting tomorrow morning. K: I see. H.M.Jr: I want a little help. K: Well, Stark will be there -- he planned to be there. H.M.Jr: Thank you. K: And we'll be at your office at 1 o'elock. H.M.Jr: Thank you. K: All right. 16 July 22, 1940 12:45 p.m. H.M.Jr: Ed? Ed Foley: Yes, Mr. Secretary. H.M.Jr: I talked to Bohn this morning, the head of the Cleveland Housing. F: Yeah. Ernie Bohn. H.M.Jr: Yeah. I told him that you were working on something to house single men. F: Yeah. H.M.Jr: Well, he's got some land -- some property there that has been given him for housing single women and he said if you knew how to fix -- get around the law Bo that you can house, as he put it, one-person families. F: Yeah. H.M.Jr: See? F: Yeah. H.M.Jr: Anything that you've done on it, if you'd send it to him he'd appreciate it. F: All right. That, of course, is up to the U.S.H.A. H.M.Jr: Yeah, that's what he knows. F: I think as a matter of law it's all right. As a matter of policy they may not want to do it. I explained that to Mrs. Morgenthau in a little note I sent to her over the weekend. H.M.Jr: ..... said you had something on the law. F: Yeah. Regraded Unclassified 17 - 2 - H.M.Jr: I told him what you were doing for Mrs. Morgenthau and he said if you could tell him what -- the Junior League up there had some property and houses where for years they've housed single girls and they've turned that over to him and he said if -- he's trying to interpret the thing to -- one-person family as one person. F: Yeah. H.M.Jr: If you had anything on it he'd ..... F: All right. I had a little memorandum that I gave to Mrs. Doyle and I'll send a copy of thatalong to Ernie with a little note. H.M.Jr: You know Henry 18 working for him. F: Yes, I know that. H.M.Jr: Right. F: Yeah. H.M.Jr: I just got a flash on the ticker that ..... F: Annenberg has gone to jail. H.M.Jr: No. F: Oh. H.M.Jr: No, this is just along the same lines, and Hanes and Lewis Douglas are forming a separate independent Democratic movement for Willkie. F: Well, that's where they belong -- both of them. (Laughs). H.M.Jr: Well, this is all -- what do you think of my little move onto the ..... F: ..... business loans? H.M.Jr: Teah. : 18 - 3 - F: I think it's fine. H.M.Jr: Yeah. Somebody has got to do something. F: Sure. It's good. Regraded Unclassified 19 July 22, 1940 2:42 p.m. H.M.Jr: Hello. Operator: Mr. Welles. Go ahead. H.M.Jr: Hello. Sumner Welles: Hello, Henry. H.M.Jr: Sumner, if Herbert Feis saw those people I wonder if I could see him this afternoon 80 I could be brought up to date. W: He has not, Henry, because it was Saturday and they were none of them there. H.M.Jr: Oh. W: And then I haven't yet had a chance to check up with him. H.M.Jr: Well, I just -- before I went into that meeting I wanted to be up to date. Well, then there's nothing on that? W: There's nothing further on that. It'll have to be taken up independently from now on. H.M.Jr: Well, the date's on at 6 then, isn't it? W: Yes, indeed. I spoke to Lothian on Saturday. H.M.Jr: Thank you. W: All right, Henry. Good-bye. 20 July 22, 1940. MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston Fritz Sternberg is a German refugee who has been in this country for some time. His address is 49 Mayflower Avenue, New Rochelle, N. Y. and his telephone number is Hamilton 4379. Bruce Bliven, Editor of the New Republic, from whom I got this information, suggests that we write to Sternberg rather than phone him since he speaks rather broken English. Sternberg has been writing for The Infantry Journal and other military publications and is the author of one or two rather well known books, including "From Nasi Sources." Bliven is sure he would be pleased to come to Washington. Regraded Unclassified 21 July 22, 1940. MEMORAN DUR TO: Secretary Morgenthau FROM: Mr. Gaston Frits Sternberg is a German refuges who has been in this country for some time. His address is 49 Mayflower Avenue, New Rochelle, E. Y. and his telephone number is Hamilton 4379. Bruce Bliven, Editor of the New Republic, from whom I got this information, suggests that we write to Sternberg rather than phone him since he speaks rather broken English. Sternberg has been writing for The Infantry Journal and other military publications and is the author of one or two rather well known books, including "From Nasi Sources." Bliven is sure he would be pleased to come to Washington. HEG/mah 22 COPY Copy of paraphrase to TREASURY PARAPERASE OF TELEGRAM NO. 172, DATED JULY 22, NOON, FROM TEHRAN, IRAN. The Legation at Tehran reports on July 22, 1940, that an order of the Iranian Ministry of Finance has forbidden all banks to buy sterling. No reason is offered, other than that sterling is ostensibly not being quoted. 891.5151/199 23 TREASURY DEPARTMENT Washington FOR IMMEDIATE RELEASE Press Service Konday, July 22, 1940 No. 21-67 Secretary of the Treasury Morgenthau today announced the final subscription and allotment figures with respect to the current offering of 2-1/4 percent Treasury Bonds of 1954-56. Allotments on public subscriptions aggregated $630,719,850. This amount in- cludes $39,110,300 allotted in full to subscribers for $5,000 or less who specified that delivery be made in registered bonds 90 days after the issue date. In addition to the amount allotted on public subscriptions, $40,600,000 of the bonds have been allotted to Government investment accounts, within the $50,000,000 reserva- tion. Subscriptions and allotments were divided among the several Federal Reserve districts and the Treasury as follows: Federal Reserve Total Total District Subscriptions Allotted Boston $ 628,019,500 $ 58,328,050 New York 2,924,302,650 270,526,400 Philadelphia 393,641,000 38,626,150 Cleveland 449,152,250 42,981,200 Richmond 221,241,700 22,349,350 Atlanta 204,688,950 20,114,450 Chicago 771,165,850 75,625,650 St. Louis 156,315,200 17,315,600 Minneapolis 89,506,900 9,717,100 Kansas City 113,212,450 13,200,350 Dallas 143,390,750 14,497,050 San Francisco 502,503,150 46,526,600 Treasury 7,931,200 911,900 Government Investment Accounts 40,600,000 TOTAL $6,605,071,550 $671,319,850 Regraded Unclassified 24 Regraded Unclassified July 22, 1940 Water Secretary Bell Rr. Dechras STRICTLY CONFIDENTIAL Reference is made to the attenhed amerantes of July 16 from our Foreign Punds Control, requesting more detailed information from the First National Bank of the City of Tev York as follows: "Why are dividends to be paid is dollars in Nov Tark - the French, Belgian and Dansig issues of steck! 'Ins this procedure been fellowed regularly in the past? If act, when and under what circumstances was the present procedure adepted? "That is the source of the funds to be used in payment of dividends)* In accordance with a understanding with Mr. Pahle, I talked this neratag X telephone with Mr. Leen Preser, President of the First National Bank of In Tork. ®. Traser stated that the B.I.S. had informed his last March, as be resalled the date. that the B.I.S. désired this year to pay all B.I.S. dividends through American dollars. It has ant hom the practice in the past to pay all dividents in my che currency since the various issues of D.I.S. stock are specified in the currency of the country of Lease. The B.I.S. dividend has, however, been paid 92 & gold basis steadily since the D.I.S. vas created, and there has frequently been disoussion of the desirability of paying this through one gold currency. This year 11 was decided that archange conditions were se difficult and mest currencies w violently flactuating that 11 would be meet convenient to use the dollar for paying all of the dividend chesks. The Pirst National vas advised that this presedure is to be fellowed. M- sequestly, however, 11 developed that the First National was only to pay dividends to American residents and to certain residents of am-invied sountries in Purope, most particularly Instructions. A - of dollars was transferred from the B.I.S. through the Federal Receive Bank of New York to the First National sufficient to take care of the dollar payments which the latter se to nate. In past years the First National has always received a special dividend deposit for the payment of three dividents specified is dellars, - the utilization of the First National is entirely regular. Likevise the transfer of the dollars through the Federal to is strict accurdance with D.I.S. regulations. 70ml #MC;dm:7.22.40 25 July 22, 1940 Under Secretary Bell Mr. Cookram STRICTLY CONFIDENTIAL Mr. Fletcher Warron, asststant to Mr. Berie in the Department of State, telephoned me this norming that a letter had come Berle is his absence from Mr. Herbort L. Satterlee of 1 Deasen Street, New York City. Mr. Satterlee stated that he had applied for a license to cable $500 through Revgans to Mrs. Halen Bust at General Delivery, Inchen, Girende, Transo. Mrs. - is as old friend of Mr. Satteries, married to a Brittsh retired efficer. this aged couple to nov to desparate circumstance, not being able to obtain uny feats ⑉ letters of credit or cheeks, and their hotel villing # lenger to extend hospitality without payment. Mr. Berie's effice wishes to know the status of this application. july EMC:dm:7.22.40 26 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE July 22, 1940 TO Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL Activity of the six reporting banks in official sterling was as follows: 1. Purchased directly from authorised banks in London & 15,000 Purchased from the Federal Reserve Bank of New York L 15,000 Total purchase I 30,000 2. There were no reported sales of official sterling. Of the above-mentioned purchases, L21,000 were bought by the banks on behalf of their customers; the other L9,000 presumably were added to registered account balances. The Federal Reserve Bank of New York also stated that & non-reporting bank purchased L82,000 in official sterling from the Federal. In the open market, sterling opened at 3.90-1/4 and moved steadily downward to 3.80-3/4 by mid-afternoon. It closed at 3.81-1/2. In execution of customer orders, the six reporting banks sold L64,000 and purchased L49,000. The other currencies closed as follows: Swies franc .2272 Canadian dollar 11-3/8% discount Lira .0505 Reichsmark .4004 Cuban peso 9-15/16% discount Mexican peso .2015 bid, .2040 offered We purchased $6,000,000 in gold from the earmarked account of the Central Bank of the Argentine Republic. The Federal Reserve Bank of New York reported that the following shipments of gold were consigned to it: $26,783,000 from England, representing two shipments by the Bank of England, London, to be earmarked for account of His Britannic Majesty's Government. 1,800,000 from Portugal, shipped by the Bank of Portugal, to be earmarked for its account. $28,583,000 Total Regraded Unclassified 27 - 2 - The State Department forwarded to us a cable stating that Samuel Montagu, London, shipped $138,000 in gold from England to the Chase National Bank, New York, for sale to the U. S. Assay Office. The Bombay gold price advanced the equivalent of 74 to $33.84. Spot silver in Bombay was equivalent to 44.06, up 3/164. In London, spot silver was fixed 7/16a lower at 22-3/16d. The forward quotation was unchanged at 22-1/16d. According to reports from that center, Indian interests resold, for spot delivery, silver which had originally been purchased for shipment. The U. S. equivalents of the London silver prices were 40.344 and 40.11$ respectively. Handy and Harman's settlement price for foreign silver was unchanged at 34-3/46. The Treasury's purchase price for foreign silver was also unchanged at 35#- We made two purchases of silver totaling 100,000 ounces under the Silver Purchase Act, both of which were new production from foreign countries, for forward delivery. CONFIDENTIAL BMS. Regraded Unclassified 28 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 19. 1940 TO Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL The foreign exchange market was quiet today, and the volume of transactions in both official and open market sterling remained fairly small. On the basis of the official rates of 4.02-1/2 and 4.03-1/2, the six reporting banks consummated the following transactions: 1. Sales of L2,000 to the British Control, effected directly through authorized banks in London. 2. Purchases of 173,000 from the British Control, of which L18,000 were acquired directly from authorized banks in London, and L55,000 through the Federal Reserve Bank of New York. So far as our reports indicate, none of the purchases from the Federal Reserve Bank rere made by the reporting banks on behalf of their customers. The sterling so acquired apparently is being used to build up the balances in the banks' registered sterling accounts. The Federal Reserve Bank also stated that non-reporting banks purchased 36,000 in official sterling from the Federal. The turnover in official sterling for yesterday and today reveals a noteworthy contrast between the amount of purchases and sales. Whereas American banks, during the two days, bought a total of L229,000, they effected sales of only L7,000. The open market in sterling was very dull, although the rate experienced considerable improvement. From an opening of 3.81, it rose to 8. high of 3.91, and closed at 3.90. On behalf of their customers, the six reporting banks made sales of 135,000 and purchases of L52,000. The open market rate for the Canadian dollar again moved closer to the official level for that currency, closing at 11-1/4% discount. The official rates that have been quoted by the Canadian Foreign Exchange Control Board since last September are equivalent to 9-15/16% and 9-1/16% discount (rates at which the Board will buy and sell Canadian dollars respectively). The other currencies closed as follows: Swies franc .2272 Lira .0505 Reichsmark .4004 Cuban peso 9-15/16% discount Mexican peso .2015 bid, .2040 offered There were no gold transactions consummated by us today. Regraded Unclassified 29 - 2 - The Federal Reserve Bank of New York reported the following shipments of gold: Regraded Unclass $ 8,225,000 from England, shipped by the Bank of England to the Federal Reserve Bank of New York, to be earmarked for account of His Britannic Majesty's Government. 3,740,000 from Colombia, shipped by the Central Bank of the Colombian Republic to the Federal Reserve Bank of New York, to be earmarked for its account. 403,000 from England, shipped by Samel Montagu, London, to the Irving Trust Company, New York. 400,000 from England, shipped by the Swies Bank Corporation, London, to its New York agency. 140,000 from Portugal, shipped by the Bank of Portugal to the Federal Reserve Bank of New York, disposition unknown. $12,908,000 Total The Bombay gold price was slightly lower at the equivalent of $33.78. Spot silver in Bombay was equivalent to 43.864, up 1/84 In London, the prices fixed for spot and forward silver again rose 1/84 to 22-5/84 and 22-1/6d respectively. The U. S. equivalents were 41.13# and 40.11/. Handy and Harman's settlement price for foreign silver was unchanged at 34-3/4#. The Treasury's purchase price for foreign silver was also unchanged at 35#. We made two purchases of silver totaling 100,000 ounces under the Silver Purchase Act, both of which were new production from foreign countries, for forward delivery. CONFIDENTIAL 30 BRITISH EMBASSY, WASHINGTON, D.C. Personal and Secret July 22nd, 1940 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, Lolazon The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D.C. Telegram despatched from London 3/ late on the evening of July Slet 1. The recent Angle-Itelian nevel action took place in Antikithera Cheasel off northmest Crete. Early is action, "Sydney" hit the "Celleoni" is engine-room and stopped her; "Sydney" then Left - destroyers so sink the "Collecai" w continued to chase the other cruiser, "Federice 4a Barbiane" of the case class. Chase lasted 1+ hours and "Sydney" obtained coveral hits but enemy retained her speed and dree out of range. Our destroyers fired 4 terpodase at the "Colleoni", 9 hit sad cask her. 545 survivers including the Captain were picked up by dectroyers which were bembed durine sale operation without result. notifi were no casualties is His Majesty's shipe as a result of this action. Channel convey heavily attacked by about so enemy aireraft yeaterday afterness. Destrayer "Mrassa" has in engine reem cosk later off Dever when in tow; 8 vounded. slight damage to ⑉ esti-enhmarine travier. в.я. "Pulberough" (1,000 tome) sunk, 5.5. "Festorm" (TOO tens) damaged and tousd into Dever, no casualties. Regraded Unclassified ÷ 32 Reported that battle cruiser "Goetsensu" left Frondjhem at 0900 hours July 20th. French 5.5. "Ile de France" (43,500 tons) has been requisitioned at singapore. Believed that one-third of the crew will volunteer to serve. 8. Night or 19th-20th work of our heavy bombers difficult to observe owing to weather con- ditions. Successful attacks made on oil plant at Gelsenkirchen, railway target at ssen, air frame factories at Bremen, Wiemar and Wensendorf, and 8 aerodromes in northwest Germany and Holland. Single aircreft located and bombed warships "Scheer" and "Tirpits" at Wilhelmshafen, results unobserved. Attack on barges and shipping at Emden resulted in large explosion and several fires; terrific ox- plesion reported at Harlingen. Two Messerschmitts 110 shot down during these operations. Yesterday 34 Blenheime despatched against specified oil targets aerodromes and aircraft factories del northwest Germany and to Kiel Canal: majority obliged to abandon tasks, one aircraft missing. One Hudson patrolling off Norwegian coast bombed vireless station at Utsire, wireless meet collapsed, station also damaged. Last night 117 aircraft despatched as follows: 38 Wellingtons against oil and railway targets, 81 Whitleys against aireraft factories, 83 Hampdens to attack "Tirpits" in Wilhelmshafen dooks, 12 Blenheims against oil plants at Ghent and Vlaardingen, 5 Hudsons to attack Emden Seain, Regraded Unclassified 33 18 Namplens and 8 Swordfish mine-laying in Copeshagen area, Ema River and Hubertgat. Reports awaited; two Wellingtons and three Hampdens missing, one Hampden down in ass off Middlesborough. S. Little enemy aircraft activity yesterday except at Dover. One bomb fell on British Oxygen Works at Cattedown, Plymouth, extensive damage, works out of production for some time. Last night very extensive mine- laying operations off southwest coast and east coast, especially Harwich and Themes Natuary, Fellowing ports closed today: Plymouth, Milford Haven, Preston, Newhaven, and Belfast. Few hombs dropped at West Martlepool, Levestors, derwich, Swanses, Mountain Ash and Maryport: casualties slight. Testerday aircraft casualties in fighter operations: 9 enemy aircraft confirmed, 18 unconfirmed; our losses 5 Hurricanes and 1 spitfire. 4. Shipping losses:- (a) By U-Boat: British "Woodbury" (4,500 teas) sunk in western approaches on 10th; British "Pearlmoor" (4,500 tons) ounk northwest approaches on 19th. Regraded Inclassified + 34 (b) By Air: N.M. M/S Trawler "Crest Flower" sunk on 19th off Isle of wight. (e) By Nine: British "Troutpoel" (5,000 teme) sunk off Benger. (a) By Raiders: "British Petrol" (7,000 tems) sunk on 14th West Indice. This German raider reported as ship of 9,000 tone painted in Swedish colours and armed with two 5.9 100k and two 8 inch gune and number of pen-pome and machine guns. 8. Agent. During the might of July 19th-Noth Blenheims searched Tobruk Herbour for Italian cruiser chased by "Sydney"; ship not located but shipping in harbour attacked by Blenhoims and Swordfish, three direct hits, one causing major explosion. Nediterranean. Further arrival of 18 8.79 bombore at Rhodes increases total strength of bombers in the Dedecaness to 77. Reinforce- ments compries 18 Storme, reputed as Italy's most - bomber formation. This Storms probably carried out recent Haife raid. Reported German parachutists, engineers, and sirmen have arrived in Lybia and more are expected. Sudag. On 19th Wellesley airereft bombed Agardot and Bereatu aerodromes; one enemy aireraft destroyed and others damaged ⑉ well as w/r station at Barentu. Learn. On 18th four airereft of S.A.A.F. blow up petrol dump destroying ⑉ enemy aireraft and severely damaged another at Neghelli Unclassified 35 CONFIDENTIAL July 22, 1940 To: The Secretary From: Mr. Young When Mr. Bloch L'Aine was here last Friday, he told me that he felt it was his duty to return to France re- gardless of the conditions or the personal repercussions which it might involve due to his former position as an international banker associated with Lazard Freres, and his Jewish origin. He is the fourth generation of a family which has served France either in the Army or in the French Civil Service. He is convinced he must go back to see if he can help despite the hardships which he realizes he is bound to encounter. If it should turn out, however, that he could not be of help, it was his desire to return to the United States if it were still possible at that time for him to get out of France. It was this thought which he had in mind when he asked you as a personal favor to find out what the State Department might be able to do toward permitting him and possibly his immediate family to reenter the United States on & more permanent basis. He mentioned the possibility of coming in under some quota which vas not too full, and he vas quite prepared to go to Cuba or whatever place might be designated to wait his turn for admission. At the present time be has a diplomatic passport as well as an ordinary passport, the latter expiring July, 1942. Mr. Bloch L'Aine is planning to leave for France very shortly and is extremely anxious to clarify this situation before he leaves. He will be delighted to come to Washington at any time to confer with the State Depart- ment, PM. 36 HR GRAY London Dated July 22, 1940 Rec'd 3:40 p.m. Secretary of State Washington 2329, July 22, 6 p.m. FOR TREASURY FROM BUTTERWORTH. Doctor Outrata who is in charge of financial matters for the Oge ch-Slovak National Committee called at the Embassy today and explained that when he and other mem- bers of the Committee left France they took with them and brought to this country French bank notes totalling 11 million france e This they have declared to the British authorities and deposited for safe-keeping in a British bank. Doctor Outrata stated that he was having discussions with the Bank of England regarding the possible exchange of these france for pounds but that hE would prefer to acquire dollars for the whole or at least a part of this sum and he requested that I communicate with Washington to ascertain whether WE would bE interested in such a deal. While accrding to his request I expressed my personal opinion that it was unlikely that WE could enter into such a trans- action, particularly as France may at any time prohibit Regraded Unclassified 37 HR -2- No. 2329, July 22, 6 p.m. from London. prohibit the importation of franc bank notes. I think - it is for this same reason that Dr. Outrata would like as quick an answer as possible and accordingly a prompt reply would bE appreciated. KENNEDY OSB 90.99 Regraded. Inclassified 38 HR GRAY Berlin Dated July 22, 1940 Rec'd 10 p.m. Secretary of State, Washington, 3100, July 22, 8 p.m. FOR TREASURY FROM HEATH AND FOR DEPARTMENT'S INFORMATION. In the Sunday issue of the DAZ, Winschuh, the financial editor, discusses at length the gold problem of the United States under the title "gold boycott". Stating that the United States has broken the rule that a creditor nation must have a passive balance of trade he asserts that it must now face the day of reckoning with no sure solution of its gold dilemma in sight. HE quotes Secretary Morgenthau as having declared on May 3rd that "if the political situation of the world should undergo a drastic change then international trade and finance may assume the character of domestic trade and an independent monetary system would CERSE to exist. Under such circumstances it might well bE that gold would no longer bE needed. Under these circumstances however life Regraded Unclassified 39 HR -2- #3100, July 23, 8 p.m. from Berlin. life would be BO different from its predication that the loss in the value of gold would be the least of our troubles" (it will bE noted that in thus quoting from the Scoretary's spesch Winsahuh has omitted certain important phrases.) HE goes on to assert that the collapse of the value of gold would be & grave source of anxisty for the United States since it would also mean the loss of its prestige 88 an sconomically well advised, wise and successful great power. HE concludes his article with the following argu- ment: obviously the starting of European trade follow- ing the war would be substantially facilitated through the USE of gold, Obviously the reconstitution of Euro- pean currencies and the organization of monetary 00- operation is no casy task and the notions of a "labor currency" requires substantial development particularly as regards the thawing of the financial burdens of the war and the necessary return of balance between the consumption goods, Economy and industries working on Government orders. In addition, Germany wishes above all to have an Economy relieved as far as possible from bureaucratic 40 HR -3- #3100, July 22, 8 pam. from Berlin. bureducratio fetters. Particularly in this respect is gold (i) may attract the business man with the prospect of being able to conduct his business without a "paper war". The question whether or not return to gold" has in these times, however, assumed such fundamental 1m- portanos and political dimensions that technical advantages of gold are not the only considerations involved. KIRK WWC IVE is suc DIE Regraded Unclassified 41 MEMORANDUM July 22, 1940. TO: SECRETARY MORGENTHAU FROM: MR. SULLIVAN This memorandum is supplementary to that of July 16 relating to the probable excess profits and yields of an excess profits tax. Assuming excess profits of $2,000,000,000, the following average effective rates would be necessary to yield the following amounts of revenue: $ 500,000,000 - 25% 1,000,000,000 - 50 1,500,000,000 - 75 2,000,000,000 1 100 The following bracket rate schedules would roughly approximate the above effective rates: Income bracket in per-: Rates for: cent of I invested capital : $500,000,000 $$1,000,000,000 $$1,500,000,000; $2,000,000.000 $5,000 plus 15% of in- vested capital 20% . 