Volume 339, December 12 – December 14, 1940

DIARY Book 339 December 12 - 14, 1940 Regraded Unclassified - A - Book Page American Friends Service Committee See War Conditions: Foreign Funds Control (France) Appointments and Resignations Basby, Duiley: Rockefeller group asks for his transfer - 12/12/40 339 1 - B - Bank for International Settlements See Mar Conditions - 0 - Canada See War Conditions: Canada; (Fereign Funds Control Cullen bill See War Conditions: United Kingdom Custems, Bureau of See War Conditions: United Kingdom - D - - Desmark See Var Conditions: Shipping - I - Masky, Budley See Appointments and Resignations - , - Federal Bureau of Investigation Class memerandum - 12/12/40 119 a) cosporation reported b) Wythe Williams' activities commented on Pritz Mandl: Report by Federal Bureau of Investigation - - 12/12/40 120 (See also Book 240. page 234) France See Var Conditions: Foreign Funds Control - G - Germany for propagenda in Latin America, see Latin America les also War Conditions: Foreign Funds Centrol one Bee Mar Conditions Regraded Unclassified - H - Book Page Heath, Donald HMJr thanks Heath for informal observations on situation in Germany - 12/13/40 339 369 - I - Italy See War Conditions: Foreign Funds Control - J - Japan See War Conditions: Foreign Funds Control - L - Latin America German propaganda films showing bridges, landing fields, etc., made in South America, printed in United States by subsidiary of German Dye Trust, fall into the hands of Customs - 12/12/40 9,316 Liquor "Army and Havy Whiskey" - label discussed by HMJr and Berkshire - 12/12/40 21,313 a) Berkshire memorandum - 12/13/40 403 Lothian, Lord Death announced at 9:30 meeting - 12/12/40 1 a) Mackensie-King and HMJr discuss - 12/14/40. 427 Lumber See Var Conditions: Price Control - M - Morgan, J. P. See War Conditions: Purchasing Mission - I - Nelson, Donald H. Speech before Bankers' Club of Chicago - 12/13/40.. 377 Neutrality Act See War Conditions - O - 011; oil Companies See Mar Conditions Regraded Unclassified - P - Book Page Phillips, Sir Frederick See War Conditions: Purchasing Mission Pike, Summer See War Conditions: 011; 011 Companies Portugal See War Conditions: Gold Price Control See War Conditions Puerto Rico Hass reperts on conversation with Davila, Puerto Rico Housing Authority - 12/12/40 339 123 Purvis, Arthur B. Leaving London for United States - 12/14/40 247 Arrives in New York City - 12/23/40: See Book 342, page 74 - 1- Research and Statistics, Division of Report on projects during November 1940 440 Revenue Revision Tax-exempt Securities: Sullivan, Foley, and Murphy to work out examples for speech by HMJr or magazine articles - 12/12/40 4 a) Foley memorandum on conference with Walter Stone (Scripps Howard), etc. - 12/12/40 213 Rockefeller Foundation Food Situation in Spain: Chamberlain resume' of Janney memorandum - 12/13/40 374 Roumania See War Conditions Shipping - $ - See War Conditions Spain See War Conditions - T - Taxation See Revenue Revision Tax-exempt Securities See Revenue Revision Turkey See War Conditions - U - United Kingdom See War Conditions: Military Planning: United Kingdom Regraded Unclassified - Y - Book Page War Conditions Airplanes: Employment in Aviation Manufacturing Industry: Hass memorandum - 12/12/40 339 146 a) Copy sent to FDR - 12/18/40: See Book 341, page 149 Bank for International Settlements: French shareholders - resume' of situation - 12/14/40. 433 Canada: Foreign exchange position - 12/12/40 175 French gold - sale of discussed by Phillips and HMJr - 12/12/40 208 a) Clark (Canadian Treasury) and HMJr discuss - 12/13/40 388 Exchange market resume' - 12/12/40, etc 211,411,439 Export Control: Exports of petroleum products, scrap iron, and scrap steel from United States to Japan, Russia, Spain, and Great Britain, as shown by departure permite granted for week ending December 14, 1940 432 Foreign Funds Control: General over-all control discussed by Treasury group - 12/12/40 40 a) Recent movements of Ario funds 58 b) Gold shipped here by and for account of Bank of Portugal 59 c) Corporations suspected of subversive activity or of concealing assets subject to freezing 62 d) Treatment of American property interests by Germany, Canada, Italy. and Japan 72,258 Axis funds - recent movements of - 12/12/40 156 France: Offers $50,000 "from Government frosen funds in United States" to American Friends Service Committee for purchase of Swies milk for French children - 12/13/40 326 Germany: Transactions with Chase National Bank - 12/13/40 415 Italy: Transactions with Chase National Bank - 12/13/40 413 France: Bank for International Sattlements: French shareholders - resume of situation - 12/14/40 433 Germany: For propaganda in Latin America, see Latin America HAJr thanks Heath for informal observations on situation - 12/13/40 369 Gold: shipment to United States by and for account of Bank of Portugal discussed by Treasury group - 12/12/40 69 Sale of French gold by Canada discussed by Phillips and HNJY - 12/12/40 208 a) Clark (Canadian Treasury) and HNJr discuss - 12/13/40 388 Regraded Unclassified - W - (Continued) Book Page War Conditions Military Planning: Reports from London transmitted by Butler - 12/12/40, etc 339 255,406,464 Characteristics of German Anti-Aircraft and Anti-Tank Materiel: Var Department bulletin - 12/14/40 470 Neutrality Act: Resume' of various steps made by Foley - 12/12/40 215 Oil; 011 Companies: Summer Pike "to go into South American companies" - 12/12/40 19 Price Control: Henderson "minding everybody's business except his own °; HMJr to call his attention to price of lumber, wool, hides, tallow, butter, wheat, and cocoa - 12/12/40 13 (See also Book 340, page 14) a) Memorandum and charts 393 b) FDR sent lumber charts - 12/17/40: See Book 340, page 347 c) Henderson's letter and HMJr's answer - 12/23/40: See Book 342, page 60 1) Telephone conversation: Book 342, page 191 a) Hass memorandum on "sequence of events": See Book 342, page 65 Purchasing Mission: Assets: Phillips and HMJr confer privately: Cochran memorandum - 12/12/40 208 a) Sale of French gold by Canada discussed b) Financial assistance to Great Britain definitely requested 1) Butterworth memorandum 399 c) Jones told by HMJr Phillips, at last, asked for & loan from United States - 12/17/40: See Book 340, page 328 Purvis leaving London for United States - 12/14/40.... 247 a) Arrives in New York - 12/23/40: See Book 342, page 74 Gold and dollar resources of British Empire and extent of depletion reported on by Federal Reserve Bank of Few York - 12/12/40 302 Conference on sale of American-owned securities in United States as well as direct investments; present: HMJr, Purcell, Frank, Cochran, White, Gifford, Pinsent, Phillips, Playfair, Forrestal, Wise, Bell, and Clark - 12/13/40 337 a) Phillips sends list which will be included in vesting order dated December 14, 1940 387 1) See announcement: Book 340, page 177 Background on vesting procedure and Kennedy's place in problem covered in Pinsent memorandum - 12/17/40: See Book 340, page 195 Morgan (J.P.) as agent: Frank tells HMJr of Gifford's statement that he had taken Ranes' and Butterworth's comments to his 'as informal tip from HMJr" - 12/13/40.. 361 a) HMJr-White conversation - 1/10/41: See Book 346, page 416 Regraded Unclassified - V - (Continued) Book Page War Conditions (Continued) Roumania: Negotiations with Turkey for exchange of cotton for petroleum products - 12/12/40 339 126 Shipping: Denmark: Ships tied up in United States waters - discussion at 9:30 meeting - 12/13/40 318 a) Conference in Land's office: Foley-Pehle memorandum - 12/13/40 391 1) Maritime Commission hostile to Treasury participation: See Book 340, page 25 b) Coast Guard asks for DANMARK for use at Academy - 12/23/40: See Book 342, page 93 c) Conference of Treasury group - 12/26/40: Book 342, page 176 d) Use of ships in our and other neutral porte - memorandum sent by HMJr to Navy and to Land - 12/27/40: Book 342, pages 268 and 276 1) Knox's acceptance of invitation to confer - 12/28/40: See Book 343, page 1 e) Cabinet discussion - "for some reason FDR does not want Treasury in on it" - 12/27/40: Book 342, page 302 Spain: Food Situation: Chamberlain resume³ of Janney (Rockefeller Foundation) memorandum - 12/13/40 374 Turkey: Negotiations with Roumania for exchange of cotton for petroleum products - 12/12/40 126 United Kingdom: See also War Conditions: Purchasing Mission (Assets) Lothian's death announced at 9:30 meeting - 12/12/40. 1 a) Mackenzie-King and HKJr discuss - 12/14/40. 427 Phillips and HMJr confer privately: Cochran memorandum - 12/12/40 208 a) Sale of French gold by Canada discussed b) Financial assistance to Great Britain definitely requested 1) Butterworth memorandum 399 Gold and dollar resources of British Empire and extent of depletion reported on by Federal Reserve Bank of New York - 12/12/40 302 Nelson (Donald M.) speech on urgency of need for assistance - 12/13/40 377 Tax to be imposed on purchases of goods from wholesalers: United States Customs valuation of these goods further discussed in British Embassy memorandum - 12/13/40 396 a) Gaston memorandum concerning Cullen bill - 12/17/40: See Book 340, page 300 1 December 12, 1940 9:30 a.m. GROUP MEETING Present: Mr. Haas Mr. Cochran Mr. Young Mr. Wiley Mr. Foley Mr. Pehle Mr. Graves Mr. Thompson Mr. Bell Mr. Sullivan Mr. White Mrs. Klotz Mr. Berkshire H.M.Jr: It is bad news about Lothian, isn't it? Bell: Wonder what the trouble was, do you know? Cochran: The coroner has been there and they haven't given a report yet, you see. He had no doctor. He was a Christian Scientist. Wiley: He was converted to Christian Science by Nancy Astor. H.M.Jr: Did you say, "By Nazi Astor?" Wiley: Nancy, yes. H.M.Jr: Is she a Christian Scientist? Wiley: Yes. H.M.Jr: Edward? Foley: We have a lawyer by the name of Dudley Easby. Regraded Unclassified - 2 - 2 Nelson Rockefeller would like to take him. He speaks Spanish and he has some knowledge of things that Nelson thinks would be valuable to him. I can get along without him, if you want to let him go. H.M.Jr: What is he doing? Foley: Well, he is working on matters coming up from the Treasurer's Office in connection with checks and handles matters in connection with the Comptroller General's Office. He is one of the boys in Norman Tietjens' shop. H.M.Jr: What does he get? Foley: He gets around thirty-eight hundred. H.M.Jr: What would Rockefeller give him? Foley: I think he would probably pay him the same thing. H.M.Jr: Do you see any reason, Norman. Thompson: He is a good man, but we can spare him. H.M.Jr: Speak Spanish? Foley: Yes. H.M.Jr: It is all right with me. Foley: Jim Forrestal wants to resume those lunches on the Defense with Army and Navy, and 80 on, and I understand he has asked Eddie Greenbaum and Patterson and several others. He has some new lawyers now. Some of his older group has gone back to New York, and he has got a new group. I guess he wants to break them in. H.M.Jr: Where do they eat, downstairs? Foley: No, this one, he is going to have in his office. - 3 - 3 E.V.Jr: I see. All right. Feley: Walker Stone, one of the editorial writers for the Scripps Howard chain, called up and said they wanted to so to town and do a campaign on the elimination of exemptions. I saw the editorial yesterday. I almost fell over backward. Voley: Me said he needed help. he said he had gotten the paper that I had read over at the meeting of the municipal law officers, and he thought it was good but he had to have a different ap- proach for his stuff, and he wanted examples along the line you mentioned about the fellow who goes to Palm Beach and stays all winter end doesn't have to contribute. Give him the telegram that came in this morning from the Palm Beach fellow calling me down, "day pick on Palm Beach?" Klotz: I loved that. (Laughter) Foley: I had a letter from a fellow by the name of Dominick in Greenwich, Connecticut. lie said he would fight me in Washington or in hell. H.M.Jr: Sure, go ahead. (Laughter) Foley: Can John and I get together? We will probably need Murphy on these examples. H.M.Jr: I don't know whether you can get together. Foley: Well, give him the material. H.M.Jr: I think it would be wonderful to get together on something with Scripps Howard. Foley: Another fellow by the name of Izzy Stone-- I.K.Jr: What is the name? Regraded Unclassified 4 - 4 - Foley: Izzy Stone. (Laughter) I am distinguishing him from Walker Stone. He is Washington editor for The Nation and wants to do something on that. H.M.Jr: Oh, that is the fellow. They ran their real names in something or other. Foley: Yes, his name was Einstein, and he changed it to Izzy Stone. (Laughter) H.M.Jr: Well, the question is, is he? Foley: Is he, or isn't he? H.K.Jr: The answer is yes. (Laughter) I have got Norman crying here. Sullivan: On these examples-- H.K.Jr: What does Ike want to do? Foley: He wants to write a full piece for The Nation on it. He says from where they sit up in New York, it seems to him that the Treasury has been carry- ing the banner for what the New Deal stands for more than any other department in town during the last year or so, and they want to help where- ever they can. H.M.Jr: Sure. Who all do you want to help you? Foley: Well, I think if George could make Henry Murphy available, John and I can get him the stuff he wants. Sullivan: But we want to know about this series of speeches you are going to make. You remember before you went away, you wanted four written. Now, we don't want to waste any of these good examples - I mean not waste them, but we want to give you first crack at them. H.M.Jr: Oh, well-- Regraded Unclassifie - 5 - 5 Foley: Well, what he really wants, Mr. Secretary, is to show what a man would pay in the way of state and federal taxes with an earned income of 50 thousand dollars, and what he would get away with if he had everything in tax exempts, and then he would like to show what a fellow would have to pay if he invested 50 thousand dollars in stock that produced a magneto or something that went into an airplane after he got through taking the risk and after he got through supply- ing something useful for the Defense Program and compare that with somebody that just putsit into something like tax exempts. H.M.Jr: Well, I was all steamed up down in Jamaica, in the tropics, to do a speech and - I was all steamed up in the tropics to do a speech. Foley: Yes, I get it. (Laughter) H.M.Jr: I wasn't sure. Sullivan: You have to say it twice. If they don't laugh, it is not very good. H.M.Jr: I didn't think I got the necessary response. Don't wait on me. If you fellows have got any- thing, I would go to it. What I would like you to do is, keep a little record of what you do for these people, each one, just to have it, but by all means, don't wait on me. Let them go. Like all these things, they are going to have to be like drops of water on a stone. We are going to have to do it over and over and over again. If Scripps Howard takes hold of it and goes to town, maybe somebody else will want to. Bell: The Treasury hit the Washington Post yesterday morning in three places on the editorial page. A cartoon and two columns. Sullivan: Here are the four speeches you asked for. Regraded Unclassified - 6 - 6 H.M.Jr: Wonderful. Sullivan: Here are more of these memoranda. You wanted a criticism on a summary of all those things. It takes quite a lot of work. I think you have got to determine whether or not you want us to continue those. H.M.Jr: Well, I would until further notice. Sullivan: All right, sir. H.M.Jr: If, for instance, this thing comes along, I think we ought to get some very good newspaper man who will just do a really first class job. He could help you fellows prepare this sort of thing. Sullivan: Do you recall you agreed that Mr. Blough should go to Canada to look into that sales tax and the excess profits? If he is to go before Christmas, he should go tonight and be back here a week from Monday. Is there any reason we can't let him go now. H.M.Jr: No. Sullivan: You wanted me to remind you about Mr. Stewart. Do you want to call him or shall I? H.M.Jr: I will. Sullivan: When you talk with him, he should have in mind that he said that he felt that they would, and he was going to put it up, and he wasn't going to let his view become at all apparent. H.M.Jr: I am always very frank. On second thought, I am simply going to say I think the Treasury should finance it. Foley: On McCloy, I have those statutes any time you want to look at them. Bernie ran into McCloy down at the Supreme Court on Monday. He was ? - 7 - down there when Mitchell was arguing. He, in an offhand way, told Bernie that he had resigned from his firm, and that he was down here full time. H.M.Jr: I see. Foley: So I don't think that he violates the statute, but I talked to Eddie about it, too. Eddie dropped in the other night, but - shall I show the statutes to you? H.M.Jr: No, that is enough. Sullivan: I have to call Gulick this morning for his meet- ing. We can get him $22.20 a day and part of the time we can base him at New York, if you want to do it that way. H.M.Jr: No. Twenty-two twenty is plenty for anybody. If he doesn't want to come down on that basis, let his own institution take care of it. Sullivan: I will tell him that is what we will do. Thompson: Besides five dollars subsistence? H.M.Jr: The twenty-two twenty plus five. Foley: And I think you can shove him up to twenty-five after you have had him 30 days or something like that, but I don't think we ought to do anything more; and, Norman, that won't work out on the contract basis. Thompson: I didn't think it would. H.M.Jr: Twenty-two twenty plus five, and if you can go to-- Sullivan: Twenty-five plus five. Foley: They did it in Procurement, but I think they were playing fast and loose. I think on that contract arrangement which they never cleared Regraded Unclassified - 8 - 8 with us, they were paying him for three days when he only worked two. H.M.Jr: When were they doing that? Foley: I think that is what they were doing in some instance the Norman called to my attention. H.M.Jr: If, for no other reason, Congress may say, "Well, we want to take this group over, and then They find out that we are paying this thing, and say, "How do you get that way?" Foley: The only way it could be done, Mr. Secretary, would be out of the President's hundred million dollar fund. H.M.Jr: Try and get it. Foley: I shouldn't think he would want to pay for this out of that. H.M.Jr: He wouldn't. Cochran: Pinsent will confirm to me before noon about that meeting tomorrow, and I suppose you don't want to get the SEC man until we get that taken care of. H.M.Jr: I will be incommunicado from twelve-thirty today on until tomorrow morning. I will be home, and I don't want to be bothered. Cochran: Pinsent told me that last night Sir Frederick suggested to him that he might call this morn- ing and want to see you privately, but he asked me if Phillips had phoned me last night. H.M.Jr: I am leaving here today at twelve-thirty and no appointments until tomorrow morning. I am tak- ing all of this stuff home. I hope to read most of it while I am not asleep. - 9 - 9 Cochran: I talked to Stone this morning, and he is going to send us that memorandum which you wanted. And on that question of the military mission of Germany in Argentina, that has been dispersed some months ago. There have been four men there. One went to Chile, and one went to Rio. They passed a law in Argentine that the couldn't have & military mission of a beligerent country, so that is stopped. H.M.Jr: Wiley? Wiley: Customs has run into something interesting. German educational films are made in South America, and then they are sent up here and printed by a subsidiary of the German Dye Trust. These educational films apparently are only of educational value for German Military Intelli- gence. They show bridges, landing fields, and difficulties of terrain. H.M.Jr: In this country? Wiley: In South America, chiefly in Peru, but not much is known about them yet. The films for the moment are in the Treasury Department, and there is hope that we can run them off and look at them. H.M.Jr: Good. You know Coast Guard has a projector. Wiley: I don't think it fits. These are 35 millimeter films. I believe we will have to go over to Agriculture. Sullivan: What size are they, John? Wiley: Thirty-five. Foley: We have one, but ours is sixteen. H.M.Jr: Archives has a beautiful picture theater. White: Why do you imagine they would want to display Regraded Unclassified 10 - 10 - them here? Wiley: I don't think they were to be displayed here. They were probably sent here to be printed and then go on, probably to Germany via Siberia. H.M.Jr: Anything else? Pehle? Pehle: Nothing, sir. H.M.Jr: Philip? Young: I have & note here with a copy of Buckley's report. H.M.Jr: Oh, yes. I sent one to Mr. Hull. Cochran: Here is & memorandum on the destination of securities that you asked for. H.M.Jr: Right. Philip, I read this morning early, this report of Buckley's, see. Got a pencil? (Buckley's report of December 10 regarding West Coast airplane manufacturers inspection trip) Young: Yes. H.M.Jr: Now, these are the things that I would like to have an answer on tomorrow morning: 1. Why shouldn't the English cancel their order with Boeing for these so-called Douglass bombers and leave Boeing free to do just the big ones. In this report it said the English would take it under consideration. I would like to have the answer on that. Young: All right. H.M.Jr: 2. There seems to be a desperate need for an aluminum factory on the West Coast to make the parts, tubing, and so forth and so on, and can Regraded Unclassified 11 - 11 - you find out from somebody at National Defense why the hell - excuse me - don't they do some- thing about it? Young: That is a hard one. H.M.Jr: Then in reading this report on Lockheed, why don't the English have permission to put in super-chargers in all of their planes that they want to? If they can have them in some, why can't they have them in all? Then on a 24- hour basis, I would like to get, on the same two weeks that Haas has his thing set up on, see, the same two weeks, I would like to know - for instan ce, the English get so many engines. We know how many engines they get of each kind. I want a report from them tomorrow - we will go back, say, for four weeks. That will be enough. What distribution did they make of these engines, see? Young: Yes, sir. H.M.Jr: I want that tomorrow because it is - to me - I can't understand why Lockheed should be short, waiting for 25 or 30 engines. I just can't understand it. When I look at their production, the ones that they received - the two things. I want to know what did they do with all of these engines? If they are selling them to England, they are breaking their agreement, see. There are plenty of these engines coming off. What are they doing with them? According to this report, there are 25 or 30 planesawaiting engines of the Hudson Model 414. Now, there is something wrong somewhere. Haas: Are those those interceptors? H.M.Jr: I don't know what it is. Haas: I think one plane they make has the Allison. H.M.Jr: Anyway, they are waiting for the Pratt and Regraded Unclassified 12 - 12- Whitney 1830's or the Wright 1820's of which there are plenty each week being turned out, many, many more than lanes. If they are send- ing them to England, then they are breaking their agreement. The agreement is that there shall be no planes without engines in this country. Young: Part of those planes were supposed to be the ones which were grounded due to the fact they gave up the engines to the Boeings. H.M.Jr: That is just plain, unadulterated "hooey." They can't fool me. And the other thing, which is not on a 24-hour basis, is that I am shocked to find that in every case except the Merlin, which they had with Ford, England's orders expire in the fall of '41. All of their engine orders run out. That seems unbelievably short- signted to me. They have got enough people that they ought to be able to answer that. Now, one other thing: this request of rifles for Canada, that seems important. How hard are you hitting that? Young: Haven't done anything on it. H.M.Jr: Well, Young: I wanted to-- H.M.Jr: Supposing I forward your memorandum to Stimson? Young: All right. H.V.Jr: Say that this seems important, what can he do about it. Young: The only reason I wanted to call that to your attention, or one of the principal reasons, was that is not a recommendation of the United States- Canadian joint defense board. Now, we have got to get a tie-in there with what they are doing and what Canada and British Purchasing Commission Regraded Unclassifie 13 - 13 - are doing also. There is no coordination. M.M.Jr; Supposing you (Reporter) take this letter: "Hy dear Mr. Stimson: I an forwarding herewith a memorandum from Philip Young to me in regard to rifles for Canada. This seems very important to me and I would like to have your advice and help. May I hear from you at an early date." Does that fit in? Young: Yes, sir. B.K.Jr: Now, George, in the room here - I have been catching up with my memos. Oh, if you would bring in the head of the Netherland Purchasing Commission, I would like to meet him. Young: He is in London at the moment talking with Purvise. H.M.Jr: Get him. (Laughter) Next time he is around. Young: That is a very interesting development. You have van den Broek and Purvis and Howe all con- ferring in London on evidently some sort of a joint purchasing effort. H.M.Jr: Well, I got a secret message this morning that Purvis will leave - I think this weekend for the United States. Young: The sixteenth he was scheduled to leave. H.M.Jr: The message says he will leave this weekend. Now, George, will you write a letter for me, unless Mr. Bell wants to do it in another way, to Leon Henderson who is worrying about every other person's responsibilities except his own, see. I would like to draw to his attention Regraded Unclassified - 14 - 14 these charts which you have sent me which show that lumber is up sky high, What is he doing about it? What is he doing about wool, hides, tallow, butter, wheat, and cocoa? Those seem to be the ones. I would say that they are all out of line. Isn't that worse? Haas: Yes, those are the ones that made the greatest rise. There is some question about some of them, whether anything should be done. H.M.Jr: Well, let's say,"What do you think should be done, if anything, and what are you doing about it?" Do you want to send him these two charts? Haas: Oh, yes. H.M.Jr: Why don't you send him these charts, the lumber chart and the other one. Haas: Yes. H.M.Jr: And, George, it would make life easier for me if, instead of sending these things with about five of these things on, you would put them in a little book from now on. Any report, instead ofpinning it up like this, if it could be in a little folder. Harry, do you seen any reason - oh, pardon, me, Pasha. (Laughter) From now on, it is Pasha White. White: That is very dangerous, Mr. Secretary. I was thinking that over, and I was thinking one of the wits around here is liable to mention that to my wife. (Laughter) H.M.Jr: I hope you aren't getting personal. White: No. I am afraid of what response there will be. She will say, "What does that stand for?" and I can just see Ed Foley saying, "That is short for passionate, and the part thattroubles me Regraded Unclassified 15 - 15 - is my wife's response. (Laughter) White: My wife is liable to say, "Oh, yeah!" (Laughter) Let's forget the nickname. It is really danger- ous. You were asking me about whether it was fair, what you just said about Leon Henderson? H.M.Jr: No, advisable. White: Oh, definitely. He is worrying about prices, Mr. Secretary. H.M.Jr: All right. We will just send it over. I didn't give George a chance to finish, and we have got to give White a chance to recover, and me. White: Thanks. H.M.Jr: You don't even want me to tell them how the nick- name came around? White: I don't mind what you say, but some of them have a way af adding on. It is unrecognizable by the time it gets where it shouldn't. (Laughter) H.M.Jr: I will let Harry tell it to you in his own im- passioned manner. (Laughter) Klotz: That was good. Haas: The Boeing situation is interesting. H.M.Jr: I want to take this chart to the house. Haas: Here is all the other stuff (handing reports to Secretary). H.M.Jr: All right, George. Yes, Dr. White. Regraded Unclassified 16 - 16 - White: The Dutch East Indies have apparently come to an agreement with Japan on the oil arrangements. H.M.Jr: All I want to S ay is, I can't help it. I have not seen Kintner and Alsop or Pearson and Allen, and I don't expect to see them the rest of this week, so if it appears Monday in their column, it is not my fault. White: You mean you don't want me to tell you so you will be able to run it down? H.M.Jr: No, I mean on this Pasha White stuff. White: Oh, they don't bother with such small fry. H.M.Jr: You may be surprised. (Laughter) Sullivan: Merry Christmas. White: Let's see, we were talking about oil. The Dutch East Indies - the Japanese asked them for about 25 million barrels, which is about what they need. The Dutch East Indies companies, the American and the others, offered them about a third, which has been accepted, so that accord- ing to current contracts, they will get about 10 million barrels of oil on these contracts & year. H.M.Jr: As against what? What were they getting before? White: I have forgotten, but it was less than that. I have forgotten how much less. It was less. I will write this up in connection with the other oil matter and have it for you when you come back. There is a phrase here that I don't understand. I don't know whether it is important because maybe Merle Cochran could explain it. It says "force majeure" applies. Does that mean if they don't deliver, Japan can force them to deliver? Cochran: That is the way I understand it. Regraded Unclassified 17 - 17 - H.M.Jr: Harry, Walter Stewart tells me one of the greatest authorities on oil and oil companies in this country, if not anywhere, is this SEC Commissioner. White: Pike? Foley: Yes, Sumner Pike. H.M.Jr: That is field oil and oil companies. White: We are ready for him to go into these South American companies any time you are ready. H.M.Jr: Just call him up. White: I see, Also ask him about oil. H.M.Jr: Yes. White: Canada has just imposed some new restrictions on imports in an effort to conserve foreign exchange. They will hit our exports, particu- larly, to the extent of about 50 or 60 million dollars a year, at present contemplated. Auto- mobiles and petroleum products, electric appli- ances. H.M.Jr: What is our export? White: Our exports to Canada will be reduced. They haven't touched fresh fruit, including applies, I suppose, because they said it is politically undesirable. H.M.Jr: As a matter of fact, they export apples. They are not importing apples. White: Then I was wrong. Applies aren't included. That was my own addition. It just says fresh fruit and vegetables. Bell: Clark said they might have to include fresh fruit. Regraded Unclassified 18 - 18 - H.M.Jr: As a matter of fact, my apple grower friends are worried because they are duping so many of their Canadian applies in the United States. They are not helping me at all. White: There is a ltter here that you passed on from Welles indicating what is being done for Chile and also indicating that it is less than they had hoped and wondering whether we couldn't re-examine the situation and see, in the light of the current situation, whether a little might not be done for them. H.M.Jr: Bring it up - let's make it for next Monday's staff meeting. White: Right. That is all I have. H.M.Jr: Are you (Bell) going to see me before ten twenty-five? Bell: I am going to try to. I am going to try to get it out of New York. They started working at eight thirty. H.M.Jr: While I an talking to Berkshire, you might slip out and then come back again, and we will go ahead with foreign funds. I mean, while I am talking to Berkshire, if you will slip out and get the dope. Bell: If it isn't ready, I should think you could say that preliminary reports indicate that this issue has gone as well as any previous issue. Foley: I think if you could say that, it would be a great help. H.M.Jr: Well, I will tell you what I can say, because I had what's-his-name dictate it to Hadley last night, that at five o'clock last night he com- pared the subscriptions with the last five year note and at five 'clock last night we had more Regraded Unclassified 19 - 19 - subscriptions for this than the previous one which was also three-quarters of a percent. Foley: Yes, that would be a big help. That was one of the things that Walker Stone wanted to know, just what the difference was in actual performance, because he thought that if we could demonstrate that there was no real difference between a partially exempt and a wholly taxable security, it would go a long way toward overcoming some of the handicaps. H.M.Jr: Well, Bob Rouse gave ne that at five o'clock, and I said please dictate that over the tele- phone to Hadley, which he did, but at five o'clock last night, compared with - when was the last five year note? Bell: Last December. H.M.Jr: There were more subscriptions at the same time than there were for last December. Foley: Would it have been the same, Mr. Secretary, if you had offered it as a partially exempt? Bell: It might have been, but it could have gone down to five-eights, but it might have been the same coupon rate, but the Secretary could have made it a little thinner and made it five-eights. H.M.Jr: You mean this one, the one we just sold? Bell: Yes. You could have gone on a five-eights and got twelve thirty-seconds. Haas: About eight, I think. H.M.Jr: Well, the whole Street had the price at seven- eights. White: That is speculative. You don't know if it was five-eights, Dan, it might have gone to a little Regraded Unclassified 20 - 20 - discount. Foley: It might have gone sour. Bell: It would have been a little too thin to put a five-eights coupon. I think it would have been about the same. Foley: I think, if you could say that, that would be grand. H.M.Jr: They would all jump on me, The New York Times, for instance, have a little piece and say the gossip is that I could have priced the tax free note at five-eights. Well, it would start a whole argument. I an just going to say, "These fellows don't know enough about it. It just went as well as the last one. Bell: And I think that is a good thing to say. I wouldn't go in too much but you got as many as you did last time because you have got a different situation. H.M.Jr: Well, I would say it went just as well. Bell: I think that is good. We will try to have some figures. H.M.Jr: Norman? Thompson: We are planing to move Mr. Pehle's Foreign Funds section over to the Raleigh Hotel. H.M.Jr: Good. Bell: May I tell you some more? H.M.Jr: Please. Bell: Jesse Jones announced a loan yesterday to Argen- tina. Ambassador Espil called up and wanted to know if you couldn't say something on the Treasury Regraded Unclassified 21 - 21 - end. I said I would speak to you, but I didn't think we ought to do that at this time. H.M.Jr: No. Now, if you want to go out and get that, I will have Berkshire come in and then if you will come back, we will continue on foreign funds. Foley: They think that these fellows -- (Mr. Bell left the conference and Mr. Berkshire entered) K.M.Jr: Berkshire, show them this sign ("Serve Army and Navy Whiskey. James Moroney.") which I picked up. I was shocked. I picked it up when I was up there. I think it is terrible. Now, what, under the law, can you do? Berkshire: We have, by wire, after I had the poster last night, conceled the label first. There had been an old label issued by the Federal Alcohol Ad- ministration in 1936 authorizing that whiskey to be labeled "Army and Navy Brand whiskey." I find that later they advertised it as "Army and Navy Whiskey." The FAA had cited them for that, that is, the dropping of the word "brand," and they had paid a fifty dollar offer - compromise of that violation. Now, this evidently is the next that they have observed. They have dropped the name "brand" again. That doesn't go to the bottom of the thing, I might say, Mr. Secretary. We don't propose that they use this kind of a label even with the word "brand" there, and since the FAA came over to the Unit, we had refused to issue Army and Navy Brand to sherry wines and something else. This I didn't know about. It was the first I had heard, but we canceled that brand, and we may, if this advertising material has been disseminated outside of the State of Pennsylvania - that is necessary, and my wire asks that that be investigated. If it is disseminated beyond the borders of the State of Pennsylvania, Regraded Unclassified 22 - 22 - we may cite them and even revoke or suspend their permit. H.M.Jr: Well, couldn't I, B5 Secretary of the Treasury, telegraph the Governor of Pennsylvania and ask them to cooperate to stop this thing? Berkshire: You should. I can't say what authority the Governor of Pennsylvania would have in control- ing a matter of this kind. R.S.Jr: What I thought of doing, and that is what I wanted your advice on - I mean, I an all right on my law. I think that this is pretty shock- ing. I didn't know whether you people thought it was wise or unwise for me, as Secretary of the Treasury - I would like, for instance, at my press conference to show this to the boys, and say, "This is the kind of thing here the Treasury is not going to stand for, and that we hope we will get public support on. This is the first thing of its kind I have seen, and that I have seen it myself, and that we have taken steps to cancel this brand. If You can see - I didn't know that that was & brand name. When I saw "Serve Army and Navy Rye Whiskey," I thought it meant to serve it to them. That is the way I read it. White: That is the way I read it. Foley: Yes, and then you have got "for company attention" down there in quotes, too. What does it say over the name "Moroney?" On the left hand side. Rlots: "At holiday time." White: It is specifically designed to convey an in- pression of the prestige of the Government and SO on, H.M.Jr: What I thought, I would just 20 out and say to the boys, "I think that this is absolutely out- rageous. This is the kind of thing we want to Regraded Unclassified 23 - 23 - nip in the bud, and I want to do my part to see that this kind of thing doesn't spread." White: I am wondering, Mr. Secretary, whether there might not first be tried. to get in touch with the people who have done it and merely request them, talk it over with them. I have 8. little bit doubts about making-- H.M.Jr: Well, they have done it, Harry. White: Do they know that you disapprove or that there is disapproval in the Government on it? H.M.Jr: Well, how are you going to let them know? White: Well, I would be inclined to let the Army and Navy take it up with them. I feel 8 little bit "leery" about clamping down on anything if it is within the law, even though it is of that character. H.M.Jr: Well, it is 8. matter of taste. White: That is why I think it should be done either through cooperation or let the Army and Navy complain. I don't feel strongly about it. Sullivan: I agree with Harry in principle, but not in his technique. You have full authority. You don't need cooperation from anybody. I think it is beneath your dignity to go after a thing like that. That is pretty small. And the whole purpose is accomplished by having Stewart re- voke it. That is all there is to it. He has full authority under the law. He doesn't need cooperation with the Army or the Navy or the Governor of Pennsylvania or anybody. White: Doesn't he need a good legal reason for revoking it. Sullivan: Why certainly he does. He has got it. He has Regraded Unclassified - 24 - 24 to approve every bit of their-- H.M.Jr: every label-- Sullivan: of their labeling and everything else. H.M.Jr: I have got to go out in the field to check up on you fellows. Berkshire: It seems so, Mr. Secretary. H.M.Jr: Well, somebody certainly in Philadelphia - the Secretary of the Treasury has to go up and see a thing like that and pull it off a sign post. Berkshire: It certainly should have been picked up by our men. H.M.Jr: The question is, how much other obscene and stuff of bad taste is there like that going on in the United States. Berkshire: Well, Mr. Secretary, if we weren't on the watch constantly, I can't imagine what might happen. H.M.Jr: Well, do you get copies of all advertisements. Berkshire: No, sir. The law doesn't require that they get approval of advertised material. They must get approval of their labels, and then there are certain restrictions about their advertis- ing matter. Unless they submit one for free approval, we don't have anything to say about it unless we just catch them. H.M.Jr: Bell, I want to say at my press conference that I saw this advertisement, and I have taken the first steps to cancel the permit. Is that what you call it? Berkshire: The label approval. Bell: Well, it was approved? Regraded Unclassified - 25 - 25 H.M.Jr: Yes. Thompson: The label on the bottom hasn't the word "brand." H.M.Jr: They call it "Army and Navy Brand, and then you see they use the word "serve" - you see, it is "Serve Army and Navy Rye Whiskey." You wouldn't do it, if you were me? Bell: I don't know, but I don't understand how it got approved. Do they have authority in the field to approve things like that? H.M.Jr: It says, "brand," but they just serve Army and Navy whiskey, for company attention. Bell: Even what is on the label, "Army and Navy Brand," I don't see how they got it. H.M.Jr: Well, it was approved by the old FAA. Do you see any reason why I, as Secretary of the Treas- ury-- Foley: Mr. Secretary, I don't think we ought to shoot today on this. I think you ought to give us a little time to look into it and make sure we are on good, sound grounds. I would like an opportunity to determine what constitutes a violation and what our power is to summarily revoke these permits. I am not prepared now to say that it is all right for you to go out and make this statement at a press conference. H.M.Jr: You are not? Foley: No. White: It is a matter of morals involved there, Mr. Secretary. Foley: It doesn't make any difference whether it is done today or at your next one, and then we will know 8. little more than we know now. Regraded Unclassified 26 - 26 - White: It is a matter of morals involved, and I - I don't know. Bell: How about him saying he is looking into it? Sullivan: No. What you are objecting to-- Klotz: I think these fellows ought to be given a chance. After all, they are perfectly all right. Every- body advertises that way. If they won't cooper- ate then, I would say, Go after them,' but they haven't been given a chance. Foley: My reaction, Mrs. Klotz, is this: I think we ought not to be objective or personal about this. I don't think we ought to single out one fellow. I think when we do it, we ought to put it on a higher plane, and say, "That this sort of ad- vertising, at a time when we are marshalling the resources, the man power of this country, is the sort of thing that just can't go on. It is unpatriotic, and it isn't compatible with what we are doing. The Secretary of the Treasury is going to see to it that this kind of advertising and this sort of sales campaign for liquor is not conducted anywhere within the United States or anywhere in the vicinity of our training camps. H.M.Jr: That is what I want to say. Foley: Yes, but I think that we ought to put it on a broader basis, and I think you ought to give us a little chance to look into it. H.M.Jr: All right, but also I think it just raises this whole question of advertising and labeling and how good are you since you have taken it over. Berkshire: Mr. Secretary, we think we have pretty close supervision over certain of the labels, because there isn't one approved that doesn't go through the office down here. Now, as far as that Regraded Unclassified - 27 - 27 advertising is concerned-- H.M.Jr: Yes, but how about outstanding ones? Berkshire: Well, there isn't any way, of course, of condemn- ing this liquor, and all of the liquor that is now labeled "Army and Navy" must be sold that way. H.M.Jr: I will tell you what you haven't done, Berkshire. You haven't made a review of the permits for labels and advertising which were given prior to the time you took this thing over, have you? Berkshire: We haven't gone back through all of those records. H.M.Jr: I am ordering you to do it now. I want you to bring in every label, every piece of advertis- ing, and review it just the way we do in Inter- nal Revenue. I gave orders that every charitable organization that had been granted tax exemption, we reviewed every single one, and each year they have got to come in and prove that they have that right. Now, I put this on the same basis, that first you should review every single one that has been issued, and then make a business of reviewing them once a year. Berkshire: We can do that, all of the active ones. Of course there have been some three hundred labels a day approved ever since the FAA went into effect. H.M.Jr: Go back - if you haven't'got enough help, get your help, but go back and review every out- standing label and every piece of advertisement that has been issued prior to the time that you took it over. Berkshire: We can do that. H.M.Jr: Because you don't know how many more things there are. Regraded Unclassified 28 - 28 - Berkshire: There isn't very much of this because they pass through our office there. H.E.Jr: And what I would think of is getting in an advisory committee of outsiders, sort of & jury. Berkshire: We denied this same label. H.M.Jr: Did you hear what I said? Berkshire: Yes, sir. H.M.Jr: I would get a kind of a jury, get some women on them and some people - get some women and some men to represent the American nation, represent the League of Women Voters, some groups like that. They could be a sort of jury. They would love it. You don't have to pay them. You should have done it long ago. Then you and Foley get together. Does this come under Foley? Foley: Sure. H.M.Jr: We will have a report from Philadelphia about this in the next two or three days, I am sure. Foley: Monday. Berkshire: Yes, sir. H.M.Jr: O.K., Berkshire. I will see you Monday, Berkshire. What I am going to do, now, gents, on this frozen funds, those who sat with me yesterday, we have added Philip Young to the list. He said it would solve 80 percent of his problems. We will meet again at twelve o'clock. Frozen funds at twelve. I have got to see Bell. Regraded Unclassified 29 December 12, 1940 10:27 a.m. Walter Stewart: Hello, Henry. H.M.Jr: How are you? S: Very good, sir. H.M.Jr: Walter, on thinking over this question of asking your one organization to assist us on this Federal tax study, 800, on second thought I agree with you. I think that it is something that the Treasury ought to pay for itself. S: You do think 807 H.M.Jr: Yes, I do. 3: You mean - just how will you set it up then? H.M.Jr: Well, we'd set it up just the same. I mean, whoever comes down we'd pay it in the regular way. I mean, we can pay them $22.50 and $5. a day, I mean, for the top men. S: Right. I think I'd do that until I got deeper into it anyway. H.M.Jr: And Thompson tells me that we have money enough to do that. S: Right. All right, sir. H.M.Jr: So I wanted to tell you that. On second thought I think we ought to do it. 8: Well, then if you want me to be of any help on personnel or something I'll be delighted to do it. H.M.Jr: Well, we certainly will. It was most helpful having you down. S: Thanks very much. H.M.Jr: All right. 