45% 70% 100% Between 15 and 30% of invested capital 40 60 85 100 Over 30% of invested capital 40 60 85 100 It is again important to observe that the above figures are highly tentative and subject to very substantial revision. The 9 42 MEMORANDUM July 22, 1940. TO: Secretary Morgenthau FROM: Mr. Sullivan SUBJECT: Conference with certain Democrat members of the House Ways and Means and Senate Finance Committees from 2:00 to 4:15 PAI, Monday, July 22, 1940. Present: Representatives Doughton, Cooper, Boehne, Buck and McCormacky Senators Harrison, Byrd, Connally and George; Messrs. Beaman and O'Erien from the office of the Legislative Council of the House of Representatives; Mossrs. Stam, Myers, Price and Stratton, from the Joint Committee Staff; and Messrs. Sullivan, Tarleau, Blough and Eichhols from the Treasury Department. Chairson Doughten gave a brief summary of excess profits tax developments to date, including Congressional action on the Revenue Act of 1940, the message of the President to Congress on the excess profits tax, and the conferences of Congressional leaders at the Treasury and the White House. He indicated the - sirability of having an agreement between the Treasury Department and the Joint Committee Staff, in order to save the time of the Ways and Means and Finance Committees. Messrs. Harrison and Cooper also said a few words, Mr. Sullivan then explained the main outline of the excess profits tax plans on which the Treasury had worked. In the course of his exposition, there were frequent questions from and discussion among the Congressmen. The most significant among the points raised are briefly indicated later in this - randum. Mr. Doughton asked Mr. Sullivan if the Treasury and the Joint Committee Staff were in agreement on all points. Mr. Sullivan replied that there were four points on which they were not in agreement, of which three were minor in character. On the inquiry of Mr. Doughton, Mr. Stam stated that the major point of difference was whether invested capital should be used as a basis of taxation as in the plan suggested by the Treasury. Mr. Stam said he felt that the use of invested capital would impose hardships on some taxpayers and was not entirely a fair method. Be them said that be had understood that Great Britain and Canada had abandoned or were about to abandon the use of invested capital and were using a comparison of pre-war and current earnings to measure excess profits. Be said be was not proposing such a. plan, and that be had no plan to suggest which was free from serious difficulty. Mr. Stam stated that if the invested capital prin- ciple was to be used, be believed the Treasury proposal was the best method that had been suggested for applying it. Mr. Doughton then asked Mr. Sullivan if the Treasury was ready to proceed today. Mr. Sullivan assured the Committee that the Treasury TAB ready to pro- ceed at once. Mr. Doughton then asked Mr. Stam if be was ready now, or wished Regraded Unclassified 43 - 2 - nore time. Mr. Stam indicated that be would like the remainder of this week to continue his research. Mr. Doughton then expressed the view, which was supported by Mr. Cooper, that it would be well to have an agreement between the Treasury and the Joint Committee Staff and that time would be saved for the Committee if consideration was postponed until next week, when presumably an agreement would have been reached or in the absence of an agreement, Mr. Stam would have a definite plan to present. It was accordingly determined to reconvene the group at 10:30 Tuesday morning, July 30th. Among the important sapects of the EXCESS profite tax discussed at the Conference ware the following: Senstor Byrd asked whether the depreciation of assets recorded on the books would not reduce invested capital to zero in many cases. It was explain- ed that since the deduction of depreciation was offset by the increase in other assets, the capital would remain intact unless there were losses or distribu- tions of the capital to stockholders. Mr. Buck was interested in the same problem and also in the analogous problem of depletion. Mr. McCormack, together with Senator Byrd, raised the question of whether the Treasury plan would arrive at an invested capital figure representing the true worth of the business. Mr. Sullivan answered that it might not, but that true worth was something on which reasonable men might have widely different opinions. The theoretical issue involved was not discussed and the administra- tive problems of determining the present worth of the business were raised in only a passing manner. Mr. McCormack suggested that rather than determine invested capital as proposed in the Treasury plan, the Bureau of Internal Revenue and the taxpayer should sit down together and arrive at a mutually agreeable figure for invested capital. Senator Connally expressed the belief that invested capital is necessary as a basis for excess profits taxation. Be stated that he desired the tax to be imposed in time of peace as well as during an emergency period. In this, be was opposed by Mr. McCormack, while Senator George expressed the view that the tax would continue after the emergency. Senator Connally expressed doubt as to the desirability of including borrowed capital as part of invested capital. There was considerable dis- cussion whether a tax could be applied only to certain industries which bene- fited specifically from the defense program. Senator Byrd and others expressed the belief that it would be impossible to segregate the benefiting industries sufficiently to permit the distinction to be made. Senator George appeared to be of the opinion that the tax should prefer- ably apply only to profits in excess of those received during a base period. He expressed the opinion that if the invested capital basis were used, over- capitalised concerns (as examples he mentioned the United States Steel Corpor- ation and the railroads) would pay little tax while smaller concerns would be heavily burdened. JLS Regraded Unclassified 44 saly 22. 1949 m. Livesty I i Mill you kindly send the following collegrams "Aperiess Natussy, France. I INC I a Reference your July 16 to Interverth. 90 have telled with Phillips and Beoley should French balance is Great Aritain. these affiews main that Mondek and other nembers of the French lisberry the, asserding to Butterverih's message of day 18, - then coiling for France, will be to a position to provide this information. Reference your 63. July 23, 33.m. French balances is the Waited States were subjected w a Insurative Order dated date 17 to treatment sizilar to that conserted accete of Delgium et other Laraded areas. Be general licenses covering efficial Fresch balances have born issued, the system to the - as explained to you when is Washington. All persinent regulations unles the control system have been mailed to you currently w this Treasury. Levey-Beaulion line librovise been provided and states that he has hept the French Ministry of Finance informed. In summary you are advised that the following transmotions with respect to property in which my intervet, direct # indirect, 10 hold by France, or m any person demiciled is, w & whjost. citizen w recident of Trace, its territories, dependencies ni personaleza, on or since My 17. 1990, except persons deniciled or residing is the United States on - date, my be effected only purcuss to & Moment (a) payments w transfers of credit involving ⑉ of mare beaking institutions within the United States: (b) exporte from the United States or correcting of gold w diver currency " bullies by any person within the United Mates: (d) dealings is oridences of indebtoduces w emerakip W my person within the United States: (e) my transaction designed to mis the foregoing requirements. Application fer and Itemse my be undo to the Federal Reserve Bank of See York w the American besies referred to to your communication w by my party be such transaction, whether or not is the United States. On July 19 good to treasury officials a coblegive - w his to the French Maintry of Pinance a day 15 giving Me interpretation Regraded Unclassified 45 - 2 - of American objectives of control as applied to French accete. So entered to obtain confirmation from the American treatury afficials as to the ear- restmoss of his interpretation of the control, which se refused. For your information, 10 414 not consider Me interpretation satisfactory." pms Regraded Unclassified 46 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 22, 1940 TO Secretary Morgenthau FROM Mr. Gaston Nos MERCHANT SHIP MOVEMENTS Matters Requiring Action by the Secretary of the Treasury None. Matters Not Requiring Action by the Secretary of the Treasury Closed Cases The Italian vessel ANTONIETTA requested on July 19, 1940, a departure permit for Philadelphia from Norfolk, Virginia. She carried 6,161 tons of scrap iron taken on at Port Arthur, Texas, and Pensacola, Florida, for Genos, Italy. On June 11, 1940, she put in at Norfolk and has remained there ever since. The ANTONIETTA is unarmed and under charter to an Italian concern controlled by the Royal Italian Government. Her first officer is an officer in the Italian Naval Reserve. On inquiry, it was learned that she intends to go to Philadelphia to unload the scrap iron and to pick up fuel. A departure permit was authorized on the morning of July 20, 1940. Pending Cases There is no change. in the status of the vessels described under paragraphs 2, 3, and 4 under "Pending Cases" in the July 17, 1940, re- port, nor are there any further developments on the normal peacetime consumption of petroleum products in Spain. Regraded Unclassified 47 COFF Secretary Morgenthau July 17, 1940 Mr. Cairns MERCHANT SHIP MOVEMENTS Closed Cases 1. A departure permit was refused for the American Tanker ARIAN, carrying petroleum products to Spain. This vessel 18 owned by the Texas Company, and 18 at Port Arthur, Texas. 2. A departure permit was refused for the American Tanker NEVADA, carrying petroleum products to Spain. This vessel is owned by the Texas Company, and is at Port Afthur, Texas. Pending Cases 1. The Texas Company has submitted a request to export 610,000 tono of petroleum products to Spain for the balance of the year 1940. This would make a grand total of 1,076,000 tons for the year 1940. A memorandum of a conference with representa- tives of the Texas Company held on July 17, 1940, is attached. This matter is under consideration. 2. The Texas Company has requested advice as to whether or not the SS MONTE JAVALON, under Spanish registry, will be permitted to carry 5,000 tons of asphalt to Spain. The vessel will be loaded at Port Neches, Texas, some time between August 10 and the early part of September. This matter is under consideration. 3. Suspicious circumstances have arisen in connection with the departure of the SIMLA, a Norwegian vessel now at the port of Philadelphia. No departure permit has been requested, but a stop order has been placed against such a request when it is received. 4. The Lithuanian Steamship DENNY is now in Boston. The Lithuanian-American Import & Export Corporation, 157 Chambers Street, New York City, has requested that it be advised if a departure permit is asked for this vessel. The corporation desires to submit certain facts to the Treasury Department before such permit is granted. This matter is under consideration. HC/cp (Initialed) H. C. 00: Miss Chauncey Mr. Foley Regraded Unclassified 48 July 22, 1940 Secretary Norgesthan Mr. Garbon MERCHANT SHIP MOVEMENTS Matters Requiring Action by the Secretary of the Treasury None. Nations Not Requiring Action by the Secretary of the Treasury Closed Cases The Italian vessel ANTONIETTA requested OB July 19, 1940, . departure permit for Philadelphia from Horfolk, Virginia. She carried 6,161 teas of serep Lron taken on at Port Arthur, Texas, and Pensonala, Florida, for Genos, Italy. On June 11, 1940. she put in at Norfalk and has remained there over sines, The ANTONISTTA is unermed and under charter to 43 Italian ecnosrn controlled by the Royal Isalian devernment. Her first efficer is as officer in the Italian Neval Reserve. On inquiry, it was learned that she intends to go to Philadelphis to valoed the screp iron at to pick up fuel. A departure permit was authorized on the morning of July 20, 1940. Pending Casse There is as change in the status of the vessels described under peragraphs 2, 3. and 4 under "Pending Cases* in the July 17, 1940, № port, ner are there my further developments a the normal pensetine consumption of petroleum products in Spain. ( E in M/oy 7/22/49 Regraded Unclassified 43 Incretary Horgenthan July 17g 1940 Mr. Cairna HERGRANT SKIP novements Closed_Cassa 1. A departure permit NJ refused for the American Tasker AREAN, carrying petrolous products to Spoin. This vassel is owned w the Terms Company, and is at Part Arthmr, Tome, 2, A departure permit m refused for the American fulur HEVARA, carrying petrolem products to Spains This ressel is owned by the Texas Company, and 10 at Port ADDRESS Tenns, 1. The teams Company has submitted & request to export 610,000 tab of petroleum products to Spain for the bulance of the year 1940. This would min a gread total of 1,076,000 tome for the year 1940. A of & conference with represents- tives of the Texas Company hald of July 17, 1940, is attached. This matter is under consideration, 2. The Temas Company has requested advise as to whether or not the u MOSTS JAVALON, under Spenish registry, will be permitted to carry 5,000 tomo of asphalt to Spain, the vessel will be leaded at Part Hoober, Texas, - time between August 10 and the early part of September, This matter is under consideration, 3. Supplatous have arisen in commetion with the departure of the a Norwegian vessel me at the part of Philadelphia, b departure permit has born requested, bet a stop order has been placed against such a request when at is received, 4. The Lithmain is MV in Bectom, the Imports & Report Corporation, 157 Checkers Street, les York aw, has requested that it be advised if a departure permit is asked for this vessel. The corporation desires to shalt certain faste to the Treasury Department before milk permit to greated, This matter is under commideration, m/n (Initialed) no a, 00c Bilse Chemosy It, Foley Regraded Unclassified 50 July 22, 1940 My dear Mr. Nelsons I an sending you herewith a copy of the President's message to the Congress of May 16 1940. I want to draw your particular attention to Page 4 where the President saids *For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-nade planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. . . "Our immediate problem is to superimpose on this production capacity a greatly increased ato ditional production capacity." I as sure I am correct in interpreting the President's message that when he referred to American- made planes be meant the complete planes with engines. Yours sincerely, (Signed) H. Morgesthau, Jr. Mr. Donald M. Nelson, Coordinator of National Defense Purchasing, Federal Reserve Building, Washington, D. c. By Mensenger 3'o Regraded Unclassified 51 July 22, 1940 My dear Mr. Nelson: I am sending you herewith a copy of the President's message to the Congress of May 16, 1940. I want to draw your particular attention to Page 4 where the President said: "For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. ... "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity." I am sure I am correct in interpreting the President's message that when he referred to American- made planes he meant the complete planes with engines. Yours sincerely, (Signed) H. Morgenthau, Jr. Mr. Donald M. Nelson, Coordinator of National Defense Purchasing, Federal Reserve Building, Washington, D. C. By Messenger Regraded Unclassified 52 July 22, 1940 By der Mr. Noleons I an sending you herewith a copy of the President's message to the Congress of May 15, 1940. I want to draw your particular attention to Page 4 where the President saids Tor the permanent record, I ask the Congress not to take any action which would in my may hamper OF delay the delivery of American-nado planes to foreign nations which have ordered them, or seek to purchase - planes, That, from the point of view of - on national defense, would be extremely shortsighted. é "Our immediate problem is to superimpose en this production capacity a greatly increased ad- divional production capacity. I - store I an correct in interpreting the President's mange that when be referred to American- made planes be ment the complete planes with sucines. Yours sincerely, (Signed) H. Morganthan, Jr. Mr. Denald M. Helson, Condinator of Mational Reserve Bulloing, Washington, Do Co m Memenager Regraded Unclassified 53 July 22, 1940 My dear Mr. McReynolds: I an sending you herewith a copy of the President's message to the Congress of May 16, 1940. I want to draw your particular attention to Page 4 where the President said: "For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. ... "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity." I an sure I an correct in interpreting the President's message that when he referred to American- made planes he meant the complete planes with engines. Yours sincerely, (bigned) H. Morgenthau, Jr. Mr. william H. McReynolds, Secretary to the Advisory Council of National Defense, State Department, Washington, D. c. By Messenger 3'o Regraded Unclassified 54 July 22, 1940 My dear Mr. MoReynolds: I am sending you herewith A copy of the President's message to the Congress of May 16, 1940. I want to draw your particular attention to Page 4 where the President said: "For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. - "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity." I an sure I an correct in interpreting the President's message that when he referred to American- made planes he meant the complete planes with engines. Yours sincerely, (Sagned) H. Morgenthusu, Vi. Mr. william H. McReynolds, Secretary to the Advisory Council of National Defense, State Department, Washington, D. C. By Messenger 55 July 22, 1940 My dear Mr. MoReynolds: I am sending you herewith a copy of the President's message to the Congress of May 16, 1940. I want to draw your particular attention to Page 4 where the President saids "For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-wade planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the paint of view of our own national defense, would be extremely shortsighted. ... "Our immediate problem is to superimpose on this production capacity a greatly increased as- ditional production capacity." I an sure I an correct in interpreting the President's message that when be referred to American- made planes he meant the complete planes with engines. Yours sincerely, (Signed) H. Morgenthau, VI: Mr. William He MoReynolds, Secretary to the Advisory Council of National Defense, State Department, Washington, D. c. By Messanger Regraded Unclassified 56 - FOR THE SECRETARY July 22, 1940 n. 1. Foley, Jr. Subject: Legislative preposals for small business loans. There are too principal bills pending at this Bossion. One of them is a. 3511, which is entitled, & Bill uso establish & permanent iniustrial loan corporation to assist financing institutions in making credit smil- able to commercial and industrial enterprises." The industrial loan corporation would discount for or purchase free financing institutions chligations of commercial w industrial basinesses and would also insure banks against lesses which they might metain upon obligations of commercial or industrial businesses. The management of the corporation would be vested in & Heard of directors composed of members of the Board of Governors of the Federal Reserve System, and its capital stock and surplas would be companed of funds paid by the Bearetary of the Treasury to purchase from each Federal Reserve Bank the stock of the Federal Deposit Insurance Corporation heretofere subscribed for by such back. The amount to be paid by the Secretary ef:the Treasury would come from the miscellaneous reseipts created w the increment resulting from reduction of the weight of the gold dollar. On Im 25, 1940, the Acting Secretary of the Treasury advised the Sairms of the Somete demittee on Beaking and (crrency that the MM 57 Secretary Marganthen - 2 we already authorised to advance credit and capital to business enterprise and that the EPO was the proper agency through which to advance muh assistance to business. I declimedte initial this report. The other bill is s. 3943, (which is almost identionl with a. 3839) and which is outitled A Bill ugo amend section 13b of the Federal Reserve 108, 48 anneded." This Mill would amount section 13b which now authorises Federal Reserve Banks to make Lease to optablished industrial or comercial businesses by climinating the requirements that the Lease be unde to established businesses, that they be unde for the purposo of providing working capital, end would also eliminate the limitation es the naturity of the leans so five years. This will also provides that the financing institution chligate steelf for only 10 percent of any less sustained by the Federal Reserve - instead of 20 persent as see provided. a June 12, 2940, the Acting Secretary of the Treasury delivered personally a report to the Chairman of the Committee a Deaking and Currency which suggested that instead of the MILL, there be enseted as amount which would discontinue entirely further advances of funds from the Treasury, requiring the repayment of advances heretefere mais, and clarifying certain asbiguities now existing in the operation of section 13b. This report pointed out that the maximum amount of loans extranting at my time under section 150 168 lass than $33,000,000, and that a n only $12,721,000 of loans was outstanding is addition to conditions of $0,600,000. $ declinedte initial this report. CLX:mp 7/22'40 (Initialed) B. H. You Jr. Regraded Unclassified 58 July 22, 1940 This 1s the Treasury draft which was ready for presentation to the Ways and Means Committee on July 22nd, but the Committee postponed the meeting until July 30th. to accept was not consideration mill 7/30 Regraded Unclassified Treasury Araft, 5 1.C ( / 7-22 r 1 59 y 7 in 5 1 6 7 - 30 . r 6 7 30 The following sections numbered 1 to 15, inclusive (Title I), are intended as an amendment to the Internal Revenue Code to be inserted as a new subchapter. The section numbers will be changed and quotation marks will be inserted later. The sections following the above mentioned sections (Title II) are intended as amendments to the Internal Revenue Code which are other than insertions of the new subchapter. They are necessary by reason of the new subchapter. They have been put in their proper places and surrounded by quotation marks. Regraded Unclassified 60 -1- 1 TITLE I 2 EXCESS PROFITS TAX 3 SEC. 1. DEFINITION OF INVESTED CAPITAL. 4 For the purposes of this subchapter the invested capital 5 for any taxable year (including the taxable years in the base 6 period) shall be the average invested capital for such year, 7 determined under section 2, reduced by an amount computed under 8 section 6. 9 SEC. 2. AVERAGE INVESTED CAPITAL. 10 The average invested capital for any taxable year (including 11 the taxable years for the base period) shall be the aggregate of 12 the daily invested capital for each day of such taxable year, 13 divided by the number of days in the twelve months preceding 14 the day following the close of the taxable year. 15 SEC. 3. DAILY INVESTED CAPITAL. 16 The daily invested capital for any day of the taxable year 17 shall be the sum of the equity invested capital for such day 18 plus the borrowed invested capital for such day. Regraded Unclassified -2- 61 1 SEC. 4. EQUITY INVESTED CAPITAL. 2 (a) Definition.-The equity invested capital for any day 3 of the taxable year shall be determined as of the beginning of 4 such day and shall be the sum of the following amounts -- 5 (1) Money paid in.--Money previously paid in for 6 stock, or as paid-in surplus, or as a contribution to 7 capital; 8 (2) Property paid in.-Property (other than money) 9 previously paid in (regardless of the time paid in) for 10 stock, or as paid-in surplus, or as a contribution to 11 capital. Such property shall be included in an amount 12 equal to its basis (unadjusted) for determining loss 13 upon sale or exchange. If the property was disposed of 14 before such taxable year, such basis shall be determined 15 in the same manner as if the property were still held 16 at the beginning of such taxable year. If such unadjusted 17 basis is a substituted basis it shall be adjusted, with 18 respect to the period before the property was paid in, 19 in the manner provided in section 113(b)(2); Regraded Unclassified -3- 62 1 (3) Taxable stock dividends.-Distributions in stock - 2 (A) Made prior to such taxable year; and 3 (B) Previously made during such taxable year 4 to the extent to which they are considered distribu- 5 tions of earnings and profits other than earnings and 6 profits of the taxable year; and 7 (4) Earnings and profits at beginning of year.--The 8 accumulated earnings and profits as of the beginning of 9 such taxable year; 10 less the sum of the following amounts - 11 (5) Distributions in previous years.-Distributions 12 made prior to such taxable year which were not out of 13 accumulated earnings and profits; 14 (6) Deficit in earnings and profits.--The deficit in 15 accumulated earnings and profits as of the beginning of 16 such taxable year; and 17 (7) Distributions during the year.-Distributions 18 previously made during such taxable year which are not 19 out of the earnings and profits of the taxable year. 1 (b) Rules for Application of Subsection (a).-For the 63 2 purposes of subsection (a) -- 3 (1) Distributions in stock.-The term "distribution 4 in stock" means a distribution by & corporation to its 5 shareholders in its stock or rights to acquire its stock. 6 To the extent that such a distribution was not subject 7 to tax in the hands of the distributee because it did not 8 constitute income to him within the meaning of the 9 Sixteenth Amendment to the Constitution or was not tax 10 able to him under the applicable revenue law it shall not 11 be considered a distribution. 12 (2) Distributions in first sixty days of taxable 13 year.-In the application of such subsection to any taxable 14 year beginning after December 31, 1940, 80 much of the 15 distributions (taken in the order of time) made during 16 the first sixty days thereof as does not exceed the 17 accumulated earnings and profits as of the beginning of 18 the taxable year (computed without regard to this para- 19 graph) shall be considered to have been made on the last 20 day of the preceding taxable year. 64 1 (3) Computation of earnings and profits of taxable 2 year.-For the purposes of subsection (a)(3)(B) and (7) 3 in determining whether B. distribution is out of the 4 earnings and profits of the taxable year, such carnings 5 and profits shall be computed as of the close of the 6 taxable year without diminution by reason of any distribu- 7 tion made during the taxable year and without regard to 8 the amount of earnings and profits at the time the dis- 9 tribution was made. 10 SEC. 5. BORROWED INVESTED CAPITAL. 11 (a) Borrowed Capital.-The borrowed. capital for any day of 12 the taxable year shall be determined as of the beginning of such 13 day and shall be the amount of the outstanding indebtedness (not 14 including interest) of the taxpayer which is evidenced by a bond, 15 note; bill of exchange, debenture, certificate of indebtedness, 16 nortgage, or dood of trust. 17 (b) Borrowed Invested Capital.