3: Good-bye. Regraded Unclassified 30 December 12, 1940 11:14 a.m. H.M.Jr: Hello. Fiorello LaGuardia: Hello, Mr. Secretary. H.M.Jr: How are you? L: Pretty good. H.M.Jr: I was Henry the other day. Why do you demote me? L: (Laughs). Maybe I have to be on my guard. H.M.Jr: Oh, you never know. Look, I got word that you were coming down either Monday, Tuesday or Wednesday - going to have lunch with me Tuesday. L: No, I've got the Canadian Commission. Let's see, Monday and Tuesday I have the Canadian Commission. H.M.Jr: Where? L: In New York. H.M.Jr: Oh. I understood from ..... L: Yeah, I thought Bo too. I was off my track. Now I could come down Wednesday for a very short time. H.M.Jr: Well, do you want to come around noon? L: Uh-huh. H.M.Jr: Do you like my lunches - you remember you kicked about it the last time you were here. L: Yes. Suppose I take a 11 o'clock plane and that will get me at the Air Port at 12:30. H.M.Jr: And then you'd come up here? L: And then I'd come right up there and then I'd come right back. Regraded Unclassified 31 - 2 - H.M.Jr: Swell. L: All right. Then I'll make that for Wednesday. H.M.Jr: That'll be fine. L: Yeah. They're raising hell all through the country on that. H.M.Jr: On what. L: On your proposed unconstitutional tax. H.M.Jr: I'm getting wonderful support. ( L: You are. (Laughs). H.M.Jr: Yes, sir, from everywhere except Palm Beach. L: Palm Beach. H.M.Jr: Yeah. They don't like it. L: Aw, they haven't got anything down there. H.M.Jr: They don't like it. L: They're just H.M.Jr: Yeah. L: All right, 12:30 Wednesday. H.M.Jr: Well, you're plane gets in - you'll be here about 12:45. L: Yeah. The plane will be there at 12:30. Just give me time to get to your office. H.M.Jr: All right. I'll be waiting for you. L: Thank you. Regraded Unclassified 32 December 12, 1940 11:19 a.m. H.M.Jr: Hello. Operator: Forrestal. H.M.Jr: Hello. James Forrestal: Hello, Henry. H.M.Jr: James, how are you? F: Well, a little bit dizzy. H.M.Jr: Well, ah - I was going to get off a wisecrack but I - (laughe) - I was going to say I hope it isn't the blonde that's responsible. F: (Laughs). H.M.Jr: I've got these English fellows coming in at 10:30 tomorrow morning to talk about why they don't sell their stocks different and also their assets in this country, and I'd like very very much to have you sit in. F: 0. K., Henry. H.M.Jr: Now, I don't know whether your former boss told you what he told me as to the damn fool way they've been selling their stuff. F: Yeah. H.M.Jr: Did he feed that to you? Have you got all of that? F: Yeah. H.M.Jr: So that you can dieh it out to them? F: Yeah. H.M.Jr: Well, that's what I want you to do. F: All right. Regraded Unclassified 33 - 2 - H.M.Jr: I mean, how for instance they whisper to a fellow - you get your security in one place and your money in another place? F: Yeah. H.M.Jr: He told you all that. F: Yeah. H.M.Jr: All right. And I'm going to try to have Jerome Frank or somebody here from the S.E.C. F: O.K. H.M.Jr: But I'm going to lay it right on the line and I need your help because you know this Wall Street ..... F: Racket. (Laughs). H.M.Jr: Thank you, and I only know it by hearsay. F: Well, you know it good enough all right. H.M.Jr: But I got along fine with Clarence Day and I liked him. F: Well, he's got a first-rate brain. H.M.Jr: Yeah, and if you've got what he told me then I want to lay that right on the line. F: (Laughs). All right. H.M.Jr: You've got it haven't you? F: Well, I think so, yes. H.M.Jr: You might want to talk to him about it - Just how he thinks that they've been making a fool of themselves up on the Street, and one of the things that I want to get them to do is to as soon as they're out of an issue 1s to tell the world. F: That's right. Absolutely. Regraded Unclassified 34 - 3 - H.M.Jr: See? F: That's right. H.M.Jr: And also that the possibility of negotiating some of these sales privately. F: Yeah. H.M.Jr: Well, you be thinking about it, will you? F: Well, I'll probably talk to him sometime tonight. H.M.Jr: Will you do that? F: Yeah. H.M.Jr: 10:30. F: All right, Henry. 35 December 12, 1940 11:22 a.m. H.M.Jr: Hello. Operator: Chairman Frank. H.M.Jr: Hello, Jerome. Jerome Frank: Hello. H.M.Jr: Are you back at work? F: Oh, yes. H.M.Jr: Oh, good. I got your message that you went after the Trans-America suit. F: oh, yes. We're having lots of fireworks now. H.M.Jr: Good for you. F; They're probably going to refuse to comply with a subpoena on a cock-eyed reason and we're probably in the next day or 80 going to have to go into court after them. H.M.Jr: I Bee. Jerome, the reason I'm calling you is the English are coming in here at 10:30 tomorrow morning to have you and Forrestal and me tell them why we think they've been handling their sales 80 badly because I feel that very strongly. You remember you and I spent a lot of time with them and then they didn't take any of our advice. F: No. H.M.Jr: Well, I told them the other day that I thought they had been handling it very badly and now they're coming in at 10:30 tomorrow. Could you be here? F: Yes. Could I bring one of my men with me? H.M.Jr: Which one? F: I'd like to bring Purcell. Regraded Unclassified 36 - 2 - H.M.Jr: Yeah. That's the fellow you had the other time. F: Yeah, that's right. H.M.Jr: Yeah, I think that would be helpful. F: All right. 10:30. H.M.Jr: If you please. F: All right. H.M.Jr: Thank you. Regraded Unclassified 37 December 12, 1940 11:29 a.m. H.M.Jr: Hello. Cordell Hull: Henry, this is about those Grecian planes. H.M.Jr: Yeah. H: The way I understood it we undertook to get the British to put up 30 in the beginning which we wanted the Greeks to have and the British said they couldn't and anyhow the upshot was we were to put up 15 of these 42's or something and the British 15 and they were to come out of the British order. H.M.Jr: Yeah. H: Now, the British step in to you and say here these don't exactly fit in over there and we'll find out whether - what you have got that they can use and let you know. H.M.Jr: That's right. H: Well, now, the British are taking the thing out of our hands in & sense Bo far as our pledge to the Greeks are concerned and I'm telling Mr. Murray and he's agreeing with me, in fact suggesting 1t, that we must make clear to the Greeks that we are not in any way welsh- ing on our pledge, that we're not going to let the British unless they and the Greeks with the Greeks voluntarily agreeing on modifying our promise. We re not going to modify it ourselves or go to the Greeks and say you can't use this, you can't use that and so on and 80 on and ..... H.M.Jr: Well, let me ask you this: has somebody for this Administration promised the Greeks 30 planes? H: Well, I thought the Greeks were to have 30 - they asked for 60 and somebody said they - there are so many people who are in on this, you know. Welles has been in on 1t, I've been in on it and Berle has been on it and you've been in on it Regraded Unclassified 38 - 2 - H.M.Jr: Well, we don't have to promise anybody anything. H: Yes, well then ..... H.M.Jr: We ven't promised anybody anything. H: Well, anyhow - what I'm getting at is this: that we don't want the British to come back and tell us that they have talked the Greeks out of this thing and leave the Greeks wondering if we haven't welshed on them in some way. Now, we want to keep in touch with the Greeks. I think that it's understood that we were to be responsible for 12, I mean, 15 to go to the Greeks and we want them to know that we are not trying in any sense to get out through anything that may be said to them by the British, that we stand by our promise. H.M.Jr: Well, I haven't contacted the Greeks. I've only talked to your office - I've talked to you and to Stone, that's the only person I have talked to. Now on the practical side they claim, and it is very easy to ascertain it, that this Curtiss P-40 cannot land in Greece because they haven't got the kind of airports that this plane needs. This needs a smooth concrete field to land in. You see? H: Yes. Well, now, we want to get that from the Greeks. H.M.Jr: So I made the suggestion to Stone last night that what I told him of my conversation with the British be immediately repeated to the Greek Minister here BO that he could check up as to whether the English were telling the truth. H: Yeah. Now, Murray is going to do that this morning and send you a copy of his conversation. H.M.Jr: Well, who 18 Murray? H: He's the head of the Near Eastern Division. H.M.Jr: Well, you and I are together because we're both saying the same thing. I said that the Regraded Unclassified 39 - 3 - Greeks ought to be told that to make sure that the English are telling the truth. H: That's all. We don't want the Greeks to have the least occasion for suspicion. H.M.Jr: I can get that but you agree that if what the English say is true that it would be stupid to send a plane over that they couldn't use. H: Yes, we are glad for the British to tell us anything, but we want the Greeks personally in on it. H.M.Jr: I think that 16 perfect. H: Yeah. H.M.Jr: I think that's perfect. H: Yes. All right, Henry. Regraded Unclassified 40 December 12, 1940 Ree lints 12:00 m. Pres of 12/22 RE FREEZING Present: Mr. Bell Mr. White Mr. Cochran Mr. Graves Mr. Young Mr. Pehle Mr. Wiley Mr. Klaus Mr. Bernstein Mr. Foley H.M.Jr: Now, where do we go? Pehle: Harry seems to be missing. H.M.Jr: Well, we won't wait. Go ahead. Pehle: Well, on the point as to movements of Axis funds, I have a memorandum which points out some of the high-lights, things that have been gathered recently. H.M.Jr: Read it out loud so that everybody can get it. (Mr. Pehle read memorandum which is Attachment 1) H.M.Jr: Well, the one thing which seems to be missing, in the first place, is how few cases you have, and the second thing is, what about that move- ment of gold out of Portugal? Cochran: I have a memorandum on that. (See Attachment 2) Regraded Unclassified 41 - 2 - H.M.Jr: Well, that ought to go here. Do you know about that? What is that? Cochran: Well, we have gotten more gold here now than their Central Bank statement shows that they posess. H.M.Jr: That ought to go on, Portugal. Cochran: And the Federal has made some investigations of that, and they are going to give us a list of the different types of bars and so on that they have. H.M.Jr: I think that was one of the most - how much money? Cochran: About 70 million dollars. That is their total gold that they have over here now. H.M.Jr: How much of that has come in the last two or three months? Cochran: I will have to check up on that. We have had 33 million dollars in gold shipped since October 2. H.M.Jr: That ought to go into this thing. To me, that is one of the most - there is 33 million dollars here, which can hire a lot of propagandists, if that is German. Wiley: Mr. Secretary, it looks as if they have enough money already in Brazil to almost buy the government and the armed forces. H.M.Jr: Not quite. Wiley: It is somewhere about a hundred million dollars. H.M.Jr: But look at this thing coming out of Portugal. Did you know about that? Regraded Unclassified 42 - 3 - Wiley: No. The last I heard was that they had sus- pended shipments of gold. Pehle: They are starting again, aren't they, Merle? H.M.Jr: I would add that, very definitely. Now, who else was going to have things for me? Bell: White. He was in my office at a conference, and he had to go to his office to get it. H.M.Jr: Oh. Cochran: You asked me for several things. H.M.Jr: Please, will you (Pehle) take this back and add Portugal on there. Cochran: I have the statement from Sir Frederick Phillips on their desires and the one from Clark describ- ing the Canadian situation. I kept the one from Somary, which the men, most of them, have seen, but which was submitted before this thing came up. H.M.Jr: Well, where are they? Cochran: I have them right here. H.M.Jr: I would like to have them and take them home. Cochran: And if you want this Portugese memorandum. Because we are trying to find whether the Portu- gese treasury owns this gold. This is the one from Clark, here is the one from Phillips, and this is the Somary memoranda, and this is the memo the British sent us sometime ago telling us what they want if we put on exchange control in China. H.M.Jr: Is Phillips coming now? Cochran: He is coming at 12:30 and is going into my office. Regraded Unclassified - 4 - 43 H.M.Jr: Who else has got some more work? iley: Here is a little item of back ground, sir, that might be helpful in talking to the Secretary of State. (Mr. White entered conference) Wiley: This is from the alien property custodian report of 1919: "The relation between the German Government and the great German chemical houses was so close that representatives of the indus- try were naturally almost direct representa- tives of the government and their work in this country gave them unequalled opportunities for examining our industries from within * #, After the war began the industry became a center not only of espionage but of propaganda and of direct governmental activity. The number of striking instances of this development is so great that only a few can be detailed, but these appear sufficiently striking * #." (See Attachment 3) Wiley: Now, of course that should apply with equal force to the possibilities of the present. Then we have already got several items of interest with regard to what is going on now: "The FBI is watching the Dye Trust activities, especially since two persons posing as aspirin salesmen in its employ were found actually to be engaged in subversive or at least dubious activities in the Western Hemisphere, including the carriage of secret codes (the Hoehne and Wolff cases). (Mr. Foley entered conference) Wiley: "2. Chemical Marketing Company and German Gold and Silver Refining Institute (Dr. Kertess and associates) are undoubtedly engaged in activi- ties close to espionage according to the Dies Committee report. Regraded Unclassified - 5 - 41 "3. Ufa Film. This is B. propaganda agency and is being used in connection with the Agfa Ansco for taking pictures of military objectives in the Western Hemisphere in the guise of producing "educational films" for consumption in Germany. Then German shipping facilities, they can be accepted as going into that work. The German money forwarding agencies, Robert Hautz and Company, New York and Chicago; Hans Utsch and Company, New York; Carl Marks and Company, New York; etc., are believed clearly to need investigation. H.M.Jr: Now, I can't remember, but I know I have asked each one of you for something. Does that finish you? Wiley: A little later I will have something. H.M.Jr: Fine. I will give you a call. Harry? White: You asked for a description of the treatment of American property interests by Germany, Japanese, Canada, and Italy. H.M.Jr: Yes. White: I have it here. Would you like me to read the summaries or just tell you? H.M.Jr: No, I want to take it and read it at home. White: The one on Italy, as I indicated before, is rather brief. H.M.Jr: Have you got anything else? White: Then you asked for a statement of the remittances by the-- II.M.Jr: Post office. Regraded Unclassified 45 - 6 - White: Yes. We had submitted those figures about two months ago. We got in touch with the Post Office and the American Express Company to find out that, and we brought them up to date as much as possible. H.V.Jr: I would like them all. I will take it all home and do the best I can. Shite: All right. There is a brief memorandum here on what the fund might do with regard to Latin American relations. R.S.Jr: You give all of that stuff that you prepared to McKay and tell him to send it up to the house. White: Right. There is one thought that occurred to me that I don't think has been mentioned. I haven't heard it mentioned. It just occurred to me today. With respect to the possibilities of controlling subversive activities in Latin America through the extension of exchange control, all that information that we received of the tie-up between American concerns and others is very comprehensive. There is E possibility that might be worth thinking about, that where ex- ports are sent to companies that this Govern- ment doesn't approve of through agents, through the extension of exchange control, you have an instrument which you can use if you wish in that so as to get the changes made by the American companies if they don't see fit to cooperate through the ordinary channels. H.M.Jr: Now, does Mr. Wiley get those Nelson Rockefeller reports? White: I don't know. I have got them on my desk, and was going to - didn't know who they would go to. H.F.Jr: The ones where he is looking into which American businesses are being-- Regraded Unclassified - 7 - 4S White: That is right. I was going to give them to Gaston. Klaus: We got one set on Peru and a report from the State Department man. H.M.Jr: No, Nelson Rockefeller. Klaus: He sent them in. They were State Department reports. H.M.Jr: You had better get together with White and make sure they are the same things. White: If they haven't got them, I will make them avail- able. H.M.Jr: It is something Rockefeller made available to me personally. I doubt if you have them. White: They are very comprehensive. It is one of the best jobs I have seen done on anything like that. I was very much suprised at the amount of work they have done in a brief time of that caliber. H.M.Jr: Just make sure, because it ought to flow into them for digestion. White: I think it has great possibilities. H.M.Jr: Will you? White: I will do that. H.M.Jr: Now, just a second. Tomorrow morning at ten- thirty the English are coming in on their securi- ties, and I would like to have you (Bell) here and White and you (Cochran). That is all that sits with me on England, isn't it? Bell: I think that is all that has been in so far. White: You wouldn't want to have one of the men in the SEC? 47 - 8 - M.M.Jr: Yes. I an having Frank and Purcell. : Oh, you are. R.C.Jr: Yes, Frank and Purcell. Cochran: And Clark just accepted. He will be here. R.H.Jr: Good. Now, there is, and we seem to have for- gotten it, & committee that is supposedly between the State Department and the Treasury and in which you (Bell) represented me on this thing. You remember when we were over there, we said we would appoint a committee. Now, as you remember, who was it up to to call that meet- ing. Fell: Hull. S.M.Jr: Was it up to Hull? Bell: He went out of the room, and you said, "Bell is at your disposal, and we will wait until he hears from you, so he said, "All right, I will get in touch with you in the next few days." Also at the last Cabinet meeting I attended, the President said that Mr. Hull "has the Secretary's memorandum and he is supposed to get in touch with you in the next two or three days. Mr. Hull said again, "I will call you in the next few days." Then that is all right. Bell: That is the last I have heard of it. Jr: Now, why is Philip Young here? How does he come into this thing? In this thing, there are B. number of agencies - let's put it in this way. I am a exporter. Let's say we put on exchange control. I want to sell & thousand dollars export stuff, and the thing we have got to en- visage - while you (Bell) are busy, if somebody could take this who isn't overworked - it is an administrative matter - that this exporter Regraded Unclassified - 9 - 48 could make an application, let's say to Foreign Funds, if that would be the place, and also all the other things so that when he got a license he wouldn't have to go to a half dozen agencies in Washington, see. Now, I think what we ought to do is, let's take the initiative so that this exporter - I mean, after all, if he has got to go here, if he has got to go to Colonel Maxwell, if he has got to go to Joe Green - where else? Young: If it is a new order that has to be placed, it clears through my office, and we, in turn, clear it with Defense and War and Navy and State. H.M.Jr: Well, Harold, you are always quiet, so you never seen busy, although I know you are busy. This is EL strictly administrative matter. I mean the machinery. You see what I mean. I wish you would take on this thing, you see. You have been studying Pehle's setup. Now study Ree Pres the be set up so that this exporter, when he applies the thing that Young can give you. How can it to of for the funds, can get the whole works, 80 that 12-23 he doesn't - the poor fellow would wear himself out, so by the time he gets through, he would say, "Well, the hell with it, I would rather not sell it," see. It is administrative machinery, which you are a past master at. White: I think there is a way of doing it. H.M.Jr: Well, but I mean the question of the setup, and all that, and all you other fellows are mixed up with Argentine and China and God knows what else, so I think, Phil, if you and Harold could get together, you see, and pour out your heart to him and tell him the troubles about the Priorties Committee, and McReynolds is in on this too, but Mac tells me, when I ask him, that he can't find out what Don Nelson is doing because Don Nelson won't let him see the forms that he wants the President to sign, you see. White: I think that would be a remarkable development, 49 - 10 - if you could head that into one hand because that is one of the difficulties they are hav- ing in all the other countries, is that they are segregated, and there is a lot of red tape. H.M.Jr: Well, I mean Mac tells me that, and he says, "Well, I will go down the hall and see Don Nelson and find out what he is doing." Well, that was a week ago, but it is your old pal Mac. You know Mac when he doesn't want to do something, that is, you know him just as well as I do. But I would like to - I don't say that it all should be headed up in the Treasury, but I do say that a manufacturer shouldn't have to go to three different places to get an export license and B. permit for the money because they won't stand for it. White: The policy cannot head up here. It shouldn't. The administration absolutely would have to-- H.M.Jr: Now, I am coming to that. I am glad you men- tioned it. The question of the machinery, I think, ought to be here. Now, as to policy, that is something else. White: That is right. H.N.Jr: And what I think, the question of - the way I look at it, whether a man should or shouldn't, the high policy, I think, should be settled by State, Treasury, and Commerce, possibly War and Navy. But there ought to be those five Depart- ments. Bell: Leaving out the Defense Commission? White: They don't need them, but they will get their foot in. H.M.Jr: But anyway, I am just thinking out loud, and as I say, somebody has got to carry this through administratively, but I think certainly State, Regraded Unclassified - 11 - 50 Treasury, War, Navy, Commerce-- I am not at all sure you want Mar and Navy on it, Young: except in an advisory capacity. E.I.Jr: Well, after all, how are you going to tell whether a machine tool should leave the country if the Navy says they need it. White: They have got to be on it. E...Jr: Oh, sure they have. I think one person from the National Defense. Now supposing a man is going to sit on Pri- orities. He will say, "Well, I need this machine tool." Well, it is like the case you (Young) cited me the other day. They wanted to buy some boxcars - I may not have it exactly right - from South Africa and they wanted to place the order in a factory that is now making tanks. Now, should South Africa be permitted to get an export license and be permitted to place the order with a company who is making tenks? Now the question is the Priorities, and I think it would be Nelson who is the administrative head of the Priorities Board. That is the way I feel as of today. White: How about the Department of Justice in view of the activities of the FBI and so on? H.M.Jr: No. They are legal advisors. Now I am just throwing this out, you see. I am beginning to get in to the thing, just begin- ning. How does it sound to you, Ed? Foley: All right. H.M.Jr: Would that be two things: administrative machinery in one spot, and then a board which would sit once & week and fix the high policies as to what should or shouldn't go out. Regraded Unclassified 51 - 12 - Foley: Yes. There are so many Departments involved in it you have to have an inter-departmental board, as far as policy is concerned. H.M.Jr: And that would really be a board of economic warfare. Foley: That is right, and if you had the administration here where the policy that was determined would be carried out and not sabotaged-- White: And another thing the administration would break down if the administration has to determine the policy alone. H.M.Jr: Well, I wouldn't take the responsibility, Harry. White: No, I don't think you should, but if you can segregate the two, the better job the policy board does, the simpler the administration, and it can be very effectively done, I think, and done with much less red tape than elsewhere. H.M.Jr: And not done by personal hunches the way it is now. I mean the best example is in the room here, Mr. Hull tells me that somebody, he doesn't know who, has given the Greeks their word of honor that we are going to give them 15 Curtiss P-40's, and the English are going to give them 15. I said, "Well, who gave them that word?" He said, "I don't know, somebody did." And everybody else tries to scramble around and make good on it, and the British say positively that the Curtiss P-40 can't be flown by a Greek because he doesn't know how to fly it, and in the second place there is no field where they can land it, because they need an absolutely perfect landing field. Otherwise, it is a beautiful idea. White: I think that policy committee would have to be of Cabinet rank, Mr. Secretary. H.M.Jr: Oh, definitely. Regraded Unclassified - 13 - 52 White: They could have subcommittees to deal with any technical material. H.M.Jr: How do you like that, just pulling it out of the air? I dreamed it. Did you dream it? White: I think that is a perfect plan and an essential plan. H.M.Jr: Did you dream it, Harry? White: No, I didn't dream much last night. (Laughter) (Discussion off the record) H.M.Jr: Philip, you have given a lot of thought to this. Does this at all fall into what you have been groping for? Young: Yes, sir, it does. You will find an ardent supporter for that scheme in Berle. He and I have talked about exactly the same sort of a plan, of a coordinating committee at the top with the administration centralized, which he is very enthusiastic about and also very anxious that the administration be carried on in the Treasury. H.M.Jr: Yes, but I mean this would fall into - I haven't given you a chance to pour out your heart on this, but would this be along the lines that you have been thinking? Young: Yes, exactly, because, at the present time, you have four clearances that a foreign supplier has to go through. Joe Green, technically under the neutrality act; Maxwell, in the interest of defense, representating the President; my office for the placement of an order before even a con- tract can be signed, and frozen funds where you run into it at the moment or everywhere if ex- change control is put on. Our difficulty is in keeping control over foreign orders which may come into the category of strategic items or war supplies, the boundary line being very Regraded Unclassified - 14 - 53 shadowy. Where they come through the hands of import firms and agents over whom you have no control, because the original setup for our office was to deal directly with the foreign government, and you have all of these purchases in instances where you don't have purchasing missions or accredited representatives coming through all sorts of different ways. H.M.Jr: Harold, you see there are these four agencies, and I think the argument for the Treasury doing it is - after all we have Customs, which can be used to reverse - I mean they could be used to supervise stuff going out as well as coming in. We have Coast Guard to stop the boat from leaving if we don't want it to. We have complete con- trol of all ports now through the port captains. We have - we issue a license before a ship can sail through our ship control. We issue the licenses for the money, so the machinery, the policing and all that, I think, belongs here. Graves: Is this contingent upon the extension of the foreign funds control to the uncovered areas, or is it a separate proposition in your mind? H.M.Jr: No, what I would do - what I am thinking of, if I was going to do this for the President, I would lay the whole thing before him so he could do it all at once, freeze the funds, set up this thing, and the whole thing would be explained. Graves: But they do hang together? H.M.Jr: Definitely. Bell: But this other thing was in the mill before the extension of foreign funds came up. You have been talking about this with Philip, how it could be separated and still work. H.M.Jr: Yes, but if I am going to do this, why not let's do a good job for the President, and also it Regraded Unclassified - 15 - 54 kind of takes the curse off the foreign funds business. It doesn't stick out like a sore thumb. Bull: I think if a decision were made not to go any further on freezing foreign funds, you still might want to do this. E.C.Jr: That is right. Bell: In order to get the loose ends together. M.M.Jr: I didn't understand, but I think this is defi- nitely something which needs a smooth running machine, and Harold is the fellow to do it. White: Isn't there an additional reason why it should be in the Treasury Department, Mr. Secretary? The State Department after all is the important Department that shapes foreign policy. H.M.Jr: Right. White: And it seems to me that there should be & seg- regation between the shaping of policy which corresponds to legislation, the legislative branch of the Government, and the administration branch of the Government, those who execute the policy. In that way you get both a counter-check and the division of labor lends for efficiency; and, I think, for that reason alone - and those are the only two Departments who could possibly handle it. For that reason alone, it should be here. I.M.Jr: Harold, what I would like you to do - I didn't mean to shut you off. White: No, I an through. H.M.Jr: Do you like the way I am approaching this now? Bell: Very much. Regraded Unclassified - 16 - 55 H.H.Jr: What I would like you to do is, anybody that you (Graves) don't know, and I think the person whose work you likely know the least about is Young. Get that. I would get hold of McReynolds not later than tomorrow and give him a sketch of this thing 50 that he doesn't go off on some angle before it is too late, and then tell him that we want to work with him on this, you see. Get to Mac not later than tomorrow. Graves: Right. H.M.Jr: And tell him quite frankly just what we have in mind. White: Would you want this to get out before you inform the President. H.M.Jr: Well, McReynolds is administrative assistant to the President. Any orders have to flow through him anyway. White: That is the channel? H.M.Jr: Yes. Administrative orders have to be set up by McReynolds for the President. White: But you weren't thinking of McReynolds taking it up with the Council of Defense first. H.M.Jr: In his capacity as administrative assistant, as a man who draws up these orders, isn't that right? Graves: That is right. H.M.Jr: And is a Treasury employee on leave-- Bell: He has already discussed one phase of it with Don Nelson. H.M.Jr: I know, but the thing is all sixes and sevens. Now, if it could be done in a nice adminis- trative package, the whole thing would have an appeal to the President, and he would say, "Well, Regraded Unclassified 56 - 17 - this makes sense." What do you think, Wiley? Wiley: Sounds all right to me. M.M.Jr: Nothing in here but what it would be much easier for you to work. Well, Harold, get your teeth into this thing. Is anybody, from an administre- tive standpoint, unhappy about this? Cochran: Just the one thing. You would consult with State and Commerce on this business of extending the freezing before you tried to put it in-- II..Jr: Oh-- Cochran: That is my only reservation. .....Jr: They way I would do it now, if I were going to do it, I would consult with Mr. Hull after we have the whole package rather than a piece of it. Cochran: But give him 8. chance to give his O.K. before it goes to the President. M.M.Jr: Oh, sure, but I don't want to - I wasn't happy to walk over just on this thing, but the way I Bill talking and thinking, it secms to me that that is something that might appeal to Mr. Hull and to anybody else who is interested. I mean, on this basis, after we go along 8. little Tur- ther - you see, I will keep pushing it. White: There is one consideration that is not quite clear, Mr. Secretary. Luch of what you are speaking of in the exchange would not apply to present controls, SO that it really has point only if there is some extension because the kind of problems that come bafore Philip and the other groups do not apply to most of the countries with which we freeze the funds, so that the kind of problems that they would con- tend with, it seems to ne, depends largely upon the prior assumption that it is zoin to Regraded Unclassified - 18 - 57 be extended into other areas. Otherwise, the organization doesn't have much point with the kind of problems that are confronting it now. H.N.Jr: But this puts the whole thing together. It is a vast, important problem, and the President can see it and whereas a man withdraws from taking action because he is afraid of the administra- tive end of it, he will say, "I can do this. This is all right. This will work." O.K., gents, I hope you all have a nice after- noon. NOTROUTS or AXIS JUNDS 58 TRANSFIRS TO SOUTH AMERICA. It is reported that since September soss $4,600,000 of German funds have bom transferred to South American banks, and that approximately $2,300,000 has returned from Argentina and Pera to the account of the Reichabank in Too York. During: the - period there vas transferred from Italian assomia in the United States approximately $13,000,000 to South incrios, of which $10,000,000 vest to the Italian Roberty in Brasil from the Italian Foreign Imlange Central Tunis in You Terk and in addition, $4,500,000 MM and in ask by courier. As & result of recent return transfers of Less than $1,000,000 the net amount of Italian funds transferred to latin America since September anomis to more then $16,000,000. Recent information indicates that the Bank of leasil expects to reseive $10,000,000 for credit to a Jupenese assess M part of the Japanese program designed to centralise dollar enclungs operations of the Toknhama Specie Bank with the Tank of Brasil. GERMAN runns. The flow of Gurna funds in this country appears principally to have been to the accounts of Swedish banks here, $1,500,000 being trans- forred to such assocate from Gream abcounts since November 25. About $1,350,000 is known to have born transferred to Swine accounts here, while $750,000 has returned from Buies to Garman accounts. Cash withdrawale from German consular accounts since December 1 have anounted to $850,000. of this amount $650,000 was vithirawn W the Censul General in New York, who paid $530,000 to cover interest payments n German bonds. The remining $120,000 is apparently still in the consulate. The Bernan Tubseay in Vashington recently reseived $200,000 w draft from the Reichobank, Berlin, and obtained this amount in notes of $20 to $1,000 demoninations. There is - indication that eash deposite are being mão by the Relahsbank by way of South America, National City Bank having resently reseived $180,000 w this mothod. ITALIAN runds. Transfers of Italian funds, excluding those to South America, have been principally to Spanish, Swedish, and American assomite and treasfers from Sundish to Italian assomis have been noted. It has also boen recently reported that the Italian Attache at Tokyo has carried $800,000 is American currency from Shanghai to Japan. Further reporte indicate that substantial Italian Government funds have been converted into eash which is being kept on diplomatic premises. JAPANESE FUNDS. Japanese Institute, Inc., a Japanase cultural organization, is known to have been reseiving its principal Income from the Japancee Consul General in New York. The various Infence consular officers throughout the World are apparently being supplied with funds from the Japanese consuler accounts with the Bank of America. Regraded Unclassified 2 C 59 0 P Y December 9, 1940 Mr. Cochran Mr. Hawkey Subject: Gold shipped here by and for account of the Bank of Portugal. More than $70 million in gold has arrived here from Portugal since the beginning of July, 1940, shipped by and for account of the Bank of Portugal. Since all of the gold was earmarked upon arrival in New York, that Bank's gold balance here rose from $30.1 million as of July 3 to $109.8 million at the clost of December 5. (About $6.0 million of this increase resulted from the purchase of gold from the U. S. Stabilization Fund.) On October 10, I wrote you a memorandum in which comparison was made between the Bank's gold in New York and the asset item "Encaisse-or" (gold coin and bullion) on the Bank's own weekly statement. At that time, the most recent statement available was dated August 21, and it could not be asserted definitely that the Bank's gold in New York was of B. greater value than its "Encaisse-or." We have now received the Bank's statement as of October 2, listing an "Encaisse-or" of $69.1 million. On the same date, its gold balance in New York amounted to $70.5 million and since October 2, the Bank of Portugal has shipped another $33.3 million in gold to New York. (All of this has arrived: there is no gold in transit at present.) We have no "encaisse-or" figure available for dates subsequent to October 2, but since this item has moved upward less than $2.0 million in the past six years, it is very likely that little or no change has taken place since early October. The foregoing information is tabulated below (in millions of dollars): Imports for Gold bal- "Encaisse- acct. of Bk. ance here or" 3/ Period-1940 of Port. 1/ (At end of each period) $30.1 (July 3) $68.8 (July 3) July 4 - 31 $ 7.1 37.8 68.9 Aug. 1 - Sept. 4 16.7 55.3 68.9 Sept. 5 - Oct. 2 15.2 70.5 69.1 Oct. 3 - 31 21.1 97.6 (69.1) Carried Regraded Unclassified 60 - 2 - Nov. 1 - Dec. 5 12.2 109.8 (69.1) Forward All from Portugal, except $1.4 million from England in July. During October, the Bank of Portugal also purchased $6.0 million in gold from the U. S. Fund. 3/ According to 1931 law, the Bank values its gold at .066567 fine grams per escudo; conversion of escudo value into dollars hence made at the rate of $.0748 per escudo. The apparent conclusion is that the Bank of Portugal has sent to the United States at least $33.3 million of gold not shown in its "Encaisse-or". Since only $14.6 million of Bank of Portugal gold arrived here during the first half of 1940 (of which $2.1 million came from Portugal and about $12.5 million from England), it may be further concluded that most of the "extra" gold was shipped in the past five months. This "extra" gold may be any of the following: 1) The Bank of Portugal's own gold. In addition to the gold listed under "Incaisse-or", there is a reason to believe that the Bank carries some gold in its asset item "Dispon- ibilittesor a l'etranger et autres reserves" (liquid gold exchange assets abroad and other reserves). Here is some evidence: in the week ended March 20, 1940, the Bank purchased slightly less than $5.0 million in gold from the U. S. Fund in order to strengthen its gold reserves. In that week, its "Incaisse-or" changed not even 8 fraction of one escudo. "Disponibilities, etc.", however, rose $4.9 million (using the rate of $.0749) About a year ago, the largest amount of gold that could have been included under "Disponsibilities, etc". was $22.0 million. In the Bank's statement for December 30, 1939, this item was valued at 536.3 million escudos. Examination of the Bank's annual report for 1939 reveals that 242.2 million escudos of the above represented the Bank's holdings of the Government of Portugal's 3% sterling obligations. Therefore, the maximum amount of gold that could have been included under this item was 294.1 million escudos worth, or $22.0 million. (The Bank's holdings of dollars were negligible at that time.) 2) Gold held by the Portuguese Treasury. The Federal Reserve Regraded Unclassified -3- 61 Bulletin, in its table "Gold Reserves of Central Banks and Governments", uses only the Bank's "Incaisse-or" figure, converted at $.0748. But the Portuguese Bank's annual report for 1939 shows a table of the Treasury's liquid assets at the end of November, 1939, wherein appeared 430.2 million escudos worth of gold in bars, equivalent to $32.2 million. For all we know, the Bank of Portugal may have exchanged its holdings of Portuguese Government sterling bonds for Treasury gold, shipping the latter to New York. 3) Gold of some foreign bank or government, in the shipment and earmarking of which the Bank of Portugal acted really as intermediary. Unless we receive further evidence that 8 third party's interest was involved, it would seem inad- visable to question the Bank of Portugal for what appear to be shipments of "extra" gold. The information presented under the preceding two points suggests that Portugal does own gold beyond that shown in the "Encaisse-or" asset item of the Portuguese Bank statement. Regarding the markings on gold bars already shipped here, from Portugal, I think you will agree that these cannot be offered as proof of ownership, since many Continental assay marks constitute good delivery in Europe's gold markets. #The dollar funds used in this purchase were remitted to the Federal by various banks in New York. Indication that the Bank of Portugal acquired such dollars during that same week is given in the Bank's statement, wherein Portuguese bank deposits at the Bank of Portugal rose 100 million escudos, or slightly more than $4. million. Regraded Unclassified 62 Regraded ev Unclassified A partial list of corporations of subversive activity 07 of censealing assets subject to freesing: As Japanase. Mr. White has estimated that our assets in Japan are around $200,000,000. Obviously our bargaining position with regard to Japan my term an the concealment of substantial assets by Japanese is the United States. 1. Tekeheme Specie Bank. This Bank has breaches in New York, Hawaii and Sep Francisco, is controlled by the Japanese government, and has at- ready been found to have filed false reports consealing about $100,000,000 in assets from American banking authorities. a. Mitoubishi Bank, Led., New York. 8. Missui Bank, Ltd., Now York. 4. Bank of Chosen, lieu York. 8. Sendtome Bank, Ltd., New Yerk. 6. Bank of Taisan, Ltd., New York. 7. Eyede Wire Insurance 00., Ltd., New York. a. Meiji Fire Insurance Go., Ltd., New York. 9. Mippen Pire Insurance Go., Ltd., Homolulu. 20. Tokyo Marine and Fire Insurance Do., Ltd., Nov York. 11. Iwai and Company, Led., New York (impart and export). 12. Marimure Brothers, Inc., New York (impert). 19. Mitsubishi Shoji Kaisha, Ltd., New York (impert and export). 16. Tenancial of Company, Ltd., Osaka, Japen (dealore is are goods with then Customs has had difficulties). 63 - 2 - 15. Nagoya Seite Kaisha, Ltd., New York (chineware). 16. Mitsui and Company, Ltd., New York (trading in commodities). 17. Nissho Company, Ltd., New York (import and export). 18. Fuso Marine and Pire Insurance Co., Ltd., New York. 19. Temacho and Company, Ltd., Beattle (import and export). (All of the above have been incorporated in Japan, but are doing business in the United States. The 1939 tax returns in many of the above cases show alleged locass.) 20. Among the large accounts being monitored by FBI is Shows Teache Kaisha, which in New York City shows balances in excess of $500,000. In addition there are Japamese banks in Hawaii (two or three) and the Philippines which are apparently viewed with suspicion by FBI. B. Gorman. German controlled corporations which are more or less nb- ject to suspicion include the following: 1. German Dye Trust. This consists of a group of corporations, including General Analine and Film Corporation and subsidiaries some of which are as follows: Agfa Ansee. Agfa Raw Film Corporation. Osalid Corporation. Winthrey Chemical Company (80 per cent). American Magnesium Corporation (80 per east). Regraded Unclassified 64 - 3 - This group was described as far back at the last way (Alien Prop- crty Custodian report, 1919) as follows: "The relation between the German Government and the great German chemical houses was # clese that represents- tives of the industry were naturally almost direct repre- sentatives of the government and their work in this country gave them unequalled opportunities for examining our 100 dustries from within : After the war began the industry become a center net only of espionage but of propaganda and of direct governmental activity. The number of striking instemees of this development is ⑉ greet that only a few can be detailed, but these appear sufficiently striking . . "," The FBI is watching the Dye Trust activities, especially since two persons posing M aspirin salemen in its employ 1020 found actually to be engaged in subversive or at least dubious activities in the Testern Hende- phere, including the carriage of secret codes (the liochne at Welff casse). s. Chemical Marketing Company at Come Gold and Silver Befining Institute (Dr. Kerbese end associates) are undoubtodly engaged in activities close to espiemage ascording to the Dies Committee report. 5. Ura Film. This 10 a propaganda agency at 10 being used in connection with the Agfa Assee for taking pictures of military objectives in the Western Hemisphere in the guise of producing "educational filme" for consumption in Germany. 4. German Shipping at Tourist Agencies (HAPAD, North German Lloyd, German Railroads Information). a. German Money Forwarding Agencies (Robert Hants and Company, New York and Chicago: Same Utesh and Company, See Yesh: Carl Marks and Date pasty, New York; etc.) Regraded Unclassified 65 - 4 - 6. Dures Plastics and Chemical Company, North Tonovanda, New York. FBI is interested in this company. 7. Pilot Reinsurance Company, 70 Pine Street, New York. Forty-six per cent of the stock 18 owned by non-resident German aliens worth $1,240,000. s. Allgemeine Klektricitats Gesellschaft, Berlin. C. Italy. Italian banks represent the chief subject of interest with regard to Italy. They are controlled by the Italian Exchange Institute and their transections as reported to us have been multifarious and mysterious. They include the following: 1. Banes Commerciale Italians, New York agency (a foreign or poration) a. Credite Italians, New York agency, 5. The subsidiaries of the Italian Exchange Institute, such as the Bance di Napoli Trust Company, Nov York and Chicago, and the Bease - merciale Italiana branches. The you has been observing these banks. The resident alien president of the Benes di Mapoli, Chicago, w recently die- charged by the Italian Archange Institute for not being sufficiently pro- Fascist. 4. The General Insurance Company, Led., Trieste. This company 10 being watched by British Intalligence at 10 engaged is mysterious financial transactions in the United States through at individual and Hernth, resid- ing in the Hotel Pennsylvania, New Yerk. Regraded Unclassified 66 - 8 - B. Do Mobile Cigar Company, Brooklyn, New York, is Italiam wa- twolled; paid dividends to non-resident Italians in 1939 of about $88,000 with a stock value of $1,546,000. D. Switserland. The largest amount of payments to non-resident aliens in non-frosen Continental Europe today 10 in Swiss names. It is believed that the largest portion of this is Geman (for comple, I. 0. Farben). The Electrolux Corporation 10 a suspect company. Thirty-seven per cont of the total outstanding stock 10 represented by dividends to non-resident aliens with Swine addresses. The FBI has been watching the Suede, Arel Weaner Grean (owner of the yesht SOUTHERN CROSS), of this our poration very closely. The company has 331 brench offices manufacturing and selling THERE excepers etc. Other Swies companies that might bear emmination are Hoffman- LaReche, Inc., of Matley, New Jersey, paying dividends to Swice names above- ing a stock value of over $5,000,000 Sendes Chemical Works, New York City, paying dividends to a company in Basle, Suitserland, showing stock worth about $1,500,000; Syar Distributing Company of Nashville, Teansses, paying dividends to one Adalyh Geneg, Durich, with stock valued at $1,314,000; ore. SK:von - 12/12/40 - - 5 Regraded Unclassified 4 67 There are undoubtedly types of reprehensible activity not made oriminal by any statute and which 4. regine of foreign exchange control would probably not affect in any direct way. For example, the employment by the Glenn Martin plant of substantial members of persons suspected of being Mest sympathisers; against this FBI has apparently been unable to do enything today and in the absence of action by the plant itself nothing further of a remedial nature can apparently be expected. A twilight sone existe with regard to American enterprises and funds used for pro-Axis purposes-en example, perhaps, 10 the alleged fortune of Whitehead, deceased operater of the Cose Cola bostling business. The following are some transactions which have already taken place over which the Treasury would have & ascaure of control in the event of the insti- tusion of a foreign exchange centrol regise. 1. Une of American dollar balances (frequently in surrency) in 1745 actions involving alleged repatriation of German securities held in this country. It has been estimated by Mr. White's division that during the month of October and the first two vocks of November $15,000,000 in eash alone was spent repurchasing $75,000,000 par value of German bonds as a misimm 0811- mate, amounting to about 60 per cent of all German dollar bonds held is the United States. Under a regine of fereign exchange control we would know more about the precise purpose of such transactions (the British have intercepted ovidence that this has to do with German preparation for an appearment pro- (7th in the United States at the continuence of the fraudulent bankruptcy program involving a cheap depletion of United States bargaining power by vay of off-sets). It also appears from FBI reports that German refuges Regraded Unclassified 63 - 1 - in this country are being used in acas of these transactions (for example, Jakeb Goldschmidt, A.E.B. Corporation) and that in this connection these transactions are being used to cover up the salting essy of funds for other purposes, possibly subversive (for example, FBI's discovery of Margaret Goyl, a stooge for Hermann Kollmar, and the Transfer Trues Limited's activities in Mexico City). 1. The Rueckwanderer mark system involves the probable dispoiling of the life sevings of large numbers of gullible Germans in this country for verious ends (the Chase National Bank alone from July through October handled $1,160,000 of this kind). Today nothing 18 being done to stop this (although " have turned the matter over to the FBI) but under & system of foreign exchange control this fraud upon residents of this country could be promptly stopped. Related to this is the feed package recket also indulged in by the Russians. 8. Aria powers are reseiving reyalties on American patents and sopyrights in substantial - but are refusing to make any payments except in blocked accounts to imericans in similar eircumstances. Under the proposed regime this might premptly become a natier for negotiation. 4. amounts of surrency are being shuttled between this and other countries for activities largely subversive. The amount of money ear- ried by Italian couriers to South American 18, as any realist know, sufficient to purchase the allegiance of persons of the highest importance in these cour- tries, sad the American dollar is undoubtedly being used as the surrency of payment for activities against our interests throughout the world. The pro- Regraded Unclassified 69 - $ - posse regine could prevent cash from being paid out of bank accounts to such diplomate and could be used for diplomatic demarches to prevent importation or exportation abuses. 5. Payment and receipt of remittences from Seviet sources, undoubtodly for Communist purposes, are me entirely lewful and have taken place in - stential amounts. The proposed regine would provent this. 6. Payments by consulates, embassies, serporations, end individuals falling under the inhibitions of foreign exchange control could be serutinized. Today the Chemical Marketing Company and other organizations of the kind No forred to in the Dies Committee White Paper" would be subjected to class serutiny. 7. Transfers of credits emounting to flight of And credits to Latin America to be used undoubtedly, however, within the United States by gradual repatriation in currency or disguised credit transactions are me teking place. The Italians, for instance, are reported to have in this name? built up a balance in Rie of m less than $10,000,000. The Japanese end Germans are doing the same, The purpose of these activities is to place beyond our ⑉ trol all these runde. In view, however, of the feet that dollar creation sources remain in the United States a regine of foreign change centrol, such as is propesed, would provent a continuance of this practice; and 1% might over smable us to centrol the repatriation, bewever disguised. SK:ven - 12/12/40 - - 5 Regraded Unclassified 7 70 EXCHANGE CONTROL Arswing 72 Desember 12, 1940 Mr. thite Mr. Dee subject: Treatment of American property interests by Cernany, Japan, Canada and Italy 4. 1. American of brench plants in Commany have not been per- mitted to control the management or personnel of these plants. 2. American of direct investments in Germany have not been permitted to collect dividends - their direct investments. 3. incrison - of bended investment have not been permitted to receive the full interest and amartination - these investasets, nore than half of which have been is complete defealt. Probably nore than $700 million of clear less has been taken by terrican bandhalders. he American long-term investors have been discriminated against in favor of investors from countries politically related to Germany or free countries which had sufficient control over international transactions to be able to retaliste. 5. American private citizens who vare suarded over 8600 million by the Ittmed Claims Commission have not been permitted to sellect on these claims from Cerreny. 6. American owers of short-torm claims on Germany have been per- nitted to withdraw them only over a 10-year poried and have suffered considerable leases en three claims. Our total claims - dermany, shirt-term and long-torm, excluding war debta, are about $350 million. The total claims of Commany en the United States are less than $100 million. (Both of there totals the areas nov occupied by Dermany.) 3. Iss 1. The - is the exercise of their foreign amazonge centrol and collateral regulations have canced esuaiderable damage to interests is the For East. (a) Lim (1) American assete have been from. st the discretion of the Japanese Government, is met CADGE American business have been allowed to withdraw their earnings. Regraded Unclassified 73 - 2 - Division of Monutary Research (2) The Japanese Deverment, through its foreign trade controls, has aliminated all importe of American except these vitally necessary u their we effort. (3) American enterprises in Japan are discriminated against and pressure is brought to curtail their activities. (b) In Manchmria (1) The Japanese system of foreign exchange centrol and state nonopolies has practically climinated American enterprise from the field. (2) The foreign exchange centrol is administered to discourage importe from the United States and other non-Japaness controlled countries. (e) In North China (1) As the Japanese tighten their hold upon Morth China similar regulations directed against Americans have become increasingly severe. 2. American investments in Japan have a neminal value of & quarter of & billion dollars. Since these are fromes their astual value is deubtful. While enaller, the Japanese investment of $1.50 att- lien in the United States 18 crucially important to Japam M 10 represents about half of Japan's foreign exchange reserves. (There is appended a longer discussion of the injurious effects of the Japanese exchange control.) c. Italy Italian exchange centrel has been more lenient 02 American industrialists and investors than that of Germany. 1. The Italians have serviced the greater part of their U.S. dollar bends. 2. Short-term assets have been withdrawable with little diffi- only. However, the total of these assets has been mall. 3. Regular resittances of dividends and profits to the United States has been profitable since 1935, but there have been & number of special examptions. (Total Averican heldings in Italy are under $140 million. Italian holdings in this country are 690 million.) Regraded Unclassified 74 Division of Monstary - 3 Research D. Canada Canadian exchange central is mash less hersh with respect to the United States than the centrols of the Ande powers. but the following restrictions may be noticed: 1. Balances hold prior to the was cannot be withirem by incrisons at the official rate. 2. withdrawal of profits required 30 days' notice before a permit is issued, 3. Importe from the United States in excess of 825 require 6 permit. Certain categories of goods are prehibited and others restricted. 4. Proceeds from the sale of securities held prior to the war may not be withdrawn at the official rate. 5. Insurance companies mut declare their heldings of foreign exchange. 6. American companies must nake a monthly report of operations and submit to periodis emaminations. In this commestion, it is only fair to list the activities which can be engaged is by American property - in Canada and which would net be permitted under the Avis type of exchange control. Americans can withdraw interest and dividents on Canadian investants. Brench plants can conduct business freely with parent company in the United States. American investors can withdraw DEV funds in foreign exchange. incrican residents in Canada on held and dispose of foreign currency and securities. Returning Americans may withdraw foreign exchange which they brought in, and goods up to 8100. Americans may sell foreign or demostic securities to the United States. American balances my be used freely within Canada. Comittments by insurance companies to pay in foreign exchange are being honored as respects Americans. United States life insurance companies are permitted to de business as usual. (There is appended a lenger report on the organisation of the Canadian exchange control system.) VFC:esh 12/12/40 Regraded Unclassified Germany Division of Monetary Research to Iff. lite December 11, 1940 1900 Mr. Used Dubject Cermac Exchange Control and American Interests. jumary 1. The Germans have for many years exercised an exchange control vis-a-via the United States which has cost this country and its nationals hundreds of millions of dollars. They are now using this central to damage this nation not only in its external relations but also in its internal affairs. Mitherto, the mjor damage has been effected through German control exercised over American- owned assets in Germany and other areas: more recently the use of the foreign exchange control over Dersan-owned dollar assets in the United States has been the souree of injury. Specifically the effects of the German Exchange Control as it has been exercised with respect to the United States are as follows 2. The greatest lesses inflicted on American property interests by Germany have been borne by those Americans who, during the 1920's, invested liberally in the reconstruction of German industry, both through the purchase of long-term German dollar bonde and through the establishment of modern branch plants in Germany. 3. Under the liast Regime, United States holdings of Derman dollar bonde have been reduced from a face value of approximately $1,100 million to & face value of approximately 875 million. Considerably more than half of this redue- tion, probably over 6700 million, represents a elear loss by the American bondbolders. 4. When the National Socialists came into power in Germany, American branch plants in that country had an estimated value of over $260 million. There has been very little repatriation of this investment, tut st has gradually become almost valueless for practical purposes. Since the widdle of 1933, transfer of dividends has been permitted only intermittently and only to a few favored - cerns. The American parent company, in most cases, receives no dividends, has no control over management and personnel, and 1s not permitted to receive informe- tion concerning the details of operations. Ownership has been reduced to the thinnest legal fietion. 5- At the end of 1930, Americans held about 0925 million of short-term claims on Germany. Today the value of our outstanding short-term claims is less than 050 million. This reduction was not achieved thout considerable losses to the American creditors, though the short-term ereditors fared sush better than the owners of Cerman dollar bonds or the owners of direct invest- sente in Germany. 6. About 61,275 million is the Derman Government's indebtedness to the Government of the United States. Over $600 million of this represents awards of the Mixed Claims Commission to American private citizens. These totals are exclusive of the debts to the United States Government of other countries which Germany has occupied and amount to the Reich. Regraded Unclassified 77 Division of Monetary - 2 - Research Regraded Unclassified 9. The National Socialist Covernment has discriminated against American long-term investors ever since 1933. Several other countries, who either had closs political time with Germany or were in a position to retalists by taking over German assets of by eliminating - - of importe from Germany, was able to get specially favorable cottlements. The United States was unable to secure equal treatment for American creditors. lione of the former American lease has been serviced in full and nore than half have been in complete default. Tes virtually all Dateh and Juice leans, and the English Dame and Young loans, wore serviced in full up to the authoresk of mr. 8. Since 1933, when the last Government defaulted en transfers of bend interest and amertisation, ostensibly because dollars were scaree, Germany has repurchased approximately & billion dellars face value of United States-bald German dellar bonds, at a cost of between $200 and 6250 million. Dellars, of which there 4 seareity when 10 - & question of meeting legitimate oblign- tions, apparently became plentiful when there w an opportunity to repurchase there came obligations at the low prices which were the direct result of Derman Government policy. 9. Since September, 1940, the Insi Government, with avonued political unde, has accelerated the repatriation program by repurshases of a face momt of approximately 675 million of United States-hold German dollar banda. the purpose of these repurchases, all avowed by German agents, is to strengthen the position of Germany at the Peese Conference by subling her to min a cheep gesture of agreeing to service all her international obligations in full. German control over United States preperty, is all the area today under her jurisdiction, is also regarded as - instrument of M eventual all-rease settlement with the United States. The withdrewal of all German liquid caseta from this country, or their consealment in the accounts of other sountries, serve the - purpose. 10. In recent months, German officials in the United Dates have carried - a large part of their financial transactions in eash, presenably to prevent the detection of Improper disbursements or to build up secret in care German balances are blocked. In tide way, the unrestprecated freedom wideh W afford to the use of German dollar balances enables the German Government to finance activities directed against our national interests, without perious danger of detection. 11. The Germane are in a position to utilise every losphele and every licensed area in our our foreign funds control insefar of our foreign funds control ⑉ be persuaded to release French or other funds to Latin America, to Switnerland, to Seeden and other countries. The Gersons are given the opportunity through intermediaries in the case of Latin America and through commie and politival ocereien in the case of countries adjacent to Commany to sequire the dollars which w free. 12. German-controlled direct investments in to United States constitute 8 formidable source of direct influence by the Gurman Government over certain American industries. Im addition, the widespread influence of German-ocutrolled 78 Division of Monetary I - 3 - capital, and certain German individuals, in - domestically controlled indus- tries makes possible the exertien of German influence in quarters not super- ficially apparent. Germany also controls many industrial processes in the United States, - of which are vital to National Defense, through patent holdings and licenses. 13. German investments and the activities of German nationals in the United States are strictly centrolled by the Mast Government. is long as the United States Government fails to establish its em system of central over German assets, it permits the Masi Government a the hand here. The alternatives are not freedom versus control but German control versus American centrol. 00 tmg 12/11/40 Regraded Unclassified 79 Division of Numbery - & - Research Carger receive and sectrol. Persign exchange centrol - first adopted in Germany ea July 16, 1931, as 8 result of the covere financial crisis of that year. Prom that date on, the commonic life of Germany and the position of the foreign crediter has been subject to increasingly rigerous government central. Long before the outbreak of war, the Cerses Government had assend complete eastrol over international transections of all kindes without the permission of the proper authorities, DE treasfere abroad of payments for importe, for foreign dobt service, for prefits, rente, # reyalties, or cepital withdressal might be made. The regula- time governing such permission were complex, the use which might be made of any Reichemarks belonging to, or accordag no, foreigners being dependent upon the specific origin of these balances. Permission to transfer Reichmark funds or claims into foreign currently is granted or withheld according to the commonde, political and strategie policies of the Germen Government. For exemple, substantial amo of foreign exclunge have been paid to certain countries with when Germany either was in a poor bargaining position, or found 10 desirable to maintain very good relations. In the case of the United states, elmest the only transfers permitted were payments for current importations into Gernery from the United States, and even here a large propartion of our total experts to Commany could eally be name by scoopting various forms of blocked balances. German restrictions on international emital transporting. The system of regulations which the German Government our up to control cepital asvanents was repidly expended after 1993 to ester every conseivable transaction and plug every loak wherely capital might essape the country. the German authorities are erned with valimited authority and the regulations have been adopted with great vigue be take account of new developments is commis position. Additions, subtractions, and exceptions to the rules are froquent, and a complete description of the regins at any time would be our of date before it could be compiled. the following description 10 intended only to illustrate the scops end nothed of the German regulations; any specific vales or examples sentioned may have been experseded. ifter June 1933, the Gestann Government required that interest, dividends, capital payments, and rests resulting from foreign is Commany - be paid in Reichmarke into the Conversion office for Gereen Persign Date to the credit of the foreign crediter. Standstill agreement debte and Income from empital sequired after 1931 with free foreign exchange were emeryted from this requirement. The Conversion Office Lossed to foreign creditors men-interest bearing Reichanark certificates w interest-bearing bonds in the currenty of the original claim. Alternatively, the anomis paid into the Conversion office could be transferred to Mested accounts in the foreign exchange besin, there they could be drown a for cortain limited purposes. Copital papaymento could be made only into special blocked secumber which could be expended for certain spostfied limited purposs. Regraded Unclassified 80 - 5 - Division of Mometary Research Regraded Unclassified is a result of the severe restrictions - transfer payments, 4 large number of blocked mark accounts were opened in the German banke authorised to accept and associate. German debtate is meet cases were permitted to discharge their obligations to foreigners by payments into these accounts, may of which are still held, shile others have been used chiefly for investment in certain securities and real estate in Certify or for payment for German experts. Elocked marks could also be sold to other foreignare, but the was of such asquired marks wro even more restricted than the uses of the original assounts, and - quently they could be sold only at a heavy discount. In addition to the rigorous regulation of financial transastions, the German Government also bas imposed direct restrictions since the outbreak of war en the expert of commedities from Germany. These restrictions are a further obstasle to the liquidation of American assore in Germany. Discrimination U.S. holders of German dellar bendy. Since 1933 the National Socialist Government has discriminated against American leng-term creditors. Up until I'me of that year Germany had ml is full the interest and amortisation charges - her foreign bonds. not a July 1, 1933, Gerasey premiented a law relieving German debitere of the obligation to pay is foreign surrencies and requiring them to pay their fored.go obligations in reichemarks into the conversion office. lines that time, - of the former German dollar bondshhave been fully serviced is this country and nare than half have been is complete default. Yes the Detah and Indian creditors were able to collect virtually the whole of the interest due these they 0970 able to reach auch as agreement because of Owner's favorable balance of trade with Holland and Switeerland. This VAI clearly & discrimination against the incriom creditors. And is 1934 the British Deverment was able to obtain fall service a British heldings of the Dame and Terms leans) they vers able to reash such an agreement by PASSA of & Law expewering the British Government to take retalistery action against German trade. The United States, however, had & strong favorable balance of trade with and emeoquently ⑉ net able to bring effective presenze on the German Government with respect to these leans. The have been servicing about 75 persont of the payments due - the American haldings of those leas. This procedure also slearly discriminated against the American wediters. Furthermore, although the Need Government defmulted a transfers of bed interest and martisation, ortensibly because dellars 05/1 peareo, - has reperchased approximately - billism dellars fase talse of UnitedStates- held German dellar bands at a sect of between $200 and $250 million. 81 Division of Nome tary - 6 - Research This repatriation of Carmen dollar bonde was stimulated by special measures undertaken by the Certer Government. After 1933 default by German debiers and official restrictions on service transfers staresd caused the price of German bonds held abroad to fall severely. On the German market prices received relatively high. The German Government book advantage of this differ- ential to inetitute - system of "supplementary exports". by this wethod German exportere sould buy dollar bonds with part of the proceeds of their exports, and then could register them for sale at the higher prices prevailing is Gernany, Those, dollars, which were scaree when 11 was I question of meeting legitimate obligations, wore plentiful when 1% was a question of saking American beadhelders indirectly may for German exports. Fince 1940, however, Wasi Government has accelerated the repatriation program for avoved political ends. It has repurchased 8 face amount of approximately $75 million of United States-held German dellar bands at a cools of about 820 million. Two German agents alone, acting privately for the German Government have received $15 million since October 10 for the express purpose of making these repurchases. The purpose of these repurchases, M avound by these Cereas agents, 10 to strangthen the position of Germany at the Posce Conference by enabling her to nate a geoture of agreeing to service all wher international obligations in full. Here again dollars which were scares when 10 one 4. question of meeting legitimate obligations became plentiful when 11 was e question of realizing German political ends. Injury to American-owned direct investments in Cerumar. The value of American direct invostments in Gerenay has been estimated by the Department of Commorce at about $264 million as of the end of 1933. " present the book value of these investments is about $225 million. However, this figure of 8225 million is deubly fletitions. On the - hand, these investments are at the newst practically valualess to their medinal imerican owners because they yield no transferable interest or dividends. On the other hand, the back value of American direct investments under German centrol has new been more than doubled by the extension of Gorman control over the larger part of Continental Europe. Already American sepital and managing personnel are being eliminated from enterprises in all the occupied area-from Pranos to Rusends. Resent experience in humanie still comes fresh to the mind. In that country, ae Feen as the Germans sequired complete economic emiral, with the advent of General inteneses to power, American-owned subsidiaries began to pass into Garman bands. For instance, the director-gemeral of the American- owned Societa Amendum Roman de Telefons, a $90 millice subsidiary of the International Telephone and Telegraph Company, was permaded be agree be s demand of the Irem Guard for a reorganisation of the Telefona's directorship. The Irea Ceard thereupen named a special commissear to supervise the telephone Regraded Unclassified 82 Regraded Unclassified Mvisism of Honetary - 7 - Research company's activities. On Ostober 11, 1940, the commissar took over centrol of the company, and it was announced that Iron Ouard understrudies would be solected to take over all the nost important executive posts. Also, on December 4, 2940, a decree announced the expropriation of all the orude eil and gaseline lines, together with pumping stations and tank farms, of the Rousno-Americans, & company owned by the Standard 011 Company of New Jersey. Payment for the exprepriated property will be made in bends to be mortized in 25 years and carrying interest at , percent. Similarly the International Business Machine advidiary in Rumania was confronted with the alternative either to accept a commisser or to replace American managers by Germans, and to relinquich part of their share- heldings to German interests. Short-term investments and the standstill agreements. During the late 1920's American short-term capital named in large volume to Europe, principally to Germany. In 1930, American short-term claims an Germany totalled about $925 million. The severe financial crisis of the number of 1931 convinced Germany's foreign commercial creditors that any attempt at general liquidation of their comercial credits to Cermany would lead to # collepse of German industry. A Standstill Agreement was reached between a condittee of the foreign bankers and a consittes representing the Reichabank and the German backers. the foreign benkers agreed to maintain the existing volume of short-tom credits which had already been extended to German firms. In return the German banks provided certain guarantees of the regular payment of interest and agreed to certain previsione which permitted the gradual reduction of the extetending credits. The Agreement bas been renewed each year since 1932. About $486 million of American boat leans WN covered by the first Standstill Agreement. Be estimates are at hand for the volues at that time of short-term credite not covered by the agreement, but they probably were several hundred millions. The arount (in marks) due the incrican bankers under the Agreement has been steadily reduced since 1931. This reduction has been the result of three factors 1. Cansellation of unceed credit lines. 2. Repayments through the sale of Travel marks. 3. Develuation of the dellar. by March 1939 the movent outstanding The mly 065 million. In Suptember 1934 the agreement was emeelled, but - December 9, 1939, - of the heries beaks reached a - agreement covering about 846 million of credits. Per the post three years, credito not covered by the Standstill Agreement have been & mall and shrinking frestion of all Incrican short-torm credits to Germany. at the end of 1938, the Agreement covered $71 million out of a total of about 090 million. Our latest Treasury figures show a total of only about 845 millies is U.S. short-taym claims ⑉ Commany. 