--Borrowed invested capital for 18 any day of the taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts: 65 1 (1) An amount equal to that portion of the borrowed 2 capital for such day which does not exceed the excess of 3 $100,000 over the equity invested capital for such day; 4 (2) (A) If the equity invested capital for such day is 5 less than $100,000, an amount equal to 66 2/3 per centum of 6 that portion of the remainder of the borrowed capital for 7 such day which does not exceed $900,000; or 8 (B) If the equity invested capital for such day is 9 $100,000 or more and is less than $1,000,000, an amount equal 10 to 66 2/3 per contum of that portion of the borrowed capital 11 for such day which does not exceed the excess of $1,000,000 12 over the equity invested capital for such day; and 13 (3) An amount equal to 33 1/3 per centum of that 14 portion of the borrowed capital for such day as exceeds 15 the sum of - 16 (A) The amount ascertained under paragraph (1), 17 plus 18 (B) 150 per centum of the amount ascertained 19 under paragraph (2) -7- 99. 1 SEC. 6. ADMISSIBLE AND INADMISSIBLE ASSETS. 2 (a) Definitions.-For the purposes of this subchapter - 3 (1) The term "inadmissible assets" means - 4 (A) Stock in corporations except stock in a foreign 5 personal-holding company; and 6 (B) Obligations described in section 22(b)(4)(A). 7 (B), or (c) any part of the interest from which is 3 excludible from gross income or allowable as EL credit 9 against net income. 10 (2) The term "admissible assets" means all assets 11 other than inadmissible assets. 12 (b) Ratio of Inadmissibles to Total Assets.-The amount 13 by which the average invested capital shall be reduced as provided 14 in section 1 shall be an amount which is the same percentage 15 of the average invested capital as the percentage which the 16 total of the inadmissible assets is of the total of all assets. 17 For such purposes, the amount attributable to each asset held 18 at any time during the taxable year shall be determined by + 67 1 ascertaining the adjusted basis thereof (or, in the case of 2 money, the amount thereof) for each day of the taxable year BO held 3 and adding such daily amounts. The determination of such daily 4 amounts shall be made under regulations prescribed by the Commissioner 5 with the approval of the Secrotary. In the case of the taxable year 6 the adjusted basis shall be the adjusted basis for determining loss 7 upon sale or exchange as determined under section 113 of this titlo, 8 and in the case of a taxable year in the base period the adjusted 9 basis shall be the adjusted basis for determining loss upon sale or 10 exchange as determined under the income tax law applicable to such 11 taxable year. 12 (c) Computation of Inadmissible Assets in Case of Capital Gain 13 or Capital Loss.-If en amount of capital gain or capital loss with 14 respect to an inadmissible asset has been taken into account in 15 computing net income for the taxable year, then, in computing the 16 total inndmissible assets and the total of all assets for such year 17 for the purposes of subsection (b), so much of the amount attributable 18 to such inadmissible asset (computed without regard to this sub- 19 section) as bears the seme ratio thereto as the amount of capital Regraded Unclassified -9- 68 1 gain or loss BO taken into account bears to the sum of such amount 2 taken into account plus the dividends and interest on such asset 3 for such year, shall be considered as an admissible asset and 4 the remainder shall be considered as an inadmissible asset. 5 SEC. 7. EXCESS PROFITS NET INCOME. 6 (a) Taxable Years Beginning After December 31, 1939.-The 7 excess profite net income for any taxable year beginning 8 after December 31, 1939, shall be the normal-tax net income, 9 as defined in section 13(a)(2). for such year except that the 10 following adjustments shall be made: 11 (1) Dividends received.-The credit for dividends re- 12 ceived shall apply. without limitation, to all dividends 13 on stock of all corporations, except dividends (actual or 14 constructive) on stock of foreign personal-holding companies; 15 (2) Interest.-The deduction allowable for such tax- 16 able year for interest shall be reduced by an amount which 17 is the same percentage of BO much of such interest as 18 represents interest on the indebtedness included in the daily amounts of borrowed capital (determined under Regraded Unclassified -10- 69 1 section 5(a)) AS the percentage which the sun 2 of the daily amounts of borrowed invested capital 3 (determined under section 5(b)) is of the sum of 4 the daily amounts of the borrowed capital; 5 and 6 (3) Income taxes.-The deduction for taxes allowable 7 for such taxable year shall be increased by an amount 8 equal to the tex under Chapter 1 payable for such taxable 9 year. 10 (4) Depletion deduction.-The deduction for depletion 11 shall not exceed the amount which would be allowable if 12 computed without reference to percentage depletion under 13 section 114(b)(3) or (4). 14 (b) Taxable Years in Base Period.--The excess profits 15 net income for any taxable year in the base period - 16 (1) Taxable years 1936 and 1937.-In the case of B. 17 taxable year subject to the Revenue Act of 1936, 18 shall be the normal-tax net income, as defined in section 19 13(a) of such Act; or Regraded Unclassified -11- 70 1 (2) Taxable years 1938 and 1939.-In the case of any 2 other taxable year in the base period, shall be the special 3 class net income, as defined in section 14(a) of the applicable 4 revenue law; except that the following adjustments shall be mde: 5 (3) Dividends, interest, and taxes.-The credit for 6 dividends received and the deductions for interest and taxes 7 shall be adjusted in the same manner as provided in subsection 8 (a)(1). (2), and (3). respectively; end 9 (4) Disallowed capital losses.-There shall be added an 10 amount equal to the amount disallowed under section 117(d) of 11 the applicable revenue law by reason of the application of the 12 $2,000 limitation on the excess of losses over gains from the 13 sale or exchange of capital assets. 14 SEC. 8. EXCESS PROFITS CREDIT. 15 (a) Definitions.-For the purposes of this subchapter - 16 (1) (A) The term "base period" in the case of any texpayer 17 (except a taxpayer described in subparagraph (B) of this para- 18 graph) means the texablo years beginning after December 31. 19 1935, and before January 1, 1940. -12- 71 1 (B) In the case of & taxpayer whose first taxable year 2 under this subchapter begins on any date in 1940, which 3 was in existence during only part of the forty-eight months 4 prior to such date, the base period shell be such forty-eight 5 months. 6 (2) (A) The term "base period net income means the 7 aggregate of the excess profits net income for each of the 8 taxable years (except the years specified in subs regraph (B) 9 of this paragraph) in the base period, reduced, in the case 10 of each year in such period in which the deductions plus the 11 credit for dividends received exceeded the gross income, by 12 the amount of such excess. In determining the amount of 13 each such excess, the adjustments provided in section 7(b) 14 shall be made. 15 (B) In the case of & taxpayer the base period of 16 which is determined under paragraph (1)(B) of this sub- 17 section, the excess profits net income for any of the 18 taxable years the invested capital of which is computed 19 under paragraph (3) shall be the sum of (1) 10 per centum -13- 72 1 of 80 much of the invested capital for such year as does 2 not exceed $500.000 plus (11) 8 per centum of the remainder 3 of such invested capital. 4 (3) In the case of a taxpayer the base period of 5 which is determined under paragraph (1)(B) of this sub- 6 section - 7 (A) The invested capital for each of the tar- 8 able years of twelve months (beginning with the 9 beginning of its base period) during the whole of 10 which it was not in existence shall be the amount 11 determined under paragraph (5) (B) of this subsection; 12 and 13 (B) The invested capital for the taxable year 14 consisting of the remainder of that part of its base 15 period during which it was not in existence shall be 16 the amount determined under paragraph (5)(B) of this 17 subsection multiplied by the number of days in such 18 remainder, and divided by the number of days in the twelve months preceding the first day of its existence. Regraded Unclassified -14- 73 1 (4) The term "base period percentage" means the per- 2 centage which the base period net income is of the aggre- 3 gate of the invested capital for each of the taxable years 4 in the base period, but such percentage shall not be less 5 than 4 nor more than 10. 6 (5) In the case of & taxpayer which was in existence 7 before the beginning of its first taxable year under 8 this subchapter, its lowest invested capital shall be 9 whichever of the following amounts is the smaller: 10 (A) The smallest invested capital for any 11 preceding taxable year beginning after December 31, 12 1939; or 13 (B) An amount equal to the invested capital 14 as of the beginning of the first day of the tax- 15 payer's first taxable year beginning after December 16 31, 1939, reduced by the same percentage of re- 17 duction as is applicable under section 6 in 18 reduction of the average invested capital of the 19 preceding taxable year. -15- 74 1 (6) In the case of & taxpayer which was not in existence 2 before the beginning of its first taxable year under this 3 subchapter, its lowest invested capital shall be zero. 4 (b) Excess Profits Credit.-The excess profite credit shall 5 be an amount equal to the sun of the following: 6 (1) With respect to that part of the invested capital for 7 the taxable year which does not exceed $500,000 and does not 8 exceed the lowest invested capital, an amount which is a per- 9 centage thereof equal to the base period percentage or 6 per 10 centum, whichever is the greater; 11 (2) With respect to that part of the remainder of the 12 invested capital for the taxable year which does not exceed 13 the lowest invested capital, an amount which is a percentage 14 thereof equal to the base period percentage: 15 (3) If neither the invested capital for the tax- 16 able year nor the lowest invested capital is more than 17 $500,000, an amount equal to 10 per centum of the excess 18 of the invested capital for the taxable year over the 19 lowest invested capital; Regraded Unclassified -16- 75 1 (4) If both the invested capital for the taxable 2 year and the lowest invested capital are more than 3 $500,000, an amount oqual to 8 per centum of the excess 4 of the invested capital for the taxable year over the 5 lowest invested capital; and 6 (5) If the invested capital for the taxable 7 year is more than $500,000 and the lowest invested 8 capital is not more than $500,000: 9 (A) 10 per centum of the excess of 10 $500,000 over the lowest invested capital; 11 plus 12 (B) 8 per centum of the excess of the 13 invested capital for the texable year over 14 $500,000. 15 SEC. 9. IMPOSITION OF TAX. 16 (a) Definition of Adjusted Excess Profits Net Income.-- 17 As used in this section, the term "adjusted excess profits 18 not income" in the case of any taxable year means the excess 19 profits net income ninus the sun of: Regraded Unclassified -17- 76 1 (1) Specific exemption.--A specific exemption of 2 $5,000, or, if the taxable year is a period of less than 3 twelve months, an amount ascertained by multiplying 4 $5,000 by the number of days in the taxable year and 5 dividing the result by the number of days in the twelve 6 months preceding the day following the close of the 7 taxable year; and 8 (2) Not long-term capital gain.-The amount of 9 the net long-term capital gain, as defined in section 10 117(a)(8). 11 (b) Imposition.-There shall be levied, collected, and 12 paid, for each taxable year beginning after December 31, 13 1939, on the excess profits net income of every corporation 14 (except a corporation exempt, etc.) a tax equal to the sum 15 of the following: 16 (1) First bracket.-25 per centum of 80 much 17 of the adjusted excess profits net income as does not 18 exceed An amount equal to the excess of 15 per centum 19 of the invested capital over the excess profits credit; Regraded Unclassified -18- 77 1 (2) Second bracket.-40 per centum of so much 2 of the adjusted excess profits net income as exceeds 3 an amount equal to 15 per centum of the invested 4 capital and does not exceed 30 per centum of the 5 invested capital; 6 (3) Third bracket.-50 per centum of so much 7 of the adjusted excess profits net income as exceeds 8 an amount equal to 30 per centum of the invested 9 capital; plus 10 (4) Net long-term capital gains.-An amount of the 11 net long-term capital gain equal to a percentage thereof 12 which percentage is the highest rate applicable to any 13 part of the adjusted excess profits net income; but the 14 amount under this paragraph shall not exceed whichever of 15 the following amounts is the smaller: 16 (A) The sum of (1) 25 per centum of the 17 amount of such net long-term capital gain, plus 18 (ii) the amount of the adjusted excess profits net 19 income in excess of 15 per centum of the invested capital; or -19- 78 1 (B) The sun of (1) 40 per centum of the amount 2 of such net long-term capital gain, plus (11) the 3 amount of the adjusted excess profits net income in 4 excess of 30 per centum of the invested capital. 5 (c) Alternative Tax.-Where the adjusted excess profits net 6 income is less than 15 per centum of the invested capital, then the 7 tax imposed by this section shall be an amount equal to 25 per centum 8 of the amount by which the excess profits net income exceeds the 9 sum of (1) the excess profits credit and (2) the specific exemption 10 provided in subsection (a) (1). 11 SEC. 10. CONSOLIDATED RETURNS. 12 (a) Definition of "Affiliated Group".-As used in this -13 section an "effiliated group" means one or more chains of 14 corporations connected through stock ownership with a common 15 parent corporation if - 16 (1) At least 95 per centum of the stock of each 17 of the corporations (except the common parent corpora- 18 tion) is owned directly by one or more of the other 19 corporations: and -20- 1 79 1 (2) The common parent corporation owns directly 2 at least 95 per centum of the stock of at least one of 3 the other corporations. 4 As used in this subsection the term "stock" does not include 5 nonvoting stock which is limited and preferred as to dividends. 6 (b) Filing of Consolidated Returns.- 7 (1) An affiliated group of corporations, determined 8 as of the beginning of January 1, 1940, shall file a 9 consolidated return for the taxable year 10 of the common parent corporation under this 11 subchapter beginning after December 31, 1939, 12 and before January 1, 1941, in lieu of separate 13 returns. 14 (2) Corporations required to file a consolidated 15 return under paragraph (1) of this subsection shall 16 file consolidated returns for the taxable years 17 beginning after December 31, 1940, and before January 1, 1943, 18 in lieu of separate returns, except that any of such 19 corporations - -21- 80 1 w Which at any time during the first of such taxable 2 years would not be included within the affiliated group if 3 the percentage figure in subsection (a) were 80 per centum 4 in lieu of 95 per centun, shall not be included in the 5 consolidated return for each of such taxable years, but shall 6 be required to file a separate return for such years; or 7 (B) Which at any time during the second of such tax- 8 able years would not be included within the affiliated group 9 if the percentage figure in subsection (a) were 80 per 10 centun in lieu of 95 per centum, shall not be included in 11 the consolidated return for such taxable year, but shall be 12 required to file a soparate return for such year. 13 (c) Regulations.-The Commissioner, with the approval 14 of the Secretary, shall prescribe such regulations as he may 15 deem necessary in order that the tax liability of any affiliated 16 group of corporations making & consolidated return and of each 17 corporation in the group, both during and after the period of 18 affiliation, may be determined, computed, assessed, collected, 19 and adjusted in such manner as clearly to reflect the base -22- 81 1 period percentage, the invested capital, and the excess profits net 2 income, and to prevent avoidance of tax liability. 3 (d) Computation and Payment of Tax.-In any case in which a it consolidated return 18 made the tax shall be determined, computed, 5 assessed, collected, and adjusted in accordance with the regulations 6 under subsection (b). 7 (e) Foreign Corporations.-A foreign corporation shall not be 8 deemed to be affiliated with any other corporation within the meaning 9 of this section. 10 (f) China Trade Act Corporations.-A corporation organized under 11 the China Trade Act, 1922, shall not be deemed to be affiliated with 12 any other corporation within the meaning of this section. 13 (g) Corporations Deriving Income From Possessions of United 14 States.-For the purposes of this section c. corporation entitled to the 15 benefits of section 251, by reason of receiving a large percentage of its 16 income from possessions of the United States, shell be treated as a 17 foreign corporation. 18 (h) Allocation of Income and Deductions.-For allocation of income 19 and deductions of related trades or businesses, see section 45. -23- 82 1 SEC. 11. PERSONAL SERVICE CORPORATIONS. 2 (a) Definition.-As used in this subchapter, the term 3 "personal service corporation" means a corporation whose income 4 is to be ascribed primarily to the activities of the principal 5 owners or stockholders who are themselves regularly engaged in 6 the active conduct of the affairs of the corporation and in 7 which capital (whether invested or borrowed) is not a material 8 income-producing factor; but does not include any foreign 9 corporation, nor any corporation 50 per centum or more of 10 whose gross income consists of gains, profits, or income 11 derived from trading as a principal. 12 (b) Election as to Taxability.-If a personal service 13 corporation signifies, in its return for any taxable year, 14 its desire not to be subject to the tax imposed under this 15 subchapter for such taxable year, it shall be exempt from 16 such tax for such year, and the provisions of Supplement S 17 of Chapter 1 shall apply to the shareholders in such corpora- 18 tion who were such shareholders on the last day of such tax- 19 able year of the corporation. -24- 1 SEC. 12. SPECIAL CASES. 83 2 (a) Equity Invested Capital.-Where the Commissioner 3 determines that the equity invested capital as of the beginning 4 of the taxpayer's first taxable year under this subchapter 5 cannot be determined in accordance with section 4, such equity 6 invested capital shall be an amount, determined in accordance 7 with rules and regulations prescribed by the Commissioner with 8 the approval of the Secretary, equal to the aggregate of the 9 adjusted basis, at such time, of the assets of the taxpayer 10 then held minus the indebtedness outstanding at such time. 11 The equity invested capital for each day in the taxpayer's 12 base period and for each day after the beginning of the tax- 13 payer's first taxable year under this subchapter shall be 14 determined, in accordance with rules and regulations prescribed 15 by the Commissioner with the approval of the Secretary, using 16 as the basic figure the equity invested capital as of the be- 17 ginning of such first taxable year. 18 (b) Foreign Corporations.-In the case of a foreign 19 corporation engaged in trade or business within the United 20 States or having an office or place of business therein, the -25 1 invested capital for any taxable year shall be determined in 84 2 accordance with rules and regulations prescribed by the Com- 3 missioner with the approval of the Secretary, under which - 4 (1) General rule.--The daily invested capital for 5 any day of the taxable year shall be the aggregate of the 6 adjusted basis of each United States asset held by the 7 taxpayer on the beginning of such day. In the application 8 of section 6 in reduction of the average invested capital 9 (determined on the basis of such daily invested capital), 10 the terms "admissible assets" and "inadmissible assets" 11 shall include only United States assets; or 12 (2) Exception.-If the Commissioner determines that 13 the amount of United States assets of the taxpayer cannot 14 be determined, the invested capital for the taxable year 15 shall be an amount which is the same percentage of the 16 aggregate of the adjusted basis of all assets held by the 17 taxpayer as of the end of the last day of the taxable year 18 which the net income for the taxable year from sources within 19 the United States is of the total net income of the taxpayer 20 for such year. -26- 85 1 As used in this subsection, the term "United States asset" means 2 an asset held by the taxpayer in the United States, determined 3 in accordance with rules and regulations prescribed by the Com- 4 missioner with the approval of the Secretary. 5 SEC. 13. EXEMPT CORPORATIONS. 6 The following corporations shall be exempt from the tax 7 imposed by this subchapter: 8 (a) Corporations exempt under section 101 from the tax 9 imposed by Chapter 1. 10 (b) Foreign personal holding companies, as defined in 11 section 331. 12 (c) Mutual investment companies, as defined in section 361. 13 (d) Personal holding companies, as defined in section 501. 14 (e) Foreign corporations not engaged in trade or business 15 within the United States and not having an office or place of 16 business therein. 17 SEC. 14. MEANING OF TERMS USED. 18 The terms used in this subchapter shall have the same 19 meaning as when used in Chapter 1. -27- 86 1 SEC. 15. ADMINISTRATIVE PROVISIONS. 2 All provisions of law (including penalties) applicable in 3 respect of the taxes imposed by Chapter 1, shall, insofar as 4 not inconsistent with this subchapter, be applicable in respect 5 of the tax imposed by this subchapter. 6 TITLE II 7 AMENDMENTS TO CHAPTER 1 OF INTERNAL REVENUE CODE 8 SEC. 201. EARNINGS AND PROFITS OF CORPORATIONS. 9 (a) Under Internal Revenue Code.-Section 115 of the 10 Internal Revenue Code is amended by inserting at the end 11 thereof the following new subsection: 12 "(1) Effect on Earnings and Profits of Recognition of 13 Gain or Loss and of Receipt of Tax-free Distributions.- 14 Gain or loss from the sale or other disposition (after 15 February 28, 1913) of property by a corporation shall increase 16 or decrease its earnings and profits (for .any period beginning 17 after February 28, 1913) to, but not beyond, the extent to 18 which such gain or loss was (under the law applicable to the 19 year in which such sale or disposition was made) recognized 87 -28- 1 in computing net income, or (in the case of loss) would have 2 been SO recognized under such law if under such law the basis 3 (including a substituted basis) for determining the loss had 4 been the fair market value on March 1, 1913, if higher than 5 a basis otherwise determined. Where in determining the adjusted 6 basis used in computing such recognized gain or loss, the 7 adjustment to the basis (or, in the case of loss, the fair 8 market value on March 1, 1913, if such value is higher than 9 the basis) is different from the adjustment to such basis 10 proper for the purpose of determining earnings and profits, 11 then the latter adjustment shall be used in determining the 12 increase or decrease above provided. Where a corporation 13 receives (after February 28, 1913) a distribution from a 14 second corporation which (under the law applicable to the 15 year in which the distribution was made) was not a taxable 16 dividend to the shareholders of the second corporation, the 17 amount of such distribution shall not increase the earnings 18 and profits (for any period beginning after February 28, 1913) 19 of the first corporation in the following cases: -29- 88 1 "(1) No such increase shall be made in respect of 2 the part of such distribution which (under such law) 3 is directly applied in reduction of the basis of the 4 stock in respect of which the distribution was made. 5 "(2) No such increase shall be made if (under such 6 law) the distribution causes the basis of the stock in 7 respect of which the distribution was made to be allocated 8 between such stock and the property received." 9 (b) Effective Date of Amendment.-The amendment made by 10 subsection (a) shall be applicable to taxable years beginning 11 after December 31, 1938. 12 (c) Under Prior Acts.-The following rules shall be 13 applied, for the purposes of the Revenue Act of 1938 or any 14 prior Revenue Act as if such rules were a part of each such 15 Act when it was enacted, in determining the earnings and 16 profits of a corporation for any period after February 28, 1913: 17 Gain or loss from the sale or other disposition (after 18 February 28, 1913) of property by a corporation shall increase 19 cr decrease its earnings and profits (for any period beginning -30- 89 1 after February 28, 1913) to, but not beyond, the extent to 2 which such gain or loss was (under the law applicable to 3 the year in which such sale or disposition was made) recognized 4 in computing net income, or (in the case of loss) would have 5 been so recognized under such law if under such law the basis 6 (including a substituted basis) for determining the loss had 7 been the fair market value on March 1, 1913, if higher than a 8 basis otherwise determined. Where in determining the adjusted 9 basis used in computing such recognized gain or loss, the 10 adjustment to the basis (or, in the case of loss, the fair 11 market value on March 1, 1913, if such value is higher than 12 the basis) is different from the adjustment to such basis 13 proper for the purpose of determining earnings and profits, 14 then the latter adjustment shall be used in determining the 15 increase or decrease above provided. Where a corporation re- 16 ceives (after February 28, 1913) a distribution from a second 17 corporation which (under the law applicable to the year in 18 which the distribution was made) was not a taxable dividend 19 to the shareholders of the second corporation, the amount of Regraded Unclassified -31- 90 1 such distribution shall not increase the earnings and profits 2 (for any period beginning after February 28, 1913) of the first 3 corporation in the following cases: 4 (1) No such increase shall be made in respect of 5 the part of such distribution which (under such law) is 6 directly applied in reduction of the basis of the stock 7 in respect of which the distribution was made. 8 (2) No such increase shall be made if (under such law) 9 the distribution causes the basis of the stock in respect 10 of which the distribution was made to be allocated between 11 such stock and the property received. 12 SEC. 202. TAX OF SHAREHOLDERS OF PERSONAL SERVICE CORPORATIONS. 13 Chapter 1 of the Internal Revenue Code is amended by insert- 14 ing after Supplement R the following new Supplement: 15 "SUPPLEMENT S - TAX OF SHAREHOLDERS OF PERSONAL 16 SERVICE CORPORATIONS 17 "SEC. 391. APPLICABILITY OF SUPPLEMENT. 18 "If a personal service corporation (as defined in section 19 of subchapter of Chapter ) is exempt under such -32- 91 1 section for any taxable year from the excess profits tax imposed 2 by such subchapter, the provisions of this Supplement shall be 3 applicable with respect to each shareholder of such corporation who 4 was a shareholder in such corporation on the last day of such 5 taxable year of the corporation. 