83 6 Division of lionotary Baccareb Internevernentel debt. The mounts ared the United States Devernment by the Derman Devertment represent the cost of the American Army of Decupation and the amade of the Mixed Claims Commission. On June 30, 1940, the total value of these dobts, including principle and accumulated interest, VISA 81,264 million. The last payments, of about $1,250 thousand, - these debta were received in 1934. This brought the total paid to about 434 million. Since 1934 Sermany has been in complete default. To these debts of the Ourman Deverment wast now be added the debie oved to the Government of the United States w the countries which Commany has occupted. Doe of Cornen Dollar Recources for Inproper Activities in the Prited States A common tochnique currently being used by Germany to finance improper activities in the United States is the cocuralation of large cash balances which can be disbursed fee various subversive perposes without leaving traces behind. According to reports from the Federal Puress of Investigation, bills traced recently by serial numbers from the account of the Germen consulate la les York City are Incm to have been received by firms and organizations supported of being engaged in propagands activities. That this device of using eash assorate for undersover purpose is emealy being reserted to is attested by the fellowing exempless (2) on Desember 4, 1940, the German Schesey withdraw $200,000 in each from its account. All of this was to bills of $1,000 : demonination or smaller. (2) In the last for menths, the German Commiste General in Bes York occured - $1,000,000 in cash. & detober 14, 11 withdrew $400,000 in eash; on November 19, $30,000; as November 25, $20,000; - December 2, $650,000. (3) Frite Wiedeman, when be assumed the Ownewlate in Sm Francisco, opened - account with a local bank W depositing, reportedly, 05 million. Detran October 2, 1940, and the middle of November, it has been submited that Gerean bank funds in this country have dropped from appread- mately $13,200,000 to $7,700,000. The freeden of notion which these transastions represent is hardly resiprocated by Generary N for no incricen funds is Nasi-hold territory are concerned. Mission 12/11/60 Regraded Unclassified R1 Division of Monetary - 9 - Research German astempte to circumstant our formign funds control. The Cermane have ant up various devices whereby they attempt to circument the foreign funds control which we have established with regard to the compted countries. in recent senths, they have affected important trade and remittance transactions, in which nationals of the countries sub- joot to licensing have an interest, through interesdieries in Latin invoice, siberia, Adtserland, Portugal and Spain. For example, the Surich branch of an Alentian bank has cabled 6 liew York bank stating that they can effect payments syst: of considerable amounts against dollars in New York, both in uncompied and in the occupted French Lerritory. This ties up with the announcement of the German Consul-Osneral in San Francisco that resitioness could be made to France and other countries whose funds have been blocked by transfers through this ties York bank. Again, & New York fire has been cooperating with a Fresich fire in the occupied sone in oveding our foreign funds control by facilitating payments for perfumes in Mexico and Switserland. In another case, an exte controlled benie in the Argentine odvertises that 18 has established a regular payments service for France. Although there is nothing irregular in transfers from this bank to France, yet the purpose of these transfers to clear. Cne can effectively evade the centrols by remitting Funds to agents in the Argentine who, in their tarn, regit these funds to France. German influence in imerican industry. The direct investments of Cermany in the Enited States, clus the direct investments in the United States of those countries over which Oarmany has montrol, pake Mast influence in some United States industries of considerable importance. The General Aniline and yilm Corporation of you York is a good example of a Berman-controlled firs which has AD important place in one of the large industries of this country, vis., the chemical industry. The extent of Corman influence en industries in this country ie greater, however, than indicated nerely by the anount of derman-controlled direct investments here. Yor example, General Aniline and Film Corporation (which is indirectly owned by I. 0. Farben, the Cerman dye trust) has considerable investments in Standard 011 of New Jersey, in sterling Products, Ins., and 10 E. I. du Pant de Nameurs and Co. Purthermors, many of the officers and directore of General Aniline and Film are officers and directors of large demestically-centrelled corporations. Idsel Ford, holds the position of director in General Aniline and Film as well w the position of officer and director in several other well-known demestic fine. The presence of such interlocking directorates can hardly fail to eshance the magnitude of German influence in American infustries. In still another way, the presence of Kasi control in United States industry manifests itself. In 1937, Germany hald 37 persont of all foreign held United Itstes patents. Not only is this patent control important, but it 1a important in - cases with respect to industrial processes vital to national defense, among which - the following may be mentioned: Regraded Unclassified 85 Division of Monetary - 20 - Research (2) Patent control of Bausch and Lamb Optical Company has recently kopt easential instruments from Army and Havy use; (2) Magnosium, an sevential netal, 1a preduced in this country partly under patents held by a partially Gorman-owned corporation) Board as "strutogic", is produced by Consral Electric, with Krupp having (3) Tungsten carbide, & material listed by the Army and Navy Manitions the right, under contract, to limit the number of new licenses of tungaten cartide patents. The "freedou" of Nasi assets in this country. à special circumstance which should be taken account of in the formulation of our policy with respect to regulating OF not regulating the use of German funds in tide country, 10 the pesuliar relationship which exists between the lies: Government and its subjects. Unlike the situation in meet democratie countries, the control over foreign assets held by German subjects 10, in offect, held by the German Government. The idea of free and individual property ownership has been eliminated in Namidom. the State has assumed full juris- dietion and control over all funds and properties of its subjects, whether the altus of these is at home or abroad. The private, individual ownership of Gegzen investments and funds in the United States 10 convenient to the German Government as a legal fiction, but the reality of the situation is that they are the property of the Raich. Hence, the absence of American control over the funds of German subjects is tentamount to giving the Octuan Government & tree hand in whatever finan- eial control it can obtain over industries in this country. It is impessible unilaterally to maintain "free" rights where a bilateral relationship exists and where the other party exercises control. The institution of Centrol measures by the United States over Oerman funds in this country, therefore, would not destroy 8. "freedom" which does not axist, bet would rather vest in this Government a control now exercised by a foreign government. Regraded Unclassified 86 Japan 87 Dashange Centrol and American Intereste 1. the depanses in the exercise of their foreign exchange centrol and colleteral regulations have ocused great damage to American interests is the Far East. a. the Japances imposed embange centrol on May 1, 1933. This brought the resittence of - from Japan ro United States from American investments in Japan under Japanese control with resulting damage to American interests in several instances. As early as Nevember, 1934, for example, 10 - reported by Mr. Grow that the Concral Motors Company subsidiary in Japan wes net permitted to export funds no- sulting from the sale of some of its sharee. since 1937 the Japansee centrol has become increasingly stringent to the extent that incrison funds in Japan are - completely freem. it present, only transactions amouting to less than 100 you a year (623.00) are exempt from the control. The Japance Government is - organizing a complete control of all inports and asperts. Iven under the partial centrals in endstence before, the depansee ware able arti- trustly to discriminate against American exporters to Japan. The Japanase have eliminated all importe from the United States except these vitally moonessy for their war effort. American enterprises in Japan are being forced out of instruct. After Long years of profitable existence, the American-emed Japan Advertiser has been received foreed to discontines. b. the system of foreign exchange control is Mansteria has discriminated effectively against jacrican business. The estensible purpose of the embange control was plainly stated se being " ourtail imports from comtrice other then Japan". the papper foreign enshange centrol 10 linked with the Japanases centrol and in prestice surve only purposes. Under all transactions in currenation, other then the you, including transcriptions in United States dollars, are mbject to rigerous administrative Prepared by Mr. A. N. Issurek Regraded Unclassified 88 Division of Memotary - 2 - Research control. time all other currenales than the you are regarded all foreign exchange and the purpose of the control is to restrict the we of foreign enchange, 18 is obview that constant discrimination against Americans and in favor of Japances exists. Implementing the foreign enchange centrol are & vide variety of puppet state nonspelies dominated by Japanese and excluding insuriems from fertile fields of industry. American - have been foreed to abandon industry after injustry to the Japanese. For mumple, the petrolem nemopely was organized to beenes the sole importer into Manchuria of prestically all petroleum products. American companies were forced to discontime their Mansharian business at great loss. the Kwantung Any enforees discrimination by the Government against the purchase of American motor trusks in favor of Japanses-assembled products. the Government's Law of Ostober, 1937 resulted in the withdrawal of practically all American notion picture companies from the Manchurian murket. 6. North China The Japanese paypet government in Borth Grina has sixilarly premigated a fevel.gn auchange centrol which is increasingly injuriess to American business. the puppot Federal Receive Bank of North China has been placed in charge of all foreign contrange transestions. Since the value of the Borth China year to efficially first - a partly with the you, while its astual foreign enchange value in terms of other currension 10 much lover, a produm is placed - importe from Jepan w against the United States. the Japanese are instituting a system of trade nanapelies in North China which already has caused considerable damage to American interests in this area. the Impense military and nevel authorities in North China engage in posstices which discriminate against Americans. seale marling dependes various providess - are enter the compled Chinsee ports without the payment of - w part fees. Regraded Unclassified 89 Division of Memotary - , - I Regraded Unclassified 2. Under present American assots under the control of Japan have statemer value the Jupenson wish to not upon them. having Larestments in Japan have no protection against the arbitrery actions of the Japanazo Government. Freesing of Japannee assets in the United states is essential to provide the necessary protection ass to American property. Americans have a quarter of a billion dollars invested in Japan of which over one-third is represented in short-term funds which have been from by the Japanese. on the other side of the lodger, the Japanese have about $100 million in short-torm funis and about $50 million in direct investments in the United States. From the viexpeint of relative importance, however, the Jaganese funds in this country represent almost mis of Japan's known foreign enchange reserves shoress, inviow funds is Japan represent only a negligible portion of our foreign exchange receives. 3. Yes effective defense, centrol of Japanese reserves in the United states is measurery. a. Exchange centrol is the neet flerible and poverful nothed of controlling international economic transactions. At the present time, the extatending feet about the commis relations between Japan and the United States is that the Japanese are supplying their var - with materials and machines from the U. s. their me - with enshange control M a compenses part, has already emard - damage to the commis interests of the U. 8d in the For Sect. Rechange control would enable the U. s. to place into operation my desired curb on the supply of materials acress the Pasific. This ourb might be nevely a gradual alouing down. It adght be drastic on seme articles and loss on others. Whatever the peljey was, 11 could be quickly enforced. The exchange control could be med - a supplament to diplematic negotiations and bargaining. Not only because Jupensos policy has already conced great damage to the United States, but also because the dominent orientation of Japanese foreign policy - to be against the United States, W should sut of elementary self-interest take stops to provent the strengthening and culargment of Japanase my interests. be It is corcential to have the dollar reserves available to $ I 1 yes I a A boxis in New York, is bee appeared that Japan was libely to enhaust ber foreign enchange received. This false plature has meenmged the viempoint that no setion by the United States w necessary sizes Auren would automatically be forced to curtail her war offert du to lask of foreign I 30 Division of limetary - 4 - I Regraded Unclassified 0. Ankassedor Grow has recommend that Japancee funds in the United states be blooked to esciet his in covering the liquidation of from American funds in Japan. This to regards as particularly urgent at the present time as be has caught eigne that inficate the depenses will - withdraw all available funds on of the United States. 4. It is essential for national security that control be maintained over Japanese expenditures in the United States. a. the Japanase efficials in the United states statein a class repervision over all of their nationals in the United States, the recent registration of all Japaness recidents with the depansee consule being a good instance. the Japanese foreign exchange control has required registration of all Japanese foreign assets and these are, therefore, also at the disposal of the Jepanese state. 10 is obview that all Japanese assets, consume and nationals in the United States man operate for Japanese state ends. The existence of such 6 foreign centrol reaching incrison borders and emercising its influmes on people and concerns resident in the United States is a direct threat to the security of the American nation. In self-defunce 14 10 vitally necessary that such foreign control be neutralised by the importion of an ineriesn centrol reclaiming the severei.go rights of the United States over all within our boundaries. b. The Japanese are medistaining an extensive explemage network in the United States. For proof, 10 is nersly measury to recall the - recent 08000 of the apprehension of - income- paid agents, Farneworth and the Philippine Secute officer recently convicted. the Japaneee have recently started a - school for explanage agents to be sent to the Philippines. Unquestionaly, the United States has many graduation of - of the older depense any schools, The F.B.I. reperted that - agreement for cooperation and interchange of information has already been reached between the German and Japanane explanage organisations in the United States. The Japanese naturiously attempt to influence public opinion in the United States by paying large - for noutnal services to influential people (Consural O'hyan being a case in point). Unile control over Japanese funds would not stop Japanese emplanage and attempts at helbery, both of these Japaname practices would understatly be severely crippled. 31 - 5 - Division of Necetary I So The Japanese have engaged in merch financial transmetions in the United States. for a period of over two years (July 27, 1938 to September 4, 1940), the New York office of the seal-official Tekehana Specie Bank - coaled accounts held for the Bank of Japan, the Japanese Government, and the pappet Federal Reserve Bank of North China. n its highest point on April 10, 1940, the secret account held for Japan assurated to $111,000,000 while $3,000,000 was held for puppet North China. For the last two years, the Tekshown Specie Bank of See York bought and sold American securities and these transactions were nbb reported. These faste were discovered by the lieur York Federal Reserve Bank almost by pure chance. & thoreagh investigation lasting ovveral seaths proved necessary to secure the complete story. It is entirely pessible that the Japanese have other Midden associate in the United States which only a complete census of Japanese funds would reveal. AMK/Jm 12/12/40 Regraded Unclassified 32 Canada at 93 December 12, 1940 m. white Miss sistler and Mr. adder subjects Canadian Foreign Issurance Central I Codumil 1 and I I I 1 a Deprember 15, 1939. The Bank of Cameda - appointed technical advisor to the Beard ml authorised to mt M its agent or benker. The heard w given the prove w regulate all foreign enthange transportions betwom residents of Canada at the outside world and take over the No of the Exchange 7ml areated in 1935. 1. Objectives of Persion Reshanges Central a. to insure that the foreign exchange secraing from experts will be available to the Heard to purchase assential imports and most other Canadian conditments abroad. b. To provent the flight of capital is erder to Canadian foreign resources and to prevent disorgamisation of security markets. 6. to stabilise the rates of enshange between the Canadian dollar and the unjer foreign currencies. d. To insure that commercial and financial transactions with the British Empire take place in Empire survencion. the boste principle underlying the orders and regulations of the Consition Foreign Surbange Deard is that no transastions between Canada and non-residente of Canada involving foreign exchange or financial dealings shall be effected without sending under the supervision of the Foreign Control hard. All foreign exchange received by residents of Conada is required to be cold se, and all purchases of foreign exchange are required to be made from, an authorised dealer. The energenci.es of the Beard are directed tomal obtaining and conserving all large an - of United states dollare as pessible becomes the United States is the ⑉ country with which Geneta has a large debdt is 14a balance of international payments, 2. a. Besidents of Conada my not bay or sell foreign enshange encept Manugh the Reard or its agents and at unlieve rates proseribed w the Deard. Possits are required both for exports and for imports. All inports or experts of goods and services - be at 8 fair yel.ec. Regraded Unclassified B1 Division of Honetary - 2 - I b. Residente my not dispase of foreign assets to non-residents except for payment in foreign enchange, nor transfer Canadian dollars to non-residents except with the Board's permission. C. headdents were required to deelare their holdings of securities and foreign exchange all of September 15, 1939. d. Residents were required to sell all foreign evehange in their pessession as of April 30 by June 1 under the Foreign Enchange Acquisition Order of April 30, 1940. e. The Seard designates to the Authorized Dealers the buying and selling rates for foreign exchange. Since the inception of central, they have been as follows: U. 3. dollars, buying rate 108 premism U. 5. dollars, solling rate 115 premium Founds sterling, buying rate 4.43 Pounds sterling, selling rate 4.47 3. Mechanica of Operation a. Licensing armite. Every curtoms office and post office WM made a licensing agency. No importe can be cleared and delivered to the importers without & Foreign isshange Control Board permit. Likewise, no exports can be cleared from Canada without & Foreign Exchange Control permit. Unless exports are made under a general export license or a special export-import license, the permit must be signed by the Collector of Customs and Incise at the Customs Frontier , art of Madet before the carge is cleared. If the export is made under & general license, the permit must be subsitted within six days of clearance. If the export is made under . special export-import license DD permit is submitted to the Collector of Customs and Excise, but the operator is required to make a monthly return to the Foreign Exchange Control Board and heard examiners have the authority to examine bis books and reserds in order to verify hão reports. The use of the Contons Division and Post office was a natural and obvious step is My system of control over goods entering or leaving Conada. b. Authorized Dealers. Every chartered bank in Canada vas made all authorised dealer by the Board) the Bank of Canada corres 40 & rechnical advisor. The fact that there are only ten chartered banks and that Canada has a breash banking system, facilitated the establishment of the system of authorized dealers for the collection and payment of foreign exchange. 4. tra License a. Importe. No export license or peridt to required in the following i Regraded Unclassified 95 Division of Hometary - , - Research (1) For export of goods having a value net exceeding 825 where payment is reseived in foreign surrencies. (2) For goode passing through Canada "in transit for exports without entry at Customs. (3) Goods taken out by a non-resident tourist, not conselling $100 in value per person. (4) Personal effects taken out by travellers. b. Importe. No licenses for the import of goods are required in the following 01:00: (1) For the import of goods having the value not exceeding 625 where payment is made in foreign currency. (2) For goods passing through Canada "in transit for export" without entry at Customs. (3) Goods to a total value not exceeding $200 imported by my person in any calender month. (4) Personal effects belonging to and necessary for any person entering Canada. 0. Insurance 1. No permit is required for my payment in Canadian dollars to, or to the order of, a nen-resident by any life insurance company authorised so do business in any part of Canada, where such payment is made by the company in persuance of an insurance policy, munity, or other contract of & sinilar nature. This prevision extends to any insurance policy, anmity, or other similar contract entered into prior to September 16, 1939. 2. No interference 10 nade with the maintenance of payments in foreign exchange by insurance companies - the obligation of the company is to naise payment in foreign anchange. Life insurance companies authorized to do business is my part of Canada and in my country outside Canada are authorized to continue the contact of their business in accordance with their normal procedure. Regraded Unclassified Division of Nonwtary 36 - 4 - Hosearch 5. offeness and Fesalties It 10 an offence under the Foreign Enchange Centrel Order to make a false statement is my application; to deselve or mislead the Board or an authorised dealer or a Collecter of Customs and Insise or any other person conserned is the administration of the provisions of the order) to fail to comply with the conditions of any liemse or pendit or to violate my prevision of the Order or any Regulation of the Board. Everyone guilty of an offense is liable to a fine up to $2,000 or to imprisement up to one year or to both fine and imprisement, and in addition, If any person, contrusy to the provisions of the Order, importe or attempte to import into Canada any goods or other property or buys or attempts to buy any foreign exchange, such goods and foreign exchange are liable to forfeiture. 6. Personnel and Origination Organisation arrungements for foreign exchange control bad born care- fully worked out in Canada in advance. This enabled drabange control to be established an the morning of September 16 with a sinimm of inconvenience and dialesation to business. as soon as exchange control THE established, the Beard called together a group of experienced - from banks, financial institutions, chartered accountant firms, investment dealers, trust companies, insurance companies and various government departments. Has with vide professional and industrial experience took charge of the section of the Deard for which they were best qualified. The Fereign Eashange Central Board consists of the following members Chairess, Oraham Towers, Governor of the Bank of Canada Dr. 1. c. Clark, Deputy Minister of Vinance B. Fortier, Chief Inspector Past office Department B. 4. Robertoon, First Secretary, Department of Enternal Affeirs 2. D. Soully, Comissioner of Customs L. D. Wilgress, Director of Commercial Intelligance There are three branch offices, at Tennessey, Turento and employing forty people. The balk of Canadian foreign enchange transactions originate in Mentral and Torento but mort of the centrol work is dome in ottens. The Board is composed of the fellowing sections: (a) deals with experts seld for payment in Canadian dellare, issuing special permite for this purpose. Three thousand such pendite have been issued. This costion explays ten people. Regraded Unclassified Division of Monetary 97 - 5 - Research (b) The Central File Dection employe twenty-two people. (e) The Commercial Section is concerned with the transactions of companies which operate under special export-import licenses and report on a monthly or periodic banis instead of using forms for each individual transaction. This sytem is employed for companies having a large volume of transas- Mone and was adopted in order to relieve them of the burden of the routine which would have been necessary if individual form for seeh transaction had been required. Up to the and of June 1940 a total of 4,500 such organiss- tions had been granted permite of this kind. The work of this section is divided into five groups as follows: (1) Examiners - dealing with foreign currency bank ascounts (2) Investigation of records of the special permit holders (3) Orain trade (4) Approvals of interest end dividents paid by such companies, especially as they affect non-residente (5) General The Consercial Section also has supervision ever the Montreal and Torunto branches of the Board. The number of persons employed 10 108. The problem of controlling and supervising the foreign trude and foreign exchange activities of the larger cor- porations and compandes engaging in numerous international transactions might at first sight have appeared exceedingly sumbersome, if not untractable. but the device of special livenses and periodic examination by the Commercial Section which - substituted for seruting of individual transactions has apparently provided a satisfactory solution of the problem and contributed to the efficient functioning of the exchange control system. (d) The Traffic Section mintains limison with various govern- mest departments such as the Post Office Department, the Department of National Revenue, Board of Transport Commissioners, National Narbere Heard and the Certedian of Enesy Property. It employe 12 persons, (o) The Inforcement Seation cooperates with other government agencies in safereing foreign exchange centrol for which 11 has the prine responsibility. It has a staff of 17. Regraded Unclassified 38 Division of Memory - 6 - I Regraded Unclassified (f) The Foreign Exchange Dention maintains contacts with the authorized dealers and settles foreign exchange policy. It has a staff of 47. (g) The General Seation has a staff of 23 people. (b) The Insurance section has 4 staff of 5 persons. (1) The Intellicence Costion handles problems of public relations. There are 4 people employed. (3) The Vatching Seation (Exemining Section) examines, matches and disposes of copies of forms. the device of matching the "Deslaration of Goods Exported" Form provides an excellent - for assuring that the Board will receive the foreign exchange assering from exports. While the "Application for License to Import" Form is also estabed with the "Application for Foreign Exchange" Fern, the natching process here is net so important, as the Board retains asro foreign exchange if an application for license to import 10 not followed through with an application for foreign exchange. It also recerds information supplied by residents # their holdings of foreign eashange and securities. It has a staff of 115. (k) The Mail Section employe 14 people. (1) The employe 2 people. (m) The Descrities partion exportises all transactions in foreign securities a the part of residents. It employs 11 people. (a) The Secretary Section employe 20 people. (e) The Statistical SeeMem analyzes and classifies the forms involving foreign asshange transactions and representing transfers of Canadian dellars to the assounts of neo-residents. (p) employe 5 people. (a) The Tecentry Seation deals with the Fereign Insurance Acquisition Order of May 40 1940. A staff of 24 people so employed. All in all the Canadian Foreign Enchange Centrol Deard employe a total of 509 people. The 509 people ware recruited w follows: on lean from Bank of Canada 20 - - . Civil Service 6 - - - entoide time 33 Tesporary employees 490 99 Division of Memotory - 7 - I Expenses of the Foreign Exchange leard for a normal year, after elininating special organisational expenses or items of a mm-reverring nature, are expected to total about 03.1 million. this amount will be recounted for as follows: (In thousands) Salaries 5758 (average salary so about $1400 por - Stationery and printing 150 Rentals 53 Telegrame and telephone 52 Traveling expenses 50 Sundries 37 7. The Board and Leonomic Relations Canadian international transactions total 64 billion to $5 billion per year of which almost half 10 accounted for by foreign trade. Two countries - the United Kingdom and the United States - dominste the international trans- setion of Canada. More than half of all Canada's international transactions are confucted with the United States and almost one-third with the United Kingdom. Therefore, the problem of foreign exchange centrol largely resolves itself into the supervision and centrol of transactions with these two countries. In the case of England the problem is further simplified through the intimate eseperation of the Canadian Toreign Exchange Control Board with the British Enchange Centrol and the exchange controls of storling area countries. is Canada's belance of payments is favorable with England and the starling area, and unfaverable with the United States, and as sterling is not age freely convertible into D. 3. dollars, the mainttask of the Board 10 to conserve Canadian holdings of U. 3. dollars. The Beard is notivated by two decisive fusters: a. The desire to less at small, and to acquire M large, - anount of U. 0. dollars as possible. (1) There has been a tread in the direction of tightening up regulations to prevent Loss of foreign enchange on service and trade items. (1) Traveling by Canadians in the United States has been drestically restricted and assisage ter travel 10 new granted in linited - only for business, educational, official, medical, and scientifie purpose. Regraded Unclassified Division of Denetary 100 - 8 - Issuarch (11) Restrictions on the imports of goods not urgently needed for Canada's var effort have recently been imposed. The impart of certain catagorias of goods from the United States has been entirely probibited and of others restricted, these restrictions and probibitions are in addition to the 10 percent far Tax on imports. (2) Positive amouragement is given to U. D. tearist expenditures in Canada, and to the investment of U. 5. dollars in Dev Consition enterprises. New capital invested in Canada can be withdrawn at a later date is foreign exchange. b. The desire to preserve amicable political and economic rela- tions with the United States. (1) & reciprocal agreement between Canada and the United States me reached on June 18, 1940 providing for reciprocal exemption from vertain aspects of the 02- change control regulations for American residents in Canada and far Canadian residents in the United States. American citizens resident in Canada are exempted from the Foreign Exchange Control Order of September 15, 1939, from the Foreign Exchange Acquisition Order of April 30, 1940, and from any future orders respecting the acquisi- tien and disposition of foreign currency and foreign securities held by such individual Americans. This exemption does not apply to corporations nor to foreign auchange reselved in connection with exports from of imports Late Canada of other than exempted property. (2) In the case of transactions between parent and sub- sidiary companies, a special license only is required and individual transactions are net subject w 5 crutiny, but there is periodic assissation of company books. Meet of the companies involved are American companies with affiliates in Canada and Canadian companies with affiliates in the United States. Benever, the Deard doss net approve applications for foreign exchange which would reduce the "capital employed* in Canadian subsidiaries. (3) while applications for lisenses for foreign exchange to pay interest and dividends to non-resident investors must be made thirty days in advance, M obstruction is placed in the may of payment of interest and dividends to American investors. Furthermore, the Deard sells foreign exchange for payment of services mah as insurance preduces, agents' commissions, malandag, freights, case, patent rights, traveling expenses, ere. A large part of these payments of foreign eashange as service Items goos to the United states. Regraded Unclassified 101 Division of Nonstary - 9 - I (4) Foreign holders of Canadian balances are allowed to - then freely within Cenada itself. (This in sharp contrast with the United States Fereign Fund Control.) The desire to accomodate American interests and to preserve U. s. dollar exchange cannot always be easily resemeiled and the difficulties in the way night even increase with the ortension of Canada's var offort. a. - a. Canada (1) Experts constitute from 15 person's to 20 pareent of the national income. (2) The value of the items on service account in the balance of international payments 10 relatively high. (3) The intimesy of comments relations with the United States both on trade, service, and capital account and the extent of the common land frestiers with the United States make administration and enformement complex. (4) The former triangle or relationships between the United States, Canada, and the United Kingdom has born broker. Canada compequently has to make me provisions both to neet its mounting unfeverable balance of international payments with the United States and to utilise its - lation of starling belonces. (5) Canadian embange central started from I erstek as for as trained personnel and administrative presedent end experience in Canada in related aphere were emerged. ; The and without imposing - strain and as the functioning of the Consdian - (1) the of foreign trade has not been disturbed by the functioning of the enchange control system. The exporter sells me foreign exchange to the Authorized Dealer, who happeno to be the bank with which be had always examinated Me business. (2) Payments of interest and dividents to foreigners - be use - application for 4 license thirty days in (9) Insurance ompunies are allowed to earry a their foreign operations without distructors. life insurance empenies are emported to report their not foreign asshange position e 4 quarterly busis. Regraded Unclassified 102 Division of Monetary - 10 - I (6) intercourse with the United States MI allowed to contitue unhampared except for (1) Nestrictions on certain categories of non-essential importe. (11) Prohibition of Canadian pleasure expenditure in the U.S. (5) Dealange are freely permitted between Canadian companies and their foreign affiliates. (6) The Board is & useful instrument to facilitate the repatria- tion of British-hold Conadian securities. The repatriation of these securities is the seens by which Canada's favorable balance with the U. K. 10 being liquidated. The Board supervised and carried through the orderly repatriation of $200 million of Brittsh-held Canadian securities in the first year of Mar. (7) The imposition and enforcement of enchange control relued no difficult edministrative and personnel problems. The properation for the introduction of the enchange central system were carried through expeditionaly and secretly and the system went into effect without unformable reparenceions ⑉ the Canadian enonomy. Trained and competent personnel. w recruited from the Civil Service, banks and industry, ao that exporienced - vere in leage positions from the very beginning. The use of existing facilities and institutions contributed to the efficiency of the control system. timpli- fisation and standardisation of roatine reduced the adminio- trative complexities and the volume of work. the Deard has been able to edequately cope with the different tacks and problems arising from a variety of the transactions and of the types of corporations and individuals it had to doal with. The administering exchange control in Canada has been negligible and runs at the rate of about $1.1 aillien per I TNX:SA:esh 12/12/40 Regraded Unclassified 103 Italy Regraded Unclassified 101 Regraded Unclassified December 12, 1940 Secretary Morgenthan MP. white Subject: Italian treatment of American property interests. American owners of enterprises and investments in Italy have been treated moderately well in comparison with the treatment accorded them in Cormany. 1. The Italians have serviced by far the greater part of their United States-hold dollar bonds. 2. There has been relatively little difficulty in with- drawing short-term American assets in Italy though Americans have never hold any considerable short-torm funds in that country in recent years for fear of blocking. 3. Regular remittance of dividends free the operations of American branch plants in Italy has not been permitted since 1935. On the other hand the Italian Exchange Centrel has granted a considerable mober of exemptions and special permissions. Total American holdings in Italy are under 8140 million. Short- term American assets in Italy are now only about 3,300,000. American holdings of Italian dollar bonds are new less than 870 million; the lew quotations on these securities indicate that Americans have been accepting leases in order to repatriate their funds. American direct investments in Italy are less than 870 million. Total Italian holdings in this country are about #90 million. These holdings in the United States include about 019 million in short-term funds, about 437 million in security holdings, and about 034 million is direct investments. In recent months the Italians have even outdons the Germans in turning their accere in this country into United States Govern- ment bonds, each and accounts held in the names of Latin American countries. Obvieusly, the Italians desired to son- seal the exact nature of the transactions in which they were engaging and feared that their assets in this country would be subjected to licensing control. 00:rel 12/12/40 105 Remittance Data Regraded Unclassified 106 December 12, 2940 M. N. D. White 6. 4. Saly Subjects Personal Remittences to Generary, Italy and Japan. Little information is new available on 1940 resittances to the Ando yours. The Department of Commiree estimate for 1939 were: Japan $6 millies (84 personal, $2 institutional) Italy 20 million (of which $13.5 was through Itale-U.S. banks, which report once yearly.) Germany 7.5 - 10 million Reparts - only too courses of resittances are available before the end of the year. A table is attached showing Pestal Money Orders to the three countries during the first eleven months of 1940. Nothing specially significant - to be indicated. The American Express resittences of marks and lire are also shown in a table attached. Seen increase in the rate of sending marks in recent months is explained as due to resitiances through New York to Chinese and Japanese students in Borlin, who fernerly obtained their funds through Ansterden. I 12/12/48 Regraded Unclassified 107 Festal Money Orders - 1940 Germany Italy dease January/March $14,272 8253,940 $123,900 April/June 5,885 183,736 106,200 July/September 3,604 90,000 99,700 October - 1,100 105,000 73,600 November 3,000 $27,860 $632,776 $403,000 liste: November Nermally includes a pre-Christmass increase. Treasury Department, Division of Nonetary Research, December 12, 1949. GAE:dla 2/12/40 Regraded Unclassified 108 Postal Money Orders - 1940 Germanz Italy danan Jemary/March 514,272 $253,940 $123,500 April/June 5,885 183,736 106,200 July/September 3,604 90,000 99,700 October $ 1,100 105,000 73,600 November 3,000 $27,860 6432,776 $403,000 Notes November Normally includes e pro-Christmas increase. Treasury Department, Division of Hometary Research, December 12, 1940. GABedla 1/12/40, Regraded Unclassified 109 American Express Company Resittances In thousands of dellare dan./July Aug./Hov. Total Jan./Nev. to Germay Reg'd., sife, and support marks 15 - 15.64 362 332 $ Travel marks 16 - 16.64 R 137 233 Free marks (noney orders) (404) MIL Total to Cornamy....... 494 620 1,014 To Italy Esigrant live (4.054) 622 463 1,285 Internal live (sinee Sept. only) 3.94 0 334 334 Free live 5.074 100 216 Total to Italy 1,002 8 1,835 20 Japan - no data freesury Department, Division of Memotary Research. Dec. 12, 1940 GAE:ion 12/12/40 Regraded Unclassified American Express Company Hamittances of Marks and Lire Reg. Warks oift & Support Mke. Travelmarks Tree Marks Emigrant Tire Internal Lire Pree Lire N.O.only M.O.only 1940 Jan. 293,841. 27,400. 24,463. 1,845,717. - 588,117. Feb. 323,694. 20,272. 17,920. 3,023,399. 575,397. Mar. 414,678. 22,579. 26,001. 4,164,513. ... 826,469. Apr. 337,261. 18,353. 26,242. 2,854,760. --- 492,027. May 354,888. 13,114. 3,280,487. ... 30,427. 595,292. June 367,365. 148,495. 13,722. 2,468,528. 258,206. 18,996. 2,656,858. ... 221,839. July 324,533. 212,402. Aug. 378,386. 253,056. 28,053. 3,493,781. - - 411,716. Sept. 345,057. 213,724. 14,853. 2,892,598. 1,620,743. 96,138. Oct. 506,213. 219,494. 44,592. 2,313,685. 3,135,523. 140,176. Nov. 801,504. 124,298. 39,375. 2,729,059. 3,814,407. 59,890. Total- 4,447,420. 1,284,494. 267,421. 31,723,345. 8,570,673. 4,264,267. c .1560 9 .1660 e .4005 0.0405 @.0390 0.0507 Dollar Equiv. $691,797. $213,226. $107,102. 