6 "SEC. 392. UNDISTRIBUTED SUPPLEMENT S NET INCOME. 7 "For the purposes of this chapter, the term 'undistributed 8 Supplement S net income' means the Supplement S net income 9 (as defined in section 393) minus the amount of the dividends 10 paid during the taxable year. 11 "SEC. 393. SUPPLEMENT S NET INCOME. 12 "For the purposes of this chapter 'Supplement S net 13 income' means the net income, except that there shall be 14 allowed as additional deductions - 15 "(a) The Federal income tax payable under this chapter 16 for the taxable year; and 17 "(b) In lieu of the deduction allowed by section 23(q), 18 contributions or gifts, payment of which is made within the 19 taxable year, to or for the use of donees described in section 92 -33- 1 23(q) for the purposes therein specified, to an amount which 2 does not exceed 15 per centum of the corporation's net income, 3 computed without the benefit of this subsection and section 23(q). 4 "SEC. 394. CORPORATION INCOME TAXED TO SHAREHOLDERS. 5 "(a) General Rule.-The undistributed Supplement S net 6 income of a personal service corporation shall be included 7 in the gross income of the shareholders in the manner and to 8 the extent set forth in this Supplement. 9 "(b) Amount Included in Gross Income.-Each shareholder 10 who, on the last day of the taxable year of the corporation, 11 was a shareholder in such corporation shall include in his gross 12 income, as a dividend, for the taxable year for which or in 13 which the taxable year of the corporation ends, the amount he 14 would have received as a dividend if on such last day there 15 had been distributed by the corporation, and received by the share- 16 holders, an amount equal to the undistributed Supplement S net 17 income of the corporation for the taxable year. 18 "(c) Credit for Obligations of the United States and Its 19 Instrumentalities.-Each such shareholder shall be allowed a credit -34- 93 1 against net income, for the purposes of the tax imposed by 2 section 11, 13, 14, 201, 204, 207, or 362, of his proportionate 3 share of the interest specified in section 25(a)(1) or (2) 4 which is included in the gross income of the corporation. 5 "(d) Effect on Capital Account of Personal Service 6 Corporation.-An amount equal to the undistributed Supplement S 7 net income of the personal service corporation for its taxable 8 year shall be considered as paid-in surplus or as a contribution 9 to capital, and the accumulated earnings and profits as of the 10 close of the taxable year shall be correspondingly reduced, 11 if such amount or any portion thereof is required to be included 12 as a dividend in the gross income of the shareholders. 13 "(e) Basis of Stock in Hands of Shareholders.-The amount 14 required to be included in the gross income of the shareholder 15 under subsection (b) shall, for the purpose of adjusting the 16 basis of his stock with respect to which the distribution would 17 have been made (if it had been made), be treated as having 18 been reinvested by the shareholder as a contribution to the 19 capital of the corporation; but only to the extent to which -35- 94 1 such amount is included in his gross income in his return, 2 increased or decreased by any adjustment of such amount in 3 the last determination of the shareholder's tax liability, 4 made before the expiration of seven years after the date 5 prescribed by law for filing the return. 6 "(f) Period of Limitation on Assessment and Collection.- 7 For period of limitation on assessment and collection without 8 assessment, in the case of failure to include in gross income 9 the amount properly includible therein under subsection (b), 10 see section 275(d). 11 "SEC. 395. NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS. 12 "In the case of a shareholder taxable under section 13 211(a) or 231(a), his distributive share of the undistributed 14 Supplement S net income of the corporation required to be 15 included in the gross income shall be considered as a dividend 16 received by him from sources within the United States. 17 "SEC. 396. SHAREHOLDER'S TAX PAID BY CORPORATION. 18 "If a personal service corporation is exempt for any 19 taxable year under section of subchapter of Chapter -36- 95 1 from excess profits tax, it shall, at the time of filing its 2 return, pay to the collector an amount equal to the amount 3 that would be required by section 143(b) or 144 to be deducted 4 and withheld by the corporation if any amount required by this 5 Supplement to be included in the gross income of the share- 6 holder had been, on the last day of the taxable year of 7 the corporation, paid to the shareholder in cash as a dividend. 8 Such amount shall be collected and paid in the same manner as 9 the amount of tax due in excess of that shown by the taxpayer 10 upon a return in the case of a mathematical error appearing on 11 the face of the return." 12 SEC. 203. STATUTE OF LIMITATIONS IN CASE OF CONSTRUCTIVE 13 DIVIDENDS. 14 Section 275(d) of the Internal Revenue Code (relating to 15 statute of limitations) is amended to read as follows: 16 "(d) Constructive Dividends.-If the taxpayer omits 17 from gross income an amount properly includible therein: 18 "(1) Foreign personal holding companies.-Under 19 section 337(b) (relating to the inclusion in the gross 20 income of United States shareholders of their distributivo -37- 96 1 shares of the undistributed Supplement P net income of 2 a foreign personal holding company); or 3 "(2) Personal service corporations.-Under section 4 394(b) (relating to the inclusion in the gross income 5 of shareholders of their distributive shares of un- 6 distributed Supplement S net income of a personal service 7 corporation); 8 the tax may be assessed, or a proceeding in court for the 9 collection of such tax may be begun without assessment, at any 10 time within seven years after the return was filed." 11 SEC. 204. CREDIT OF NONRESIDENT ALIEN OF TAX AS S HAREHOLDER 12 IN PERSONAL SERVICE CORPORATION. 13 Section 216 of the Internal Revenue Code (relating to 14 credit against tax of a nonresident alien individual) is 15 amended by adding at the end thereof a new sentence to read 16 as follows: "A nonresident alien individual shall be allowed 17 as a credit against his tax the amount required by section 396 18 to be paid by the personal service corporation of which he 19 is a shareholder with respect to his tax liability under Supplement S." 97 -38- 1 SEC. 205. CREDIT OF FOREIGN CORPORATION OF TAX AS SHAREHOLDER 2 IN PERSONAL SERVICE CORPORATION. 3 Section 234 of the Internal Revenue Code (relating 4 to credits against tax of foreign corporations) is amended 5 by adding at the end thereof a new sentence tc read as follows: 6 "A foreign corporation shall be allowed as a credit against 7 its tax the amount required by section 396 to be paid by 8 the personal service corporation of which it is a shareholder 9 with respect to its tax liability under Supplement S." -29- 98 1 "(1) No such increase shall be made in respect of 2 the part of such distribution which (under such law) 3 is directly applied in reduction of the basis of the 4 stock in respect of which the distribution was made. 5 "(2) No such increase shall be made if (under such 6 law) the distribution causes the basis of the stock in 7 respect of which the distribution was made to be allocated 8 between such stock and the property received." 9 (b) Effective Date of Amendment.-The amendment made by 10 subsection (a) shall be applicable to taxable years beginning 11 after December 31, 1938. 12 (c) Under Prior Acts.-The following rules shall be 13 applied, for the purposes of the Revenue Act of 1938 or any 14 prior Revenue Act as if such rules were a part of each such 15 Act when it was enacted, in determining the earnings and 16 profits of a corporation for any period after February 28, 1913: 17 Gain or loss from the sale or other disposition (after 18 February 28, 1913) of property by a corporation shall increase 19 or decrease its earnings and profits (for any period beginning -28- 99 1 in computing net income, or (in the case of loss) would have 2 been so recognized under such law if under such law the basis 3 (including a substituted basis) for determining the loss had 4 been the fair market value on March 1, 1913, if higher than 5 a basis otherwise determined. Where in determining the adjusted 6 basis used in computing such recognized gain or loss, the 7 adjustment to the basis (or, in the case of loss, the fair 8 market value on March 1, 1913, if such value is higher than 9 the basis) is different from the adjustment to such basis 10 proper for the purpose of determining earnings and profits, 11 then the latter adjustment shall be used in determining the 12 increase or decrease above provided. Where a corporation 13 receives (after February 28, 1913) a distribution from a 14 second corporation which (under the law applicable to the 15 year in which the distribution was made) was not a taxable 16 dividend to the shareholders of the second corporation, the 17 amount of such distribution shall not increase the earnings 18 and profits (for any period beginning after February 28, 1913) 19 of the first corporation in the following cases: -27- 100 1 SEC. 15. ADMINISTRATIVE PROVISIONS. 2 All provisions of law (including penalties) applicable in 3 respect of the taxes imposed by Chapter 1, shall, insofar as 4 not inconsistent with this subchapter, be applicable in respect 5 of the tax imposed by this subchapter. 6 TITLE II 7 AMENDMENTS TO CHAPTER 1 OF INTERNAL REVENUE CODE 8 SEC. 201. EARNINGS AND PROFITS OF CORPORATIONS. 9 (a) Under Internal Revenue Code.-Section 115 of the 10 Internal Revenue Code is amended by inserting at the end 11 thereof the following new subsection: 12 "(1) Effect on Earnings and Profits of Recognition of 13 Gain or Loss and of Receipt of Tax-free Distributions.- 14 Gain or loss from the sale or other disposition (after 15 February 28, 1913) of property by a corporation shall increase 16 or decrease its earnings and profits (for any period beginning 17 after February 28, 1913) to, but not beyond, the extent to 18 which such gain or loss was (under the law applicable to the 19 year in which such sale or disposition was made) recognized Regraded Unclassified -26- 101 1 As used in this subsection, the term "United States asset" means 2 an asset held by the taxpayer in the United States, determined 3 in accordance with rules and regulations prescribed by the Com- 4 missioner with the approval of the Secretary. 5 SEC. 13. EXEMPT CORPORATIONS. 6 The following corporations shall be exempt from the tax 7 imposed by this subchapter: 8 (a) Corporations exempt under section 101 from the tax 9 imposed by Chapter 1. 10 (b) Foreign personal holding companies, as defined in 11 section 331. 12 (c) Mutual investment companies, as defined in section 361. 13 (d) Personal holding companies, as defined in section 501. 14 (e) Foreign corporations not engaged in trade or business 15 within the United States and not having an office or place of 16 business therein. 17 SEC. 14. MEANING OF TERMS USED. 18 The terms used in this subchapter shall have the same 19 meaning as when used in Chapter 1. -25 102 1 invested capital for any taxable year shall be determined in 2 accordance with rules and regulations prescribed by the Com- 3 missioner with the approval of the Secretary, under which - 4 (1) General rule.--The daily invested capital for 5 any day of the taxable year shall be the aggregate of the 6 adjusted basis of each United States asset held by the 7 taxpayer on the beginning of such day. In the application 8 of section 6 in reduction of the average invested capital 9 (determined on the basis of such daily invested capital), 10 the terms "admissible assets" and "inadmissible assets" 11 shall include only United States assets; or 12 (2) Exception.-If the Commissioner determines that 13 the amount of United States assets of the taxpayer cannot 14 be determined, the invested capital for the taxable year 15 shall be an amount which is the same percentage of the 16 aggregate of the adjusted basis of all assets held by the 17 taxpayer as of the end of the last day of the taxable year 18 which the net income for the taxable year from sources within 19 the United States is of the total net income of the taxpayer 20 for such year. -24- 1 SEC. 12. SPECIAL CASES. 103 2 (a) Equity Invested Capital.-Where the Commissioner 3 determines that the equity invested capital as of the beginning 4 of the taxpayer's first taxable year under this subchapter 5 cannot be determined in accordance with section 4, such equity 6. invested capital shall be an amount, determined in accordance 7 with rules and regulations prescribed by the Commissioner with 8 the approval of the Secretary, equal to the aggregate of the 9 adjusted basis, at such time, of the assets of the taxpayer 10 then held minus the indebtedness outstanding at such time. 11 The equity invested capital for each day in the taxpayer's 12 base period and for each day after the beginning of the tax- 13 payer's first taxable year under this subchapter shall be 14 determined, in accordance with rules and regulations prescribed 15 by the Commissioner with the approval of the Secretary, using 16 as the basic figure the equity invested capital as of the be- 17 ginning of such first taxable year. 18 (b) Foreign Corporations.-In the case of a foreign 19 corporation engaged in trade or business within the United 20 States or having an office or place of business therein, the -23- 104 1 SEC. 11. PERSONAL SERVICE CORPORATIONS. 2 (a) Definition.-As used in this subchapter, the term 3 "personal service corporation" means & corporation whose income 4 is to be ascribed primarily to the activities of the principal 5 owners or stockholders who are themselves regularly engaged in 6 the active conduct of the affairs of the corporation and in 7 which capital (whether invested or borrowed) is not a material 8 income-producing factor; but does not include any foreign 9 corporation, nor any corporation 50 per centum or more of 10 whose gross income consists of gains, profits, or income 11 derived from trading as a principal. 12 (b) Election as to Taxability.-If a personal service 13 corporation signifies, in its return for any taxable year, 14 its desire not to be subject to the tax imposed under this 15 subchapter for such taxable year, it shall be exempt from 16 such tax for such year, and the provisions of Supplement S 17 of Chapter 1 shall apply to the shareholders in such corpora- 18 tion who were such shareholders on the last day of such tax- 19 able year of the corporation. -22- 105 1 period percentage, the invested capital, and the excess profits net 2 income, and to prevent avoidance of tax liability. 3 (d) Computation and Payment of Tax.-In any case in which & it consolidated return is made the tax shall be determined, computed, 5 assessed, collected, and ad justed in accordance with the regulations 6 under subsection (b). 7 (e) Foreign Corporations.- 1 foreign corporation shall not be 8. deemed to be affiliated with any other corporation within the meaning 9 of this section. 10 (f) China Trade Act Corporations.-A corporation organized under 11 the China Trade Act, 1922, shall not be deemed to be affiliated with 12 any other corporation within the meaning of this section. 13 (g) Corporations Deriving Income From Possessions of United 14 States.-For the purposes of this section & corporation entitled to the 15 benefits of section 251, by reason of receiving a large percentage of its 16 income from possessions of the United States, shell be treated as a 17 foreign corporation. 18 (h) Allocation of Income and Deductions.-For allocation of income 19 and deductions of related trades or businesses, see section 45. 106 AL CONFIDENTIAL. BUSINESS ADVISORY COUNCIL FOR THE DEPARTMENT OF COMMERCE Recommendations of the Committee on Taxation on the EXCESS PROFITS TAX Approved in Substance Executive Committee Business Advisory Geuncil July 12, 1940. 13154 107 The evident need for additional revenue legialation to help defrey the cost of current and prospective expenditures for national defense and apparent popular opinion that such additional revenue should be derived from the increase in net profits or income attributable to expected improvement in business and industrial activity have resulted in a number of proposals for the levy of an excess profits tax during the emergency period. Members of the Tax Committee have reviewed a number of these proposals and have discussed the question generally with representatives of the Treasury Department, and in the event the Congress should decide to levy such a tax, recommend that it be imposed in con- formity with suggestions as follows: 1. That the basis or measure for determination of the tax be made in all respects as definite and certain as may be. It is of primary importance that taxpayers know with reasonable certainty the burdens with which they are faced, and the importance of this fact increases with increase in tax rates. Heavy taxes affect prices, and uncertainties as to tax liability tend to cause price inflation to cover maximum rather than actual tax burdens. Moreover, high tax rates accentuate adwinistrative problems and difficulties and increase risks of litigation, expensive to both taxpayers and government. Such difficulties and risks are substantially reduced by definiteness and certainty in the provisions of the law imposing the tax, 2. That the tax be imposed on all corporations and associations, other than personal service and exempt corporations, for & limited period of three to five years, the first taxable year to be the first calendar or fiscal year commencing after December 31, 1939. 13154 - 2 - 108 Due to difficulties of administration and the fact that individual surtaxes should provide an adequate means for taxing excess profits earned by individual enterprises, partnerships, personal service corporations, etc., it is felt that the excess profits tax should be limited to corporations and associations corporate in nature. It may be observed that an excess profits tax applicable to all taxpayers was tried for the year 1917, and presumably for such reasons was there-after limited to corporations and associations for 1918 and subsequent years. 3. That the tax for each year be made the smaller of two tentative taxes as follows: (a) & tax based upon net profits in excess of average net profits for a defined base period preceding the emergency period; and (b) a tax based upon net profits in excess of a. specified percentage of invested capital, a specific credit of $3,000 to be allowed in either case, While it appears that the levy of tax upon net profits in excess of average net profits for a base period would be the simplest and most uniformly desirable type of levy for a limited emergency period, it would evidently result in substantial hardships in certain cases. The necessity for some type of equalisation is readily seen when you compare the inadequate base period income of such businesses as heavy goods, railways, and the like, with more adequate incomes of other business with comparatively small investment in base period years. It is believed that the alternative methods of determination would aliminate substantial inequalities of application in the great majority of cases, It is suggested that the taxpayer, by regulation or otherwise, be afforded an option to report and pay the tax computed by either method, waiving the benefit of the alternative computation. The specific credit of $3,000 is suggested for the relief of small corporations and corresponds to a similar credit allowed under the 1918 and 1921 Revenue Acts. 13154 -3 - - 109 4. That the tax be imposed at rates substantially as follows: Net Profits Bracket Tax Rate Method (a) 0 - 100% of storage net profits for base period exempt 100%* 150% of average net profits for base period 20% Over 150% of average net profits for base pariod 40% Method (b) 0 - 8% of invested capital exempt 8%* - 20% of invested capital 20% Over 20% of invested capital 40% # Plus specific exemption of $3,000. The rates suggested under method (b) are the same as the excess profits tax rates levied under the 1921 Revenue Act. It is believed that such rates should be considered miss peace-time rates under that method, especially in view of the current normal income tax rate of 20.9% which reflects an increase of 10.9% over that imposed for 1921, The net profits brackets and tax rates suggested under method (a) are recommended for study by the Treasury Department. 5. That net profits for the taxable year and for each year of the base period be the normal tax net income for such year less the amount of normal income tax due thereon, end that the definition of invested capital for the taxable year be substantially the same as the definition thereof in the 1921 Revenue Act. Administrative problems incident to determinations of invested capital would be minimised for the Treasury Depart- sent and for miserous taxpayers by having such determinations vary as little as may be from those formerly required under the 1921 Act. 6. That the base period be the four calander years, 1936-1939, or the four fiscal years comenoing during such calendar years, and that the average net profits for such period be the average net profits for my three of such four years selected by the taxpsyer. 13154 - 110 It is falt that the privilege of omitting one year from the four-year period would to a great extent obviate the inequity arising from years of submoral profits. Cerpora- tions in existence for less than the full base period should be permitted to use average net profits for the full calendar or fiscal years included in such period of existence, unless resultant hardship indicates proper handling in accordance with suggestion 7. Corporate successors of transferees following non-taxable reorganisations or liquidations effected during or after the base period should be permitted to use average net profits of their predecessor corporations in the determination of average net profits for such period. 7. That the excess profits tax law include provisions similar to those of Sections 327 and 328 of the 1921 Revenue Act. This recommendation is made for the purpose of avoiding exceptional hardships or marked inequalities due to abnormal conditions affecting either net profits or invested capital. 8. That net profits and invested capital of affiliated corporations, for both excess profits tax and income tax purposes, be required to be determined upon a consolidated return basis. Consolidation of net profits and invested capital for the determination of income and excess profits tax was re- quired during the World War period. As & result, numerous groups of affiliated corporations have a history of determina- tion of invested capital on a consolidated basis which, from the viewpoint of administrative economies for taxpayers and government, would be the normal starting point for determinations required under the proposed excess profits tax law, due to settlement of many controversial points in their earlier history. It is felt that consolidated returns would not result in any material loss in revenue for 1940 and subsequent years, and that any such loss would be more than compensated by the avoidance of numerous administrative difficulties and contro- versies relating to intercompany profits, investments and accounts between affiliated corporations. 9. That the foreign income and profits tax credit be allowed egainst the domestic income and excess profits taxes combined rather than against the domestic income tax only. 13154 111 ' The more liberal application was allowed corporations in computing income, excess profits, and war profits taxes payable during the World War years, and would prevent the possibility that corporations night, in certain instances, be required to pay combined domestic and foreign taxes at effective rates of more than 100%. 10. That in the event the alternative levy of the tax upon net profits in excess of average net profits for the base period is not adopted, consideration be given to the desirability of including in the invested capital of a corporation any indebtedness represented by its securities. Many corporations, especially those engaged in trans- portation and mining activities, are financed substantially through borrowed capital as distinguished from equity or investment capital. Since the invested capital represented by the equity securities of such corporations would in many instances be relatively nominal, there is some question whether the uniformity of application of an excess profits tax necessarily correlated with capital investment would not be improved by according the same treatment to corporate bonds and other obligations and interest paid thereon as is provided for capital stock and dividends paid. 11. That the capital stock and excess profits taxes now in effect be repealed and that, in lieu thereof, there be imposed on all corpora- tions and associations now subject to capital stock tax an excise tax measured by 1-1/4% of the excess profits tax credit; 1. D., 1-1/4% of the average net profits of the corporation for three years of the base period or 8% of its invested capital, whichever is the smaller. Adoption of this provision should result in approxi- mately the some amount of revenue as is derived from the capital stock and excess profits taxes now in effect. It would, mersover, remove the guese-work basis of wide-spread objection to the present capital stock and excess profits taxes and could apparently be administered with even less difficulty and expense both to the Treasury Department and to the taxpayer. M. B. FOLSOM, Vice Chairman Business Advisory Council 13154 July 18, 1940 112 1 Title III 2 Repeal of Profit-Limiting Provisions of 3 Vinson-Trammell Act and Merchant Marine Act 4 Sec. 301. The provisions of section 3 of the Act of March 27, 5 1934 (48 Stat. 505, 34 U.S.C. sec. 496), as amended, beginning with 6 the first proviso thereof, and section 2(b) of the Act of June 28, 7 1940 (Public, No. 671, 76th Cong., 3d sess.), shall not apply to any 8 such contracts or subcontracts for the construction or manufacture 9 of any complete naval vessel or any Army or Navy aircraft, or any 10 portion thereof, as are entered into after the date of enactment of 11 this Act or are completed in a taxable year beginning after December 31, 12 1939, and any agreement to pay into the Treasury profit in excess of 13 10 per centum, 12 per centum, or 8 per centum, as the case may be, of 14 the contract prices of any such contracts or subcontracts shall be 15 without effect. 16 Sec. 302. The provisions of section 505(b) of the Merchant 17 Marine Act, 1936 (49 Stat. 1998, 46 U.S.C., Sup. 5, sec. 1155), as 18 amended, shall not apply to any such contracts or subcontracts for 19 the construction, reconditioning, or reconstruction of any vessel 113 1 as are entered into after the date of enactment of this Act or are 2 completed in a taxable year beginning after December 31, 1939, and 3 any agreement to pay to the United States Maritime Commission profit 4 in excess of 10 per centum of the total contract prices of any such 5 contracts or subcontracts shall be without effect. Title IV 114 1 Amortization of Cost of Defense Facilities 2 3 SECTION 401-Amortization of cost of defense facilities. 4 Section 23 of Chapter 1 of the Internal Revenue Code (relating 5 to deductions from gross income) is amended by adding at the end 6 thereof 8. new subsection reading as follows- 7 "(t) Amortization of cost of defonse facilities- 8 (1) In the case of 2. corporation (at its election) a deduction 9 for amortization of the adjusted basis (computed without the application 10 of this subsection) of any emergoncy facility constructed after July 10, 11 1940 and during the continuence of the emergency declared to exist by 12 the President on September 8, 1939. Except as provided in paragraph (3). 13 such deduction shall be computed on the basis of a period of sixty 14 months. The amortization period shall (at the election of the taxpayer) 15 commence either (1) with the beginning of the taxable year during which 16 the emergency facility is constructed or (2) with the beginning of the 17 next succeeding taxable year. The failure of a taxpayer to claim a 18 deduction for amortization in its return for the year during which 19 the facility is constructed shall not deprive it of the deductions for 20 such year provided under section 23(1), relating to depreciation. 115 1 (2) & corporation may discontinue its deduction for amortisation 2 ne to any emergency facility as of the beginning of any month by filing 3 prior thereto e notice in writing with the Commissioner of Internal 4 Rovenue designating such month. In euch E. case, it shall be ontitled 5 to the deductions provided under section 23(1), rolating to depreciation, 6 beginning with the first dry of the month following such discontinuence, 7 but it shrll not be entitled theresftor to any further deductions under 8 this subsection for amortization with respect to such emergency facility. 9 (3) If within sixty months from the beginning of the amortization 10 period with rospect to any emergency facility, either (1) the Prosident 11 hrs proclaimed that the emergency reforred to in the President's mossage 12 of September 8, 1939 has censed to exist or (2) the Secretary of War or 13 the Secretary of Nevy has certified to the Commissioner of Internal Rovenue 14 that any emergency facility is no longer necessary in the interest of 15 national dofense, the corporation may elect to terminato the amortization 16 period with rospect to such emergency facility as of the date of the 17 President's proclamation or as of the date of the certificato of the 18 Secretary, by filing amonded returns for all taxable years for which it 19 claimed amortisation under this subsection. end the amortisation deduction 1 shall be recomputed on the basis of the amortization period as 80 116 2 terminated. Notwithstanding any other provision of law. any overpayment 3 resulting from such recomputation of the amortization deduction shall be 4 credited or refunded to the taxpayer if claim therefor is filed with the 5 Collector of Internel Revenue for its district within one year after the 6 date of such termination of the amortization period. 7 (4) During the amortization period, the allowances under this sub- 8 section with respect to egy emergency facility shall be inclusive of all 9 deductions for exhaustion, wear and tear, and obsolescence with respect to 10 such facility. 11 (5) Deductions made pursuant to this subsection shall be reflected 12 in the corporation's financial books of account, in its reports to share- 13 holders, and in its reports to the Federal Government or any of its agencies. 14 (6) The provisions of this subsection shall apply only to such 15 emergency facilities as the Advisory Commission and either the Secretary 16 of War or the Secretary of Navy certify to the Commissioner of Internal 17 Revenue are necessary in the interest of national defense during the 18 emergency referred to in the President's message of September 8, 1939. 19 The issuance of such certificate shall be subject to such regulations as 20 the President may prescribe. 117 1 (7) When used in this subsection- 2 The term "emergoncy facilities" means buildings, machinery and 3 equipment: 4 The term "constructed" means constructed, reconstructed, erected, 5 installed or acquired; 6 The term "Advisory Commission" means the Advisory Commission to 7 the Council of National Defense. 8 (8) The provisions of this subsection shall be applied in computing 9 net income for purposes of excess-profits taxes as well as income taxes. 10 (9) Any taxpayer taking deductions for amortization of emergency 11 facilities pursuant to the provisions of this subsection may not thereafter 12 destroy. demolish, or by any act impair the productive capacity of such 13 emergency facilities without the consent in writing of the Secretary of 14 War or of the Secretary of Navy. In the event such consent is not given 15 within a period of ninety days from the date of receipt of written request 16 therefor, the Secretary of War or the Secretary of Navy, as the case may 17 be, shall and he is hereby directed to purchase such facilities at & price 18 which he shall fix. The taxpayer shall have an option to repurchase such 19 facilities at the price which he was paid before such facilities are 20 resold to any other person. 118 THE FOREIGN SERVICE OF THE UNITED STATES OF AMERICA AMERICAN EMBASSY Berlin, July 22, 1940. E. Merle Cochran, Esquire, Office of the Secretary of the Treasury, Washington, D. C. Dear Merle: The new Counselor of the Estonian Legation, Albert Tattar. who arrived here about three weeke ago, told ne that he had B. $200 check drawn by the Bank of Estonia on the National City Bank and asked me whether there was any likelihood that we would block the credits of the Baltic countries in the United States and whether it would be advisable for him to cash his check immodiately. Ee said that the German banks would accept it only for collection. I told him that I would inform him if we did take action against Estonian credite in the United States, which has since occurred. About 8. week ago he was called back to Estonia for consultation. He WAS supposed to have returned yesterday but has not done 60 and, with the news this morning that the three countries have been definitely taken over by Russia, he probably never will get out. He left this check with his wife who asked me today through the Estonian Minister here if I could send it by pouch for collection. Under normal circumstances I would have refused the request but did not feel that I could in the present in- stance. He left her with relatively little funds and she may never see him again. Could you ask the appropriate section of the Treasury which deals with blocked credits of occupied countries to permit payment of this check and, if such permission is granted and there are funds to cover it, could you have it deposited to my account No. 122282 in the West End Branch of the Washington Loan and Trust Company and then send no a brief telegram, "Estonian check deposited". In the contrary case, if there are no funds to cover the check or if for some reason it cannot be cashed, will you telegraph briefly the facts? I enclose & check for $3.00 which I trust will cover the cost of your cable. Sincerely yours, (Signed) Donald R. Heath Donald R. Heath, Pirst Secretary of Embassy 119 - 2 - Upon receipt of your affirmative advice that the check is good and deposited to my account I will pay over the proceeds in dollar currency to the Estonian Counsellor, if he returns, and if he does not, to his wife. (Initialed) D.R.H. 120 July 22, 1940 2:50 p.m. H.M.Jr: Hello. Operator: Colonel Maxwell. H.M.Jr: Hello. Colonel Maxwell: Colonel Maxwell. H.M.Jr: This is Morgenthau speaking. M: Yes, Mr. Secretary. H.M.Jr: How are you? M: Fine, thank you. H.M.Jr: Colonel, what 1s the status of the proposal to cancel all outstanding licenses issued prior to July 5th. M: Well, the Secretary of State is quite anxious not to have anything -- make that necessary. Now, we've looked over -- as I told you the last time we talked about it -- I've looked over the outstanding ones on Sweden which was the case in question at that time and they're not material amounts -- they're no great amounts of anything that are in that category of outstanding and incompleted licenses. H.M.Jr: Have you got a list of outstanding and in- completed licenses which were issued? M: Well, I have only in the case of Sweden. H.M.Jr: Have you got them for the rest of the countries? M: No, we haven't -- we haven't asked for that on any country except Sweden. H.M.Jr: Well, I'd like to ask you something unless you ask me not to, because I've discussed this again with the President and I got the distinct feeling that he wanted to do this for all -- not just Sweden, and I wondered 121 - 2 - if you would mind putting it up to him once more and let him decide. M: Well, I most certainly will do that. H.M.Jr: Because he's holding me responsible for not letting this stuff go and I'm in an impossible position and I talked to him about it and he gave me the distinct feeling that he wanted to cancel all outstanding licenses. As a matter of fact, at this Council of National Defense meeting at which the Cabinet was present he made the statement that that had been done and I didn't want to contradict him because I figured it was up to some of the other people to do that. I think that was last -- well, whenever this thing met the last time. So if you would do that and then let him decide. M: Yes. Well, of course, that's exactly -- when we talked before and I developed the Swedish situation, I put it up very definitely 80 there shouldn't have been any misunderstanding and I had the message back that the matter was being discussed with you again. H.M.Jr: Well, since then though I've had another discussion with the President and I got this impression. And could I also ask that you have & complete list of outstanding licenses which are -- remain? Is that very difficult? M: Well, I think it would take a little time to compile it. It's not ..... H.M.Jr: Well, could it be done but in the meantime, whatever this would be, Directive No. 6 or 7, could it be sent up to Hyde Park to the President? M: You mean the -- insofar -- the one we discussed before. H.M.Jr: No, I mean the one for everything. M: I see. 122 - 3 - H.M.Jr: I mean, to put on his desk & Directive, I think that's what you call them, which would cancel all outstanding licenses issued prior to the 5th of July. M: Well, your contention 1s that you feel that that is his understanding what he ..... H.M.Jr: Would like. M: expects to be done. H.M.Jr: Yes, and he's up there and he can decide quietly whether he wants to do it or not, but I got that distinct impression from him that's what he does want to do -- and that's personally what I hope he'll do. M: Yes. H.M.Jr: Because it'll make my job here on Customs and these ships much, much easier. M: Yes. Yes, well I appreciate that. H.M.Jr: Now to show you the confusion, for instance. Last Saturday we let one of these vessels go; Wednesday Mr. Hull calls up, why hadn't we let the Swedish vessel go? Well, we told him we had let it go the previous Saturday and by Friday it reaches Admiral Stark and he calls up on the same thing. M: (Laughs). Well, of course, that's hopeless. H.M.Jr: Yes. Well, may I ask, will you send it up to the President? M: Yes, sir. I'll go into the question right away and I'll let you know how it comes out. H.M.Jr: And I'm talking on all outstanding licenses just not ..... M: Yes. H.M.Jr: And then would you also have somebody begin to prepare & list of these in case the President Regraded Unclassified 123 - 4 - should say, well, what does this mean and who will it hit? M: Yes. Well, he undoubtedly would ask that question. H.M.Jr: Yes. M: And that'll of course take & little time to do in view of all the other rush of business that the license people have over there. H.M.Jr: But just to get out this Directive and put it in the pouch oughtn't to take more than fifteen or twenty minutes. M: Yes. Well, that I'll take care of. H.M.Jr: Thank you so much. M: Yes, sir. H.M.Jr: Thank you. 124 July 22, 1940 3:24 p.m. H.M.Jr: Hello. Operator: Secretary Ickes is busy talking on long distance. I'm waiting for him. H.M.Jr: 0. K. 3:25 p.m. H.MJr: Hello. Operator: Secretary Ickes. H.M.Jr: Hello. Secretary Ickes: Hello, Henry. H.M.Jr: How are you? I: Very well. H.M.Jr: Harold, a couple of weeks ago I brought up the question at Cabinet in connection with oil to Spain and at that time you said you had in preparation a statement which could be used if necessary showing that on oon- servation grounds no oil should leave this country. I: No. What I said was that I had a -- was having a study made and a report was then being written showing about the situation with respect to oil along the Atlantic sea coast in the event of an emergency. It just reached ay desk here now. H.M.Jr: That couldn't be interpreted 80 by you that ..... I: I haven't looked at it yet. 125 - 2 - H.M.Jr: Well, I tell you, I'm working terribly hard on this thing, see? I: Yeah. H.M.Jr: And if you could see your way clear, if necessary and the President wanted to use it, to say that no oil should leave this country for national defense and conservation, I mean, it would be terribly helpful, if he wished it. I: Yeah. H.M.Jr: What? Hello? I: Yes, I get you. H.M.Jr: See? I: Yeah. (Aside -- before Holland and Swanson and the other man go down there I want to see them. Hold them, also hold Commissioner of General Land Office.) I'm sending for them now. H.M.Jr: Oh. Well, the thought is, I'm working up something -- the possibility of being able to control the oil and ..... I: It ought to be done. H.M.Jr: ..... and I'm sending up now for you only a proclamation of the President to stop -- add oil and oil products to his list, plus scrap iron but I need your help..... I: All right. H.M.Jr: ..... on the stuff inside the United States. I: All right, I've just sent for my people now on it. H.M.Jr: Did you hear him tell Hull that he wanted to handle Central America and South America? I: Yes. 126 - 3 - H.M.Jr: Well, from that day until Friday they've never done a damn thing over there. I: Well, that's to be expected. H.M.Jr: And in discussing this with the President, I recommended that if we do this oil thing that he let you handle it, 80 ..... I: Well, why didn't you suggest somebody that he'd be willing to let handle it? H.M.Jr: Well, that's what I thought I was doing. I mean, I used helium as an example. I: Yeah. H.M.Jr: Somebody's got to do this that's got the ..... I: Oh, hell! It ought to have been done then first. H.M.Jr: Well, anyway ..... I: The way they piddle around here. H.M.Jr: Will you ..... I: I'll let you know, Henry. H.M.Jr: Thank you. I: All right. 127 GROUP MESTING July 22, 1940 11:45 a.m. Present: Mr. Thompson Mr. Sullivan Mr. Heas Mr. Young Mr. Sohwars Mr. Foley Mr. Cochran Mr. Gaston Mr. Viner Mr. Bell Mr. Graves Mrs Klots H.M.Jr: I will unload first. Dan, I read this memorandum of yours - hello, Viner - on Treasury finanoing in '41. I think I understand it. I read it twice very, very carefully. I think -- Bell: I read it over carefully to myself and it was a little jumbled because I can only spend five minutes at a time on it. H.M.Jr: It isn't up to your standard. Bell: It isn't clear. H.M.Jr: You had better make it simple for me. I think this, gentlemen: I think it is terribly important that in connection - if I have to make an appearance on the Hill, that I state frankly and openly what the situation is on the financing, you see, be- cause I think the Congress and the people of the United States are entitled to it and - because the way Bell has it, he has got a perfectly feasible way - if you don't mind By using the word - to circumvent the situ- ation if the debt limit is not raised above 45 and I think that what we ought to do when we go up just as soon as possible is to say, "Now, we can do it two ways. We can - under the existing law this is the only way we can do it. Or if Congress wants to and we recommend they can raise the debt 128 - 2 - limit from 45 to 'X', whatever we decide it should be," but I think we ought to come right out in the open and say it and I think with that in mind, if you could sort of rewrite a formal statement for me and that gets down to the fact - after all, I don't draw the distinction between money appropriated and money permitted to be con- tracted for in this bill. Bell: The only distinction is that you need to draw it. You don't need & debt increase for the contractual obligations until some time maybe in '42. Eventually you will need it, but you don't need it now. H.M.Jr: You can think it over personally. You can tell Congress that they ought to take into consideration that that is being contracted and whoever is here will have to go up to Congress twice a year to get a debt increase. They ought to increase the debt sufficiently to take care of the money which is to be spent and money to be out of here. I think that is - if I may use the word - rather statesmanlike on my part. Wouldn't you think 80, Viner? Viner: I think you might say you would like to en- dow your successor, if there is to be one, with that freedom of action. H.M.Jr: Because what he has to go through to cir- cumvent that situation is childish and very poor policy. If you would write something and take advantage of Viner's being here to have him go over it, I think it would be very good and then that leads ne to your (Sullivan's) proposals - questionmark - with a five million dollar appropriation, how much taxes we want to raise, which all was part and parcel of this picture, and I don't know the answer, but I don't think - talking - I mean, I have had time to think about it. I don't think we will be able again to say it is five billion dollars 129 - 3 - and sell five billion dollars of five-year notes on top of the already outstanding notes. If I had & table from you (Sullivan) showing the five hundred million, a billion, and a billion and & half, what this excess profits tax would do, I could sort of soak it up. Sullivan: You have. H.M.Jr: No. Sullivan: You asked for that Friday afternoon and it came in Friday afternoon. H.M.Jr: I am sorry. I have got every piece of paper here that anybody gave me. Sullivan: I sent it in Friday afternoon. H.M.Jr: I don't know where it went, John, and I don't know how you got it, but the stuff I wanted and asked for, I got. I did not got that. Sullivan: I will find out what happened to it, because it left my office something before 1:00 o'clock. H.M.Jr: Two people can get it, Mrs. Klots or McKay, and it didn't come to me. Sullivan: I sent it to MoKay, one sheet of paper. H.M.Jr: Well, I have read everything I took with me. Klots: Well, I will look for it. H.M.Jr: Well, shall I give this to Viner to read and then he can return it to my file? Bell: Well, you can keep that and I will give Viner a copy and talk to him about it. H.M.Jr: Well, you see I missed - will you (Sullivan) put into Bell's hands after you leave this room a copy of the memorandum and then he 130 - 4 - can take that and let's evolve something as & fiscal policy, you see, looking for- ward to what Congress is voting, how we are going to finance it and how we are going to raise the money, but I would like to take advantage of Viner's being here in the next day or two. As a matter of fact -- Bell: I will talk to him. H.M.Jr: I would like to meet on this at 8:30 tomorrow morning when I am fresh. Is that all right with you, Jake? Viner: Yes. H.M.Jr: I think you (Sullivan) ought to be here. Sullivan: Yes, sir. H.M.Jr: If you can make it. Sullivan: What, not until 8:30? H.M.Jr: I will make you a little bet you aren't here by 8:30. Sullivan: What is the bet? H.M.Jr: A package of my Camels against your stink weeds. Sullivan: It is & bet. H.M.Jr: If I can get you here on a package of cigarettes, it will be a good investment. Now, that much for that. I find myself doing a lot of talking, but I have got a lot of stuff. Now, Merle, I read this thing from Irigoyen and if I sent this to the President he would say, "Well, why don't you send it down to Mr. Hull?" I think the first to get it should be Mr. Hull. Cochran: I thought someone should have it while they are down there. 131 - 5 - H.M.Jr: Well, what I would suggest 1s, I think it is important enough that if you will fix me up a letter right away and have this copied - this was given to me Saturday and - he must get a pouch from the State Depart- ment. Cochran: I think they might be disposed to cable. part of that if we would send it in a letter to Mr. Welles. H.M.Jr: I think it ought to go, if you will take care of it. And then will you see that in strict confidence & copy of this is furnished to Mr. - what is the coordinator on South America? Foley: Forrestal. H.M.Jr: And ask him after he has read it if he will talk to me. Coohran: Yes, sir. H.M.Jr: Then by accident - I don't get anything from the State Department. Ambassador Lothian gave me this memorandum, which I would like Bell and the people on his committee to read, stating that the British have decided that they are not going to let any food of any kind get into either occupied France or free France. Now, the State Department - I think it is outrageous. They never furnish me with this. Lothian asked me whether I had seen it and I hadn't, so he sent me another copy. Bell: It is very important in connection with this decision you have to make. H.M.Jr: There is no such thing as the State Depart- ment ever furnishing me with anything. Where is Philip Young? Phil, if this is an order, just return it to Mrs. Klots. If I have to do anything, let me know. (Handing letter from Secretary of War under date of July 18 to Mr. Young). 132 - 6 - This is also for your committee, Bell, Settlement Committee on funds in Hongkong. Herbert, in the July 15th issue of the New Republic, the War of Factories by Fritz Sternberg - I wish through Secret Service and any other sources that you have, literary or otherwise, you could find out who Pritz Sternberg 18. I don't know if anybody else knows. It is one of the best articles - and you (Sullivan) ought to read it, particularly on the tax thing, and anybody else interested in taxes. The main thing that it shows - the German production - they show that as the Ger- man production both in dollars and velocity increased the last five years, the earnings stayed stable but the taxes just absorbed the increase in the earnings. In other words, if 8. man had a turn-over of & million dollars in '34 and his taxes were a hundred thousand dollars and the turn-over went to ten million dollars in '39, his taxes went up and his net profit stayed the same. It is very, very - and if Sternberg is here and he is okay and everything, I would like that fellow to come down, because we are going to have to do some publicizing on our tax methods and this is one of the most intelligent things I have read. I will lend it to you if you will give it back to me. And if anybody has not yet read in that issue, "If You Were President", who is interested in anything fiscal, I recommend that also. Gaston: July 15, New Republic. H.M.Jr: And Ed, I am going to do something about loans to small business men. Now, whoever is working on that for the present, if they could polish it off and have a little meet- ing in my office at 9:00 o'olock tomorrow morning, invite Tom and Ben to come, will you, at 9:00 o'clook? And polish off what is there. I an thinking in terms, now, 80 we don't have any misunderstanding, of 133 - 7 - loans to men of $25,000 or under. I am not thinking of anything else, you see. The only one that I know of that at all appealed to me was the plan of the PHA insurance, but where the risk is spread over the whole amount and not just asking the banks to take the first ten percent, which is silly. I would like to go into it. We have got to do something about it. If they wanted to talk about an industrial bank long-term loan to industry, we could do it, but I suppose with RFC we can't. But I would like to discuss it anyway. I mean - what do they call that bank in France, Jake, the one that does that? Viner: The Credit Mobilier, the real estate bank? H.M.Jr: No, industrial bank, long-term loans. Viner: Credit Foncier. Cochran: That is a mortgage bank. H.M.Jr: No, I mean industry. It is intermediate credit to industry. Are they fairly punctual, those boys? Viner: There was a Bank of England set up in England. Sullivan: They both smoke. H.M.Jr: Are they fairly - well, tell them & quarter of 9:00. Do you want to sit in on it, Jake? Viner: As an observer. H.M.Jr: Bell? All right, a quarter of 9:00. Will you polish it off and see what we have got? Foley: Yes. H.M.Jr: What else did I write down? 134 - 8 - Regraded Unclassified Bell: Is that tomorrow morning? H.M.Jr: Yes. Viner: You are not going to work back on your schedule, are you? H.M.Jr: No, we start at 8:30 when Sullivan gets here on the tax thing and then we will invite Corooran and Cohen to get here at a quarter of 9:00 and we will meet them at 9:00. Bell: And expect them to show up at 9:00. H.M.Jr: Yes. And Herbert, I want to compliment Coast Guard on the best Federal building I have seen since I have been in Washing- ton at that Coast Guard Lifesaving Station. Gaston: Is that so? The new one at -- H.M.Jr: Yes. I almost stayed there. They have a guest room which is on the lake, which is the best room there. If you go out there -- Gaston: I will have them arrange that. H.M.Jr: And that architect, if we have any more Treasury work, I want to grab him. They say he does & job and then goes on a binge for 80 long, and then another job. Gaston: Is he a Government architect? H.M.Jr: No, Cleveland. He is a man over 70, gradu- ated from the French School of Architecture, and that 18 the best looking building I have ever seen. It is monolithic concrete. It is really beautiful. Gaston: I think that is a good idea instead of 80 many brick buildings. H.M.Jr: It is the best looking thing you ever saw. 135 . 