81,284,795. $334,256. $216,198. Treasury Department, Division of Monetery Research December 12, 1940. graded Unclassified 111 Foreign Funds in the United States 112 Funds in the United States of Jersey, Italy, Japan, Rumania and Hungery (In Millions of Dollars) Total of I Germanya Italys Japane Humaniss Items I Date old - earmark - - - 27.1 - 27.1 12/4/40 ficial funds: n Bew York Fede Ass. Bank oh - - 2 - sb 12/4/40 as other Here York banks .5 .1 - 1 , 66 11/27/40 Private funds V 4.8 w In Bes Zerk Fed. lies. Dist. 6.8 18.2 115.8 24.9 170.5 11/27/40 In other districts .3 6 4.2 ? ? 501 11/13/40 Issu States securities 15. 37. ? ? 2 52. 10/31/40 and other investments 84. the 1 ? ? 118, 12/31/39 Total 107 89.9 120 52.2 4.8 373.9 - Suptember 25, 1940. Deposite only. Treasury Department, Division of Neastary Desearch December 12, 1940. Regraded Unclassified 113 BRITISH air COMMISSION 1785 MASSACHUSETTS AVENUE WASHINGTON. D. c. TELEPHONE HOBART 9000 PLEASE QUOTE December 12, 1940 REFERENCE NO. The Hon. Henry Morgenthau, Jr. Washington D. C. My dear Mr. Morgenthau: I have just received the following cablegram from Lord Beaverbrook: "Please tell Morgenthau I have interviewed today Group Captain Sorley who is in charge of Boscombe Down, the experimental station. He says Curtiss P40 is a straight-forward job. Flies easily. Allison engine has proved to be reliable. It's performance is equivalent to Spitfire which is very fine according to our views. Speed equal to Spitfire in actual exper- ience. Altitude comparison shows good results. "If desired by Morgenthau, immediate facil- ities will be given for United States Observers at Boscombe Down to study Curtiss P40 perform- ance compared with British types." If there is anything further you would like us to do in this connection, please let us know. Yours sincerely, in Morris W. when Wilson v MT Regraded Unclassified 114 December 12, 1940 X My dear Cordell: In view of our conversation, Tuesday at your apartment, I an sending you herewi th in strietest confidence copy of a report by Mr. Buckley, of my office, on his recent in- spection trip of West Coast airplane manu- facturing plants. This report points out the many weaknesses in the present program and the opportunity for increasing production. If this kind of material interests you, I shall be glad to send you additional reports as they 60M9 to my desk. Yours sincerely, Honorable Cordell Hull, Secretary of State. Regraded Unclassified 115 December 12, 1940 My dear Cordell: In view of our conversation, Tuesday at your apartment, I an sending you herewith in strictest confidence copy of a report by Mr. Buckley, of my office, on his recent in- spection trip of West Coast airplane - facturing plants. This report points out the many weaknesses in the present program and the opportunity for increasing production. If this kind of material interests you, I shall be glad to send you additional reports as they come to my desk. Yours sincerely, Henorable Cordell Hull, Secretary of State. Regraded Unclassified 116 December 12, 1940 My dear Cordell: In view of our conversation, Tuesday at your apartment, I an sending you herewi th in strictest confidence copy of a report by Mr. Buckley, of my office, on his recent in- spection trip of West Coast airplane - facturing plants. This report points out the many weaknesses in the present program and the opportunity for increasing production. If this kind of material interests you, I shall be glad to send you additional reports as they come to my desk. Yours sincerely, Honorable Cordell Hull, Secretary of State. Regraded Unclassified 117 THE SECRETARY OF STATE WASHINGTON December 12, 1940 Dear Henry: Thank you very much for your note of December twelfth and the enclosure, which I am very glad to have. I should indeed appre- ciate receiving any supplementary information along the same line. Sincerely yours, Correcthes The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. 113 TREASURY DEPARTMENT Washington FOR RELEASE, MORNING NEWSPAPERS, Press Service Thursday, December 12, 1940. No. 22-83 12/11/40 Secretary of the Treasury Morgenthau announced last night that the subscription books for the current offering of 3/4 percent Treasury notes of Series B-1945, National Defense Series, closed at the close of business Wednesday, December 11. Subscriptions addressed to a Federal Reserve Bank, or Branch, or to the Treasury Department, and placed in the mail before 12 o'clock midnight Wednesday, December 11, will be considered as having been entered before the close of the subscription books. Announcement of the amount of subscriptions and the basis of allotment will probably be made on Saturday, December 14. 00000 Regraded Unclassified 119 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 12, 1940 stortly CORPIDENTIAL TO Secretury Morgenthau FROM Mr. Klaus FBI reports: December 3. The usual report regarding Hans Thomsen states, among other Thomsen's reiteration that Oumansky on instructions from his with superiors things, Thomsen fully advised with regard to every move Oumansky makes United keeps States officials; that Thomsen believes Russia will exercise pressure of OF Bulgaris ut the expense of Greece and Turkey; that Weygend is cooperating Bulgaria for Hitler in exchange for an outlet to the Aegean in favor 100 cent with the Vichy government and is more anti-British than Petain; the Creeks; that landslides and not sabotage were the causes of recent railroad that per Italy will land sufficient troops in two months in Albanie to beat damage in Norway; and that Germany had already extended feelers for peace with the cooperation of continental powers, including Russia. December 5. Memorandum on the activities of Wythe Williams, radio com- mentator of the Mutual Broadcasting System and editor of the Greenwich "Time," charges him with being guilty of deliberate distortion of facts concerning national defense broadcasts over the Mutual Broadcasting System; it appears that Williams has been called before grand juries to compel him to give ovi- dence concerning his broadcasts after refusal to cooperate with FBI December 9. Transmits a copy of a letter from the president of the General Mercury Corporation, Dallas, Texas, who requests Government protection around the Big Bend mercury district of Texas in order to safeguard American mercury mines; he says similar measures were taken in 1914-1918. State Department reports: December 7. American Consulate General at Shanghai says the Italian Com- mercial Attache at Tokyo carried $800,000 in American currency B. few days be- fore from Shanghai to Tokyo; the currency was obtained in Shanghai. Regraded Unclassified JOHN EDGAR HOOVER DIRECTOR 7 Federal Bureau of Investigation United Stutes Department of Justice 120 Washington, D. C. December 12, 1940 any PERSONAL AND CONFIDENTIAL BY SPECIAL MESSENGER The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: As of possible further interest to you, I am transmitting herewith a copy of a memorandum containing information to supplement the data sent with my letter of November 6, 1940 concerning Fritz Mandl, alias Frederick Mandl. Sincerely yours, 2a. Hower Enclosure Recd few 12-16-40 - skrid - 12/16- degisted for dieg 121 Regraded Unclassified December 7, 1940 MEMORANDUM A highly confidential informant has advised Frits Mandl, alias Frederick Mandl is alleged to have said that: 1. He was convinced of 4 Masi vistery and British collapse. 2. He was arrenging his affaire accordingly and was now on excellent terms with the Masis who permitted him to set twelve millions out of Germany. 3. He was using Schicht, formerly the Unilever representative in Germany as his "go-betmoun" with the Ramis and was also in close toush with Matteresse in See Paule. 4. He was in contact in New York with Brown "Chairm or Vise-Chairman of Resington" and with Frank Altechull, who is busily engaged in buying German bends) that both of these nen were of his opinion as to the outcome of the war. 5. He wanted to get & share of the $500,000,000.00 lean to South American countries. (Informant stated it was believed at one time if Mandl was successful in this he would use it for buy- ing up supplies and plantations for Germany, but, it has since been heard that he has recently retired from Washington very disgramtled after a conversation on this point with the Treasury Department). 6. Be was in close touch with Dester Moriali, the Italian Consul in Baltimers who was previously 122 - 2 - press attachs at the Italian Legation at Vienna. The source of the above information reports that Mandl is MW staying at the Waldorf Towers, New York city: that he is either & eitisen of Argentina or Paraguay and has & large industrial plant, Cometa, outside of Buence Aires and is also the amer of large rise plantations and centrols the Mihanovich Shipping Line at Busace Aires. The Princess Starhenberg is at present living M his guest in that city. Regraded Unclassified 123 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE December 12, 1940. Secretary Morgenthau TO FROM Mr. Have NA Subject: Report on conversation with Mr. Cesar Corders Davila, Executive Director, Puerto Rico Housing Authority. In accordance with your instructions, Commander McKay made en appointment for Mr. Davila and Colonel Manuel Font, Commissioner of the Housing, Authority of San Juan, to see me at 3 o'clock this afternoon. Mr. Davila explained that his colleague, Colonel Font, WAS unable to come with him as he had gone to Baltimore this morning. Briefly, Mr. Davila's problem is this. The United States Housing Authority "earmarked" $12 millions for slum clearance in Puerto Rico. Later $2 millions were deducted from the $12 millions, the reason being given by the United States Housing Authority that the funds were needed for defense housing in the United States. Kr. Davila said, however, that since the time of the deduction a direct appropriation has been made for defense housing. He 1a endeavoring, therefore, to have the $2 millions restored to the funds "earmarked" for alum clearance in Puerto Rico. Mr. Davila stated that Admiral Leahy said he had shown you the Puerto Rican slums and that you therefore had firet-hand information with regard to them and were aware of the needs. It is Mr. Davila's hope that you will call Mr. Straus and put in a word in behalf of having the $2 millions restored to the Puerto Rican slum clearance fund. Regraded Unclassified 124 JR GRAY Berlin Dated December 12, 1940 Rec'd 7:15 p.m. Secretary of State, Washington, 5018, DECEMBER 12, & p.m. My 4406, October 22, 2 p.m. FOR TREASURY FROM WOODS IN THE ABSENCE OF H ATH AND FOR DEPARTMENT'S INFORMATION. According to a statement published in WIRTSCHAFT and STATISTIK the Reich's disclosed Indebtedness increased during September by 3,179 million marks to a total of 69,721 million marks as compared with an increase of 3,631 million marks in August. However, whereas in August over three fifths of the increase had been in the form of short term indebtedness 2,336 million marks of the total borrowed in September was on long term and only 843 million marks on short term. The major increases in long term debentures during September were 1,383 million marks in the sixth series of 4% bonds (with 20 year maturity) and 955 million marks li loans of which 623 million marks were 4% loans and 332 million Regraded Unclassified 125 -2- #5018, December 12, 4 p.m., from Berlin. million marks 42% loans (apparently an old issue since to our knowledge new issues carrying 43% interest were discontinued some months ago). Of the total increase in short term borrowing during September 244 million marks was in Treasury bills and certificates 307 million marks in "other loans" (including the loan of the Reichkreditkassen system to the Reich) and 306 million marks in the Reich's operating credit at the Reichsbank offset in part by a reduction of 14 million marks in tax certificates outstanding. MORRIS WWC 10 THE TECHNICY varialvas OFFICE of THE DVD DEC 13 VVV " IS IBEVENSA BECEINED 126 DEPARTMENT OF STATE WASHINGTON In reply refer to EA 840.51 Frozen Credits/985 December 12, 1940 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and encloses copies of a paraphrase of telegram no. 782 of December 4, 1940 from the American Legation at Bucharest, regarding Turkish and Rumanian negotiations for the exchange of cotton for petroleum products. Enclosure: From Bucharest, December 12, 1940. Regraded Unclassified 127 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Legation, Bucharest, Rumania. DATE: December 4, 1940, 4 p.m. NO. : 782. Reference is made to Department's telegram no. 374 of Oct. 29, 8 p.m. Yesterday this Legation was visited by an officer of the National Bank, who showed me a telegram received from the Chase Bank to the effect that the United States Treasury was reconsidering the license in the amount of $1,410,000 for Turkish cotton, which was issued on Oct. 29. He asked if I knew anything about why this license was being reconsidered. I replied that I knew nothing of this matter: whereupon he requested that I make recommendations to the Treasury that the license be issued. I told him that he should make B representation through the Rumanian Legation in the United States. Edson has been notified by the Turkish Commercial Attache here that negotiations between his Government and Rumania involving the exchange of cotton for petroleum products have reached a deadlock. He said that Rumania insists that Turkey import petroleum products in the ratio of 4 units of gasoline to one unit of kerosene, and Turkey (which urgently needs kerosene) insists on 8. ratio of one to one. Evidently Turkey insists that no cotton will be shipped pending the granting of its request. The Regraded Unclassified 128 - 2 - The desire of Rumania to export gasoline is due to the shutting off of markets in the Mediterranean and the oil-buying policy which Germany (which since last June has been the sole buyer of any importance) has pursued in recent months. In spite of the fact that Germany has been buying more Rumanian gasoline than kerosene or diesel oil, her gasoline purchases have been below the ratio of kerosene and diesel oil provided by the Rumanian crude oil. Moreover, Germany does not desire to step up her imports of gasoline enough to equal the refining ratio as she apparently has a greater need for kerosene and diesel oil than for gasoline. This has resulted in a shortage of kerosene and diesel oil, while gasoline storage space has been completely filled up. Therefore, the refineries are confronted with the question as to whether they ought to keep up their refining operations when there is a market for kerosene and diesel oil and storage space for gasoline is already used up. This situation (plus pressure by Germany) has forced Rumania to attempt to make all her Balkan markets take gasoline, in order that the problem of storage may be alleviated. GUNTHER EA:MSG im COPY Regraded Unclassified 129 JT GRAY BERLIN Dated December 12, 1940 Rec'd 3:10 p.m. Secretary of State, Washington. 5009, December 12, noon. By decree of the Reich Minister of Finance goods originating in the Netherlands are to be admitted free of customs duties as from December 16, 1940. In Berlin circles it is anticipated that the Staathalter in the occupied Netherlands territory will issue a parallel decree stipulating duty free entry of German goods. MORRIS CSB Copy:emk of 010 DEC 18 bit V S9 ABEVENSA DESTRIMENT BECEINED Regraded Unclassified COPY 28254 130 PLAIN Stockholm Dated December 12, 1940 Rec'd 10:30 p.m. Secretary of State, Washington. 1099, Twelfth. Government revenue for fiscal year 1941-1942 estimated by Budget Bureau at 2076 million crowns or slightly higher than current fiscal year. Riksbank December 7 million crowns metallic reserve 663 foreign exchange 808 loans discounts 638 circulation 1375 check clearances November Stockholm 3296 Gothenberg 339. Government price guaranty to forest owners for pulpwood fixed at first class sulphite wood between 30 and 36 ore per floating cubic foot, second class sulphite and first class sulphate wood between 24 and 30 ore, second class sulphate wood between 22 and 28 ore. Price guaranty covers 30 million cubic meters. Press reports Boliden Company copper production 12 thousand tons 1940 and further increase to 16 thousand tons expected with exploitation of state-owned deposits. First recurrence foot and mouth disease since July fifth reported from south Sweden. Industrial production index up one point to 106 for October but current falling off in imports of coal causing considerable anxiety. Negotiations looking to renewal of basic wage agreement for industry for 1941 resumed, Regraded Unclassified 131 I -2- 1099, December 12 from Stockholm. it is too early to predict outcome but negotiations are proceeding slowly. After lengthy debates Rikedag finally approved sales tax effective January 1, 1941 on nearly all retail sales of 5 per cent estimated to yield nearly 200 million crowns in one year also approved appropriation 15 million crowns for erection shale oil plant expected to yield 15 thousand metric tons of crude oil per annum. Also appropriation nearly 32 million crowns for laying down two light cruisers and undisclosed number of destroyers and submarines. Bankrupticies November numbered 113. INFORM TREASURY, AGRICULTURE, COMMERCE. STERLING NPL 10 THE 100HWOYF oclictor 145 BIO DEC 11 bill s 12 BECEIVED Copy:jpt Regraded Unclassified 132 0-2/2657-220 RESTRICTED M.I.D., W.D. December 12, 1940. No. 268 SITUATION REPORT 12:00 M. This military situation report 18 issued by the Military Intelligence Division, General Staff. In view of the occasional inclusion of political information and of opinion it is classified as Restricted. I, Western Theater of War. 1. Air Force Operations. During daylight of the 11th, the Germans made scattered raids on southern England. Last night Birmingham was bombed rather heavily and there were light attacks in southwest England and the London area. The R.A.F. last night operated normally against porte in occupied territory and against inland docks and railroad yardo in western Germany. II. Greek Theater of War. Increased Italian resistance has slowed down the Greek ad- vance in the center and north. The Greeks are reported to have pushed ahead on the southern front north of Argirocastro and Porto Edda. Italian air activity appears to have been somewhat more ef- fective. III. Mediterranean and African Theaters of War. The capture of Sidi-Barrani on the afternoon of December 11, 1940 is reported by the British. Cairo dispatches officially estimate 20,000 prisoners (probably mostly native) and huge quantities of war materiel. Two Italian divisions, one native and one Blackshirt, appear to be cut off from Graziani's main army. The British have gained air superiority on this front and are exploiting it. RESTRICTED Regraded Unclassified 133 0-2/2657-220 RESTRICTED M.I.D., W.D. December 12, 1940. No. 269 SITUATION REPORT 12:00 M. This military situation report is issued by the Military Intelligence Division, General Staff. In view of the occasional inclusion of political information and of opinion it is classified as Restricted. I. Western Theater of War. 1. Air Force Operations. The German Air Force during daylight on the 12th operated normally over southern England. Last night bombing activity was high. Sheffield was subjected to a. particularly heavy attack. Smaller raids were made on various other points. The R.A.F. last night cancelled all operations ex- cept a small Coastal Command raid on Brest. II. Greek Theater of War. The capture of Porto Palermo on the coast road about twenty miles north of Porto Edda has been announced officially by the Greeks. It is believed that stiffening Italian resistance and bad weather have slowed up the Greek advance, except along the coast. Air activity apparently limited. III. Mediterrenean and African Theaters of War. In Egypt British forces are now following up the Italian withdrawal toward Sollum. RESTRICTED Regraded Unclassified FEDERAL RESERVE BANK 134 OF NEW YORK December 12, 1940. Mrs. H. S. Klotz, Secretary to Hon. Henry Morgenthau, Jr., Treasury Department, Washington, D. C. Dear Mrs. Klotz: In accordance with the suggestion made by the Secretary late this afternoon, I am enclosing copy of the notes which we made of our interviews with the market here on Tuesday morning with respect to the new issue of Defense Notes. He told me that you would see that it got to him promptly in the morning, and that it would not be subject to general distribution. Sincerely yours, Robert G. Rouse, Vice President. Enc. Regraded Unclassified FEDERAL RESERVE BANK OF NEW YORK 135 FFICE CORRESPONDENCE DATE TUESDAY, DECEMBER 10,1940 PILES SUBJECT Recommendations by banks and dealers which were interviewed by us this morning with respect to the maturity and coupon on cash Pre les house and & A. Miller offering this week of $500 million taxable Defense Notes. c. Levy of Salomon Brothers and Hutzler LIVE Teasury could seli any of the following notes: 1 year - 1/4% 2 " - 3/8% 3 " - 1/2% 4 or 4 1/2 " - 3/4% 5 " - 7/8% believed there WELB no question about a one year note at 1/4% or et five year note ..t. 7/82 being EL success and that & five year 7/8% note might even be sold by the Pensury at 100 1/4 to yield 0.82% which would save the Treasury B. little money. No also thought that a 3/4% coupon on a four and one-half year note would be reasonable. He believed the market basis for a four to four and one-half year note would be 0.60% to 0.65% and for B. five year note 0.70%. He mentioned that Date estimate of the market basis for the five year note was lower than the tax sulvalent murket basis for the 2 1/2% bonds of December 15, 1945, because of an allowance he made for the high premium on the latter issue. Messrs. Wills, Marckwald and Leeds of Discount Corporation: They submitted the following statement of estimates covering a. one year, 2ND year, three year, four year or five year note: 1 Year Taxable Note Due December 1941 Coupon .125% .0833% .05% 1/18 100.4 100.6 100.7 3/8% 100.8 100.9 100.10 Comparable with 0.0.0. 1% - 11-15-41 on .00% basis tax equiv. .32% U.S.H.A. 1 Year 1/ 4's on.04% basis tax equiv. .12% 2 Year Taxable Note Due December 1942 Doubon .275% .225% .175% 3/81 100.6 100.9 100.13 1/2 100.14 100.17 100.21 Comparable with - H.O.L.C. 2 1/4% 7/1/42-44 on .08% basis -tax equiv. .57) R. 1. C. 1% 7/1/42 on .06% basis -tax equiv. -38% 3 Year Taxable Note Due December 1943 cupón -425% .375% ,325% 1/3 100.8 100.13 100.17 100.19 100.24 100.29 Comparable with - 3 1/4% October 15, 1943-45 on 265 besis - tax eouiv, 1.44 1 1/8% December 15, 1943 on .18% basis - tax equiv. .54% Regraded Unclassified FEDERAL RESERVE BANK 135 OF NEW YORK FICE CORRESPONDENCE DATE TUESDAY, DECIMED 10,1940 FILES SUBJECT: 1.9.Rouse and S.A.Miller - 2 - 4 year Taxable Note Due December 1944 / -55% .50% -45% 100.7 100.16 100.23 100.25 101. 101.6 Convirble with 4% December 15, 1944-54 on 14% basis - tex equiv. 2.78% 1% September 15,1944 on .38% basis - tax equiv. 70% 5 year Taxable Note Due December 1945 boron .60% 65% .70% .75% .80% 06 100.24 100.16 100.8 T/M 101.3 100.28 100.20 100.12 Comparisons: 3/15 Che March 15, 1945 at 101.6 - .47% basis - tax equiv. .71% 3/44 il Sept. 15, 1945-47 "110.3 - .60% basis - " " 1.47% 1/2% " Dec. 15,1945 "109.13 - .60% besis - n. " 1.3% 1 1/2% June 1, 1945-47 at 103.5 - .78% basis - If er 1.25% Comments: A defense note would have no right value. Assuming one point premium right velue on outstanding five year notes, you might, therefore, justifiably edd .20% basis to the yield now obtainable on present 5 year tex exempt note. -7.12 additional .20% basis would place 8. 5 year texable defense note on approximately El 70% basis. To arrive at probable yielde for shorter tabable defense notes, 8. straight line from .70% basis for 5 years descensing to zero for December 140 (there being no right value) was drawn, 12765 the yields above were thereby indicated. Prices derived from probable yield on taxable notes, based on current mirket level. Vills believed that there would be some resistance in the market to a telable note and thought E. 3/4% coupon on & five year note would be too thin, secondin to their estimate that such en issue would sell in the market on E basis Details 0.00% and 0.70%. He also thought that a 3/45 note for four and one-half SMITH rould be stretching it. He said the new note issue will be an experimental or = the murket will be watching it closely. While it might be possible that -- I'Lye year issue would be taken, 8. 7/8% five year note would be & greater THE und would pave the way for future issues. He believed that some allowance that Dy crüe for & possible increase in texes next year which would make vulnerable note put out on the basis of present market levels. Owing to the "smoke" Accountrying & long taxable note, his recommendation would be to put out & short marry, Regraded Unclassified FEDERAL RESERVE BANK 137 OF NEW YORK OFFICE CORRESPONDENCE DATE TUESDAY, DECEMBER 10,1940 CONFIDENTIAL FILES SUBJECT A.G. Rouse and S.A.Miller 3 Messrs. Morris and Schlioting of Bankers Trust Company Submitted the following ostimates: 1 Year 2 Year 3 Year 4 Year 4 1/2 isar 5 Year Coupon 1/4% 3/8% 1/2% 3/4% 3/4% 7/8% Estimated 0.58% 0.66% = 101. Worket 0.08 - 0.10 - I +50 .55% 0.60% 0.70% = 100.28 Rasis Mr. Morris stated that his first choice would be B. five year 7/8% note en he Telt 1% would be too generous and 3/4% too close. He thought, however, that * four year 3/4% note might be stretched to four and one-half years. Mr. Schlicting stated that he thought 8 five year 7/8% might be too rich and his first choice would be a four and one-half year 3/43 which should "hit it on the добе". Mr. Morris mid that a one year 1/4% note would be no problem and that the same would be true for a two year 3/8% or & three year 1/2%. He said that he did not believe there would be any resistance in the market to the innovation in the type of securities being issued and there would not be too much selling of the tax-exempt issues because as time goes on more banks will need the tax exemption. Both Mr. Morris and Kr. Schlicting believed the total amount of subscriptions received for the taxable note should compare favorably with the amount of subscriptions received In the past for tax-exempt notes. Messrs. Garner and Richmond of Guaranty Trust Company Mr. Garner stated that short paper is attractive to them; however, the evount of their taxable securities income is increasing and an increase in taxes La probable mext year. He believed that the question of "Right" value was also à factor in pricing a new note as it would make B. difference of about 1/4 of B point in the price of & five year note. Both Mr. Garner and Mr. Richmond believed the Treasury could sell & one year 1/4%, a four year, or possibly a four and one- half year 3/4% or B. five year 7/8%. However, a. four and one-half year 3/4% note looked thin to them although it would not be impossible for it to sell in the market at a yield as low AE 0.58%. They believed it might be wiser for the Treasury to add an extra 1/8% to the coupon in order to insure success until the market can be tested for this kind of an issue. While they believed a four and one-half year 3/4% note might be too thin, they also believed that five year 7/86 note might be B. little rich and Mr. Garner said that it might be desirable to put out a short issue to conform with present legislation which provides for payment of the notes at maturity with taxes. If this were done, Lt, would permit the Treasury to get away from cumbersome financing at an early date provided it could obtain the necessary approval of Congress. In any event, they would put out either a one year or a five year note as there appeared to be little reason for doing anything in between. Although a one year 1/4% note would not enjoy as wide distribution 88 B five year note, it would be taken or the larger banks. They would subscribe for such an issue if for no other reason Regraded Unclassified EDERAL RESERVE BANK 138 OF NEW YORK OFFICE CORRESPONDENCE DATE TUESDAY, DECEDED 10,1940 FILES SUBJECT: 40,Rouse and S.A.Miller to jut some deposits to work and to cover the cost of deposit insurance. They, of course, would also take a four or four and one-half year 3/4% note or a five year 7/8% note. Mr. Green, Vice President of Chase National Bank The Treasury could sell a one year 1/4%, a four and one-half year 3/4% or 8. five year 7/8% note. Based on the current market yield of 0.70% for the HOLC 1 1/2s of 1945-47, 8. five year 3/4% taxable note would look too thin. He also believed a four and one-half year 7/8% note would be safer than E. 3/4% note as there undoubtedly will be a lot of market resistance to EL new taxable issue. He believed, however, that the Treasury should sell B. short note in enticipation of taxes, pending such time as the Treasury could put out a long bond. no said be realized, of course, that B. short issue would wind up in E. few large banks, which would not be as desirable as the wider distribution of & longer note. /nother objection he saw to the one year maturity was that 1941 was pretty well filled up with other maturing issues which might make it more desirable to put out = two year maturity as there are relatively few issues maturing in 1942. Messrs. Burgess and Kane of National City Bank The bond market feels pretty much like the stock market in 1929, or Las other words it is EL "hectic bull market". This should be taken into consideration In new Treasury financing. Furthermore, if there is any question of the authorities Deling with excess reserves in the near future, a five year 3/4% note issue at this time might look very bad later. Therefore, they would recommend B. four me one-half year 3/4% note or a five year 7/8% note, recognizing that either might 2 et little full. While there is something to be said in favor of a one year 1/45 note, such an issue would add more fuel to the fire in the keen demand for longer naturities of short issues at a higher yield. Notwithstanding their recommende tion of t. four and one-half or five year note, they believed it would be no problem for the Treasury to sell a one year 1/4%, 8. two year 3/8%, B. three year 1/2% or N. four year 5/8% note. Their preference, however, would be for 8 note maturing in Wree years or longer. They also commented on the need for the Treasury to give consideration to the earning requirements of investors as the return on investments is getting much too small to provide a. livelihood. Mr. Devine of 0. J. Devine and Company, Inc. A five year 3/4% note would go very well and sell in the market on EL 0.65% basis equivalent to E price of 100 1/2. However, others in his offics think that a five year note should carry a 7/8% coupon. He also said the Treasury could sell a one year 1/4%, a two year 3/8% & three year 1/2% and a four year 5/8%, although his office thinks that the three and four year issues should carry a coupon 1/8% higher. Re believes that, under existing conditions, the question of paying off maturing taxable notes with taxes in one year is merely something to talk about and that, owing to the state of the market, the maturity should be made If Long as possible, in this case five years. Regraded Unclassified LIKM 0.40 FEDERAL RESERVE BANK OF NEW YORK 139 FFICE CORRESPONDENCE DATE TUESDAY, DECEMBER 10,1940 CONFIDENTIAL FILES SUBJECT: Messrs. E.G.Rouse and S.A.Miller ROM. - 5 - The above mentioned views of the banks and dealers were telephoned to Undersecretary of the Treasury Bell shortly after 11:00 a.m. today. Our recommendation was, briefly, that while most of the banks and dealers recommend a 7/8% coupon on a five year note, our estimates indicate that a five year 3/4% note should sell in the market to yield around 0.60%; that we believed such an issue would be well received but that, for reasons stated in the memorandum presented to the Treasury at the meeting on Monday, if the Treasury decides to use the National Defense authorization we would prefer to see it issue a one year 1/4% note, which is the shortest maturity that could be made taxable. SAM:FD Regraded Unclassified 140 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATEDecember 12, 1940 TO Mr. D. 1. Bell FROM W. H. Hadley 3/48 DEFENSE NOTES Subscriptions by 25 Largest Commercial Banks and 5 Largest Savings Banks in the New York District Maximum Allowable Bank (1/2 Cap, & Surplus) Subscription 1. Guaranty Trust $130,000,000 $100,000,000 2. Chase National 100,000,000 100,000,000 3. National City 65,250,000 65,250,000 4, First National 55,000,000 55,000,000 5. Irving Trust 51,467,500 10,000,000 6, Central Hanover 40,500,000 40,500,000 7. Bankers Trust 37,500,000 37,500,000 8, Manufacturers Trust 37,373,000 37,373,000 9. Chemical Bank 35,000,000 35,000,000 10. Bank of Manhattan 20,000,000 20,000,000 11. J. P. Morgan, Inc. 20,000,000 20,000,000 12. New York Trust 18,750,000 18,750,000 13. Savings Bank Trust 16,248,000 16,000,000 14, Corn Exchange 15,000,000 5,000,000 15, United States Trust 14,000,000 5,000,000 Regraded Unclassified 141 Bank Maximum Allowable Subscription 16. City Bank Farmers $ 10,000,000 $ 10,000,000 17. Marine Trust,Buffalo 7,500,000 7,500,000 18. Public National 7,000,000 7,000,000 19. Commercial National 7,000,000 7,000,000 20. Fidelity Union Trust, Newark 6,750,000 6,750,000 21. Brown Bros. Harriman 6,632,000 6,000,000 22. Brooklyn Trust Co. 6,337,500 6,337,500 23. Manufacturers & Traders Trust, Buffalo 6,250,000 6,250,000 24. Marine Midland 5,000,000 5,000,000 25. Lincoln Alliance, Rochester 3,400,000 3,400,000 SAVINGS BANKS: 1. Agency Bank, Montreal 37,500,000 25,000,000 2. Bowery Savings Bank 22,100,000 22,000,000 3. Immigrant Industrial 21,490,000 21,000,000 4. Drydock Savings 12,700,000 10,000,000 5. Union Dime Savings 11,750,000 10,000,000 Note: The above banks are listed in the order of the maximus allowable subscription and not according to relative size of the banks. Regraded Unclassified 142 December 18, 1940 Mr. D. 1. Bell I. 1. Hadley 3/45 was NOTES Subscriptions W 25 Lergest 0 oroial Banks at 5 Largest Savings is the Bee York Matriet Maximum Allowable look (1/2 Can. & Purplus) Aubscription 1. Guaranty Trust $130,000,000 $100,000,000 2. Chase National 100,000,000 100,000,000 3. National City 55,250,000 65,250,000 4. First National 55,000,000 55,000,000 6. Irving Trust 51,467,500 10,000,000 6. Central Hanover 40,500,000 40,500,000 1. Beakers Trust 37,500,000 37,500,000 8. Nanufacturers Trust 37,373,000 37,373,000 9. Chemical Bank $5,000,000 36,000,000 10. Bank of Manhatten 20,000,000 20,000,000 11. J. P. Norgen, Inc. 20,000,000 20,000,000 12. Bew York trest 18,750,000 18,750,000 18. Savings Bank Trust 16,248,000 16,000,000 14. Gora Exchange 15,000,000 5,000,000 15. United States Trust 14,000,000 5,000,000 Regraded Unclassified 143 Maximum Allowable task Debecription 16. City Bank Farmers $ 10,000,000 $ 10,000,000 17. Marine Trust,Buffalo 7,500,000 7,600,000 10. Public National 7,000,000 7,000,000 19. Commercial National 7,000,000 7,000,000 20. Fidelity Union Trust, Newark 6,750,000 6,750,000 2. Brown Bros. Harriman 6,632,000 6,000,000 22. Brooklyn Trust Co. 6,337,500 6,337,500 25. Nanufacturers & Traders Trust, Buffale 6,260,000 6,250,000 24. Marine Midland 5,000,000 5,000,000 25. Lincoln Allience, Rechester 3,400,000 3,400,000 SAVINGS BANKS: 1. Agency Bank, Mentreal 37,500,000 26,000,000 2. Bovery Savings Bank 22,100,000 32,000,000 8. Immigrant Industrial 21,490,000 21,000,000 4. Drydook Sevings 12,700,000 10,000,000 8. Union Dine Savings 11,750,000 10,000,000 Mate: the above banks are listed in the order of the maximum allowable subscription and not according to relative sise of the banks. Regraded Unclassified 144 FEDERAL RESERVE BANK OF CHICAGO December 12, 1940 Hon. D. W. Bell Under Secretary of the Treasury Treasury Department Weshington, D. C. Dear Dan: In line with our telephone conversation I am setting out below the subscriptions entered by the various banks men- tioned to the current offering of Treasury notes: Chicago Continental Illinois National Bank & Trust Company $ 42,500,000 First National Bank 15,000,000 65m City National Bank & Trust Company 3,500,000 Harris Trust & Savings Bank 2,500,000 - 14A M Northern Trust Company 4,500,000 Detroit Detroit Bank $ 3,925,000 Manufacturers National Bank 3,000,000 National Bank of Detroit 12,875,000 Indianapolis Indiana National Bank $ 4,500,000 Milwaukee First Wisconsin National Bank $ 9,000,000 All of the above subscriptions are for the maximum amounts permissible with the exception of the First National Bank of Chicago, whose capital and surplus is $65,000,000, and the Harris Trust & Savings Bank, whose capital and surplus is $14,000,000. Enjoyed hearing from you and hope that this gives you the desired information. Very truly al yours, Sihh Alfred T. Sihler B Assistant Vice President Regraded Unclassified STANDARD FORM No. 14A APPROVED BY THE PRESIDENT FROM The White House 145 MARCH 10. 1926 Mashington TELEGRAM OFFICIAL BUSINESS-GOVERNMENT RATES DEC. 28, 1940 VIA NAVAL COMMUNICATIONS. CLEAR TO: THE PRESIDENT. FROM: HENTOS MORGENTHAU, Jr. I an pleased to inform you that first public offering of fully taxable notes has been a great cussess. (Copy for Mrs. Klotz as requested by Secretary Morganthau.) Regraded Unclassified COPY 2 TREASURY DEPARTMENT 140 INTER-OFFICE COMMUNICATION CONFIDENTIAL DATE December 12, 1940 TO Secretary Morgenthau FROM Mr. Hase all Subject: Employment in the Aviation Manufacturing Industry 1. Employment in the aviation manufacturing industry has multiplied more than four times in the last twenty months and has doubled in the last nine months. In November 1940, manufacturers of airplanes employed approximately 120,700 factory workers, and manufacturers of airplane engines approximately 34,300 factory workers,s total of approx- imately 155,000 for the entire industry. Included in these figures are the employees of manufacturers of parts for airplanes and airplane engines. 2, For the industry as a whole employment rose by approx- imately 7,100 factory workers in November. The largest increase in employment -- approximately 2,150 factory workers -- occurred at the Lockheed Aircraft Corporation. Consolidated Aircraft Corporation added 1,300 factory workers to its rolls during the month, raising its total employment to 12,355. In January of this year Consolidated employed only 2,837 factory workers. 3. The increase in employment during November was not experienced by all plants in the industry, however, there being important decreases at two of the large plants. At the United Aircraft Corporation employment decreased by 800 during the month. At the Boeing Aircraft plant in Seattle there was 8. decrease of 1,040 factory workers. Boeing reported that this decrease in employment Was due to "between contracts and laok of materials". 4. Two charte are attached to this memorandum. The first shows total employment in the industry and the employment of selected companies since January 1937. The attached tables give the figures plotted on the chart. The second chart presents total employment in the industry by geographic areas for December 1938, December 1939, and November 1940. Attachments Regraded Unclassified Employment in Aviation Manufacturing Industry (Airplanes and Airplane Engines) 147 1937-1940 : : : : : 1937 : 1938 : 1939 : 1940 : : : : Airplanes January 22,100 23,700 25,251 58,000 February 60,500 March 24,100 24,200 27,875 64,500 April 67,000 May 73,000 June 25,200 22,800 35,973 80,000 July 90,000 August 97,448 September 23,400 22,050 41,425 105,362 October 115,241 November 120,650 December 23,800 24,450 52,800 Airplane Engines January 5,500 6,500 6,989 13,900 February 15,800 March 6,000 6,600 7,825 17,300 April 18,600 May 20,800 June 6,600 6,900 8,727 22,900 July 25,400 August 27,019 September 6,400 6,772 9,289 28,981 October 32,633 November 34,314 December 6,600 6,847 12,600 Total Industry -- Airplanes and Airplane Engines January 27,600 30,200 32,240 71,900 February 76,300 March 30,100 30,800 35,700 81,800 April 85,600 May 93,800 June 31,800 29,700 44,700 102,900 July 115,400 August 124,467 September 29,800 28,822 50,714 134,343 October 147,874 November 154,964 December 30,400 31,297 65,400 Office of the Secretary of the Treasury, Division of Research and Statistics. 