9 - Gaston: I was talking to Waesche about using that at the station in New London. H.M.Jr: It is 80 much better than anything I have seen anywhere; I don't know of anything that will compare with it. Viner: Can it? we get to see some good photographs of Gaston: I will get some of it. H.M.Jr: There are pictures inside. Thompson: I have nothing. H.M.Jr: Incidentally, I came in from Cleveland in an hour and a half this morning. We hit 248 with a tail wind. Gaston: Ground speed? H.M.Jr: Yes. My ears are all stopped up. Bell: We have a copy of 8. cable which came to the Federal Reserve Bank from the State Bank of Russia -- H.M.Jr: You have got to talk a little louder, Bell, my ears are all stopped up. Bell: I say we have a copy of a cable which the Federal Reserve received from the State Bank of Russia. It says, "We consider Executive Order of July 15 mentioned by you as having no con- nection to gold required by State Bank of Russia and being its property. In consequence, delay in execution our instructions which we suffer losses or which we hold you responsible." H.M.Jr: Who is this from? Bell: "We insist upon immediate execution our in- structions. Awaiting information regarding execution." Regraded Unclassified 136 - 10 - This was in reply to a wire which the Latvian, Lithuanian and Esthonian Banks had sent to the Federal Reserve to transfer their gold balances to the State Bank of Russia. H.M.Jr: Who sent this? Bell: The State Bank of Russia. H.M.Jr: They are going to hold us responsible? Bell: The Federal Reserve Bank in New York. H.M.Jr: Wonderful. Bell: The Federal Reserve Bank replied they couldn't execute the orders because they had to apply to the Treasury for a license and they con- sider themselves as having no connection. H.M.Jr: Offset it against our debt, the Russian debt. Bell: It is quite interesting. We are prepared -- Viner: Do you want us to let the State Department know about that? Bell: I don't know whether they know about it or not. Cochran: No, I don't know. H.M.Jr: Besides our own legal boys, show that to Professor Chamberlain. Bell: We are prepared to discuss now an Executive Order regarding securities that may have a foreign stamp of some kind on them, get out an Executive Order and require 8. stamp something like that (showing sample) to be attached to each security. We have been working on it for some time. H.M.Jr: Marvelous. Who is this? Bell: Marshall. 137 - 11 - H.M.Jr: I don't know why he was chosen. Bell: Harold says they have an engraving of Marshall and he hasn't been used on & security or on currency. H.M.Jr: Robert Marshall, isn't it? Graves: John. H.M.Jr: John? Klots: That isn't good looking. Bell: Robert Morris. I would like to discuss that today or tomorrow, if I could. H.M.Jr: What are you doing at 9:30 tomorrow mozning? Viner: You should have gotten a stamp - one of the stamps used by the Treasury during the "Non- Intercourse Act. Bell: When was that? Viner: 1810 to '14. H.M.Jr: They have done a lot of work on this one now. Bell: Yes. H.M.Jr: That is good enough. What else? Bell: Did you see the letter that came from Secre- tary Hull regarding the - sending over a letter from the German Charge d'Affaires? H.M.Jr: No. Bell: Commenting on the Netherlands decree. H.M.P. No. Bellt It says - I will read one paragraph. 138 - 12 - "In the name of my Government I have the honor to call attention to the fact that the measure of the refugee Netherlands Government mentioned above laoks any legal basis and consequently 18 to be considered an arbitrary act which is in the most out- raged contradiction itself to the principles of the inviolability of private property. Recognition of the orders of the refugee Netherlands Government concerning assets which could not belong to it would render the depositories of such assets liable for damages." H.M.Jr: You had better let both Foley and Professor Chamberlain - when is Chamberlain coming down again? Foley: I don't know when he expects to be back, do you, Dan? Graves: I saw him this morning at the Cosmos Club. Foley: He is probably back here. He went back Friday afternoon and I didn't see him be- fore he left. Thompson: He expected to be here this morning. Bell: He didn't go baok home. He went down in Virginia over the week-end. H.M.Jr: Well, I want to go over things with him to- morrow. Will you tell him 3:00 o'clook to- morrow, if he is here? Bell: All right. H.M.Jr: Or 11:00 tomorrow morning. 11:00 will be better. I will be fresher. Will you let MoKay know? Bell: Yes, sir. That is all. H.M.Jr: And when he is here, will you let him sit in at your 4:00 o'clook meeting? 139 - 13 - Bell: He is sitting in. H.M.Jr: Harold? Graves: I would like to stay behind to ask you a question. H.M.Jr: That is all right. Graves: I have nothing. H.M.Jr: George, I want you to get into this small business stuff. Haas: All right. H.M.Jr: So get busy, see, and the thing that I was thinking of, the best way to do this thing would be if we could send one of George's men to a Federal Reserve field office, an RFC field office and let each of them sit there for a week and go through their appli- cations and see the people that come in, what kind of stuff do they want. Pick Balti- more and let a fellow go to Baltimore and go through this stuff, both the RFC and Federal Reserve stuff. George has been all through this for me and we will not let Jesse pick stuff to send over here the way he did to Bill Douglas, but let us - let George or somebody go to Baltimore or Richmond and just sit there and go through these files. We ought to do it openly; let them know we are going to go there; be there when the fellows come in. You have got enough help, haven't you? Haas: Oh, yes. We will switch somebody around to do what is necessary. H.M.Jr: Well, the point is if you actually had & week's experience and then the people argued about the credit, all right, but if you are there and go through the files and see the people that come in and have a talk with them, that is the best way to do it, isn't it, Jake? 140 - 14 - Viner: It is the only way really to know what the thing means. H.M.Jr: And I would start that today. Viner: The only point is, do the people know - is that a going organization now on that point, will there be applications and so on? H.M.Jr: They say they take care of everything. Viner: But does the public know? H.M.Jr: If they don't - well, I don't know and I am part of the public, but we have got to do something in the next four years for the small business man. This is a long viewpoint. Gaston: Don't smile when you say that. H.M.Jr: Just 80 I don't -- Viner: You have waited eight years. I don't see why you should be so impatient. H.M.Jr: That is just the reason. I had a talk today with a fellow. He was saying that we have done this for the sharecropper and this man, and so forth and so on, how about doing some- thing for the small business man. I have had this down for three days. Either Rich- mond or Baltimore or both. One at a time will be enough. And do it openly. I mean, get letters from Jones and Ecoles, we are going to do it above board. Haas: He may not be very busy. H.M.Jr: Who? Haas: I mean the man we send to those places. The applications may be few and far between. H.M.Jr: Viner had a lot of experience. We went all through that in '34. Unclassified 141 - 15 - Bell: Wonder if it wouldn't be better for them to look at these statistics the Federal Reserve Board has. Viner: Yes, that is what I had in mind. Bell: And the various Federal Reserve Banks. Viner: And also I would pick out an area with small factories in it. H.M.Jr: All right, George. Haas: I am okay. Excuse me a second. Viner: I think if -- Haas: I have something more. H.M.Jr: Phil, please prepare the same kind of letter for Mr. Nelson that we did, showing part of the President's statement on May 10 or May 16. You know the letters that went out. (Mr. Haas handed report to Secretary) I think we had better have Nelson here tomorrow at 10:00 o'clook and MoReynolds. Otherwise, suddenly we agree on everything and then Nelson didn't hear about it and he wants priority. What else do you know? Young: Nothing else. H.M.Jr: Oh, would you - between you and Mrs. Klotz - I want a little statement of what Bloch-Laine wants so that I can mention it to Mr. Welles at 6:00 o'clock tonight when he comes to the house. Did you take care of Mr. Purvis coming in from Canada? Did they ask you anything about it? Young: No, sir, I haven't heard anything about it. H.M.Jr: When I go home at 6:00 I want to take some- thing with me. The P-40's for the Allies are piling up? Regraded Unclassified 142 - 16 - Heas: Allies, that is right. H.M.Jr: It doesn't say 80. Haas: It says on the top the British contracts. H.M.Jr: It isn't clear, George. Six hours a day for the English or both English and -- Haas: For the English, Mr. Secretary. That isn't clear, I see now. It is for the English. By September 1, the P-36's requiring the Wright Cyclone engine will be all completed, he estimates. And then from that time on they will be producing six airplanes, these P-40's, and unless they have six Allison engines a day, they are just going to pile up in storage. He says -- H.M.Jr: Why is the Wright Cyclone so far behind? Haas: Well, they had a little delivery trouble there, too, but Mr. Vaughn was up there at the plant and he has promised them to come through with that, 80 he says that situation will get better rather than get- ting worse. The Allison people have made some promises, too, but he is very skeptical about getting the engines. He says the Army is getting them all, as you know, so far. H.M.Jr: Well, Lookheed isn't so bad, is it? Haas: No, but he had none except that one almost complete waiting for two engines. The Allison didn't do 80 well last week. There is another item I noticed. You will notice the figures for deliveries this week when you get the report will be down. The Wright plant took a week's vacation. H.M.Jr: They did? Haas: That is what they said on their report. Regraded Unclassified 143 - 17 - H.M.Jr: Well, that is nice. Chick? Schwarz: I have two matters here. Tomorrow morning in the Federal Register will appear the T.D. which gives up the green duplicate copy on the income tax returns which Mr. Sullivan has worked on and I suggest you may wish to have a short piece to hand out at the press conference this afternoon. H.M.Jr: Well, take care of it. Schwars: I will do that. The other matter involves the first of the new shipments of gold from New York to Fort Knox. They begin Thursday. Is that right? Graves: The 25th. H.M.Jr: I wouldn't say anything. Graves: I wouldn't think 80, either. Schwarz: Mrs. Ross, of course, is eager to -- H.M.Jr: If she does anything like that, she gets fired. Schwars: I like to have your moral support. H.M.Jr: Let her take a ride with a motorcycle cop. Viner: Why not put her on one of the trucks and take photographs? Gaston: That has been done. H.M.Jr: Seriously, tell Mrs. Ross I will be very much annoyed if there is any publicity. Graves: I will tell her. H.M.Jr: Where were we? You have taken care of "Seeing Nellie Home", haven't you? That is Harold Graves' assignment. 144 - 18 - Cochran: Mr. Brady of the American Consulate at Ran- goon is coming in to see me this afternoon. H.M.Jr: Who? Cochran: Mr. Brady. H.M.Jr: From where? Cochran: Rangoon. He has been sending in some pretty good reports on Chinese -- H.M.Jr: He is a Consul? Cochran: Yes, sir. H.M.Jr: Will he be here all week? Cochran: Yes, sir. H.M.Jr: I would like to see him. Cochran: Do you want to suggest a date or shall I see Mac? H.M.Jr: Mac. Cochran: All right, because he has stayed over, hoping that he could -- H.M.Jr: Maybe we can work it in tomorrow between 8:30 and 9:00. Cochran: All right. That is all I have. H.M.Jr: John? Sullivan: Mr. Helvering was in this morning. He is anxious to leave this afternoon. H.M.Jr: My God, he has been away -- Sullivan: To August 8. I think he had some talk with you and you suggested he report back here today. H.M.Jr: How long has the man been away? Regraded Unclassified 145 - 19 - Sullivan: I don't know, sir. H.M.Jr: My understanding was he was going to go home first then go to the Convention and I thought he was coming back to go to work. Sullivan: I don't know, I wasn't here when he left and I don't know what the understanding was. H.M.Jr: I really don't remember. I didn't remember that he was going away again. Sullivan: He hoped to get away this afternoon. H.M.Jr: I think he ought to stay here while this bill is on the fire. Sullivan: Well, he spoke of that and he said from what he could gather he would be more valuable here later on. H.M.Jr: He has worked pretty hard. When he works, he works hard. Sullivan: Oh, there isn't any doubt about that at all, sir. He did look tired this morning. He really did. H.M.Jr: I suggest a week-end in Cleveland. Sullivan: He was at the Convention all week. I should think he would be tired. H.M.Jr: All right. Sullivan: There is a meeting this afternoon at 2:00 o'olock on the tax bill which there has been some talk about. Mr. Doughton and Mr. Cooper and Mr. Harrison and, I think, Senators King and George will be there, too. Bell: Is the bill ready? Sullivan: What do you mean, ready? Bell: It is past the deadline. 146 - 20 - Sullivan: At five minutes of 9:00 there wasn't anybody to deliver it to (handing bill to Secretary). H.M.Jr: Where were you at five minutes of 9:00? Sullivan: Right here, sir. H.M.Jr: Did you come down with Knox? Sullivan: Certainly. H.M.Jr: And you came down this morning? Sullivan: We were right here at five minutes of 8:00. H.M.Jr: And you left New Hampshire this morning? Sullivan: Ten minutes past 6:00. H.M.Jr: Traveling with Knox gets you up, doesn't it? Sullivan: Well, it is a hard habit to break. Gaston: It gets him up or keeps him up? H.M.Jr: Both. I am all for Knox. He is a good guy. That is very sweet of you. Did you have any trouble getting that nice ribbon? Sullivan: No, no trouble at all, sir. H.M.Jr: All right. Anything else? Sullivan: No, sir. H.M.Jr: Ed? Foley: Here are those papers for the safe which you gave me on Friday. Knudsen called up on Friday and he wanted an opinion as to the RFC's powers to make loans both under the 1940 National Defense amend- ment of the RFC powers and under the Glass- Steagall Amendment of 1938 powers to cor- porations in the United States for national defense purposes where the facilities will Regraded Unclassified 147 - 21 - be utilized both for us and for the British, and I have this opinion that holds that they have adequate power under both sections to make that type of loan. Now, the opinion, like all our opinions, is addressed to you. Is it all right to give it to Mr. Knudsen? H.M.Jr: Yes. Foley: He will use it in his talks with Jesse, but I am confident that the Attorney General will sustain us. H.M.Jr: I think on a thing like that, before you give it to him you ought to show it to the Attorney General. Foley: All right. H.M.Jr: Or what you could do to save time, give it to him and say you are sending one over to the Attorney General, but I would give it to the Attorney General. Foley: All right. H.M.Jr: On third thought, I would not give it to him until the Attorney General has passed on it. Foley: Okay. H.M.Jr: I would let the Attorney General pass it. It is really up to the Attorney General. I have a reason. Foley: Yes. H.M.Jr: All right? I have a reason, a good reason. Anything else, Ed? Foley: I would like to talk to you about a couple of Executive Orders. I have them in the alternative. One would add oil and petroleum produots to the list of products within the embargo. The other would add oil and petroleum products and scrap iron and I think we ought to -- Regraded.Unclassified 148 - 22 - H.M.Jr: Let me have those. Foley: ....produce one or the other, because we need them to implement our ship control. H.M.Jr: I want those for lunch. Foley: We can't control oil to Spain simply through the control of the ships, I think that oil ought to be added to the -- H.M.Jr: Can you release it then? Foley: Sure, all you have to do is issue a license. Gaston: That question was considered quite extensively in one of the meetings to frame that proclama- tion, but they decided they wouldn't include petroleum and wouldn't include anything that wasn't actually short or urgently needed, critical for national defense. H.M.Jr: Leaving the Treasury representatives out of it, there isn't a man on that committee -- Gaston: I know, they are terrible. H.M.Jr: ....who can see beyond the end of his nose. Gaston: That is right, and if only some of the other departments besides the Treasury would recog- nize the fact that the way to keep us out of war is to keep England fighting, we would get much further ahead in much less time. H.M.Jr: Let me handle this at lunch. Foley: Yes, I think it is very important that our hand be implemented by having oil and petroleum products added to the list of embargoed products. We are holding ships, Herbert. Gaston: Yes, I know. H.M.Jr: Let me take care of this. What else? 149 - 23 - Foley: Nothing. H.M.Jr: Herbert? Oh, I won't give you this. I read this thing that Cox prepared for Nelson. As far as I am concerned, it is all right. Foley: I think that gives us the control we need. H.M.Jr: I would like you (Thompson) to read it and then return it to my files. It is an ad- ministrative matter. Gaston: Here is that report that Cairns got up. H.M.Jr: That is good. Gaston: There is a case of & ship to load asphalt for Spain, Texas Company. I don't know of any reason why a cargo of road asphalt shouldn't be shipped to Spain. H.M.Jr: I would let it go. All right, now. Harold wants to whisper in my ear and Mr. Gaston will stay a minute. 150 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION CONFIDENTIAL DATE July 22, 1940 TO Secretary Margenthau FROM Mr. Haas BA Subject: The Business Situation, Week ending July 20, 1940. Conclusions (1) The national defense program is providing increasing support to industry through new construction awards and new industrial orders. For example: (a) Heavy construction awards, chiefly for Federal defense projects, established & new high record last week. (b) Structural steel awards have increased to the highest figure, with one exception, since September 1938. (o) New orders of the U. S. Steel Corporation have risen to 149 per cent of capacity, from 109 per cent the previous week. (d) New orders for lumber have reached the best levels since last fall. (2) Eventually the defense orders will become a major business factor. For the time being, however, business activ- ity is tending to slacken, as evidenced by the failure of weekly business indexes in the second week of July to equal their late-June levels. There is no evidence, 80 far, that the FRB index in July will exceed the June figure of 114. (3) While prices of industrial raw materials (including steel scrap) declined somewhat further last week, 8. firmer undertone was noted near the end of the week in some markets. This may foreshadow a strengthening trend in commodity prices. The BLS all-commodity price index has risen gradually in the two weeks ended July 13. secretary Morgenthau - 2 The general situation The recent slackening tendency in business activity, which has been accompanied by some weakness in prices of in- dustrial materials, became more evident in the week ended July 13, when weekly indexes of cusiness activity failed to equal their late-June level. The New York Times index in that THE (eee Chart 1, upper section) showed no recovery from the docline registered during the Fourth of July week, and stood at an FPB equivalent of 113. This compares with an FRB index of 114 in June. The levelling out in production rates 16 re- flected in a number of important industries, (Lower section of Chart 1), Steel ingot production has held practically un- changed over the past two weeks, when the seasonal trend should be upward. Automobile production has declined rapidly in preperation for an early changeover to 1941 models. Cotton will activity in the second week of July (after seasonal ad- justment) was slightly lower than in the last week of June. Lumber production (adjusted) has not made a normal recovery from the holiday shutdown. The levelling-out in business activity seems to indicate 18 tendency in many industries to swait actual defense orders before stepping up production further. Uncertainty over the present war situation, particularly with respect to its influ- ence on the continuation of export war orders, has apparently also been A factor. Defense orders increasing rapidly Defense orders are rapidly coming Into the foreground " A sujor business factor. This fact was particularly evi- dent 10 the volume of awards for heavy construction pro jects in the United States and outlying possessions last week. (See Dirt 2, upner section.) According to the Engineering News Fecord, "Never before in history has such a volume of construo- tion contracts been let in one week e.d. were placed on the books in the seven days ending Tuesday, July 16." The total amounted to $217,000,000 (including $47,000,000 in outlying possessions), which compares with a previous record figure of $182,000,000 in one week of March 1930. Naval base projects accounted for CSP bulk of the awards. Structurel steel awards (lower section of Chart 2) have likewise shown B. pronounced upturn. The total for fabricated structural steel, fabricated steel plate, sheet steel piling, Regraded Unclassified 152 Secretary Morgenthau . 3 and reinforcing bars during the week ended July 16, amounted to 64,560 tons, more than double the previous week's figure. "ith one exception, thie 18 the highest since September 1938. Steel orders gain markedly New orders reported by the U. B, Steel Corporation for the week ended July 11 jumped to 149 per cent of capacity, 25 compared with 109 per cent in the previous week. (See Chart 3, upper section.) Since this ie far in excess of re- cent production rates, B.B. shown on the chart, it indicates an increased backlog of unfilled orders. Steel production this week 1E scheduled at 38.2 per cent of capacity, an in- cresse of 1.4 pointe over last week's rate, and a new high for the year. A. greater concentration of orders in the field of heavy steele has apparently given the U. S. Steel Corporation a production advantage over most of the independent companies. In the past week, thie Corporation has operated at 90 per cent of capacity, as compared with an average of 85 per cent for the independent companies. (Lower section of chart) Steel scran prices declined further last week, notably at Youngstown, Pitteburgh and Buffalo, with the Iron Age composite price off 33% a ton to $18,38. Japan has completed buying about 300,000 tons of scrap, according to press re- ports, apparently including some stocks on the Eastern sea- board originally destined for Italy. Recent reports that-a shortage of pig iron 1a beginning to hendicap Canadian steel production attracts attention to the fact that the Dominion has only 10 blast furnaces and, over the last ten years, has produced only 2.5 per cent 88 much 01g iron as the United States. New orders index improves Our weekly index of new orders for the week ended July 13 recovered strongly from its holiday dip, aided both by in- creased steel orders and by increased orders for miscellene- ous products, particularly for building materials and eleo- trical equipment. Regraded Unclassified 153 Secretary Morgenthau - 4 (See Chart 4.) Lumber orders recovered to about the level reached in the last week of June, which was the highest since early October of 1939. New orders reported by the General Electric Company in the week ended July 13 rose sharply to the highest weekly figure on our records, going back to 1933. It is reported that both this company and Westinghouse have the largest backlog of electrical equipment orders on record, and are booked at capacity for a year or more on heavy products. In view of this situation, according to press reports, the new British powder plant in the South has been obliged to utilize second-hand electrical equipment from a western utility company Prices of basio commodities decline Spot prices of both raw industrial materials and food products declined somewhat further last week. (See Chart 5.) Near the end of the week, however, some evidence of a firmer tendency was noticeable in the futures markets for a number of commodities, namely wheat, sugar, wool, rubber, tin, and zino, which may foreshadow a revival of demand. The BLS all- commodities index improved gradually during the two weeks ended July 13, following a 6-weeks' downward trend. Among the industrial raw materials, rubber prices last week moved upward, in contrast to the group average. Uncer- tainty about Japanese intentions regarding the Dutch East Indies was a bullish influence, but in the long run many traders believe that Japanese control in the Dutch islands would make for larger production and lower prices, since British restriction would then be impossible. Deliveries to Continental Europe have apparently been much reduced in June and July, increasing the amount potentially available for United States delivery. Hides futures prices have declined considerably because of fears that exports of hides from South America would bring added competition to domestic production. Cotton spot prices were lower last week, partly because of reduced exports. For the second week in succession no cotton moved to any country on the Continent, a situation which is unprecedented since the first few weeks of the World Var. The crop outlook, on the other hand, has become more unfavorable because of excessive rains and 0001 weather. Regraded Unclassified 154 Secretar Morgenthau - 5 Copper futures last week showed definite weakness, pre- cipitated by the award of a Navy contract to Kennecott for 2,000,000 pounds of Grade A copper at a price fully three- quarters of a cent lower than the regular producers' market price. Tin prices were little changed last week, when nego- tiations looking toward the smelting of Bolivian ore in the United States were reported. Although Bolivian output alone could not supply United States consumption, which last year was estimated at 70,460 long tons, assurance of a part of the necessary supply would be e safeguard. Bolivia now produces about 36,000 long tons of tin annually, which is smelted in the United Kingdom where operating costs are reduced by the mixing of Nigerian are with Bolivian ore, and by other factors. At present the United States has two experimental smelters with a combined annual capacity of slightly over 1,000 long tons per year. Cost of living The cost-of-living index of the National Industrial Conference Board has held generally steady since last Sep- tember, with a slight rise in the past three months due al- most entirely to an increase in food prices. The June in- dex of 86.4 exceeds by 0.5 point the figure for last Sep- tember. Weekly business indexes Business activity as measured by the New York Times in- dex in the week ending July 13 failed to regain the loss suffered in the previous holiday week, and in fact declined 0.2 point to 100.2. This figure 18 2.7 points below that of the pre-holiday week. The principal factors in this slight decline were sharp decreases in the adjusted indexes of automobile production and cotton mill activity, with the indexes of miscellaneous freight car leadings and steel ingot production also lower. The decline in the index of cotton mill activity followed six consequtive gains which had carried the index to a high level. Conversely, a sharp advance in the index of lumber production, and a substantial gain in the index of electric power production, partly retraced unusually sharp dealines of the previous week resulting from holiday influences. Regraded Unclassified 155 Secretary Morgenthau - 6 Barron's index of business activity for the week ending July 13 showed & greater downturn than the Times index, fall- ing 1.3 points to 112.2. Preliminary data for the week ending July 20 reveal fur- ther moderate declines in the indexes of steel ingot and auto- mobile production. Although actual steel operations held up well they did not come up to seasonal requirements, and it is now estimated that a decline of about 3 points occurred in the adjusted index. Automobile production during the week ended July 20 was reduced nearly 12,200 units to 53,020, a figure about 100 units below the corresponding week of 1939. While this merely re- flects preparation for an early changeover, it will reduce the seasonally-adjusted New York Times index of automobile produc- tion. Actual retail sales tendencies, according to Ward's Reports, continue highly encouraging. General Motors' retail sales in the first 10 days of July were only 29 per cent lower than in the last period of June, as compared with a decline of 40 per cent at that time last year. SELECTED BUSINESS INDICES BUSINESS ACTIVITY PER CENT Seasonally Adjusted Eet. Normal 100 120 110 40 100 " 90 Yes 80 N. y Times 70 JAN. MAR. MAY JULY SEPT. NOV. STEEL INGOT PRODUCTION AUTOMOBILE PRODUCTION PER CARD CENT Per Cent of Capacity THOUSANDS U.S. and Canada 150 60 140 125 29 140 60 100 75 40 39 50 30 20 25 30 Amer / and e Inst. Word's Est. o D JAN. MAR. MAY JULY BEPT. NOV JAN. MAR. MAY JULY SEPT. NOV. COTTON MILL ACTIVITY LUMBER PRODUCTION PER PER CENT Est. Normal . 100, Adjusted CENT 1929-31 . 100, Adjusted 160 100 '40 29 40 140 30 80 120 30 60 39 100 40 80 N. x Times M.Y.Times 60 20 JAN. MAR. MAY JULY SEPT. NOV. JAN. MAR. MAY JULY SEPT. NOV. 156 Regraded Unclassified CONSTRUCTION AND STRUCTURAL STEEL ORDERS JAN. MAR. MAY JULY SEPT. NOV. DOLLARS DOLLARS MILLIONS MILLIONS Heavy Engineering Contracts Eng. News Rec., Daily Ave. 40 40 35 35 30 30 25 25 1940 20 20 15 15 10 10 5 5 JAM. MAR. MAY NOV. TOBS TORS THRUSANDS THOUSANDS Structural Steel Orders 80 80 60 60 40 40 20 20 o o JAM. MAR. MAY JULY SEPT. NOV. 157 e INCLUDING OUTLYING or THE U.S. Regraded Unclassified 5 STEEL INGOT PRODUCTION AND U.S. STEEL CORPORATION ORDERS Chart 3 CONF ID IDENT 1938 1939 MAY JULY SEPT. NOV. 1940 MARe JAN, MAR, MAY JULY SCHT. NOV. JAN. JAN. MAR. MAY JULY SEPT. nov, PCR PER CENT CCHT U.S. Steel Orders and Total Steel Output 160 160 (EXPRESSED IN PERCENT or CAPACITY) 140 140 120 120 ORDERS, U.S. STEEL CORPORATION IN TERMS or U.S. STEEL CAPACITY 100 100 80 80 TOTAL STEEL OUTPUT 60 60 40 40 20 20 JAN. MAR. MAY JULY SEPT. NOV. JAN, MAR, MAY JULY SEPT. NOV. JAN. MAR. MAY JULY SEPT. NOV. 1938 1939 1940 100 100 Steel Output (EXPRESSED IN PERCENT or CAPACITY) BO 8 INDEPENDENT COMPANIES 60 60 40 40 U.S. STEEL CORPORATION 20 20 JAN. MAR. MAY JULY SEPT. NOW, JAN, MARV MAY JULY SEPT. NOV, JAN. MAR. MAY JULY SEPT. NOV. 1938 1939 1940 Office el the Secretary of the Inmury I % 1 I I 1-48-B Regraded Unclassified 159 Chart 4 CONFIDENTIAL INDICES OF NEW ORDERS Combined Index of New Orders and Selected Components 1938 1939 1940 o N PERCENTAGE PERCENTAGE POINTS POINTS 160 160 150 150 140 140 130 130 Total (combined Index) 1936 . 100 120 120 110 110 100 100 90 90 BO BO 70 70 $ 60 Total excluding Steel and Textiles 50 50 40 40 Steel Orders 30 30 20 20 to 10 Textile Orders 0 A $ o - D J , 0 El A M J all A $ o # D J , M A M J J A . o N D 1938 1939 1940 - of The Secretary - The Treasury 1 of - - 1-65-C 160 BUSINESS ACTIVITY AND PRIORS OF RAW INDUSTRIAL NATURIALS AND FOODSTUFFS 1940 1939 1940 MY JUNE JULY AIRKNET SEPT. NOV. JAN. MAR. MAY JULY SEPT. 5 12 19 26 2 9 16 23 30 7 14 21 28 4 " 10 25 PER PER PER FOR GENT CENT CENT CENT (NUSINESS) (PRIOES) Daily 105 Weekly 152 122 122 105 148 120 120 BUSINESS ACTIVITY N.Y. TIMES, CIT. INDIMAL - 100 ADJ. 104 144 118 118 PRICES of Rai INSURTRIAL MATERIALS 102 140 Debite AUG. 1939 - 100 116 116 100 136 114 114 PRICES or 98 Ram INDUSTRIAL MATERIALS 132 B.L.S. AUG. 1939 - 100 112 112 96 128 110 110 94 124 108 106 92 120 106 PRICES OF FOODSTUFFS\ 105 90 B.L.S. AUG. 1939 - 100 116 104 104 88 112 PRICES or FOODSTUFFS* AUG. 1939 - 100 102 06 102 108 100 B4 100 104 a so 100 98 8 96 111 96 SEPT. 56 NOV. JM. MAR. MAY JULY SEPT. 5 12 19 26 2 9 16 23 30 7 14 21 20 4 11 16 25 1939 1940 - JRE JULY AMOUNT 1940 FIVE DAY AVERABLE FOR Paints Office of the Secretary of the Transury Drive of Emargh and Statistics 0 - 310 - A . Regraded Unclassified 161 July 22, 1940 Dear Harolds Thank you for the July 16th letter from Mexico City. I should be delighted if you would continue to send - these re- porte as I enjoy reading them very much. with kind regards, Yours sincerely, Henry Mr. Hareld Nechschild, American Metale Company, 61 Broadway, New York, N. Y. 162 July 22, 1940 Dear Marcld: Thank you fer the July 16th letter from Mexico City. I should be delighted if you would continue to eend me these re- parts as I onjoy reading them very with kind regards, Years sincerely, Henry Mr. Mareld Mechaehild, American Metale Company, 61 Breadway, New York, 1. Y. Regraded Unclassified 163 July 22, 1940 Dear Harold: Thank you for the July 16th letter from Mexico City. I should be delighted if you would continue to send no these re- ports as I enjoy reading them very much. with kind regards, Yours sincerely, Henry Mr. Harold Hochschild, American Metale Company, 61 Broadway, New York, N. Y. From Mr. H. K. Hochschild 164 Copy of letter or July 16. 1940 from Mexico City Last Thursday, the day of the recounting of the votes, passed without incident. The Almazanistas refused to go to the official counting as they were afraid of personal attacks and other rough handling, which for reasons I declare later on, they are trying to avoid under all circumstances, The machine brought in I number of "pistoleros" from the rural districts, which fact is simply mentioned to show that the labor unions and Lombardo Toledano are not trusted any more by the party. The Almexanistas met at secret places and issued 150 certificates for their own deputies, which the Government tried to avoid but without success. Bo we have now a double amount of deputies holding certification of their having been elected, and the old Chamber will have to decide which ones are legal and which ones are not, some time in August, The reason why Almasan is trying to avoid blood shed is to avoid persecution of his party. Undoubtedly long before the election the old trick to try and make it appear that an unfriendly candidate is trying to make a revolution and then take this as a reason to liquidate him, did not work in Almazan's case, and for this reason also he is trying to avoid blood shed. The logical result will probably be that Avila Camacho will be President, but to avoid the sting of a clear imposition, the party will have to cede a lot of seats in the Chamber to Almazan, of course, less than the majority, Many indications point toward this settlement and it remains to be seen if Almazan will be satisfied with it. Somehow or other, I believe he will be, as I do not know what else he is going to do unless, of course, politics in your country or in fluences from Washington should determine otherwise. In this connection I point out the fact that the Government observers declared that in five districts of the twelve electoral districts in Mexico City the elections were held in illegal form. Some optimistic people believe that this will give Avila Camacho a. chanc to get out of the Chamber such politicians who belong to the party whom he wants to get rid of, specially the communists, and at the same time they will satisfy the Almazanista voters who were 10 overwhelming, especially in the big cities and in Mexico City. Economically there are no news whatsoever. The exchange remains at 5 with practically no transactions, demand and offers leveling themselves fairly well. Business is going somewhat back into normal lines and merchants assure me that their sales, while having fallen off considerably in the last few months, are now slowly and gradually picking up. viting these letters and unsurg tel H.H. Jerjoy Regraded Unclassified 165 RDS PLAIN Budapest Dated July 22, 1940 Rec'd 3:19 a.m., 23rd Secretary of State, Washington. 167, Twentysecond. Futura very anxious know result Legation's 161, July 6th. Please reply. STCOR MONTGOMERY EMB 10 THA 00 22 7 50 1.40 166 JR PLAIN Oslo Dated July 22, 1940 Rec'd 3:48 p.m. Secretary of State, Washington. 783, twenty-second. Presluft Incorporated Oslo requests license transfer 3000 dollars from Realbankens account with NEW York Trust Company to American manufacturers for consignment stocks. Norges Bank approves transfer. Matter urgent. Stcor. PRESTON CSB 167 ATP PLAIN LONDON Dated July 33, 1940 Rec'd 1:56 p.m. Secretary of State, Washington 2328 July 80, 5 p.m. FOR TREASURY FROM BUTTERWORTH 1. The Government's weekly deficit, which averaged pounds 29.7 million in April, pounds 35 million in May and pounds 52.3 million in June, was during the first two WEEKS in July respectively pounds 53.1 and pounds 43.6 million. The Manner in which the deficit WBB met in the quarter ended June 30 was reported in my No. 1913 of July 1. Since that date, 88 reported in my No. 2094 of July 10, the weekly EXCHEQUER returns have omitted all details of money raised by creation of debt but the following figures have been published for the periods stated: between July 2 and July 9, from savings certificate pounds 9.4 million; baby bonds pounds 17 million; and interest-free loans pounds 7.4 million: between July 1 and July 16, from 2-1/2 percent bonds pounds 67 million: in the three WEEKS ended July 19, from increases in tender treasury bills issued pounds 41 million: and by the new de- posit certificates described in my No. 1992 of July 5, pounda/ 10 million on Friday June 28 pounds 20 million on July 168 -2- #2328 July 23, 5 p.m. from London July 5, but for the two subsequent Fridays nil. The good receipts from 2-1/2 percent "on tap" bonds, naturally heavy in the first WEEKS of the issue as they absorb accumulated savings, have evidently put the EXCHEQUER temporarily in funds to a sufficient degree to enable 10 to repay the Bank of England ways and means advances of about pounds 20 million at the 30th of June, to under allot by pounds 4 million on July 18 the pounds 65 million of treasury bills tenders for which WETE invited, and to refrain from borrowing from the banks by special deposits on the last two Fridays. The higher level weekly returns from savings cerificates and baby bonds (which averaged about pounds 4 million per week in April and May and over pounds 11 million per week in June and July) 88 well B.S amounts offered free of interest, have also assisted, 2. The Bank of England has requested the stock exchange to advise members that the word "France" which appears twioe in the declaration contained in section 2 of forms D and B should in future bE delated. (SEE revision pages 53 a and D snolosed with despatch No. 5362 of June 6). Forms D. and B (the latter used for bearer scourities) filsable for transfers of excurities between United Kingdon residents 169 -3- #2328 July 22, 5 p.m. from London residents carry a declaration which must bE made by the transferee to the Effect that no Enemy, or enemy subject living outside the United Kingdon, Palestine or France. will have any interest in the security. The deletion of the word "France" means in Effect that any interest by an enemy subject residing in France would render approval of the application for transfer of the security illegal. KENNEDY CSB sex 5.00 170 day as. 1940 STRICTLY CONFIDENTIAL the Honorable themser Wellos. Acting Secretary of State. four Mr. Secretary: I have pleasure to transmitting herewith, as of per sible interest to the Department of State and also to Decretary Ball at - a my of a - which 100 delivered to the treasury Department w a. Irigeren. Argentine Recember and Financial Commector. and stated w his to represent a personal message tree the Mainter of Finance of Argestion to squalf. Very truly yours, (Signed) H. Morgesthau. JI. Incretary of the Treasury Ene. amp sott X I Regraded Unclassified 171 note from the Utalater of Finance of Argestion to the desretary of the Treasury, delivered et 19 - - July 20 w - Iriguyes to Mr. technica is the Treasury) the our and Viestude have upset the equilition to the international transactions of Augustion. As a recult of mp policies of the belligerent nations we have commulated rebotestial mercelisable belonses is blocked currensive: a the other hand the balance of payments is free currencies my ches a deficit of core than w cillion posse is the next treive moths. - more of gold and foreign enchange hold abroad - be anyroximately - million posse. United the present rate of deficit commistion they will w extracted to the sext five moths. the country at emport is who to M too memory insurts. Iven If ve adopt a policy of drustic cartailment is m importe 18 is net possible to reduce the beyond certein limits. Moreever, consituate arising free - investation of certain vital necossities must tabe procedure over and above any other countriests. the Government to or this - contemplating the edeption of certain INSURER to order to statutes the dreim # the foreign enchange recerved. these - will be tabes solely with that purpose to visa and are to be considered as of as energrapy I s I I payable s % 1 this - ⑉⑉ chiefly toporto from the United States, will to I Éta, Personal 1 Instructions $ perfumes, tape, etc. will be prohibited altegother. 172 a I # Emporte 1the antenstiles, favoling moking, building meterials, electrical applicance, trunsportation opelyment, to nostion only the meet Savertast will be variously reduced to totusen # end 80 persont of the total inyorted last year. Iron end stool, industrial equipment, ful, etc. will continue to - is w hirstofore. M a assent atop to be false of a estimated later stage I I # I n = I a 111 I and corporate transfers to the free survey conside. n to expected that this will result is 6 forther commy of our reptily depleting foreign sochage mmm. the deversment also intends to the - internal INSURED souh se aid be famero and other greeys viside are feeling 6 covere christage to thats Income. " are - that this est the required expenditures will you a - strein a - finances - they are unrectuble if 90 desire to procerro - procest internal political and costal opsilition. 50 sensider the provervation of OEP institutions as of personal Importance to order to mistals internal years and w able to cooperate is continutal affairs. se - my 1thely that If active verbage - to Bureye in the - fulure or trade with that control will to curried out under con-ditions that will not permit a repid correction of the I 1 & 1 I I 1114 % 1 a I elearing or tartor agreements, with naturally will promot the improvement of - free position. Regraded Unclassified 173 I n to of special to note that the German dovernment has recently approached - with a visa of starting again the operation of the clearing agreement between both commines which - exceptad to Deptember 2000. - expect to be is a position to begin purchase and chiyments the end of Seytember. 20 - to all that to w present situation MY befor of w producto reald be votern. led 10 so also - to point out that there so - Government to the Argentico that could refere to trade with Geresay today without expecting steelf to the need cerieus constions 4 the part of yeblic optain with the notest political - 20 townld be under to - friends to the United States Government If 95 as an canditity express the feeling provaled is our country M so the possible outose of the - Conforment. our Government is villing to & its chase is bringing about execute cooperation is a continental reside. - pack experience have tought w the difficulties involved is out 6 progres ont public epinten to the Augustice so highly cheptical ⑉ be my tengible and inmitiate Improvement of the procent struction resulting the the necting. there to as dosble is - state that the mest comtrative stop that the United States Government orde - w help 00 to met I s I I 1 1 s 2 I purchase of - of w eurobase - as him at Regraded Unclassified 174 - 4 - - my sush nove ⑉ the part of the Wasted States would net coly result is - imediate inprovenent to - position bet would also to instrumental in bringing about the proper epäsät of to of leag term plane that night be developed to this continuat. Amy many action as the yest of the United States of the asture mattered above aboutd to followed - imedictely w como practical at comprehensive trute agreement between the too countries resulting to as Increase of - calse is the American morket, as will - is greater yorchases of American goods ⑉ - yest. 10 to to the expension of - calse here that no - ultimately Look to find the - to met the paymete for - importe at vall as of all other obligations to this country. Regraded Unclassified 175 I % si STRICTLY CONFIDENTIAL Date Persontal, Begaire, Advinistrative Accident to the Procident. e. Persontal: $ have glinours is atteching, for your a my of a - which - delivered 8 the treasury Department w Mr. Brigares, Augustion a I we 1 I s 1 a personal - from the Mater of Pinance of Argention to speelf. Very truly - (Signed) H. Morgenthau. Jr. Secretary of the treasury Exc. AMP By Memorage 425 25 Regraded Unclassified 176 July 22, 1940 2:11 p.m. H.M.Jr: Hello. Operator: It will take about three or four minutes to get Mr. Purvis to the telephone. H.M.Jr: That's all right. Operator: Right. 2:15 p.m. H.M.Jr: Hello. Operator: Mr. Purvis. Go ahead. H.M.Jr: Hello. Arthur Purvis: Hello. Good afternoon. H.M.Jr: How are you? P: Very well, thank you. H.M.Jr: Well, can you hear me all right? P: I have to thank you very much for an extremely nice photograph which I'm going to put up immediately and value enormously. H.M.Jr: Well, I hope you'll give me one of yours. P: (Laughs). oh, that's very nice of you. H.M.Jr: I'd like to have one also. P: That's very nice of you. H.M.Jr: You know, I never heard about Mrs. Purvis wanting to come in. 177 - 2 - P: No. As a matter of fact, I tell you why I didn't worry you about it. When I telephoned her a little later that day, she told me that she had got a permit. H.M.Jr: Oh. P: What I did wonder though was as to whether I might bring her passport down -- but I'll have a word with Mrs. Klotz about it -- to see whether I could get some sort of ..... H.M.Jr: Visa? P: ..... visa that would be all right when she goes up and down with all these children coming. H.M.Jr: Well, we could do it on our end I'm quite sure. P: Well, that's the only end that would -- I'll bring it down and talk with Mrs. Klotz if I may. H.M.Jr: Yes. She's my expert on passports. P: (Laughs). H.M.Jr: And how to get by the State Department. P: (Laughs). Yes, that's right. That has more applications than passports. H.M.Jr: Right. Well, I -- still on the personal vein before I get to the other -- I am seriously thinking of taking my family somewhere to Canada the middle of August. P: Oh, yes. H.M.Jr: And I'd like to get some suggestions from you tomorrow. P: Middle August. I'll do a little thinking about that. H.M.Jr: Will you? 178 - 3 - P: Do you want to go far or do you want to go -- I mean, is it a traveling trip or is it a trip on which you would want to settle down in one place. H.M.Jr: Well, we'd like to settle in one place -- some place where we could be fairly comfortable. You know -- the wilds all outdoors and the comforts of home. P: That's right. How many would there be? H.M.Jr: Well, I think there'd be the whole family -- there'd be five of us. P: Five and that would be middle August? H.M.Jr: Yes, for a week. P: Let me do a little thinking there. H.M.Jr: Will you? P: I will. H.M.Jr: Good. Now, without saying anything to you I've been following Curtiss at Buffalo every week. Have you got a pencil? P: Yes, I have. H.M.Jr: Well, on the week ending July 13th they had for you eleven P-40's without any engines. P: Yes. That's right. H.M.Jr: No Allison engines and they had 43 P-36's with no Wright engines. P: That's correct. Yes. H.M.Jr: Now on the week ending the 20th they had 16 P-40's with no Allison's and 49 P-36's with the Wright Cyclone engines missing. P: 49? H.M.Jr: 49. P: Yes. 179 - 4 - H.M.Jr: Now I thought that that might be something to bring up tomorrow when they're crowding you about getting all the engines. P: Yes. Yes, because actually there is a definite shortage there. H.M.Jr: You've got it. I don't have to draw you a picture do I. P: No, not a bit. (Laughs). H.M.Jr: All right. P: Excellent. H.M.Jr: What? P: Excellent. H.M.Jr: I thought that you might be able to use that. P: I got that pretty quickly. (Laughs). H.M.Jr: Now tomorrow there'll be Secretary of War, Navy and Mr. Knudsen and I've also brought in Mr. -- oh, this man from Sears Roebuck ..... P: oh, Nelson. H.M.Jr: Yeah, because I don't want to have another session of having him say he's the czar ..... P: You're quite right. It just hits us again, that's all. H.M.Jr: .....of all priorities 80 I'm having them all in at one time and ..... P: I'd like to bring down if I may Maurice Wilson with no. H.M.Jr: on, fine. P: I think that's the best one instead of the other fellow. H.M.Jr: Yes. And also on Allison, last week ending the 20th they dropped back to 11 engines -- the week before they had done 18. 180 - 5 - P: Oh, yes. H.M.Jr: So it doesn't look very hopeful. P: I wonder what's happened there. I'd better ring Loan. H.M.Jr: I'm going to call him also because there's something wrong there. P: Uh-h H.M.Jr: And wight find out also -- -- you can do it bett than I can -- how is Wright going to catol in on those engines for you, because afte 011 if you could lay your hands on 49 P-36 right now they'd be very useful. P: Exac Oh, yes, anything is useful just now. H.M.Jr: To say nothing of 16 P-40's. P: Exactly. Yes, it's a big lot. H.M.Jr: Right. Well, I'll be seeing you tomorrow. P: All right then. That's at 10 a.m., isn't it? H.M.Jr: Right. P: Thank you very much. H.M.Jr: Good-night. P: Good-night. 181 Treasury Department Division of Research and Statistics D Date July 22, 1940 To: Secretary Morgenthau From: Mr. Haas and Regraded Unclassified 182 STRICTLY CONFIDENTIAL CURTISS - WRIGHT CORPORATION Airframes held in storage awaiting engines: British Purchasing Commission contracts - Week ending July 13 - 11 P-40s (requiring Allison engines) 43 P-36s requiring Wright Cyclone engines) Week ending July 20 - 16 P-40 s (requiring Allison engines) 49 P-36s (requiring Wright Cyclone engines) Comment by Mr. Jansen, Plant Manager: The Army 18 now taking all the Allison engines. The P-40s are piling up at the rate of approximately one a day and will reach about 55 by the end of August if no engines are received in the interim. The situation with regard to the P-36s, which require Wright Cyclone engines, will probably not get any worse as increased deliveries of these engines are expected. Mr. Jansen pointed out that by the first of September the Wright Cyclone engine planes will all be complete, and the Curtiss-Wright Corporation will require at that time 6 Allison engines per day. LOCKHEED AIRCRAFT CORPORATION Mr. Carr, Production Control Manager, stated that they have no airframes in storage awaiting engine deliveries. He mentioned, however, that one twin-engine, Army interceptor 18 practically complete and will be held up unless 2 Allison engines are received shortly. Mr. Carr added that the lack of Allison engines was, however, holding up some plant work, and that this situation would get worse if the engines are not received in the very near future. Regraded Unclassified STRICTLY CONFIDENTIAL ALLISON ENGINEERING COMPANY 183 Deliveries of Airplane Engines : Actual : Estimated deliveries on : deliveries : existing orders 1940 January 10 May 1 - 23 10 May 24 - June 1 5 June 2 - 8 4 June 9 - 15 8 June 16 - 22 11 June 23 - 30 O9 June 30 - July 6 6 July 7 - 13 18 July 14 - 20 11 July 21 - 31 121 August 160 September 310 October 351 November 331 December 332 1941 January 362 February 416 March 416 April 414 May 408 June 437 July 320 August 294 September 431 October 45 November 45 December 45 1942 January 25 February 21 Office of the Secretary of the Treasury, Division of Research and Statistics. July 22, 1940. 184 TREASURY DEPARTMENT Washington FOR IMMEDIATE RELEASE Press Service Monday, July 22, 1940 No. 21-67 Secretary of the Treasury Morgenthau today announced the final subscription and allotment figures with respect to the current offering of 2-1/4 percent Treasury Bonds of 1954-56. Allotments on public subscriptions aggregated $630,719,850. This amount in- cludes $39,110,300 allotted in full to subscribers for $5,000 or less who specified that delivery be made in registered bonds 90 days after the issue date. In addition to the amount allotted on public subscriptions, $40,600,000 of the bonds have been allotted to Government investment accounts, within the $50,000,000 reserva- tion. Subscriptions and allotments were divided among the several Federal Reserve districts and the Treasury as follows: Federal Reserve Total Total District Subscriptions Allotted Boston $ 628,019,500 $ 58,328,050 New York 2,924,302,650 270,526,400 Philadelphia 393,641,000 38,626,150 Cleveland 449,152,250 42,981,200 Richmond 221,241,700 22,349,350 Atlanta 204,688,950 20,114,450 Chicago 771,165,850 75,625,650 St, Louis 156,315,200 17,315,600 Minneapolis 89,506,900 9,717,100 Kansas City 113,212,450 13,200,350 Dallas 143,390,750 14,497,050 San Francisco 502,503,150 46,526,600 Treasury 7,931,200 911,900 Government Investment Accounts 40,600,000 TOTAL $6,605,071,550 $671,319,850 185 July 22, 1940 My dear Mr. President: As you know, for about & week or ten days, pur- suant to our control of ship novements, we have been holding up two Texas oil tankers Loaded with oil products for the Spenish Government oil menopoly. At your suggestion, after consulting with the Navy Department, we offered on behalf of the Navy to buy these two eargoes of oil from the Texas Company. Since making this offer, DO have had no definite answer from the Texas Company. In order to implement our authority so that - may continue this polloy, not only for Spain, but pos- sibly in other parts of the world, I an inclosing a proposed amendment for your signature adding petroleum and petroleum products and scrap metals to your existing list of strategic materials subject to embargo, pursuant to Public 708. Signing of this proposed amendment to the out- standing Embargo Proolamation does not necessarily mean that we will immediately stop the export of all petroleum products and scrap metals. It dões mean, however, that we may do so if you decide it is in the interest of national defense policy. Yours sincerely, s-H. Margenthau, Jr. The President, STRICTLY CONFIDENTIAL The White House. 2 imls. By Measonger 3:35 Copy to 7/22/40 Mr. Foley Regraded Unclassified 186 July 22, 1940 My dear Mr. President: As you know, for about a week or ten days, pur- suant to our control of ship movements, we have been holding up two Texas oil tankers loaded with oil products for the Spanish Government oil monopoly. At your suggestion, after consulting with the Navy Department, we offered on behalf of the Nevy to buy these two cargoes of oil from the Texas Company. Since making this offer, we have had no definite answer from the Texas Company. In order to implement our authority so that we may continue this polley, not only for Spain, but pos- sibly in other parts of the world, I am inclosing a proposed amendment for your signature adding petroleum and petroleum products and scrap metals to your existing list of strategic materials subject to embargo, pursuant to Public 703. Signing of this proposed amendment to the out- standing Embargo Proclamation does not necessarily mean that we will immediately stop the export of all petroleum products and scrap metals. It dèes mean, however, that we may do so if you decide it is in the interest of national defense policy. Yours sincerely, s - H. Morgenthare, Jr. The President, STRICTLY CONFIDENTIAL The White House. 