148 Employment of Selected Aircraft Manufacturing Corporations 1937-1940 : : : : : 1937 : 1938 : 1939 : 1940 : : : : Bell Aircraft Corp. January 615 222 654 859 February 865 March 850 290 912 896 April 840 May 873 June 808 440 1,410 1,192 July 1,480 August 1,963 September 718 235 703 2,413 October 3,355 November 3,449 December 213 606 799 Boeing Aircraft Co. - Seattle January 1,834 1,493 2,380 5,137 February 4,942 March 1,726 1,700 2,749 4,759 April 4,198 May 5,190 June 1,249 1,736 2,989 5,882 July 6,571 August 6,926 September 1,109 1,798 3,985 6,940 October 6,391 November 5,351 December 1,380 2,285 4,749 Consolidated Aircraft Corp. January 3,169 2,540 968 2,837 February 3,477 March 3,246 2,518 819 3,807 April 4,349 May 5,040 June 3,099 2,104 832 5,821 July 6,743 August 7,836 September 2,617 989 1,408 9,289 October 11,018 November 12,355 December 2,580 981 2,540 149 Employment of Selected Aircraft Manufacturing Corporations 1937-1940 (continued) : : : : : 1937 : 1938 : 1939 : 1940 : : : : Curtiss-Wright Corp. - Buffalo January 1,241 2,211 3,802 4,380 February 4,744 March 1,500 2,347 2,939 5,016 April 5,213 May 5,698 June 1,933 2,310 2,848 6,314 July 6,531 August 6,597 September 2,202 2,736 1,562 6,824 October 7,682 November 7,889 December 2,007 3,491 3,447 Douglas Aircraft Co., Inc. January 5,591 6,328 4,334 11,952 February 12,077 March 5,961 6,173 4,177 13,119 April 14,033 May 14,656 June 6,653 4,672 5,445 14,957 July 14,662 August 14,898 September 5,532 4,028 6,318 14,219 October 14,158 November 14,787 December 6,771 4,110 10,362 Lockheed Aircraft Corp. January 910 1,577 2,305 5,157 February 4,768 March 1,094 1,594 3,509 4,362 April 4,400 May 5,016 June 1,338 1,797 5,699 5,591 July 6,599 August 7,296 September 1,383 1,997 5,324 7,582 October 8,517 November 10,675 December 1,428 2,123 5,156 150 Employment of Selected Aircraft Manufacturing Corporations 1937-1940 (continued) : : : : : 1937 : 1938 : 1939 : 1940 : : : : Glenn L. Martin Co. January 1,364 1,814 2,905 10,984 February 9,407 March 1,716 1,892 4,092 9,133 April 9,010 May 9,357 June 2,044 2,134 6,029 9,133 July 9,513 August 11,200 September 2,032 2,341 10,070 10,019 October 11,414 November 12,950 December 1,818 2,777 11,174 North American Aviation, Inc. January 829 1,713 2,223 4,049 February 4,324 March 889 1,935 2,457 4,154 April 4,371 May 4,336 June 841 2,400 3,125 4,782 July 4,918 August 4,916 September 1,272 2,685 2,992 5,111 October 5,828 November 6,054 December 566 2,530 3,795 United Aircraft Corp. (excluding Pratt & Whitney) January 2,350 2,245 1,826 2,757 February 3,051 March 2,444 2,16g 1,766 3,468 April 3,735 May 3,912 June 2,497 1,972 1,952 4,282 July 4,823 August 5,016 September 2,439 1,880 2,123 5,445 October 6,010 November 5,251 December 2,338 1,774 2,588 151 Employment of Selected Aircraft Manufacturing Corporations 1937-1940 (continued) : : : : : 1937 : 1938 : 1939 : 1940 : : : : Vultee Aircraft, Ino. January 364 742 February 938 March 440 959 April 1,008 May 1,334 June 560 533 2,127 July 2,618 August 2,857 September 430 288 3,531 October 3,652 November 3,749 December 334 662 Regraded Unclassified 152 Employment of Selected Airplane Engine Corporations 1937-1940 : : : : : 1937 : 1938 : 1939 : 1940 : : : : Allison Engineering Co. January 218 262 454 1,114 February 1,261 March 229 297 466 1,610 April 1,958 May 2,766 June 238 339 558 3,254 July 3,917 August 4,595 September 238 382 642 5,282 October 6,280 November 6,295 December 266 439 901 Continental Motors Corp. (Airplane Engine Division) January 151 153 134 288 February 344 March 153 152 138 358 April 368 May 378 June 162 144 171 388 July 398 August 382 September 135 146 203 567 October 732 November 855 December 152 142 243 Lycoming Division of Aviation Manufacturing Corp. January 849 729 519 581 February 638 March 889 704 521 657 April 711 May 765 June 901 549 573 819 July 873 August 970 September 756 514 644 1,080 October 1,459 November 1,320 December 762 506 689 153 Employment of Selected Airplane Engine Corporations 1937-1940 (continued) : : : : : 1937 : 1938 : 1939 : 1940 : : : : Pratt & Whitney Aircraft January 1,931 2,567 2,264 5,642 February 6,549 March 2,119 2,489 2,659 7,158 April 7,541 May 7,765 June 2,384 2,555 3,066 8,504 July 9,121 August 9,449 September 2,471 2,384 3,394 9,406 October 9,794 November 10,377 December 2,61g 2,227 5,022 Wright Aeronautical Corp. January 2,254 2,607 3,398 5,411 February 6,081 March 2,515 2,705 3,771 6,537 April 6,984 May 7,882 June 2,800 2,930 3,997 8,682 July 9,491 August 10,151 September 2,690 3,184 4,026 10,726 October 11,240 November 11,950 December 2,608 3,374 5,141 Regraded Unclassifie EMPLOYMENT IN THE AVIATION MANUFACTURING INDUSTRY, BY REGIONS / Factory Wage Earners - ⑈ MINN una 5 ** ; S DAE are WYO Nov, - 1030-2000 Pacific 61,500 - with New IRANS COMM : PTAM NEAR - (Lk. MICH IND OHIO DEG - - MO 1 EANS Mount n Central and Southern e Dec 1938- 2,300 : $ * Allia Dec. 1939- 400 Del Nov 1940 000 - N.MES Nov. Dec 1940-71.5000 ST SELA TEXAS TEHR- ARE " BA- CALIF - N LA. PCA Total U.S. DAL IV38 - 21,300 Dec. 1939-65400 Nov. 1940-155000 including Parts Companies 14 all 15th Secretary of the Transary Regraded Unclassified - at 1 - 155 EMPLOYMENT IN AVIATION MANUFACTURING INDUSTRY STRICTLY COMMENTIAL Factory Wage Earners 1937 1938 1989 1940 1941 . N a M a * 9. M a - M J . N 4 M a J E # J $ $ M E , EMPLOYEES EMPLOYEES Thousands Thousands Total Industry (Aircraft and Enginee) 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 o . - , M M J . M , M a J a N J M M 7 # N 4 M M J . N J M M J 1937 1938 1939 1940 1941 Selected Aircraft Manufacturing Companies Selected Airplane Engine Companies EMPLOYEES EMPLOYEES Thousands Thousands The Deuglas Aircraft Ca. Stann L.Martie Ca. Wright Carp. 01 15.0 15.0 H t 12.5 125 11 10,0 10.0 #: 7,5 7.6 " 5.0 0.0 " 2.5 25 " a a 1937 1938 1939 1940 1941 1937 1938 1939 1940 1941 15.0 17.5 D Boxing Amount Ca Prast and Whitney Aircraft 1937 1938 1939 1940 1941 0,5 12.5 16.0 Consolidated Aircraft Corp. 10.0 12.5 : 1.1 7.5 19.0 5.0 9.0 7.5 + 7.5 2.5 5.0 e o z.a HERT res - 1939 1948 1941 1937 1938 1959 1140 1941 12.5 Lockheed Aircraft Corp. Curtim Wright Corp. a I 1 the I 1987 1938 1921 1140 1991 -- 19.0 12.5 Allison Engineering Ca. 1.5 7.5 16.0 se s.e 7.5 LS 2.5 5.8 e a 25 1937 1938 -6.6 1930 1945 1941 1937 1938 1939 1940 1941 10.0 United Aircraft Corp. Nerth Americas Aviation, Inc. a I I I I 1987 1988 1939 1940 1941 7.5 7.5 76 Lycoming Devision of delation Manufacturing Corp 1.0 5.0 : 1.5 2.5 1.5 e B a 1937 1938 1039 1940 1941 1437 1938 1939 1948 1941 1981 1934 1948 1141 5.0 5.0 so - Carp Vultae Aircraft Corp. Certinatial leurs I 5 I 2.5 2.5 25 e D a 1997 1938 1929 1940 1941 1937 1434 1939 1940 I 1987 - 1981 - 1441 Regraded Unclassified December 12, 1940 156 RECENT MOVEMENTS IF AXIS FUNDS RUSTIN TO SOUTH AMERICA. It 16 reported that since September some $4,600,000 of Germen funds have been transferred to South American banks, and that approxi- mtely $2,300,000 has returned from Argentina and Peru to the account of the Reichsbank In New York. During the same period there was transferred from Italian accounts in the United States approximately $13,000,000 to South America, of which $10,000,000 went to the Italian Embassy in Brazil from the Italian Foreign Exchange Costrol Funds in New York and in addition, $4,500,000 was sent in cash by courier. la 4. result of recent return transfers of less than $1,000,000 the net amount of Itelian funds transferred to Latin America since September amounts to more than $16,000,000. Recent information indicates that the Bank of Brazil expects to re- caste $10,000,000 for credit to a Japanese account as part of the Japanese program designed to centralize dollar exchange operations of the Yokohama Specio Bank with the Bank of Brasil. GERRAN FUNDS. The flow of German funds in this country appears principally to have been to the accounts of Swedish banks here, $1,500,000 being transferred to such ac- counts from German accounts since November 25. About $1,350,000 is known to have been transferred to Swiss accounts here, while $750,000 has returned from Swiss to Servez accounts. Cash withdrawals from German consular accounts since December 1 have ascunted to $850,000. Of this amount $650,000 was withdrawn by the Consul (enoral is liev York, who paid $530,000 to cover interest payments on German bonds. The remining $120,000 is apparently still in the consulate. The German Embassy is Tashington recently received $200,000 by draft from the Reichsbank, Berlin, and ortained this amount in notes of $20 to $1,000 denominations. There is some indi- caties that cash deposits are being made by the Reichsbank by way of South America, National City Bank having recently received $180,000 by this method. ITALIAN FUNDS. Transfers of Italian funds, excluding those to South America, have been principally to Spanish, Swedish, and American accounts and transfers from to Italian accounts have been noted. It has also been recently reported that the Italian Attache at Tokyo has carried $800,000 in American currency from Shanghai to Japan. Further reports indicate that substantial Italian Government funds have been converted into cash which is being kept on diplomatic premises. PUNDS. Japanese Institute, Inc., a Japanese oultural organization, is cons to have been receiving its principal income from the Japanese Consul General to lien look, The various Japanese consular officers throughout the World are ap- parently being supplied with funds from the Japanese consular accounts with the Bank of Imerica. PORTUGUESE GOLD. Since October 2, 1940, $33,000,000 in gold has arrived here from Partugal and been sarrarked at the Federal Reserve Bank of New York for account of the Bank of Portugal. It is not clear that this WELS actually the Bank of Portugal's XII gold, since on October 2 the amount of gold under earmark in New York for that benk's account amounted to $70,000,000, about equal to the Bank of Portugal's gold Date and bullion reserves as shown in its bank statement. A detailed statement with regard to gold imports from Portugal in comparison with the gold reserves of Portugal is outsined in the menorandum of December 9, 5 copy of which is attached. Regraded Unclassified 157 December 9, 1940 Mr. Cochran Mr. Hawkey Subject: Gold shipped here by and for account of the Bank of Portugal. More than $70 million in gold has arrived here from Portugal since the beginning of July, 1940, shipped by and for account of the Bank of Portugal. Since all of the gold was earmarked upon arrival in New York, that Bank's gold balance here rose from $30.1 million as of July 3 to $109.8 million at the close of December 5. (About $6.0 million of this increase resulted from the purchase of gold from the U. 8. Stabilization Fund.) On October 10, I wrote you B. memorandum in which comparison was made between the Bank's gold in New York and the asset item "Encaisse-or" (gold coin and bullion) on the Bank's own weekly statement. At that time, the most recent statement available was dated August 21, and it could not be asserted definitely that the Bank's gold in New York was of B. greater value than its "Encaisse-or". ( Tie have now received the Bank's statement as of October 2, listing an "Encaisse- or" of $69.1 million. On the same date, its gold balance in New York amounted to $70.5 million and since October 2, the Bank of Portugal has shipped another $33.3 million in gold to New York. (All of this has arrived; there 10 no gold in transit at present.) We have no "Encaisse-or" figure available for dates subsequent to October 2, but since this item has moved upward less than $2.0 million in the past six years, it is very likely that little or no change has taken place since early October. The foregoing information is tabulated below (in millions of dollars): Period- Imports Gold bal- "Encaisse- 1940 for account of ance here or" 3/ Bk. of Port. 1/ (At end of each period) $30.1 (July 3) $68.8 (July 3) July 4 - 31 r 7.1 37.8 68.9 Aug. 1 - Sept. 4 16.7 55.3 68.9 Sept. 5 - Oct. 2 15.2 70.5 69.1 Oct. 3 - 31 21.1 97.6 2/ (69.1) Carried Nov. 1- - Dec. 5 12.2 109.8 (69.1) Forward All from Portugal, except $1.4 million from England in July. Regraded Unclassified - 2 - 158 During October, the Bank of Portugal also purchased $6.0 million in gold from the U. S. Fund. According to 1931 law, the Bank values its gold at .066567 fine grams per escudo; conversion of escudo value into dollars hence made at the rate of $.0748 per escudo. The apparent conclusion is that the Bank of Portugal has sent to the United States at least $33.3 million of gold not shown in its "Encaisse-or". Since only $14.6 million of Bank of Portugal gold arrived here during the first half of 1940 (of which $2.1 million came from Portugal and about $12.5 million from England), it may be further concluded that most of the "extra" gold was shipped in the past five months. This "extra" gold may be any of the following: i) The Bank of Portugal's own gold. In addition to the gold listed under "Encalsse-or", there 1s reason to believe that the Bank carries some gold in its asset item "Disponibilites or a l'etranger et autres reserves" (liquid gold exchange assets abroad and other reserves). Here is some evidence; in the week ended March 20, 1940, the Bank purchased alightly less than $5.0 million in gold from the U. S. Fund in order to strengthen its gold reserves. In that week, its "Encaisse-or" changed not oven a fraction of one escudo. "Disponibilites, etc.", however, rose $4.9 million (using the rate of $.0748).* About e. year ago, the largest amount of gold that could have been included under "Disponibilites, etc". was $22.0 million. In the Bank's statement for December 30, 1949, this item was valued at 536.3 million escudos. Examination of the Bank's annual report for 1939 reveals that 242.2 million escudos of the above represented the Bank's holdings of the Government of Portugal's 3% sterling obligations. Therefore, the maximum amount of gold that could have been included under this item was 294.1 million escudos worth, or $22.0 million. (The Bank's holdings of dollars were negligible at that time.) 2) Gold held by the Portuguese Treasury. The Federal Reserve Bulletin, in its table "Gold Reserves of Central Banks and Governments", uses only the Bank's "Encaisse-or" figure, converted at $.0748. But the Portuguese Bank's annual report for 1939 shows a table of the Treasury's liquid asseta at the end of November, 1939, wherein appeared 430.2 million escudos worth of gold in bars, equivalent to $32.2 million. For all we know, the Bank of Portugal may have exchanged its holdings of Portuguese Government sterling bonds for Treasury gold, shipping the latter to New York. * The dollar funds used in this purchase were remitted to the Federal by various banks in New York. Indication that the Bank of Portugal acquired such dollars during that same week is given in the Bank's statement, wherein Portuguese bank deposits at the Bank of Portugal rose 100 million escudos, or slightly more than $4. million. Regraded Unclassified 159 -3- 3) Gold of some foreign bank or government, in the shipment and earmarking of which the Bank of Portugal acted really 8.8 intermediary. Unless we receive further evidence that a third party's interest was involved, it would seem inadvisable to question the Bank of Portugal for what appear to be shipments of "extra" gold. The information presented under the preceding two points suggests that Portugal does own gold beyond that shown in the "Encaisse-or" asset item of the Portuguese Bank statement. Regarding the markings on gold bars already shipped here, from Portugal, I think you will agree that these cannot be offered as proof of owner- ship, since many Continental assay marks constitute good delivery in Europe's gold markets. Regraded Unclassified 160 MEMORANDUM December 12, 1940. TO: The Secretary FROM: Mr. Sullivan I attach hereto summaries of various newspaper articles on taxation. T-S Γ Regraded Unclassified 161 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 9, 1940 TO yr. Sullivan FROM Mr. Blough The following items of interest relating to taxes appeared in the newspapers of December 9, 1940: 1. New York Times, page 1, column 3 An article entitled "Labor laws, taxes, handicap program, Navy report says" reports that Rear Admiral Ray Spear, Chief of the Bureau of Supplies and Accounts, in his annual report for the year ended June 30. 1940, cites certain Federal laws as hampering naval expansion efforts. Contractors are mentioned as being loath to undertake expension of plant facilities "due to the restrictions on the employment of surplus and plant expansion in the form of & limitation on the profit and the excess profit taxes. It is reported that ninety-nine contracts having a money value of $33,577.165 showed excess profite amounting to $3,704,220 while contracts of $20,344,135 showed losses. Accordingly, it is indicated that profit limiting provisions such as those under the Vinson-Trammel Act are not needed. It is noted that the Act of June 28, 1940, amending the Vinson-Tramel Act did much to expedite the defense program but came too late to affect fiscal year 1940 procurement. 2. New York Herald Tribune, page 21, column 1 An article entitled "Treasury due to press tax exempt fight" reports that Mr. Foley's speech last Friday is the beginning of another administration move to end tax-exempt securities. The author says that a constitutional amendment 1s the "best and possibly only means of effecting this reform." 3. The Wall Street Journal, page 2, column 1 According to the article entitled "Defense notes expected to be announced today." the new defense notes soon to be issued may be subject to Federal income taxes. RB Regraded Unclassified TREASURY DEPARTMENT 162 INTER-OFFICE COMMUNICATION DATE December 9, 1940 TO Mr. Sullivan FROM Mr. Blough The following items of interest relating to taxes appeared in the newspapers of December 5-7, 1940: December 5, 1940 1. Journal of Commerce, December 5, 1940, page 3, column 4 An article entitled "Eccles urges need of Congress action on British credite" reports a speech by Mr. Eccles before the National Industrial Conference Board. Mr. Eccles recommended that steps should be taken to close the gap between income and outgo, but that taxes should not be raised to a point that would close the gap entirely before reaching the condition of full production and employment. Other recommendations, including restoration of the principle of undistributed profits taxation, were also made. 2. Journal of Commerce, December 5, 1940, page 7. column 7 An article entitled "State barrier taxes, U. S. tariffs scored" reports Professor Medlar of Clark University, Worcester, Massachusetts, as condemning taxes which act as trade barriers including national protective tariffs because they increase the consumers' bill for the benefit of special interest groups. Chain store taxes were also condemned as harmful to free enterprise. 3. New York Herald Tribune, December 5, 1940, page 41, column 6 An article entitled "Rigid economy drive is urged on taxpayers" reports an address by A. Vedder McGee of the Taxpayers' Federation, Inc., to the effect that New York State taxpayers should insist upon rigid economy in state and local budgets. Otherwise, state and local taxes combined with increased taxation needs for national defense may lead to confiscatory taxation. December 6, 1940 1, New York Times, December 6, 1940, page 14, column 1 An article entitled "35 billion outlay seen for defense" reports an estimate prepared by the Department of Agriculture to the effect Regraded Unclassified - 2 - 163 that the national defense program as now rojected will involve an expenditure of about 35 billion dollars in the next five years. The article is based on a report entitled "The impact of war and the defense program on agriculture" which indicates that if all the expenditures were to be cared for by increased taxation and decreased spending for other purposes, the effects on our domestic economy would be relatively small. 2. New York Times, December 6, 1940, page 14, column 2 An article entitled "Flexible tax plan urged by Anderson" reports the study made public by the T.N.E.C., "Taxation, Recovery and Defense" by Dr. Dewey Anderson. The report advocates, among other things, a value added tax and a flexible tax system easily adaptable to meet changing conditions. 3. New York Times, December 6, 1940, page 25, column 7 It is reported by the American Automobile Association that gasoline taxes will yield $1,160,000,000 this year or $130,000,000 more than in 1939. Of this increase, approximately $55,000,000, or 42 percent, is accounted for by the increase in the Federal gasoline tax rate which became effective last July 1. 4. New York Times, December 6, 1940, page 37, column 1 It is reported that the Fortnightly Review of Fuller, Rodney and Company states that defense spending and accompanying deficits will make e. new tax law inevitable. 5. Journal of Commerce, December 6, 1940, page 13, column 3 An article entitled "Repeal of state margarine taxes urged by Janssen" reports the recommendation of the President of the National Association of Margarine Manufacturers with respect to the tax on cleomargarine. 6. Wall Street Journal, December 6, 1940, page 3, column 2 An article entitled "Marked uptrend in recent years cause heavy excess profits levy" reports the profit position of the chemical industry. The article indicates that chemicals have had a marked upward trend in earnings in recent years, which has been accelerated by the present peak volume of operations. This will, it is reported, result in most instances in heavy excess profits tar liability. Regraded Unclassified 164 - 3 - 7. New York Herald Tribune, December 6, 1940, page 21, column 7 An article entitled "Super-tax is proposed on large land holdings" reports the recommendation by the National Catholic Welfare Council to the House Migration Committee for super-tax on large land holdings as a step in solving the problem of destitute migratory workers. December 7, 1940 1. New York Times, December 7, 1940, page 3, column 5 An article entitled "Canada passes bills to reduce luxuries" reports that Canada has passed a 25 percent excise tax on large categories of Canadian lurury manifactures and suspends imports from the United States of virtually all similar articles until after the war as a measure of exchange economy. 2. New York Times, December 7, 1940, page 32, column 5 An article entitled "Tax exempts' end linked to defense" reports an address by Mr. Foley, General Counsel of the Treasury, that the further Issuance of tax-exempt securities interferes with the effectiveness of the defense program. He urged municipalities to cooperate in ending the issuance of tax-exempt securities so that their securities would not have preference over Federal issues. 3. New York Herald Tribune, December 7, 1940, page 1, column 3 An article entitled "Tax framers turn to levy on small incomes" reports that as a result of the President's decision against resorting to a mamifacturers' sales tax, the possibilities of increased income taxes on the lower and middle income brackets are receiving the attention of congressional and governmental experts. 4. Wall Street Journal, December 7, 1940, page 2, column 2 An article entitled "Anderson urges broad revision of tax structure" reports that Professor Benjamin M. Anderson of the University of California and former Chase National Bank economist, has recommended tax revision in the form of broadening the income tax base by a lowering of exemptions. As a spur to private capital flow, he also recommends that the rates of tax in higher brackets be reduced. RB Regraded Unclassified 165 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE December 9, 1940 Mr. Sullivan TO Mr. Blough FROM The following items of interest relating to corporation taxes and their effect on corporation profits appeared in the newspapers of the week beginning December 2, 1940 1/1 1. New York Herald Tribune, December 2, 1940, page 1, column 3. An article entitled "Increase to 30 percent in Corporation Taxes Fore- cast" revorts Senator George as stating that the corporation income tax rate might be boosted as high as 30 percent before the national defense program is paid for. He indicated that increase in the corporation tax to that rate night possibly harm business to some extent, but added that there appears to be no alternative. 2. Fall Street Journal, December 3, 1940, page 3. column 2. An article entitled "Invested Capital Base to be Used by Most Companies for 1940 Year" reports that the majority of concerns in the paper industry will elect to use the invested capital base for the 1940 excess profits tax. It 1a reported that, because the paper industry as a whole, earned much less than 8 nercent on invested capital over the past four years, most companies in the industry probably will elect to make their 1940 tax returns on the invested cavital base. The outbreak of the European War in September produced a record-breaking demand for both paper and pulp. In 1939, 11 companies had earnings equal to only 5. percent of invested capital. Earnings for this year will probably range from 5 percent upward to as much as 27 percent. A majority of the comunies in the paper industry are expected to have to pay out part of their 1940 earnings in excess profits taxes. 3. Wall Street Journal, December 4, 1940, page 3, column 1. An article entitled "More Firms Study Capital Revisions as Tax Benefits" discusses the tax saving possibilities of retiring existing preferred stock issues and replacing that amount of capital with bonds or debenture issues. Such a change would result in reducing the income tax but might increase the excess profits tax. General Motors, for example, has outstanding 1,8 million shares of preferred stock callable at $120 per share. If this issue were replaced by bonds, it is estimated that, with no saving of interest, the total tax liability of the corporation would be reduced by $2.2 million. 1/ This supplements my memorandum of December 5. 1940, commenting on similar Items in the New York Times of December 1, 1940. Regraded Unclassified 166 - 2 - 4. The New York Times, December 8, 1940, Section 3, page 1, column 3. An article entitled "Makers of Machinery Show Rise of 72 Percent in Profits in Year" discusses the earnings of 73 concerns of machinery parts and equipment for factory construction, mining, road building and automo- tive and aircraft production during the first nine months of 1940 as com- pared with the similar period in 1939. It is stated that the increase of 72.1 percent would have been even greater were it not for the heavier tax schedules under the second Revenue Act of 1940. The generally declining trend of profits in the third quarter of 1940 is attributed to the effect of taking from that quarter's earnings all the taxes applicable to the first nine months of the year including, in many instances, provisions for excess profits taxes. RB Regraded Unclassified 167 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE December 7. 1940 TO Mr. Schwars FROM Mr. 31ough RB The National Industrial Conference Board's study on corporation profits and taxes published in its Economic Record of November 23, 1940, together with the press release and an Associated Press item relating thereto, have been reviewed. The study is misleading in many respects. The main points which should be noted are the following: 1. Exaggerated increases in Federal income tax for 1940 as compared to increases in net in- come are shown. 2. Tax recerve data are used instead of tax collection or tax limbility data. 3. Combined date for net income and deficit corporations are used instead of separate data. 4. Portions of the analysis relate to certain selected corporations without any indication as to the criteria used in the selection. 5. No distinction is made between direct and in- direct or shiftable and nonshiftable taxes in analyzing the tax burden. 6. Federal income taxes are not clearly dis- tinguished from state and local taxes. 1. Increased Federal income 1940 over 1939 in relation to increased income The study reports that for the 116 companies analyzed, net income for the first nine months of 1940 increased 48 percent as against a. tax increase of 131 percent. This increase exceeds the maximum increase possible for the Federal income tax of any one of the 116 companies. If a corporation's net income in 1940 increased 48 percent over 1939, the maximum possible increase in Federal income tex would have amounted to 97 percent, not 131 percent. The exaggerated tax Regraded Unclassified 168 - 2 - increases reported by the National Industrial Conference Board are obviously not correct for any one company. Their results are pro- bably due to the erroneous and misleading use of data discussed below. The sttached tables indicate the maximum possible percentage increase in tax for certain increases in 1940 net income over 1939. 2. Use of tax reserve data The amounts of income taxes reported for 1940 in the study are corporate tax reserves, that is, estimates by the corporation of what the tex liability for 1940 will be. Since these figures are estimates, they may, of course, contain a large margin of error. 3. Grouping of net income and deficit corporations It is reported that increased corporate income taxes (exclusive of excess profits taxes) absorb 37 cents out of every dollar gained in earnings during the first nine months of 1940. Other statements are also made showing 8. disproportionate rise in income taxes over BB against income. Assuming an accurate estimate of tax liability, the relations indicated are meaningless because profitable and deficit corporations are grouped. Grouping of this type may yield fantastic results. For example: In an industrial group in 1939 the profitable corporations, let us say, showed net income of $1,000,000 on which was paid an income tax of $200,000. The deficit corporations reported deficits of $500,000. On the basis of the Conference Board. type of analysis. this industrial group would show for the year a net income of $500,000 and income taxes amounting to $200,000. In 1940, let us say, the profit- able corporations become twice 28 profitable and with no increase in rates pay twice as much tax, that 1s, $400,000. The deficit corpore- tions, let us say, report a deficit of $1,450,000. The picture, according to the Record for this group in 1940, would show a net income of $550,000. and income taxes amounting to $400,000. That is, It would be argued that while profits for the industrial group increased only $50,000 or 10 percent, texes increased from $200,000 to $400,000 or 100 percent; that, in 1940, taxes took almost 75 per- cent of the net income of the industrial group and that the tax increase absorbed four times the increase in profits. Further comment is not necessary on this type of fallacious reasoning. 4. Selection of corporations It is stated that in a tabulation of 20 companies Federal govern- went taxes would take 72 cents out of every dollar of increased income. No indication is given, however, of how profitable these 20 corporations Regraded Unclassified 169 - 3 - are. If, for example, by selection, corporations which had been earning 40 or 50 percent on their invested capital were chosen, no serious inequity would result even if the fact stated were true. 5. Inclusion in tax burden of shiftable taxes recaptured through price adjustments Considerable importance is attached to the finding that in some instances "Stockholders ...... have a smaller amount available for dividends than that allowed for Federal taxes." The implication there is that taxes amount to more than 50 percent of net earnings of the corporation. Obviously these data, if they relate, as they properly should, to net income corporations only, contain taxes other than income taxes. The bulk of Federal taxes paid by corpora- tions are not borne by them since they may be included as a cost item and recaptured through price ijustments by the corporation. These taxes should be considered in the same manner as any other cost and have no more effect on amounts available for dividends than do other costs. Since these taxes may be recaptured in price, they give no indication to what extent taxes have detracted from amounts which would otherwise be available for dividend payments. 6. Identification of Federal with Federal, state and local income taxes The statistics themselves do not indicate whether the reserves are on behalf of Federal income taxes exclusively or also contain amounts for state income taxes, franchise taxes based on income, etc. The implication is, however, that the percentage increases are in no small part attributable to the increased Federal income tax rate, since no mention is made of taxes other than the Federal income and excess profits taxes. 170 Table 1 Federal corporation income taxes, Revenue Acts of 1939 and 1940 1/ and amount of net income remaining after income tax, for selected amounts of net income Net income : Income tax : Income re- : Income tax : Income re- before : Revenue Act :maining after: Revenue Act :maining after income taxes : of 1939 1/ : income tax : of 1940 1/ : income tax $1.00 $ .18 $ .82 $ .24 $ .76 1.25 .225 1.025 .30 .95 1.14 1.50 .27 1.23 .36 1.75 .315 1.435 .42 1.33 2.00 .36 1.64 .48 1.52 .90 .162 .738 .216 .684 -75 .135 .615 .18 -57 .50 .09 .41 .12 .38 1/ Computed at the rate of 18 percent for 1939 and 24 percent for 1940. Does not include excess profits tax. 171 Table 2 Comparison of percent increase and net income 1940 over 1939 with percent increase in Federal income tax 1/ and percent increase of net income after Federal income tax Increase in net : Increase in : Increase in net income before : Federal : income after Federal income taxes: income taxes : Federal income taxes 100% 166.7% 85.4% 75 133.3 62.2 50 100.0 39.0 25 66.7 15.9 0 33.3 (Decrease) 7.3 (Decrease) 10 20.0 (Decrease) 16.6 (Decrease) 25 0 (Decrease) 30.5 (Decrease) 50 (Decrease) 33.3 (Decrease) 53.7 Computed at the rate of 18 percent for 1939 and 24 percent for 1940. Does not include excess profits tax. Regraded Unclassified 172 December 12, 1941 My dear Mr. Stimson: I an forwarding herewith, a memorandum (see 12/9) from Philip Young to me, in regard to rifles for Canada. This seems very important to me, and I would like to have your advice and help. May I hear from you at an early date? Very sincerely, (Signed) H. Morganthau, Jr. Honorable Henry L. Stimson, Secretary of War Ence: Memo and attachment. By Memenger 11°7 Regraded Unclassified 173 December 12, 1941 My dear Mr. Stimson: I an forwarding herewith, a memorandum from Philip Young to me, in regard to rifles and would like to have your advice and help. for I Canada. This seens very important to me, May I hear from you at an early date? Very sincerely, (Signed) H. Morganthau, Jr. Secretary of War Honorable Henry L. Stimson, By Measenger Regraded Unclassified 174 December 12, 1941 My dear Mr. Stimson: I am forwarding herewith, a memorandum from Philip Young to me, in regard to rifles for Canada. This seens very important to me, and I would like to have your advice and help. May I hear from you at an early date? Very sincerely, (Stgned) H. Morgesthau, Jr. Honorable Henry L. Stimson, Secretary of War By Messengué Regraded Unclassified December 12th, 1940. 175 SICRET, CANADA'S FOPEIGN EXCHANGE POSITION I. Forecast of future payments to be made by Canada which require gold or U. S. dollars. 4. For vurchases from the United States by the Canadian Govern- ment or any of its agencies. For the second year of war (September 1, 1940-August 31, 1941), Canadian purchases for wer purposes in the United States are estimated at $325,000,000. (Can.) and for the nine conths' period from December 1, 1940, to August 31, 1941, they are estimated st approximately $275,000,000. (Can.). These figures include estimates of purchases made or to be made by government agencies and contractors who have war con- tracts from the Canadian Government or war contracts placed in Canada for account of the British Government. The industrial relations of Canada and the United States are 60 close that there is some United States content in nearly all Canedian manufactured products and consequently it is exceedingly difficult to made any precise estimate of aggregate Canadian war purchases in the United States, including those used in- directly as well as directly for wer purposes. It is believed, however, that the figures given above are underestimates rather then overestimates. 1. War purchases classified by major commodity items and by periods. An examination of commitments (1) made or to be made by Canadian Government agencies or by contractors to such agencies Regraded Unclassified -2- 176 has resulted in the segregation of most of the estimated expenditures by major items, as follows: Dec. 1/40 to Sept. 1/41 to Mar.1/42 to Aug. 31/41 Feb.28/42 Aug.31/42 (In millions of Canadian dollars) Iron & Steel (pri- mary castings & forgings, scrap & ore) $65.9 $45.2 $45.2 Machine Tools 29.3 7.2(2) nil Other capital advances 5.9 14.8 17.6 Aircraft (includ- ing engines and other parts) 55.0 23.5(3) 16.5(3) Petroleum & products, direct & indirect 22.2 14.9 14.9 Non-ferrous raw materials, mechan- ical transport components & mis- cellaneous 58.2 59.4 70.8 Total, segregated $236.5 $165.0 $165.0 Of which for Canadian Govt. orders $176.0 $123.7 $123.7 for British Govt. orders 60.5 41.3 41.3 Estimate of in- direct purchases, unnegregated 38.5 ? ? Grand Total $275.0 $165.04 $165.01 N.B. (1) While this breakdown has been based on commitments, it is believed to give a reasonably accurate estimate of the payments or expenditures required during the periods covered. (2) If skilled labour can be made available, this amount may increase in each case to, say $25,000,000. Regraded Unclassified -3- 177 (3) This amount may be lower than required if the war continues for a longer period and present plans have to be extended. 2. Projected monthly payments through August, 1941. The following breakdown by months, while necessarily somewhat arbitrary, represents the best estimate that can be made at this time: 1940 - September $ 15,000,000. October 17,000,000. November 18,000,000. December 19,000,000. 1941 - January 21,000,000. February 25,000,000. March 29,000,000. April 31,000,000. May 36,000,000. June 40,000,000. July 38,000,000. August 36,000,000. Total $325,000,000.(can.) 3. Segregation as between unpaid balance on orders already placed and orders being negotiated. This information is not available, and in view of the nature of many of the purchases, particularly the indirect purchases by contractors, it would be exceedingly difficult to obtain figures that were at all reliable. 4. Estimate of payments required on Capital Account. The estimate of commitments or payments on Capital Account Regraded Unclassified -4- 178 is included under the second and third items of the table in Section 1 above; that is to say, it is covered by the amounts shown for purchases of "machine tools" and for "other capital advances". It is possible that some small portion of the amounts shown for iron and steel purchases should also be regarded as capital. B. For merchandise imports from the United States other than those included in the above government orders, through August, 1941. For the second year of war, these are estimated at $550,000,000. (Can.). The breakdown by months necessarily somewhat arbitrary in character, is as follows: 1940 - September $ 48,000,000. October 57,000,000. November 57,000,000. December 44,000,000. 1941 - January 39,000,000. February 37,000,000. March 45,000,000. April 43,000,000. May 48,000,000. June 46,000,000. July 42,000,000. August 44,000,000. Total $550,000,000. (Can.) C. For invisible imports from the United States. For the second year of war, invisible imports from the United States are estimated as follows: -5- 179 Interest $ 95,000,000. Dividends 160,000,000. (1) Tourist and travel expenditures in United States 25,000,000 Freight and miscellaneous (Net) 55,000,000. $335,000,000. (Can.) (1) The estimato of dividends payable includes those of wholly-owned subsidiary companies, and 1s there- fore higher than estimates previously published by the Dominion Bureau of Statistics. (2) This compares with a figure of $55,000,000. for the celendar year 1940. It should also be noted that during the second year of war Canadian obligations, payable either solely or optionally in U. S. dollars, mature in the amount of $70,000,000. In- cluded in this total is & $20,000,000. Dominion of Canada 1-1/4% note issue due May 1, 1941, which it is believed is held largely or wholly by banks. Based on the experience of the recent past, slightly over 70 per cent. of the amount of such issues are held by residents of the United States. If this percentage continues to be applicable, and if no refunding is possible, fifty to fifty-five million dollars would be re- quired to meet these maturities. These maturities (Approximate net amounts) may be allocated by months as follows: 1940 - September $ 1,000,000. October 1,000,000. November 3,000,000. December 2,000,000. 1941 - January 2,000,000. February 1,000,000. -6- March $ 1,000,000. 180 April 1,000,000. May 23,000,000. Juno 3,000,000. July 15,000,000. August 2,000,000. Total $55,000,000. D. For imports (visible and invisible) from other areas with which Canada has an adverse balance which must be settled in gold or U. S. dollars. Estimate of Imports for second year of war. Merchandise imports $45,000,000. Immigrant remittances and other invisible debit items 10,000,000. $55,000,000. (Can.) Regraded Unclassified -7- 181 II. Forecast of Canadian dollar (U.S.) receipts during the second year of war. A. For merchandise exports to the United States Estimate of merchandise exports other than gold. $450,000,000. (This includes silver at $9,000,000.) Estimate of export of non- monetary gold. 212,000,000. Total $662,000,000. (Can.) B. For invisible items with the United States Estimate of invisible credit items in transactions with the United States. Intorest & dividends receivable $30,000,000. Tourist receipts 150,000,000. (1) Total $180,000,000. (Can.) (1) This includes an estimate of $25,000,000. for tourist expenditures from Canadian dollar accounts. It may also be noted that it assumes a. substantial increase in tourist receipts as compared with the calendar year 1940. The best estimate of U.S. tourist expenditures in Canada during 1940 runs from $100,000,000. to $110,000,000. of which per- haps $20,000,000. to $25,000,000. was made from Canadian dollar accounts. (For attempt at monthly breakdown, see Table I attached hereto, and for general summary of Canada's balance of payments with U.S., see Appendix B.) C. For exports (visible and invisible) to other areas which will be paid for in U.S. dollars or gold. Estimate of exports end other credit items for second year of war. Merchandise exports $50,000,000. Dividends & other invisible credits 15,000,000. $65,000,000. (Can.) Regraded Unclassified -8- 182 D. Estimated Canadian gold production during second year of war. Approximately 5% million ounces, valued at $211,750,000. (Can.). (Included as exports under II.A. above) E. Estimated Canadian silver production during second year of war. 22g million ounces, valued at approximately $9,000,000. (Can.). (Included as exports under II.A. above) -9- III. Assets of Canada possibly convertible into dollar exchange. 183 A. Gold (as at Dec. 9, 1940) .... $137,000,000. (U.S.) B. Dollar balances 1. Official (as at Dec. 9. 1940) Foreign Exchange Control Board - Long .... $183,000,000. Short ... 14,000,000. Net $167,000,000. Minister of Finance 22,500,000. $189,500,000.(U.S.) 2. Private (as at Sept. 30/40) about (1) 30,000,000. (held against import commitments) Total Gold and Dollar balances (net) $356,500,000.