2 incls. By Messenger 3:35 Regraded Unclassified 187 DRAFT ship Throments, you 7 My dear Mr. President: As you know, for about a week or ten days we have been holding up two Texas oil tankers loaded with oil products for the Spanish Government oil monopoly. At your suggestion, after consulting with the Navy Department, we offered on behalf of the Navy to buy these two cargoes of oil from the Texas Company. Since making this offer, we have had no definite we answer from the Texas Company. implimendow In order to have the necessary authority w con- tinue this policy, not only for Spain, but possibly in a propond smendoment other parts of the world, I am inclosing herewith en amended proclamation for your signature adding petroleum and petroleum products and scrap) Smith iron to your existing (mbyers to pursical to list of strategic materials, "Signing of this proclemation Public does not necessarily mean for example, that we will 7.03, immediately stop the export of all petroleum products and scrap iren, but It does mean, however, that we do so if you decide if is in the interest of national defense policy. I 1 metals Yours sincerely, that it in Can cong In 188 AMEXIMENT or REGULATIONS GOVERNING THE EXPORTATION OF ARTICLES UNITED THE PRESIDENT'S PROCLAMATIONS INSURED PURSUANT TO PROVISIONS - 6 OF FUNLIC-No. 703--76th CONGUES E. a. 9899/ Pursuant to the authority vosted in M by the you visigns of Section 6 of Public-No. 703--76ea Congress s. 2, 9850, I hereby preseribe the following environments and méditions to the regulations issued by as on July 2, 19401 I. After subsection 6 and before # section h under the heading "Chanicals as follows® is edded: "81 Petroleum and potrolous products." II. After subsection . under the heading "Products as follows is atted: "& Screp iron and other scrap notals." THE WHITE HOUSE July a 1940 Regraded Unclassified 189 AIMINISTRATION OF SECTION 6 or 703- 76th AGE "AN AGE so KL PROTES TUB or THE NATIONAL - APPROVED JULY 2, 1940 BY THE or THE UNITED STATES or AMERICA AMEXICANT OF The Proclemation Security w - - Pay 2, 1940 under Section 6 of Public-Bo, 703-76th Congress 9030) to cancéed est M fullows: 1. After missabion 6 and before adminism h of Bestion r there is Petrolem at petroless II. After subsection 0 of Section 4 there is edded of Sweep iron and other scrop netal." III WITHING - I have herenato 1 4 hand and email the ml of the United Makes of America so be affired. DONE at the City of Washington this day of July, in the year of our Lost stations Insured md forty, and of the Independence of the United Rates of America the of hundred and sixty-fourth, my the Presidents American I or Regraded Unclassified 190 July 23, 1940 Dear Br. Emisems In asseriance with your request, I the opinion of w General Comes). to the offents that the Resenstruction Finance Corporation has adepation matherity to Issue funds, after univer the 1940 National I w valor the 1930 Glass-Stongall I to manfacturers of articles and materials untell the national defense who bare contrasts to supply and cartisles and mterials to the United States and to Great Britain, I E (Signed) H. Morgenthau, Jr. Attachment William a, Intom, Commission to the Geneil of National Before, Federal Reserve Building, as. I 7/23140 a to mr. Thompson By Movemeger 3ʳᵈ Regraded Unclassified 191 July 23, 1940 My dear Mr. Secretary: The I Company, a manufacturer of articles and materials useful for national defense, has contracted to supply the Government of the United States and the Government of Great Britain with cer- tain of those articles and materials. In order to fulfill those contracts it is necessary that the I Company increase its productive capacity by plant construction, expansion, and equipment. Those new plant facilities will be used for the fulfilment of the above-mentioned contracts. While it is not known what use will be made of those facilities after the completion of those contracts, presumably they will continue to be available for fulfilling future contracts of a similar nature, if that becomes necessary for the national defense. It is understood that the I Company desires to obtain the.capital-for that expansion from the Reconstruction Finance Corporation by way of &- loan and has, in order to secure the repayment of the loan, offered to execute to the Corporation a mortgage without recourse covering the new plant facilities. You have inquired whether the Reconstruction Finance Cor- poration may lawfully lond that capital to the I Company for those purposes. It is ny opinion that, as a matter of law, the propriety of such a loan is beyond question. 192 - 2 - Section 5d of the Reconstruction Finance Corporation Act, DB anended (U.S.C., Sup. V, title 15, Bec. 606b), as addod to by section 5 of the Act of Juno 25, 1940 (Public, No. 664, 76th Congress, 3rd Sens.). provides in part: "In order to aid tho Government of the United Statos in its national-dofensd program, the Corpora- tion is authorized-- "(1) To nake loans to, or, when requested by the Federal Loan Administrator with the approval of the President, purchase the capital stock of, any corporation (a) for tho purpose of producing, acquir- ing, and carrying strategic and critical naterials as defined by the Prosident, and (b) for plant con- struction, expansion and equipment, and working capital, to be used by the corporation in the nanu- facture of equipment and supplies necessary to the national defense, on such terms and conditions and with such naturities as the Corporation may detormine; Il In ny opinion, the above statuto confers conplete authority on the Reconstruction Financo Corporation to nake the loan in question. Under the torns of the statute the lonns which the Rocon- struction Finance Corporation is authorized to nake, in aid of the national dofense program, are for plant construction, expansion, and equipment, which in turn are to be used for the nanufacture of articlos "necessary to the national defense". The plain purpose of those words is simply to dofine the kind or type of equipment.and supplies which will be produced by the plant. There is no language used which would require the Unitod Statos to purchase all or any of those products. The language of the statute is clear and Regraded Unclassified 193 - 3 - Regraded Uncla unnistakable that 80 long as a plant produces equipment and sup- plice of a type "necossary to the national defense". a loan for the construction, expansion, or equipment of the plant falls with- in the authority of the Reconstruction Finance Corporation. One of the nost prossing problems with which the Congress was concorned in providing for the nation's defense was the expan- sion and augnentation of private plant capacity which could be used in producing not only the articles and materials which are needed at the present time to strengthen our arned forces, but also for fulfilling the needs of an uncertain future. The Congress in 62b- acting section 5d(1) was not concerned with the acquisition of specific articles and naterials for defense purposes: various appropriation acts were passed for that purpose. See: Act of June 13, 1940 (Public, No. 611, 76th Congress, 3rd Sees.): Act of June 15, 1940 (Public, No. 635, 76th Congress, 3rd Sess.): Act of June 26, 1940 (Public, No. 667, 76th Congress, 3rd Sess.); Act of July 2, 1940 (Public, No. 703, 76th Congress, 3rd Sees.). See also the statute to expedite the acquisition of naval equipment. the Act of June 28, 1940 (Public, No. 671, 76th Congress, 3rd Sees.). The problem of expanding existing private plant capacity be- yond the nation's innediato needs was known to the Congress. The President had repeatedly brought the problem to the attention of the Congross, and he had specifically pointed out to the Congress that the production of war materials in this country for export would 194 4 incroase our plant capacity and our skilled personnel to the advantage of our national defense, since the increase in plant capacity and the additional skilled personnel would be available if and when the tine for their neod should arise. In an address delivered personally to a Joint Session of the Congross, on September 21, 1939, the President stated: "Fron a purely naterial point of view, what is the advantage to us in sending all nanner of articles across the ocean for final processing there when we could give employment to thousands by doing it here? Incidentally, and again from the naterial point of view, by such employment we automatically aid our own national defense." ((1939) 85 Cong. Roc. 10; E. Doc. No. 474) In an address on national defense delivered personally to a Joint Session of the Congress, on May 16, 1940. the President anid: "Fron the point of view of our own defense, therefore, great additional production capacity is our principal air requisito. "For the permanent record, I ask the Congress not to take any action which would in any way hanper or delny the delivery of Anerican-nade planes to foreign nations which have ordered then, or soek to purchase nore planes. That, from the point of view of our own national defense, would be extrenely short- sightod. "During the past year American production capacity for war planes, including engines, has risen from approx- inately 6,000 plance a year to nore than double that numbor, due in greater part to the placing of foreign orders. "Our imediate problem 18 to superinpose on this production capacity a greatly increased additional production capacity. I should like to 800 this Nation geared up to the ability to turn out at least 50,000 planes a year." (Underscoring supplied.) (86 Cong. Rec., May 16, 1940, at 9534: H. Doc. No. 751) Regraded Unclassified 195 5 In a nessage to the Congress, transmitting a request for additional appropriations and authorizations for the national defense, the President said: "Over and beyond the acquisition of this actual naterial is the evident requirement for the innodiate creation of additional production facilities to neet possible future emergencies as well as present dofi- cioncies in the naking of munitions, such as guns, anmunition, and fire-control equipment. These facilities roquire a long time to croate and to reach quantity production. The increased gravity of the situation indicatos that action should be takon with- out delay. ..... "In the national offort for defense upon which no are now engaged, it is imperative that we nake full and effective use of the nighty capacities that lie in our population. Here as yet undevoloped lie the ability and the strength needed in the build- ing up of our amanents to provide a suro industrial foundation for the meeting of any and all defense requirements. Without the full development of those skills, our national defense will be less than it must be in the critical days which lie ahead. With- out the full contribution of our people, our defense cannot attain the invulnorability which the Nation demands and which we aro determined it shall have." (86 Cong. Rec., May 31, 1940, at 11055 and 11087; H. Doc. 799) It appears from the dobates on the bill in the Sonato that the concern of the legislators was to oncourage the establishment of private enterprises rather than the creation of Government corpora- tions to supply the Government with needed naterials for national defense. (86 Cong. Rec., June 15, 1940, at pages 12597-12615) The sane appears in the debates of the House of Representatives. (86 185 - 6 - Cong. Rec., June 14, 1940, at pages 12497-12520). The debates of the Congress are, of course, relevant to nhow B common agreement on the purpose of 8 statute. Wright V. Vinton Branch of the Mountain Trust Bank of Roanoke, (1937) 300 U.S. 440, 464 n, See also the hearings on S. 3938, 76th Cong., 3rd Sess, (1940) 38-71, a companion bill to H.R. 9958, 76th Cong., 3rd Sece., which became the Act of June 25, 1940. It would have been inconsistent with that purpose for the Congress to have refused to authorize loans to private industry for the enlargement of ite productive capacity except upon the condition that all the output be sold to the United States Government. Further- more, it would have been a shortsighted policy indeed which would have limited plant expansion to exactly that necessary for the in- mediate needs of the Government. The events happening in Europe were such that no person could undertake to say what the needs of the United States Government would be at any time in the future. It is well known thet 8 plant expansion cannot be carried out over night. The erection of new buildings, the installation of new mechinery, end the organization of such a plant require time. The Congress could not have intended that the placing of future orders should aweit additional expansion in the future. That is especially true when it is realized that, since every order which is filled for customere other than the United States will elso bear a portion of the cost of that increased expansion, such expansion can be had at less Regraded Unclassified 197 - 7 - expense to the Government, If it be argued that the Congress could not have in- tended that the increased plant capacity, achieved by capital provided by the Reconstruction Finance Corporation, should be available to fulfill contracts for others than the Government of the United States because such other contracts might hold up production for the United States, a complete answer is to be found in section 2(a) of the Act of June 28, 1940 (Public, No. 671, 76th Congress, 3rd Sess.), which provides, in part: .... deliveries of material under all orders placed pursuant to the authority of this section and all other naval contracts or orders and all Army contracts and orders shall, in the discretion of the President, take priority over all deliveries for private account or for export:* * Under that section it is clear that all increased plant capacity will be available for the fulfilment of contracts of the Govern- ment if the President should find that necessary. Since but a few days elapsed between the passage of those Acts, the Congress must have enacted each in the light of the other. It is, therefore, self- ovident that all augmentations of plant facilities made with the 1/ See also section 120 of National Defense Act of 1916, 39 Stat, 213 (U.S.C. title 50, sec. 80), granting the President similar (but more drastic) authority when war ds imminent or during time of war. Regraded Unclassified at 8 - 198 use of loans by the Reconstruction Finance Corporation will be available for the national defense. II. It is not necessary, however, to rely solely on the para- graph added to section 5d of the Reconstruction Finance Corporation Act by section 5 of the Act of June 25. 1940, for authority to make the loan here under consideration. Authority to make the loan may also be found in section 5d of the Reconstruction Finance Corporation Act, as amended by the Act of April 13, 1938 (the Glass-Steagall Act) 52 Stat. 212 (U.S.C., Sup. V. title 15, Bec, 606b), without the new paragraph. That section provides, in part, as it appears in the Code: The Corporation is further authorized and empowered to purchase the securities and obli- gations of, and to make loans to, any business enter- prise when capital or credit, at prevailing rates for the character of loan applied for, is not otherwise available: Provided, That all such purchases of se- curities and obligations and all such loans shall be, in the opinion of the board of directors, of such sound value, or 80 secured, as reasonably to assure retirement or repayment; may be made or effected either directly or in cooperation with banks or other lending institutions through agreements to participate or by the purchase of participations, or otherwise; shall be made only when, in the opinion of the board of directors, the business enterprise is solvent; and shall be made under such terms, conditions, and re- strictions as the corporation may determine: Pro- vided further, That in carrying out the provisions of this section, the Corporation may purchase securi- ties and obligations, and may make loans, with such maturities as the Corporation may determine, notwith- standing any other provision of law. . all Regraded Unclassified 199 - 9 - The language of that section clearly would seem to authorize the Corporation to make a loan, taking as security a non-recourse mortgage, provided that the loan is of such sound value or is so secured that repayment or retirement will reasonably be assured and that the business enterprise to which the loan is made is, in the judgment of the board of directors of the Corporation, solvent. It is understood that capital or credit, at prevailing rates for the character of loan applied for, is not otherwise available. There is nothing in the Act which, if the enterprise be solvent, either requires security for all loans, or requires security of e. particular type to be taken. This 10 borne out, not only by the plain language of the statute quoted, supra, but also by the evidences of Congressional intent appearing in the legislative history of the Act. The language in the Act before the Glass-Steagall amendment was as follows: .... Such loans shall, in the opinion of the board of directors of the Corporation, be so secured AS reasonably to assure repayment of the loans, .... : Section 10 of the Act of January 31, 1935, 49 Stat, 5. That the Congress intended to liberalize that portion of the Act by providing "sound value" as an alternate basis for a loan, 80 that security need not be the sole condition therefor, is plain from the statements by Representative Steagall, Chairman of the Committee on Banking and Currency, who introduced the measure in the House. In (1938) 83 Cong. Rec, 4674-4675, he stated: .... The bill has another provision which liberalizes the authority of the Corporation in mak- ing business loans of all types. Under existing law the Corporation, in making industrial or business SUY - 10 - loans, is required to take security that will reasonably insure the repayment or liquidation of the loan. Under this bill the Corporation may make loans on B. different basis -- and I will read the language BO AS to be sure that I no entirely accurate: "'Such loans or obligations to be of such sound value or so secured B.B. reasonably to assure retirement DE repayment.' "It is quite clear from this language that it in the agreed purpose of the bill to authorize the Corporation to make loans upon & basis of soundness on the one hand, or to purchase obliga- tions, make advances, or still as under existing law, to make such loans where repayment is reason- ably assured. There is not in the present bill the arbitrary requirement that no loan shall be made except where its repayment is occured by collateral. We have departed from that require- ment of existing law. That is quite A marked change and constitutes e. very large liberalisa- tion of the act, "Mr. STEAGALL. I have tried to make it clear that this bill authorizes loans to be made without the customary collateral or security requirements. The basis is soundness. Any loan that is of sound value, whether it le to no in- dividual, B partnership. or a corporation, would be considered. "The purpose of that is to permit the Cor- poration to deal with actualities in these trans- actions and to grant extensions from time to time. There is no limit here within which naturities are to be established under contracts for loans, the purpose being to permit the Corporation to 80 liboralize its policies and its practices that it may come to the aid of any city, corporation. or partnership that has security of sound value upon which they cannot secure accomodations through ordinary channels. That is the whole purpose of the Sill, Regraded Unclassified 201 - 11 - "Mr. SADOWSKI. The purposes of the bill are good, but it seems to me that all of the provisions of the bill seem to rest upon the kind of rules and regulations the R. 7. C. will promulgate. What assurance has the gentleman or the Members of this House it is going to bring out such rules and regulations that the Nation will be able to benefit under the provisions of this bill? "Mr. STEAGALL. May I say to the gentleman, in answer to his question, that the whole matter was discussed by the committee in the hearings held on the proposed legislation. Statements have been made that it probably would not be helpful to publicize. The committee will bear out this state- ment, that delinquencies and foreclosures by the Corporation upon industrial loans show that the Corporation has gone further than was ever contem- plated under either the language, the letter, or the purpose of the law by which they were acting. That 1s the reason we have liberalized the law in this instance, to prevent immediate foreclosures, to permit extension of obligations from time to time, and to permit loans without rigorous rules of collateral." During the hearings on H.R. 10055 (which was superseded by S. 3735, a bill which, except for the addition of a paragraph not relevant here, was identical therewith, and which became the Glass-Steagall Act), some disagreement was expressed upon the interpretation of the words "of sound value". Most of the Committee members, especially Mr. Steagall, took the view that the addition of the new language liberalized the making of loans, so that collateral security need not be required in all cases, provided there was "sound value". The Chairman of the Reconstruction Finance Corporation, Mr. Jesse Jones, and the General Counsel of the Corporation, Mr. Claude Hamilton, Jr., took the narrower position that the proposed legislation Regraded Unclassified 202 - 12 - nade no change in the security requirements at all; that "of such sound value" referred only to purchases of obligations, and not to loans; and that loans must still be secured. That difference of opinion will be found on the following pages of the Hearings on (1938) H.R. 10055, 75th Cong., 3rd Sess.: 13. 15, 19, 20, 25, 32, and 34-35. It is manifest from the hearings that the Congress was try- ing to liberalize, while the Chairman of the Reconstruction Finance Corporation was attempting to restrict, the security requirements for loans to be nade under the proposed statute. The anonalous situation was thus presented of an administrative officer of an agency attempting to restrict powers which it was intended to bestow upon that agency. The only member of the Committee who appears to have accepted the interpretation of Messrs. Jones and Hamilton with relation to the phrase "of such sound value" was Mr. Williams. Chair- man Steagall, however, in his explanation of the bill on the floor of the House of Representatives, quoted, supra, did not accept the interpretation of Mesers. Jones and Hamilton. Expository statements by the sponsore of legislation may be used as aids in the interpreta- tion of that legislation. Wright V, Vinton Branch of the Mountain Trust Bank of Roanoke, (1930) 300 U.S. 440, 463: United States V. 2] Even in the face of Mr. Steagall's statement, Mr. Jones, in a speech nade after the passage of the Act, declared that loans nade by the Reconstruction Finance Corporation under the Glass-Steagall Bill must be secured. See (1938) 83 Cong. Rec. (Appendix) 1641-1642. Regraded Unclassified 203 - 13 - The American Trucking Associations, (No. 713, U.S.S. Ct., May 27, 1940). There can be no doubt, then, of the Congressional intent in the Act of April 13, 1938, to remove the requirement of security as the sole condition upon which a loan may be granted. If the Recon- struction Finance Corporation has power to nake loans without requir- ing any security, it cannot be argued that, when security is offered, it must be security of a particular type. The Act itself does not specify what kind of security shall be taken if security is offered. It merely requires that the security shall reasonably assure repay- cent. The Corporation has not in practice restricted itself to one specific type of security. During the hearings which are mentioned above, nany kinds of security acceptable to the Corporation were mentioned, At page 13, thereof, Mr. Hamilton stated, in response to a question. that the security might be & pledge of personal property, assignment of accounts receivable, or B. mortgage on real estate. On page 17, he indicated that an inventory would be good security for a loan to a retail store, if the state law permitted. On page 28 Mr. Jores said that the usual security for an industrial estab- lishment was a mortgage on the plant. On page 44, Mr. Jones made the following statement: "We want to nake any sound loan where we think the credit is good and the money will be repaid. We do not care what the security is. Ve would be glad to make the loans. What we are trying to do is to promote work and business." (Underscoring sup- plied.) Regraded Unclassified 204 - 14 - In the Senate Hearings before the Committee on Banking and Currency on (1938) S. 3735. 75th Conge,, 3rd Sess. 4, Mr. Jones said: .... Te want to say: 'All right; if some- body needs some money in any community, and they can give us security and put the money to good use, and not use it to pay some present-existing debt, but to buy something and hire someone, then we want to make the loan'." Nowhere in the hearings was indication given that any security other than that which would reasonably assure repayment was required. Under section 5d of the Reconstruction Finance Corporation Act, as amended by the Glass-Steagall Act, it is my opinion, there- fore, that the Reconstruction Finance Corporation would be acting wholly within its powers in making the proposed loan to the X Com- pany if the X Company is solvent and the prospective loan is "of such sound value" as to reasonably assure repayment, or if the mortgage without recourse, covering the proposed additional plant facilities, reasonably assures repayment. It should be pointed out, however, that what constitutes "sound value" and what loans are secured "reasonably to assure re- tirement or repayment" are matters left solely to the discretion of the Board of Directors of the Reconstruction Finance Corporation and are not subject to review by any other governmental agency except possibly the Federal Laon Administrator under his general supervisory powers. Regraded Unclassified 205 - 15 - It is ny opinion, therefore, that there is adequate authority in the Reconstruction Finance Corporation to make the proposed loan either under the 1940 National Defense Amendment, supra, or under the 1938 Glass-Steagall Amendment, supra. Very truly yours, (Signed) B. H. Foley, Jr. General Counsel. The Honorable The Secretary of the Treasury.