(U.S.) NOTE. (1) The amount of gold shown under III.A. as an asset of Canada is the amount of gold owned by the Government of Canada and held in the Exchange Fund. In addition, 11,135,127 ounces of gold valued at $426,927,487. (can.) was formerly held by the Bank of Canada for account of the Bank of France and is now in the custody of the Custodian of Enemy Property. All gold reserves of the Bank of Canada were sold to the Foreign Exchange Control Board under the terms of the Foreign Exchange Acquisition Order. (2) The U.S. dollar balances shown under III.B.1 as assets of Canada as at December 9. 1940, do not include $101,885,000 (U.S.), which was formerly in an account in the Bank of Canada in the name of the French Republic and is now under the custody of the Custodian of Enemy Property. -10- 184 (1) Under the Foreign Exchange Acquisition Order (Order-in- Council P.C.1735. dated April 30, 1940) residents of Canada were required to sell to the Foreign Exchange Control Board their holdings of foreign currency and balances, except such amounts as could be demonstrated to be necessary for the carrying on of normal business transactions. The figure of $30,000,000. does not include foreign balances of banks and insurance companies; any balances held by these institutions surplus to the requirements of their foreign position was sold to the Board under the above Order, and further surpluses accumulating to their credit are subject to transfer on a quarterly or half-yearly basis. An analysis of the foreign position of Canadian banks and insurance companies is included in Appendix A to this memorandum.) 0. Long-term investments in the United States 1. Securities Under the Foreign Exchange Control Order (Order-in- Council P.C.2716, dated September 16, 1940) all foreign securities which, or any right, title or interest in or to which, were in the possession, ownership or control of & resident of Canada at the time the order came into effect were required, unless the Board should otherwise direct, to be declared forthwith to the Foreign Exchange Control Board. Any non-resident of Canada becoming a resident of Canada subsequent to September 15, 1939. was required forthwith to make a similar declaration to the Board in respect of foreign securities owned by him at the time of -11- 185 his becoming a. resident. Citizens of the United States resident in Canada have been exempted from the requirement of making such declarations. The figures shown below have been computed from the data given on the declaration forms filed with the Board under the above requirements, up to September 15, 1940, but do not include the holdings of banks, insurance companies, trust and loan companies, etc. Foreign securities held by these financial institutions have been regarded as held against their foreign liabilities but data in respect of them will be found in Appendix A to this memorandum. (a) Listed Stocks (Stocks listed on any recognized Stock Exchange, with valuations based on market quotations as at December 31, 1939, which are substantially higher than existing market valued) No. of issues Valuation as at held in excess December 31/39, of $500,000. Industrial $228,200,000. 92 Mines 10,000,000. 5 Rails 8,300,000. 5 Utilities 47,500,000. 15 Investment companies 7,100,000. 3 Insurance companies 7,700,000. 4 Banks and Trust Co's 4,000,000. 2 Total $312,800,000.(U.S. 126 -12- 186 (b) Listed and Unlisted Bonds (Valued on basis of market quotations as at December 31, 1939.) Industrial $14,400,000. Rails 7,900,000. Utilities 15,500,000. U. S. Government ...... 7,000,000. State and Municipal 2,000,000. Real Estate 1,300,000. Total $48,100,000.(U.S.) (c) Unlisted Stocks No attempt has been made to value holdings reported in a large number of miscellaneous unlisted stocks - some 3,500 items - a great many of which are believed to be valueless or practically BO, On the basis of a rough guess, total value is estimated for this purpose at, say, $20,000,000. to ..... $40,000,000.(U.S.) Aggregate value of all securities (on above bases) $380,900,000. to $400,900,000. N.B.(1) Sales of the above securities made by their holders from dates of declaration up to December 9. 1940, total $35,000,000., and there have been maturities of approximately $2,500,000., leaving a total holding as at December 9. 1940, estimated on the bases of valuation indicated at approximately $343,400,000. to $363,400,000. From this total should be deducted brokers' loans of $10,000,000., leaving a net balance of roughly $333,000,000. to $353,000,000. o0o o0o o0o Regraded Unclassified -13- 187 General note. The figures given above as representing holdings of U. S. securities by Canadian residents (with the exceptions noted) are as indicated the result of the compilation of declarations made to the Foreign Exchange Control Board on Form M. It may be that certain residents have not filled out this return or have not disclosed all their holdings, but as such offences under the Foreign Exchange Control Order are subject to substantial penalties, it is not believed that the error in the figures due to failure to report can be of significant proportions. 2. Direct Investments There is no estimate available of the real value of Canadian direct investments in the United States. The nominal book value, according to balance sheets at December 31, 1938, as estimated by the Dominion Bureau of Statistics (which is probably substantially in excess of real or market value) is as follows: Type of Industry Merchandising, sales, etc. $6,800,000. Manufacturing 93,000,000. Mining 10,600,000. Petroleum products 9,900,000. Utilities, transportation and miscellaneous 206,800,000. Total -14- 188 These figures can be broken down by class of investment as follows: Total Bonds Stocks Other (Millions of dollars) Incorporated subsidiaries wholly owned $ 93.5 $41.5 $20.0 $32.0 Incorporated subsidiaries partly owned 5.7 2.6 0.7 2.4 Branches or agencies 0.1 0.1 Unincorporated operations 10.1 10.1 Companies in which Canad- ians have a majority interest 8.2 8.2 Railway investment in wholly owned subsidiaries 133.7 67.4 63.3 3.0 Railway investment in part- ly owned subsidiaries 72.1 35.1 36.9 0.1 Advances & other forms 3-7 - 3,3 0.4 $327.1$154.8 $124.2 $48.1 N.B.(1) Many subsidiaries represent holdings in source of raw materials. (2) Railway investment which is taken at par or other nominal valuation includes: Soo Line $36,000,000. Spokane & International 4,000,000. Duluth South Shore 30,000,000. Grand Trunk Western 86,000,000. Central Vermont 41,000,000. $184,000,000. It is obvious that these figures in no way represent real or marketable values. Regraded Unclassified - 15 - 189 D. Long-term investments in Latin America 1. Securities Estimate based on data compiled from declarations on Form M, with market valuations as at December 9. 1940. Government Bonds Market Value Par Value Argentina - $2,600,000. $3,600,000. Brazil 2,000,000. 15,000,000. Other .... 1,800,000. 12,700,000. (U.S.) Total .... $6,400.000/ $31,300,000. Other securities - believed to be negligible in amount. 2. Direct Investments There is no estimate available of the real value of Canadian direct investments in Letin America. The nominal or book value, as at December 31, 1938, is estimated by the Dominion Bureau of Statistics at $175,600,000.(U.S.) This estimate includes the following items: Bolivian Power $6,000,000. Monterey Railway 6,000,000. Venezuela Electric 3,800,000. Porto Rico Light & Power .... 3,100,000. Massey-Harris (Buenos Aires) : 3,000,000. Brazilian Traction &c. .... 75,000,000. International Petroleum ... 70,000,000. $166,900,000.(U.S.) Regraded Unclassified - 16 - E. Long-term investments elsewhere 190 1. Australasia Par Value Australian Covernment bonds payable in U.S. dollars ... $4,400,000. Australian Government bonds payable in sterling ..... 1,900,000. New Zealand Government bonds payable in sterling ..... 300,000. Total bonds $6,600,000. (Can.) Direct investments at nominal book value $13,700,000. (Can.) These include Ford of Canada $8,700,000. Massey-Harris 3,900,000. $12,600,000. (Can.) Total nominal value of in- vestments in Australasia $20,300,000.(can.) 2. Africa Par Value South African Government bonds $ 600,000. Direct investments at nominal book value 5,900,000. These include Ford of Canada $3,300,000. Massey-Harris 2,600,000. $5,900,000. Total nominal value of in- vestments in Africa .... $6,500,000. (Can.) 3. British Asia Par Value Bonds $ 600,000. Direct investments at nominal value 5,500,000. Total nominal value of in- vestments in British Asia $6,100,000. (Can.) 4. Non-British Asia Par Value Government bonds $1,400,000. Direct investments at nominal value 500,000. Total nominal value of invest- ments in Non-British Asia $1,900,000.(Can.) - 17 - 191 5. United Kingdom Securities - as at September 15, 1939, based on Form M returns. Government bonds at par value $17,000,000. Stocks and corporation bonds 15,000,000. Total $32,000,000. (Can.) Direct investments, according to Dominion Bureau of Statistics $16,000,000. (Can.) Total $48,000,000. (Can.) 6. Europe (excluding United Kingdom) Investment in Government bonds, as indicated by Form M returns, at par value $ 5,500,000. Investment in stocks, say .. 5,000,000. Loans made at close of last war by Dominion Government to Governments of Greece and Roumania, probably valueless but par value 30,854,000. Direct investments, according to estimates of Dominion Bureau of Statistics ... 8,000,000. Total $49,354,000.(0an.) The direct investments include holdings by the Massey-Harris Company in France and the Falconbridge Nickel Company in Norway. They do not include European holdings of the Aluminium Company or the International Nickel Company, as these two companies are controlled in the United States. -18- 192 IV. Forecast of Canada-United Kingdom balance of payments for the second year of war. A. On Merchandise Account U. K.'s "warlike" expenditures in Canada $823,000,000. U. K.'s other expenditures in Canada 338,000,000. Total ... .$1,161,000,000.(Can.) Less U. K. exports to Canada 161,000,000.(can.) Credit balance in Canada's favour $1,000,000,000.(Can.) B. On Service items Net debits against Canada Interest & dividends (net) $62,000,000. Expenditures of Canadian armed forces in U. K. 75,000,000.(Revised) Freight & miscellaneous services (net) 20,000,000. Total debit against Canada $157,000,000. If we combine visible and invisible items, the above estimates show a net total credit in Canada's favour of $843,000,000. A summary of Canada's balance of payments with the United Kingdom and with the sterling area as a whole is given in Appendix D. -19- 193 V. Proposed basis of settlement of the Canada-United Kingdom balance of payments on Current Account. Canada has undertaken to assist the United Kingdom in meeting the latter's debit balance in her trans- actions with Canada, to the maximum practicable extent of Canada's capacity, by the repatriation of Canadian securities held in the United Kingdom. The remainder of the deficit will have to be met by the United King- dom by the transfer of gold or cash. During the first year of war, Canada agreed to provide approximately $200,000,000. (Can.) in this way, and did BO provide about $193,000,000. For the six months' period, August 1, 1939. to January 31, 1940. (1) Canada agreed to provide $150,000,000. and hoped that in the succeeding six months' period it would be possible to increase this amount somewhat, possibly up to $200,000,000. The normal process 1s that the Foreign Exchange Control Board accumulates sterling until a suitable opportunity occurs for the calling and redemption of e Dominion Government direct or guaranteed issue pay- able in London. In addition, there have been sales, directly in the Canadian market, of British holdings of Canadian provincial or municipal bonds or of private corporate securities, but the narrowness of the Canadian markets limits the amount of securities that can be so absorbed. Regraded Unclassified -20- 134 It need not be emphasized that there are practical limits to Canada's capacity to assist the United Kingdom by the repatriation of securities. From the standpoint of Canada, such repatriation involves the same problems AE B direct war expenditure - the money must be raised in Canada - en equivalent amount of securities or the identical securities must be absorbed by Canadian 10- vestors. For this reason it is necessary to look at the total burden assumed by Canada as a result of the war. Canada's direct war expenditure during the present fiscal year ending March 31, 1941, is expected to approximate $900,000,000. and for the rext fiscal year will rise substantially - it may run from $1,200,000,000. to $1,500,000,000. To this must be added non-war expenditures of the Dominion Government of approximately $450,000,000. (excluding the cost of financing an enormous surplus of wheat) and provincial and municipal expenditures of approximately $600,000,000. A comparison of the aggregate war and other governmental expenditures with the national income (estimated at about $5,000,000,000. for the. next fiscal year) will throw light on the further amount which can be raised by Canadian citizens for the purpose of repatriating Canadian securities now held in the United Kingdom. (1) Note that of this amount only about $130,000,000. would be available to the U. K. during the second year of war. Regraded Unclassified -21- VI. United Kingdom Investments in Canada. 185 Canadian data in regard to British investments in Canada are neither up-to-date nor very satisfactory. For what it may be worth, there are presented in the following table certain data, purporting to represent United Kingdom direct and portfolio invest- ments for the year 1937, taken from a publication of the Dominion Bureau of Statistics entitled "The Canadian Balance of International Payments" (Ottawa, 1939.). The method of valuation is more fully described in Chapter IV of this publication but, stated briefly, bonds or other evidences of funded debt are taken at par value, preferred stock at par or stated value, and common stock at book value, while holdings in unincorporated branches or agencies are valued on the basis of net assets in Canada. Government Securities Dominion $317,100,000. Provincial 61,300,000. Municipal 135,800,000. Total $514,200,000. Public Utilities Railways $1,065,600,000. Other, - Traction, light, heat, power, telephone, &c 176,000,000. Manufacturing Wood & paper products $ 97,000,000. Metal industries 72,000,000. All other 201,000,000. Regraded Unclassified -22- 136 Mining $ 90,000,000 Merchandising & service 73,000,000 Insurance. 85,200,000 Finance & mortgage corporations 150,800,000 Miscellaneous (agricultural lands, summer homes, assets administered for persons or corporations residing outside of Canada). 160,000,000. Total $2,684,800,000. (Can.) Apart from considerations arising from the arbitrary basis of valuation of such investments and the reduction in value of securities payable in sterling due to depreciation of the pound, it is, of course, necessary to reduce the aggregate amount shown above by the amount of securities which have matured or which have been called for redemption or which have been resold to Canadians since 1937. While complete data are not available here, the total amount of securities (chiefly government bonds and guaranteed reilway obligations) 80 repatriated cannot well be less than $350,000,000. and may well exceed this figure. Regraded Unclassified -23- VII. Forecast of Canada's balance of payments with the rest of the 197 sterling area for the second year of war. Estimated merchandise imports from Canada $113,000,000. Estimated merchandise exports to Canada 87,000,000. $ 26,000,000. (Can.) Add net balance of invisible items, in- cluding payments by Australia and New Zealand on account of Air Training Plan,say 29,000,000. (Can.) Net credit balance in Cenada's favour $55,000,000. (Can.) Up to date, the United Kingdom has been meeting the adverse balance of the rest of the sterling area with Canada, For masons outlined under V above, it is impossible for Canada to contribute to the financing of this debit balance. -24- 138 VIII. The amount of sterling balances now held by Canada in London. As of December 9, 1940 Foreign Exchange Control Board - Spot L31,200,000 Futures 6,700,000 L37,900,000 Minister of Finance. 1 350,000(1) $38,250,000 (1) This does not include amounts held temporarily in the sinking funds of certain Dominion of Canada obligations payable in London, pending investment in securities to be held in such sinking funds. -25- 199 APPENDIX A U. S. DOLLAR POSITION OF CERTAIN CANADIAN FINANCIAL INSTITUTIONS. 1. Canadian Life Insurance Companies, as at September 30, 1940. Assets Bonds - Canadian debtor $ 15,400,000.(U.S.) U. S. II 242,700,000. Other If 12,000,000. Stocks - Canadian debtor 1,000,000. U. S. # 236,000,000. Other # - Mortgages 6,900,000. Policy loans 46,700,000. Cash 36,200,000. Other Assets 3,700,000. Total Assets $600,800,000. Total Liabilities 545,600,000. Gross long position at book values ... 55,200,000. Adjust for market values (approx.) ... 50,000,000. $5,200,000. Adjust for non-U.S. debtors 28,400,000. Net short position in U. S. ...... $23,200,000. It will be obvious that the above adjustment for market values relates mostly to the investment in stocks. Regraded Unclassified -26- 200 The investment in U. S. debtor bonds is subdivided as follows: Government $39,300,000. Municipal 19,300,000. Rails 41,800,000. Utilities 126,700,000. Industrials 14,100,000. Miscellaneous 1,300,000. $242,700,000. The investment in stocks is subdivided as follows: Rails $ 2,800,000. Utilities 115,500,000. Industrials 110,600,000. Miscellaneous 11,300,000. $236,200,000. The total liabilities which are shown at $545,600,000. include the appropriate amount of the companies' surplus applicable to their U. S. position. The all-over position of the Canadian life insurance companies, excluding assets represented by multiple payment bonds, is as follows: United States Gross long position $55,200,000. Less Canadian debtor bonds & stocks 16,400,000. $38,800,000. (long) Regraded Unclassified -27- United Kingdom & Sterling Area 201 Short $206,800,000. Canada Short 58,600,000. $265,400,000. (short) Balancing figure, which represents investments in multiple payment bonds, and assets and liabilities in other currencies $226,600,000. (Note - In the above, all conversions are at pre-war rates of exchange.) 2. U. S. Dollar Position of Canadian Trust and Loan Companies. The total U. S. dollar investments held by these companies is reported to amount to only about $18,000. 3. U. S. Dollar Position of Canadian Chartered Banks (including both Canadian and foreign branches) as at June 30, 1940. (a) Total Assets and Liabilities in U. S. Dollars, as at June 30, 1940. in Cuban silver Total such assets were $365,000,000. including $40,000,000. of which: Cash Assets # 181,000,000. # 13,000,000. foreign securities 53,000,000. current loans 100,000,000. # 21,000,000. letters of credit 22,000,000. # 2,000,000. Total such liabilities 329,000,000. II 36,000,000. -20- 202 Between June 30, 1940, and October 31, 1940, total such assets probably declined about $23,000,000. and total such liabilities about $21,000,000. As at October 31, 1940, total such assets would probably include (roughly): cash assets, $185,000,000; securities, $40,000,000; and current loans, $85,000,000. (b) Net Long Position in U. S. Dollars As at June 30, 1940 the net spot position was $35,700,000. long future exchange contracts were 1,200,000. short items in transit were 7,900,000. long leaving a true net position, $42,400,000. long Since June 30. 1940, the net long position has declined about $2,000,000, and would now be approximately $40,400,000 - of which $3,000,000 is in the form of Cuban bank premises. Note. - In view of the size of the U. S. dollar business and the need of maintaining adequate working capital margins in order to satisfy state banking laws, we would not under present conditions regard this net long position as available. (c) Holdings of Foreign Securities, payable in U. S. Dollars. As shown above, the Banks had at June 30, 1940, foreign securities payable in U. S. dollars of a total book value of $53,000,000. Known sales between June 30, 1940, and October 31, 1940, indicate present holdings of about $40,000,000. Regraded Unclassified -29- 203 Roughly, this total would be divided somewhat as follows: U. S. Government & State Government bonds $35,000,000. U. S. railway bonds and stocks ...... 1,000,000. Other U. S. stocks 1,000,000. Latin American securities (some govern- ments, some industrials, chiefly Cuban) 3,000,000. $40,000,000. -30- 204 APPENDIX B SUMMARY OF CANADA'S BALANCE OF PAYMENTS WITH THE UNITED STATES AS ESTIMATED FOR SECOND YEAR OF WAR. (Millions of Canadian dollars) Current Account Credits Debits Net Merchandise - ordinary $450 $550 -$100 - war - 325 - 325 Non-monetary gold (net) 212 - plus 212 Tourist and travel (1) expenditures 150 25 plus 125 Interest and Dividends 30 255 - 225 Freight and miscellaneous services (net) - 55 - 55 Total $842 $1,210 -$368 Add estimated amount of tourist expenditures in Canada pro- bably paid for from Canadian dollar accounts 25 - 393 Capital Account Maturing obligations $55 - 55 Capital imports 7 1 ! Total 7 $55 - 55(7) Total unfavourable balance $448 (1) Includes $25,000,000. estimated to be paid for out of Canadian dollar accounts. Regraded Unclassified -31- 205 APPENDIX C SUMMARY OF CANADA'S BALANCE OF PAYMENTS WITH COUNTRIES OTHER THAN THE UNITED STATES FOR WHICH PAYMENT MUST BE MADE IN GOLD OR U. S. DOLLARS, AS ESTIMATED FOR SECOND YEAR OF WAR. (Millions of Canadian dollars) Credits Debits Net Merchandise $50 $45 plus $5 Dividends and other invisible credits 15 plus 15 Immigrant remittances and other invisible debits 10 - 10 - $65 $55 plus$10 -32- APPENDIX D 206 SUMMARY OF CANADA'S BALANCE OF PAYMENTS WITH THE UNITED KINGDOM AND STERLING AREA, AS ESTIMATED FOR SECOND YEAR OF WAR (Millions of Canadian dollars) Credits Debits Net (a) With United Kingdom Merchandise, &c. ... $1,161 $161 plus $1,000 Interest & dividends (net) 62 - 62 Expenditures on Canadian Armed Forces in U. K. 75 - 75 Freight & miscellaneous services (net) 20 -20 $1,161 $318 -$ 843 (b) With rest of sterling area Merchandise 113 87 plus 26 Invisible items (net) 29 - plus 29 142 87 plus 55 (c) With Sterling area (including U.K.) Merchandise 1,274 248 plus 1,026 Interest & dividends (net) 62 - 62 Expenditures on Canadian Armed Forces in U.K. 75 - 75 Freight & miscellaneous services (net) 20 - 20 Other invisible items (net) 29 - plus 29 $1,303 $405 plus $898 Regraded Unclassified TABLE I ESTIMATE OF CANADA'S BALANCE OF PAYMENTS WITH THE UNITED STATES FOR SECOND YEAR OF WAR An attempt at Monthly Allocation of the Various Items. (Millions of Canadian Dollars) Freight & Total Total Capital Interest & Other Current a/c Current a/c Export Tourist Imports Dividends Current ex War War (Net) including re Exports Gold Non-War (Net) (Net) Imports Importe War Tourists September Maturities Total 37 17 13 48 18 5 4 15 19 IN 1 22 October 38 17 8 57 16 5 15 17 32 2 1 35 November 38 17 3 57 12 5 16 18 34 1 3 38 December 35 17 3 44 33 4 26 19 45 1 In 48 January 33 17 5 39 19 4 7 21 28 2 ? 32 February 33 16 5 37 9 4 4 25 21 2 1 24 March 33 17 4 45 20 5 16 29 45 1 1 47 April 36 18 4 43 18 5 8 31 39 1 1 41 May 40 19 6 48 19 5 7 36 43 2 23 68 June 42 19 14 46 32 5 los 40 48 2 3 23 July 42 19 30 42 19 4 26 38 12 4 15 31 August 43 19 30 hills 10 24 34 36 2 15 5 2 9 450 212 125 550 225 55 43 325 368 25 55 448 Note.-Allocation of individual items by months is necessarily subject to a considerable margin of error. 2 Regraded Unclassified 208 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 12, 1940 TO Secretary Morgenthau FROM Mr. Cochran STRICTLY CONFIDENTIAL At 5:30 this afternoon the Secretary telephoned me from his residence in regard to the conversation which he had had with Sir Frederick Phillips. Sir Frederick had asked me this morning to make an appointment with the Secretary which would permit a brief but private talk. At the Secretary's suggestion, Sir Frederick had come to the Treasury at 12:30 and had ridden home with the Secretary. Phillips explained that the British could not sell us the French gold held in Canada because the Prime Minister of Canada has so far objected to it. Part of this objection comes importantly from consideration of the large French population of the Dominion. Furthermore, the British are very conscious of the fact that they are running $600,000,000 behind on their annual account with Canada. An officer of the Canadian Government is in Washington, however, and Phillipe planned to nake a further attempt through him today to overcome the objection of the Prime Minister. The Secretary's press statement of today was discussed. At his press COD- "erence the Secretary had made the point that be was against any loan to Great Britain which violated even the spirit of the Johnson Act; furthermore, the British had not yet asked for any loan, Phillips said that he is now definitely asking for financial assistance. The Secretary replied that while he had consistently been opposed to lending funds to Great Britain in circumstances such 8.6 exist at present, he would favor making 8. gift of such assistance. In his relations with the press and with his colleagues in the Government the Secretary has purposely taken the position of pushing the British as far as possible. That is, he wanted it to be knowne that be vas calling upon them to put forth their best efforts and vsa demanding from them a frank and full expression of their financial end economic situation. It is the Secretary's view that his plan of getting assistance for Great Britain can best be achieved through this approach, and be is therefore pushing it. Phillips asked If he could cable this idea to his Government. The Secretary replied in the negative, stating that this was just his own personal feeling. Phillips' attitude seemed to change remarkably 80 the conversation developed. Ee affirmed his desire to let us have everything, considering the position which the Secretary has taken, The Secretary was such gratified over this conversation, feeling that he had made more progress in the fifteen minutes drive home, than he had made since Phillips' arrival in the United States. The Secretary talked briefly with Phillips on the question which is to come before our Group tomorrow morning, namely, that of marketing British-owned American securities in this country. It is the Secretary's desire that this question should be gone into thoroughly with Gifford and the British brought to realise the necessity if the most efficient system possible for carrying out the marketing of such securities B.M. Regraded Unclassified 209 HSM GRAY Bucharest Dated DECEMBER 12, 1940 Rec'd 7:42 a. me, 13th Secretary of State, Washington. 805, December 12, 5 p. m. An official of the Ministry of National Economy called at the Legation recently to discuss the question of the period of validity of United States Treasury licenses for the unblocking of Runanian funds. HE stated that the United States Treasury had hitherto followed 8 policy of limiting licenses to a validity of only a few days usually five days; that Rumanian budgetary legislation required that all payments bE approved for separate organizations including the Ministry of Finance, the Ministry of National Economy and the National Bank; and that this process was inevitably tine-consuning and difficult to Expedite Especially in VIEW of the recent reorganization of the Runanian Government. HE inquired whether the Legation could recommend that the United States Treasury if it decided to issue a particular license at all, could not make 210 hsm -2- No. 806, December 12, 5 P. me, from Bucharest make it valid for a longer period such as twenty days. While the official in question was informed that the Rumanian Legation at Washington was the proper channel for such a request, I an bringing the foregoing to the Department's attention for such action, if any, that it may SEE fit to take. GUNTHER DDM YOURABAT BECEIVED GVO DEC GW DEC 17 LMT IS 10 Regraded Unclassified TREASURY DEPARTMENT 211 INTER-OFFICE COMMUNICATION DATE December 12, 1940 TO Secretary Morgenthau FROM Mr. Cochran confidential Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns i 71,000 Purchased from commercial concerns L134,000 About 693,000 of the registered sterling purchased from commercial concerns rep- resented dividend payments received by American firms. In the open market, sterling was again quoted at 4.03-3/4 throughout the day. Transactions of the reporting banks were as follows: Sold to commercial concerns 1 5,000 Purchased from commercial concerns 1 5,000 As for the other currencies, there was a continued improvement in the Canadian dollar and Cuban peso discounts. Closing quotations were: Canadian dollar 13-1/2% discount Swiss franc .2321 Swedish krona .2385 Reichsmark .4005 Lira .0505 Argentine peso (free) .2363 Brazilian milreis (free).0505 Mexican peso .2070 Cuban peso 9-1/4% discount The yuan in Shanghai was again unchanged at 5-15/16¢. Te purchased $50,118,000 in gold from the earmarked account of His Britannic Majesty's Government. No new gold engagements were reported to us today. The Bombay gold price was unchanged at the equivalent of $33.83, and silver was 3/15# higher at the equivalent of 42.874. In London, the prices fixed for spot and forward silver were both unchanged, at 22-7/8d and 22-13/16d respectively. The dollar equivalents were 41.54$ and 41.42#. Handy and Harman's settlement price for foreign silver was unchanged at 34-3/44. The Treasury's purchase price for foreign silver was also unchanged at 35#. Regraded Unclassified -2- 212 Be made four purchases of silver totaling 225,000 ounces under the Silver Purchase Act. Of this amount, 175,000 ounces represented sales from inventory, and the remaining 50,000 ounces consisted of new production from foreign countries, for forward delivery. The Federal Reserve Bank's report of December 4, listing deposita of banks in Asia with the New York agencies of Japanese banks, showed that such deposits totaled $100,455,000, a decline of $10,345,000 since November 27. As usual, nearly all of the change in deposits took place on the books of the Yokohana Specie Bank's New York agency. The latter's reported dollar liabilities to and dollar claims on Japanese banks in Asia stood as follows on December 4: December 4 Change from Nov. 27 Liabilities: Deposits $89,796,000 - $10,124,000 # : U.S. Treas. bills, comm. paper, etc 30,426,000 - 935,000 Claims : Loans $37,566,000 - 4,391,000 " : Other - mainly Jap. import bills 18,429,000 + 4,783,000 It will be observed that $4,391,000 of the decline in deposits apparently were used to reduce loans. No definite explanation was provided for the other $5,733,000 withdrawn from deposit, although the agency stated that this represented ordinary disbursements from several branch accounts. Such funds may have been used in the purchase of American goods, or transferred to other banks in this country or abroad. Regarding the $4,783,000 net purchase of Japanese import bills, the agency empha- sized that these were bought for its own account, and that Asiatic deposits were not used in the operation. With the exception of $36,925,000 which Japanese banks in China had on deposit with the Yokohama agency (off $1,048,000 from November 27), practically all of the agency's figures shown in the above table refer to Japanese banks in Japan and Manchuria. The agency's foreign currency liabilities and claims remained negligible. We have also learned, from the Federal's letter of December 5 to the Secretary reporting its investigation of the Yokohama agency's accounts, that at the present time the agency holds no American long-term securities for foreign account. Such holdings, consisting mainly of U.S. Treasury bonds held for account of the head office, rose to a value of $66.6 million by the end of 1939. The entire amount has been liquidated since then, the bulk of the sales having been made during the past five months. CONFIDENTIAL Regraded Unclassified TREASURY DEPARTMENT 213 INTER OFFICE COMMUNICATION Regraded Unclass DATE Des13,1940 Secretary Morgenthau TO Be H. Foley, Jr. FROM 12-12-40 In addition to Walter Stone, editorial writer for the Scripps-Howard newspaper chain, and myself the following were present at a conference held in my office this afternoon from 3:30 to 4:30 o'clock, Assistant Secretary Sullivan, George Hear, Director of Research and Statistics, Henry Murphy, Assistant Director of Research and Statistics, and C. L. Kades. Mr. Stone stated that the Scripps-Uoward newspaper desired to institute an aggressive editorial campaign directed at securing the elimination of tax exempt securities. He further stated that he expected to carry on this can- paign through editorials and news articles which would appear in the various newspapers comprising the chain, and that he desired material for such editorials and articles. Mr. Stone asked if be could be supplied with a series of hypothetical cases showing the tax avoidance resulting from invest- ment in state and municipal securities, as distinguished from investment in business enterprise, after taking into consideration not only Federal income taxes but state income and intangible personal property taxes. It was agreed that this could be done and that the material would be submitted to him from time to time beginning within a week. A committee was appointed to collect the necessary information consisting of Mr. Murphy AB chairman, Mr. Kades and Mr. Ecker-Racz of Mr. Blough's Tax Research Division. Mr. Stone also said he would be interested in ascertaining who was financing the Conference for State Defense and the other pressure groups opposing the elimination of tax exempt securities, and Mr. Sullivan and I indicated that we would be glad to cooperate with him in such an undertaking. Mr. Stone also suggested the advisability of the Federal Government con- senting not only to the imposition of state income taxes upon the interest of Federal securities but also to the intangible personal property texation by the states of such securities in private hands at the Bane extent as the states taxed their securities. This suggestion was explored at some length the object being to take away from the opponents of the proposal to sliminate tax exempt securities the argument that states not having an income tax would be discriminated against if the Federal Government subjected its securities only to state income taxation. Such opposition, for example, smanates from Governor Bricker of Ohio for this reason. After exploring generally the entire problem of tax exampt securities, Mr. Stone raised the question whether the Treasury was going to do anything about income taxation so far as community property was concerned and Mr. Sul- livan stated that it was not thought desirable to do anything about eliminat- ing this inequity at this time for fear it wight jepardise the success of the proposal to eliminate tax exempt securities. 214 I asked Mr. Stone if he thought it would be desirable for the Treasury to retain a newspaper man having editorial experience to put the material in the form in which he wanted it. Mr. Stone said he did not think this was necessary as the information he needed was of the character which could be supplied adequately by economists, lawyers and accountants. 9.10.7L TREASURY DEPARTMENT 215 INTER OFFICE COMMUNICATION DATE December 12, 1940. TO Secretary Morgenthau FROM E. H. Foley, Jr. Here is some additional material that you might want to glance over in connection with the memorandum on the "Johnson Act Conference" which I sent to you this afternoon. E.10.7h. Attachments (CONFIDENTIAL) 216 C 0 October 1, 1939 P Y 7:10 p.m. The President called me awhile ago, and I told him that we had been asked by the State Department to prepare something for Key Pittman on the Neutrality Bill. We felt that the consideration fell into two matters: One, whether the credit clause in the cash-and -carry plan now under consideration was contrary with the Johnson Act, and that we in the Treasury felt that, and were of the view that, the opposite was the fact. Particularly in view of a memorandum in the Treasury's files of a conference in my office in 1934 at which Senator Johnson was present. When we had asked the Senator the specific question relative to short- term credits, the Senator had answered that the elimination of short-term credits had not been considered part of the purpose of his Bill. The President said, "That's wonderful! That's finel" And the second part, with reference to the question of the extension of 90-day credits, I felt that the President shouldn't do anything to urge it. That the whole history was that it had been introduced in the House for the direct purpose to restrict the powers of the President as to the extension of any such credits, and that we in the Treasury felt that the President should let the pressure come from outside on this. The President said, "I an in complete agreement with you, and Regraded Unclassified 217 - 2 - that is exactly the way I feel, and Cordell agrees absolutely." I told him that Cordell didn't talk that way to me this morning. He gave me the impression that he would like to see this included. "So would I", said the President, "but I am not going to do anything about it. The Pressure will have to come from elsewhere." He asked me to send over to him the memorandum, and the memorandum on the conference in my office, and while he didn't tell me 80 in so many words, I got the impression that he will see that it is sent and gets to Key Pittman. (Dictated via telephone by the Secretary to McGuire) The original sent to the Secretary's office for the Secretary's diary. Regraded Unclassified 218 0 P October 1, 1939 I MEMORANDUM Re: Credits to Belligerents Section 7 of the Senate neutrality bill relates to financial transactions with belligerents. It continues the existing provisions of the neutrality statute which prohibits the making of loans and credits to belligerents and persons acting on their behalf. It is also to be noted that the existing neutrality law authorizes the President, when he finds it in the interest of the United States, to exempt from this prohibition "ordinary commercial credits and short- term obligations in aid of legal transactions and of a character customarily used in normal peacetime commercial transactions." The Senate Committee apparently felt that the existing provision could be strengthened, without sacrificing American interests, by limiting the discretion of the President and by confining to a more limited category the permissible forms of short-term commercial credits. Accordingly, the Senate bill provides that (1) the short-term commercial credits may not be for a period more than 90 days without renewal; (11) if any belligerent or person acting for a. belligerent defaults on any such 90-day credit, no new commercial credit may be extended; and (111) the President report to Congress every six months full in- formation as to each commercial credit which has thus been permitted. Regraded Unclassified - 2 - 219 It is thus entirely clear that Presidential authority to permit short-term commercial credits to belligerents has been a part of the neutrality law continusously since February, 1936, and that the only changes which the Senate bill makes in the existing law are in the direction of additional restrictions on the Presidential discretion to permit short-term commercial credits. It has been charged that the provision in the present bill relating to short-term commercial credits to belligerents is inconsistent with the Johnson Act of 1934, and is the opening wedge for the granting of loans to belligerents. I think that an examination of the history of the Johnson Act and the Neutrality Act will show these charges to be unfounded. JOHNSON ACT The Johnson Act provided in part as follows: "That hereafter it shall be unlawful within the United States or any place subject to the jurisdiction of the United States for any person to purchase or sell the bonds, securities, or other obligations of, any foreign government or political subdivision thereof or any organization or association acting for or on behalf of a foreign government or political subdivision thereof, issued after the passage of this Act, or to make any loan to such foreign government, political subdivision, organization, or association, except a renewal or adjustment of existing indebtedness while such government, political sub- division, organisation, or association, is in default in the payment of its obligations, or any part thereof, to the Government of the United States. ***,* Within a few weeks after the passage of the Johnson Act a number of problems arose necessitating the interpretation of that statute. On April 27, 1934, a conference was held at the Treasury - 3 - 220 Department attended by Senator Johnson, the Attorney General, the Secretary of State, the Secretary of the Treasury and a number of other officials of the State, Treasury and Justice Departments. During the conference, Senator Johnson was asked if he thought that the statute applied to such every-day commercial instruments as time drafts, bankers' acceptances, etc. Senator Johnson stated that he did not think that the statute could be interpreted in any such manner and that it was not the intention of the statute to interfere in any way with ordinary commercial transactions. It also appeared to have been the view of the participants in the conference, including Senator Johnson, that the Johnson Act did not apply to time drafts, acceptances, etc., employed in connection with ordinary commercial transactions. A memorandum of the conference is in the Treasury Department's files. A copy of the memorandum is attached. On the same day the State Department issued the following press release: "Enquiries have been received at the Department of State as to whether the Act of Congress approved April 13, 1934, to prohibit financial transactions with foreign governments in default on their obligations to the United States, applies to ordinary commercial 'acceptances or time drafts,' such as are used by foreign governments to finance the current requirements of their embassies and consulates in the United States. "The Department of State and the Attorney General are in agreement that such instruments do not constitute 'obligations' within the purview of the Act. "Certain other questions that have been presented regarding the interpretation of the Act are under con- sideration. # On May 5, 1934, the Attorney General, in response to a request Regraded Unclassified 221 - 4 - from the Secretary of State, rendered an opinion on a number of questions relating to the Johnson Act, which opinion stated in part as follows: "1(2) To what types of transactions does the Act apply?' "The Committee Reports (s. Rept. 20 and House Rept. 974, 73d Cong.) recite that the bill was introduced following an investigation by the Senate Committee on Finance and the revelation therein that 'billions of dollars of securities *** * offered for sale to the American people' were overdue and unpaid; that some of these 'foreign bonds and obligations *** were sold by the American financiers to make out- regeously high profits'; and stated a purpose 'to prevent & recurrence of the practices which were shown by the investigation to be little less than a fraud upon the American people * * * to curb the rapacity of those engaged in the sale of foreign obligations * *,' "This, I think, is indicative of a purpose to deal with such 'bonds' and 'securities' and with 'other obligations' of like nature, observing the rule of ejusdem generis - that is, obligations such 88 those which had been sold to the American public to raise money for the use of the foreign governments issuing them - not contemplating foreign currency, postal money orders, drafts, checks and other ordinary aids to banking and commercial transactions, which are 'obligations' in 8 broad sense but not in the sense intended. It was obviously not the purpose of the Congress to discontinue all commercial relations with the defaulting countries." ***** "(4) Does the Act apply to acceptances or time drafts?' "This question appears to be sufficiently answered by the comments under Question No. 2, supra. It appears proper to add, however, that such transactions must be conducted in good faith, in order to be within the law, and not as mere subterfuges to circumvent its purpose." In other words, the Attorney General found that while the Johnson Act prohibited the sale of bonds and securities of countries Regraded Unclassified 222 - 5 - in default it did not prohibit those ordinary short-term commercial credit devices customarily used in international trade. The entire text of the opinion of the Attorney General was quoted in a State Department press release dated May 5, 1934 which also included the statement that the State Department concurred in the Attorney General's interpretation of the Johnson Act. Unquestionably this opinion has been relied upon by American business interests in their commercial transactions with defaulting countries and persons on their behalf. In the light of this background and at this late date, the Johnson Act should not be construed as making illegal short-term credit transactions with defaulting governments relating to otherwise per- missible trade and commercial transactions. NEUTRALITY ACT In February, 1936, Congress in amending the then existing Neutrality Act included the following provision: "SEC. la. Whenever the President shall have issued his proclamation as provided for in section 1 of this Act, it shall thereafter during the period of the war be unlawful for any person within the United States to purchase, sell, or exchange bonds, securities, or other obligations of the government of any belligerent country, or of any political subdivision thereof, or of any person acting for or on behalf of such government, issued after the date of such proclamation, or to make any loan or extend any credit to any such government or person: Provided, That if the President shall find that such action will serve to protect the commercial or other interests of the United States or its nationals, he say, in his discretion, and to such extent and under such regulation as he may prescribe, except from the operation of this section ordinary commercial credits and short-term obligations in aid of legal transactions and of a. character customarily used in normal peace- Regraded Unclassified 223 - 6 - time commercial transactions." It will be noted that this provision, which has been the law since February, 1936, specifically authorized the President to permit short- term ordinary commercial loans to belligerents and persons acting on their behalf. The debate in Congress reveals no feeling that this provision was inconsistent or in conflict with the provisions of the Johnson Act. The view of Congress was quite the contrary. The House report on this provision in the 1936 amendment stated: ## * * It is the law now under the Johnson Act that it is unlawful to sell bonds, securities, etc., in this country of any foreign country that is in default of its indebtedness to the United States. This covers most of the greater powers in Europe. This section, however, goes much further and makes it unlawful, as before stated, to all belligerent countries. Now, there is a provision in this section that if the President shall find that such action will serve to protect the commercial or other interests of the United States or its nationals, he may, in his discretion, and to such extent and under such regulation as he may prescribe, except from the operation of this section ordinary commercial credits and short-time obligations in aid of legal transactions and of a character customarily used in normal peacetime commercial transactions. There is also another provision that this section does not apply to renewal or adjustment of indebtedness which may exist on the date of the President's proclamation. The only discretion given the President under this section is in reference to such credits used in normal peacetime commercial trans- actions." By specifically prohibiting in the Neutrality Act the extension of "any credit" (which words do not appear in the Johnson Act) Congress, in view of the purposes of the Neutrality Act, apparently intended thereby to prohibit even short-term commercial credits unless the Regraded Unclassified 224 C o P Y -7- President found that the making of such short-term commercial credits to belligerents was in the public interest, in which event, such credits would be lawful. No change was made in this provision of the Neutrality Act when the Neutrality Act was otherwise amended in 1937. When the neutrality legislation wes considered in the House of Representatives last July, it was proposed to circumscribe further the President's power to permit short-term commercial credits to belligerents by limiting such credits to 90 days without renewal, and requiring the President to make periodic reports to Congress of such transactions. These limitations on the power given to the President by the existing statutory provision are included in the Senate bill, and in addition the Senate bill prohibits further 90-day credits if a belligerent defaults on prior 90-day credits given to it. Original and 1 copy taken to White House by Foley 8:30 p.m. 1 copy to Attorney General at Washington Hotel by Shelley (returned 1 copy sent to Secretary by Bernstein approved and original run given to Attorney General.) 1 copy to Viner 1 copy to Bell 1 copy to Cochran 1 copy to Bernstein 1 copy to Pehle 1 copy to Foley Bailie returned copy after reading it. Regraded Unclassified 225 C 0 P Y October 2, 1939 Secretary of the Treasury Mr. Foley As you know, we have ruled that neither the Johnson Act, nor the provisions of the Neutrality Act relating to the making of loans and the extension of credit to belligerent countries, apply to the Government or any agency thereof. The Attorney General has concurred in this view. Nothing in the Neutrality Bill, which has been reported out in the Senate, necessitates a change of this view. (Initialed) E. H. F., Jr. JWP:mgt 10/2'39 Initialed JWP and BB Regraded Unclassified 226 C o P October 24, 1939 Y To: Secretary Morgenthau From: Messrs. White and Foley Senator Wagner inquired by telephone as to the Department's position on Taft's amendment to the Neutrality Bill to limit the atabilization fund's holdings of the currency of any belligerent to no more than $50,000,000 at any one time. Tie feel that the Department should indicate to Senator Wagner its opposition to Taft's amendment for the following reasons: (1) When Congress extended the stabilization powers it was fully conscious of the possibility or probability of a war in Europe. There is accordingly no need at this time for Congress to re- consider the problem and to limit the stabilization powers. (2) Senator Taft questioned the Secretary about the use of the stabilization fund in the event of war. The Secretary said that before he would use the stabilization fund to assist any country in prosecuting that war he would come up before the proper committee and ask for guidance. This procedure would permit greater flexibility than Taft's proposal in dealing with an emergency situation in which it might be greatly in the interests of this country to purchase the currency of a belliger- ent in amounts greater than $50,000,000. By going to the con- gressional committees the Treasury could ascertain the views of Congress without the publicity and delay involved in getting new legislation. (3) If we do not indicate our opposition to Taft's amendment, there is likelihood that other amendments would be offered prohibiting the stabilization fund from purchasing any belligerent currency and in effect mullifying its use during the war. If you agree with the foregoing, we can give these views to Senator Wagner orally. (Initialed) E.H.F.Jr. H.D.W. APPROVED: October 25, 1939 (Initialed) H.M.Jr. Original was left with Senator Wagner by White and Foley Regraded Unclassified 227 C 0 The original copy was pulled. The following note appeared P on it "Please talk to me. H.M.Jr.", and "White House". Y Oct. 30, 1939 Secretary Morgenthau Mr. Foley As I stated to you in my memorandum of October 2, 1939, it is our view, concurred in by the Attorney General, that the Johnson Act and the provisions of the present neutrality law relating to the making of loans and the extension of credit to belligerent governments do not apply to this Government or agencies thereof. The pending neutrality bill contains similar language and it would have been appropriate to interpret it in a similar manner but for the state- ment made by Senator Pittman on the floor of the Senate late in the evening on October 27, 1939. Senator Pittman indicated that he and the other drafters of the bill construe its provisions to prohibit the making of loans or the extension of credit to belligerent governments by governmental corporations, such as R. F. C. and the Export-Import Bank. A discussion of this matter appears in the attached excerpts from the Congressional Record. On October 17, 1939, Senator Barkley said on the floor of the Senate that his offhand view WBB that the credit provisions of the pending bill applied as rigidly to the R. F. C. and any other agency of the Govern- ment as to any private person in this country. Senator Pittman made the statements in question notwithstanding the fact that on October 27, the Senate voted down an amendment introduced by Senator Taft, which was designed to prohibit the making of loans and the extension of credit by the Government or agencies thereof. You will note from the discussion of the matter which appears in the excerpt from the Congressional Record that Senator George pointed out that Senator Pittman's construction "covers precisely one of the amendments offered by the dis- tinguished Senator from Ohio, which was voted down by this body yesterday." Unless Senator Pittman can be persuaded to take some appropriate 8.0- tion that would nullify the effect of this statement I an fearful that we will be unable to hold that the R. F. C. and the Export-Import Bank have legal authority under the now-pending legislation to make loans of the type which have been considered to an American corporation acting on behalf of belligerent governments, collateralised by American securities owned by such belligerents. (Initialed) E. H. F., Jr. JWP:BB:mgt 10/28/39 Regraded Unclassified EXCERPT CONGRESSIONAL RECORD Regraded 2289 Unclas SENATE October 27, 1939 Page 1655 Mr. TAFT. Mr. President, while this matter is being discussed I should like to ask the chairman of the Committee on Foreign Relations one question regarding this section. On page 21 it is provided that whenever the President shall have issued a proclamation it shall be unlawful for any person within the United States to advance credits to foreign governments. I wish to know whether or not the chairman of the Committee on Foreign Relations considers that the word "person" which is also defined on page 30 as including corporations, and so forth, is broad enough to include the Reconstruction Finance Corporation and the Export- Import Bank. Mr. PITTMAN. and The word "person" expressly includes corporations,/I therefore take it that it does include them. MR.TAFT. In the Senator's opinion, it includes the Reconstruction Finance Corporation and the Export-Import Bank? Mr.PITTMAN. That is my opinion, and that was the opinion of those who drafted the joint resolution. Mr.GEORGE. Mr. President, I wish to make a short statement. Particularly I wanted to say that my construction of the word "person" is identically the same as that given by the chairman of the committee. I think that is pertinent, because in effect it covers precisely one of the amendments offered by the distinguished Senator from Ohio, which was voted down in this body yesterday. I think the word "person" here does include a subsidiary of the Government, a corporate subsidiary such as the Reconstruction Finance Corporation, or any other corporation which is owned wholly or practically wholly by the Government itself. 229 Commissioner of Accounts TREASURY DEPARTMENT 11/12/20 & Deposits. WASHINGTON April 28, 1934. CONFERENCE RE: JOHNSON BILL: (Public No. 151, 73rd Congress) The Secretary of the Treasury called 8 conference at 11 o'clock Friday, April 27, 1934, for the purpose of considering some of the difficulties in interpreting the provisions of the so-called Johnson Bill, which prohibits the flotation of loans in the United States by governments in default on their indebtedness to the United States Government. Those present were the Secretary of the Treasury, the Attorney General of the United States, Senator Johnson of California, Under Secretary Phillips and Assistant Secretary Moore of the State Department, Mr. Hackworth, Solicitor of the State Department, Mr. NacLean, Assistant Solicitor General, Mr. Coolidge, Mr. Oliphant, and tr. Bell, of the Treasury. Secretary Hull came in at 11:20. The Secretary asked Senator Johnson to outline to the meeting the objectives which he had in mind in presenting the bill to the Con- gress. Senator Johnson went into the history of the measure and stated that as it was first introduced and passed the Senate more than a year ago, he had in mind definitely the protection of the American citizen in his purchases of foreign securities in the United States issued by foreign governments which are in default on any of their indebtedness to the United States Government or its nationals. He stated that he had definitely in mind at that time the South American governments. He stated that just after the bill first passed the Senate, Senator Robinson asked that it be laid on the table and reconsidered. At a conference be- tween him and Senator Robinson at a later date, he agreed to further amendments, after which it was referred back to the Foreign Relations Committee and was there amended to its present form. He thought as the bill now stands, its main objective W&G to preclude the flotation in this country of any securities of those governments or any subdivisions there- of which are in default on their indebtedness to the United States Govern- ment. The Secretary asked him just what he meant by the term "default" and did he have definitely in mind including those governments which have made token payments as & result of which the President had stated that be did not consider those governments in default? Senator Johnson said that it was his personal opinion that if these governments did not pay the full amount due they were certainly in default Regraded Unclassified 230 2. as to the remaining balance. However, he realized that this was largely an administrative matter and the President under the powers granted by the Constitution to handle foreign affairs, certainly had the authority to state whether or not a particular government was in default on its indebtedness to the United States Government. He did not think that the act was intended to disturb the action already taken by the President in declaring those governments not in default. The Attorney General stated to the Senator that he thought the President's previous action WEB quite in line with his authority, but saked the Senator if he thought the President could take similar action on future token payments in view of the act. The Senator stated that his personal opinion was that the President had no authority after the passage of this act to accept from our debtors token payments and then consider them not in default. The Secretary then asked the Senator if he thought the bill included such everyday commercial transactions as time drafts and bankers' acceptances etc. The Senator said he did not think it could be interpreted in any such manner and that it was not the intention of the bill to interfere in any way with ordinary commercial transactions. The question was then raised 0.8 to what was meant by time drafts, acceptances, etc. lr. Coolidge ex- plained an ordinary commercial transaction with respect to the purchase of cotton in the United States by the national of some foreign government - that the concern selling the cotton might draw a bill of exchange on the purchaser, which would be honored in thirty days more or less and that this bill of exchange could be sold on various terms. It was the concensus of opinion that such B. transaction would not fall within the provisions of the act. The Attorney General then asked the Senator if he thought that a fair interpretation of the act web that it did not intend in any way to limit the ordinary everyday commercial transaction, and the Senator said that, certainly, WAB the interpretation he would put on it. Mr. MacLean, Assistant Solicitor General, then called attention to the fact that France exercised 6. monopoly in tobacco, and that the organisa- tions in this monopoly would no doubt in the course of business sell their drafts and other instruments of credit in this country. The Senator said that he did not have such transactions in mind and that the words "organisa- tions or associations" in the act were not his language. It seemed to be the concensus of opinion that these transactions would fall within a commer- cial transaction and not within the provisions of the Act. Regraded Unclassified 231 3. Mr. Hackworth brought up the question that had been presented to him just before he came to the Treasury, i.e., as to whether the oper- ations in coupons on German bonds would fall within the provisions of the act. He explained that coupons falling due on many of the German bonds were paid partly in cash and partly in scrip, and that later the scrip was purchased by a bank in Germany which was more or less under the supervision of the Reichsbank and the German Government. Senator Johnson thought that such a transaction would clearly fall within the exception in the act with respect to renewal or ad- justment of existing indebtedness. Mr. Coolidge said that he thought that one way in which to in- terpret the act was to decide whether or not any of the transactions passed upon involved new American money and that this should be a de- ciding factor. This seemed to be agreed to by the Attorney General and Mr. Hackworth. Initialed - D.W.B. Regraded Unclassified 232 Detember 12, 1960. Secretary Le L Felow, it. Here is - additional material that you night wast to glance - in connection with the en the Volution Act Conference which I - to you this afternoon. (Initialed) L.H.N. Jr. 1 Attachments : Sent out to the Secretary at his House (by hand) at 6 pollo 12/12'40 1. Momo in the Secretary's disry 10/2'39 20 telephone call from the President and the Secretary's explanation of the Treasury's views an the Neutrality Bill, 2. Memoranders ret "Credits to Belligerents". Propared at the suggestion of the State Department 10/1'20 for Key Pittern to use in connection with the debutes on the pending Neutrality Bill. 3. Foley's - to the Secretary 10/2'39 halding that neither the Johnson Act not the Neutrality AST (as reported out of the Senate) in regard to the miking of loans to, and the extension of credits to belligerent countries applied to the Governments or any agency thereof. The A.G. concerted in that view. 40 Messrs. White and Feley's - to the Secretary on 10/24'39 Three reasons viry the Treasury should object to Taft's to the Neutrality mill to limit stabilization fund's holdings of the currency of any belligerent to as nore than $50,000,000. 50 Feley's - to Secretary 10/30'39 relating to the Secretary that Key Pittuan's statement - the floor of the Senate a Date 27,1939 would have to be changed # w would have to hold that the me and the Expert-Import Bank de not have the authority to miss lease to M American scrporation seting on behalf of the belligeremb Regraded Unclassified 233 October 1, 1939 I 7020 - the President called - subile ego, and I told his that w had been asked by the State Department to propare something to Ear Pitteen a the Neutrality MILL No falt that the consideration full into two entiers) Cas, whether the credit clause in the eash-sad -48777 plan - under consideration was controry with the Johnson sor, and that we in the Treasury falt that, and were of the view that, the apposite was the fast. Particularly in view of a memerandem in the Treasury's files of & conference in my office in 1934 at which Senster Johnson was present. has 90 had asked the Senster the specific question relative to short- term credits, the Smater had answered that the elimination of short-term credits had not been considered part of the purpose of his mill. the President said, "That's venderfull That's finel* And the second part, with reference to the question of the extension of 90-day credits, I falt that the President shouldn't - anything to urge 13. That the whole history was that 10 had been introduced is the House for the direct purpose to restrict the powers of the President as to the extension of my mish credits, and that - in the Treasury felt that the President should let the pressure - from outside - this, The President said, "I as in complete agreement with you and Regraded Unclassified 234 - 2 that is emetly the way I feel, and Cordell agrees absolutely." I told him that Cordell didn't talk that my to - this seraing. the gave no the impression that be would like to ⑉ this included, "Se would IS, said the President, "bat I as not going to de enything about is. The Pressure will have to come from alsothere." Be asked no to send over to his the memorandum, and the as the conference in my office, and while be didn't tall me 60 in n may words, I got the impression that be will 000 that 10 is sent and gate to Key Pitteen. (Distated via telephone by the Secretary to MeGuire) The original sent to the Secretary's office for the Secretary's diary. The original of this sent to the Secretary at his house on 12/12'40 copied 12/12'40 by fm Regraded Unclassified 235 October 1, 1939 Bet Credits 11 Section 7 of the Somete neutrality MII relates to financial transactions with belligerents. It continues the existing previsions of the neutrality statute which prohibits the miking of leans and credits to belligerents and persons acting 00 their behalf. It-is-o also to be noted that the existing neutrality Law authorizes this President, when be finds 18 in the interest of the United States, to exempt from this prohibition "ordinary commercial credite and short- term obligations in aid of legal transactions and of a character customarily used in nermal peacetive commercial transactions." The Senate Committee apparently felt that the existing provision sould be strengthened, without sacrificing American interests, by limiting the discretion of the President and w confining to a mere limited category the permissible forms of short-town commercial credits. Accordingly, the Senate bill provides that (1) the short-torm commercial credite may not be for & period mre than 90 days without renowal) (11) if say belligerent or person acting for a belligerent defaults on my rush 90=day credit, 20 - commercial credit my be extended) and (111) the President report to Congress every als souths full in formation M to cash commercial credit which has the been paraltted. Regraded Unclassified a s - 236 26 to the entirely clear that Presidential authority to permit short-term commercial credito to belligerents has been a part of the neutrality law continuously since February, 1936, and that the only changes which the Senste bill unless is the existing las are in the direction of additional restrictions on the Presidential discretion to permit short-term consercial credito, It bee been charged that the provision in the present bill relating to short-term commercial credits to belligerents is investatent with the Johnson Act of 1934, and is the opening wedge for the granting of leans to belligerents. I think that as emmination of the history of the Johnson Act and the Neutrality Act will show these charges to be unfounded. The Johnson Act provided is part as follows That heresfter it shall be wiseful within the United States or any place subject to the jurisdiction of the United States for any perces to purchase or call the bonds, securities, or other obligations of, any foreign government or political subdivision thereof or any organization or association seting for w on behalf of & foreign government of political subdivision thereof, issued after the passage of this set, or to nake my Loan to must foreign gevernment, political addivision, organization, or association, encept a renowal w adjustment of enisting I allas 1 1 division, organization, or association, Le in defauls in the payment of its obligations, w any part thereof, 1 3 $ :- Mill Mates, s . a 8 Within a fee weeks after the passage of the Polmon we a - of problems aress assessitating the interpretation of that statute. be April m, 1934g 6 confirmence me hold at the Treasury Regraded Unclassified - , - Regraded 23% Unclassified Department attended by Senator Johnson, the Attorney General, the Secretary of State, the Secretary of the Treasury and a number of other efficials of the State, Treasury and Justice Departments. During the conference, Benater Johnson me asked if be thought that the statute applied to such every-day commarcial instruments as time drafts, bankers' acceptances, etc. Benater Johnson stated that he did not think that the statute could be interpreted in any sush nasser and that 10 was not the intention of the statute to interfere in any way with ordinary commercial transactions. It also appeared to have been the view of the participants in the conference, including Senstor Johnson, that the Johnson Act did not apply to time drafts, acceptances, otd., employed in connection with ordinary Commercial transactions. A nemerandum of the conference is in the Treasury Department's files. A copy of the memorandum is attached. On the same day the State Department issued the following press release: "Inquiries have been received at the Department of State as to whether the Act of Congress approved April 13, 1934, to prohibit financial transactions with foreign governments in default on their obligations to the United States, applies to ordinary commercial 'secoptances or time drafts," such as are well by foreign governments to finance the current requirements of their embassies and consulates in the United States. "The Department of State and the Attorney General are in agreement that sush instruments 4e not constitute 'obligations' within the purvice of the dor. "Certain other questions that have been presented regarding the interpretation of the hot are under 000+ alderation. # On May 5, 1934, the Attorney General, is response to 4 request 238 4 Regraded Unclassified from the Secretary of State, readered an opinion a a number of questions relating to the Johnson Act, which epinion stated is part as follows: **(2) To what types of transactions dose the Act apply?* "The Committee Reports (s, Sept. 20 and House Rept. 974g 734 Comg.) resite that the bill was introduced following - investigation by the Senste Committee on Pinance and the revelation therein that 'billious of dollars of securities ... offered for sale to the American people* more overder and unpaid, that some of these "foreign bonds and obligations ... vere sold by the American financiers to sake out- regeously high profits's sad stated a purpose "to prevent e recurrence of the practices which were shown by the investigation to be little less than a fraud upon the American people # " to curb the repacity of those engaged in the sale of foreign obligations . . 0,1 "This, I think, is indicative of a purpose to deal with such 'boads' and 'securities' and with 'other obligations' of like nature, observing the rule of einadem generia - that is, obligations such as those which had been sold to the American public to reise money for the use of the foreign governments issuing then - not contemplating foreign currency, postal money orders, drafts, checks and other ordinary side to benking and commercial transactions, which AND 'obligations' is a broad sense but not in the sease intended, It was obviously not the purpose of the Congress to discontines all commercial relations with the defaulting countries." ..... **(4) Does the Ast apply to acceptances or time drafts?' This question appears to be sufficiently carvered by the comments under Question No. 2g - It appears proper to add, however, that such transactions smot be conducted in good faith, in order to be within the les, and not as mere subterfuges to circumvent its purpose." In other words, the Attorney General found that while the Johnson Act prohibited the sale of bonds and occurities of countries 239 - 5 - in default it did not prohibit those ordinary short-term comercial credit devices customarily used in international trade. The entire text of the opinion of the Attorney General we quoted in a State Department press release dated May 5, 1934 which also included the statement that the State Department concurred in the Attorney General's interpretation of the Johnson Act. Inquestionably this opinion has been relied upon by American business interests in their commercial transactions with defaulting countries and persons on their behalf. In the light of this background and at this late date, the Johnson Act should not be construed as making illegal short-term credit transactions with defaulting governments relating to otherwise per- missible trade and commercial transactions. SEUTRALITY ACT In February, 1936, Congress is amending the then existing Neutrality Act included the following provisions "SEC. 1a. Whenever the President shall have Losued his proclemation as provided for in section 1 of this Act, it shall thereafter during the period of the war be unlawful for my person within the Maited States to purchase, sall, or exchange boads, securities, or other obligations of the government of any belligerent country, or of any political subdivision thereof, or of any person acting for or or behalf of such government, Lossed after the date of such proclemation, or to mine any loan OF extend any credit to ear such government or persons Profided, President and of & character customerily used Regraded Unclassified 240 - Regraded Unclassified time commercial transactions." It will be noted that this provision, which has been the law since February, 1936, specifically authorised the President to permit short- term ordinary commercial loans to belligerents and persons noting on their behalf. The debate is Congress reveals no feeling that this provision as inconsistent or in conflist with the provisions of the Johnson Act. The view of Congress was quite the contrary. The House report on this provision is the 1936 assendent stateds so # . It is the law now under the Johnson Act that it is unlawful to sell bonds, securities, etc., in this country of any foreign country that is in default of its indebtedness to the United States. This covers most of the greater powers is Europe. This section, however, goos such further and makes it unlewful, as before stated, to all belligerent countries. Now, there is a provision in this section that if the President shall find that such action will serve to protect the commercial or other interests of the United States or its mationals, be say, is his discretion, and to such extent and under such regulation as he may preseribe, ensept from the operation of this section ordinary commercial credits and short-time ebligations in aid of legal transactions and of 0 character sustomarily used in normal peacetive commercial transactions. There is also another provision that this section does not apply to reneval or adjustment of indebtedness which my exist on the date of the President's proclamation. The only diseretion given the President under this section is in reference to such credits used in normal peacetine commercial trans- actions." By specifically prohibiting in the Neutrality set the extension of "my credit" (which words do not appear in the Johnson Act) Congress, in visa of the purposes of the Neutrality set, apparently intended thereby to prohibit even short-term commercial credits unless the 241 0 0 ? I -7- President found that the making of such short-term comercial credite to belligerents was in the public interest, in which event, such credits would be lawful. No change was made in this provision of the Neutrality Act when the Neutrality Act was otherwise asended in 1937. When the neutrality legislation was considered in the House of Representatives last July, it we proposed to circumscribe further the President's power to permit short-term commercial credits to belligerents by limiting such credits to 90 days without renewal, and requiring the President to make periodic reports to Congress of such transactions. These limitations on the power given to the President by the existing statutory provision are included in the Senate bill, and in addition the Senate bill prohibits further 90-day credits if a belligerent defaults on prior 90-day credits given to it. Original and 1 copy taken to White House by Foley 8130 P.M. 1 copy sent to Secretary by Berustein 1 eopy to Attorney General at Washington Hotel W Shalley (returned approved and original run given to Attorney General.) 1 copy to Viner 1 copy to Bell 1 copy to Cookran 1 copy to Berastein 1 copy to Puble 1 copy to Foley Builie returned copy after reading 10. Regraded Unclassified 242 C 0 ? I October 2, 1939 Secretary of the Treasury Mr. Foley M you know, we have ruled that neither the Johnson dot, nor the provisions of the Neutrality Act relating to the making of loans and the extension of credit to belligerent countries, apply to the Government or any agency thereof. The Attorney General has concurred in this view. Nothing in the Neutrality Bill, which has been reported out in the Senate, necessitates - & change of this view. (Initialed) & a. For Jr. JUPingt 10/2039 Initialed JMP and n Regraded Unclassified 243 0 , October 24g 1939 I Tot decretary Morgentham From lears. White and Foley Desator Taguer inquired by telephone u to the Department's position on Taft's assistment to the Neutrality Bill to limit the stapilization fund's holdings of the currency of any balligerent to no more the $50,000,000 or any one time. To feel that the Department should indicate to Senstor Vageor its opposition to faft's assistment for the following remain (1) When Congress extended the stabilisation premo 10 was fully conseious of the possibility or probability of a var in Berope. There is accordingly no need at this time for Congress to No consider the problem and to limit the stabilisation powers, (2) Benater Taft questioned the Secretary about the use of the edabilisation fund in the event of war. The Secretary said that before he would use the stabilization fund to assist any country in presenting that SAP be would come up before the proper committee and ask for guidance. This procedure would permit greater flexibility this Taft's proposal in dealing with N energency situation in which it might be greatly in the interests of this country to purchase the currency of & belliger- at in amounts greater than $50,000,000. by going to the - gressional committees the Treasury sould assertain the visas of Congress without the publicity and duly involved in getting new legislation. (3) If - do not indicate our opposition to Taft's assedemt, there is likelihood that other Amendments would be offered prohibiting the stabilization fund from purchasing any belligerent currency and in effect mullifying its use during the will If you agree with the foregoing, we can give these views to Benefot Taguer orally. (Initialed) H.D.W. APPROVED: October 25, 1939 (Taitialed) Original me left with Senstor Vaguer by White and poler The original of this "copied" run was sent to the Becretary Insurance at his house on 12/12'40 10/24(39 copied 12/12'40 fa Regraded Unclassified 244 Regraded Unclassifi 0 o The original copy was pulled. The following note appeared P on its "Please talk to M. H.M.Jr.", and "White House", I Oct. 30, 1939 Secretary Morgenthau Mr. Foloy As I stated to you in my assorandus of October 2, 1939, it is our view, concurred in by the Attorney General, that the Johnson Act and the provisions of the present neutrality law relating to the saking of leans and the extension of credit to belligerent governments do not apply to this Government or agencies thereof. The pending neutrality bill contains similar language and it would have been appropriate to interpret it in . similar nanner but for the state= sent made by Benator Pittman on the floor of the Senate late in the evening on October 27, 1939. Benator Fittmen indicated that be and the other drafters of the bill construe its provisions to prohibit the saking of loans or the extension of credit to belligerent governments by governmental corporations, such as R. 1. c. and the Export-Import Bank. A discussion of this matter appears in the attached excerpte from the Congressional Record. On Ostober 17, 1939, Senstor Barkley said on the floor of the Senate that his offhand view was that the credit provisions of the pending bill applied as rigidly to the B. 1. c. and any other agency of the Govern- sent as to any private person in this country. Senator Pittman made the statements in question notwithstanding the fact that on October 27, the Senate voted down an emendment introduced w Senator Taft, which was designed to prohibit the seking of loans and the extension of credit by the Government or agencies thereof, Yes will note from the discussion of the matter which appears in the excerpt from the Congressional Record that Denator George pointed out that Senater Pittman's construction "Govers precissly one of the amendments offered by the die- tinguished Senster from Ohie, which was voted dom by this body yesterday." Unless Senster Pittman can be personded to take - appropriate 4- tion that would nullify the effect of this statement I as fearful that W will be usable to hold that the 2. 7. c. and the Export-Import Bank have legal authority under the now-pending legislation to nake leans of the type which have been considered to an American corporation acting - behalf of belligerent governments, collateralised by American securities owned by such balligerents. (Initialed) L. a. 1., Jr. JUPelMingt 10/28/39 245 RECORD October 27, 1939 Page 1655 TAXE Mr. President, while this matter is being discussed I should like to ask the chairess of the Committee OG Foreign Relations - question regarding this section. On page 21 10 is provided that thenever the President shall have issued a proclemation is shall be unlowful for any person within the United States to advance credits to foreign governments. 1 wish to know whether w not the chairman of the Connittee as Foreign Relations considers that the word "person" which so also defined GEL page 30 as including corporations, and ao forth, is broad enough to include the Reconstruction Finance Corporation and the Export= Import Bank. and PITTMAN. The word "person" expressly includes surporations./I therefore take 10 that 11 does include them. In the Senstor's opinion, 10 includes the Resonstruction Finance Corporation and the Expert=Impert Sank? That is my opinion, and that me the opinion of these the drafted the joint recolution. Mr. President, I wish to mike a short statement, Particularly I wented to my that my construction of the med "yursun" is identically the - as that given by the chairman of the consittee. I think that is partinent, because in effect 18 correr precissly - of the offered w the from Chio, which was voted down in this body yesterday. I think the word *perscall here does include a of the Government, a corporate emboidiary reth M the Resenstruction Finance Corporation, w my other corporation which is camed wholly or practically vally w the Governmenth itself. Regraded Unclassified