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DIARY Book 285 July 22 and 23, 1940 . Book Page A- Allison Engineering Company See War Conditions: Airplanes Appointments and Resignations Collector of Customs, Louisiana: Maloney (Paul) recommended by Harrison at request of Louisiana Senators - 7/23/40 Helson, Donald M.: Resigns as Acting Director of Procurement when appointed Coordinator of Purchases - 285 372 332 7/23/40 -BBendix Aviation Corporation (South Bend, Indiana) See War Conditions: Airplanes Bloch-Laine, Mr. See War Conditions: France Business Conditions Small Business Loans: Legislative proposals for Foley memorandum - 7/22/40 a) Conference - 7/23/40 Haas memorandum on situation for week ending 7/20/40 56 338 150 -CChina See War Conditions Coast Guard Architecture of new Life-Saving Station in Cleveland enthusiastically endorsed by HMJr - 7/22/40 Cochran, H. Merle 134 275 Kind of material HMJr does not wish at house Commodity Credit Corporation See Financing, Government Curtisa-Wright Corporation See War Conditions: Airplanes Customs, Bureau of Collector of Customs, Louisiana: Maloney (Paul) recommended by Harrison at request of Louisiana Senators - 7/23/40 372 -DDeparture Permits See War Conditions: Export Control -FFarben-Industrie, I. G., Aktien-Gesellschaft Federal Bureau of Investigation report 3 - F - (Continued) Book Page 285 Announcement of offering - 7/23/40 a) Closing of books - 7/24/40: See Book 286, page 304 392 Financing, Government Commodity Credit Corporation: b) Subscription figures - 7/29/40: See Book 287, page 245 c) Final subscription and allotment figures - 8/1/40: See Book 288, page 18 France See War Conditions -GGermany Operations of the I. G. Farben-Industrie Aktien-Gesellschaft: Federal Bureau of Investigation report 3 Gold See also War Conditions: Vatican Shipments from New York to Fort Knox: HMJr says "no publicity" 7/22/40 143 Great Britain See War Conditions: United Kingdom -HHousing Cleveland project for single women discussed by HMJr and Foley - 7/22/40 16 -J- Japan See War Conditions: Export Control -L- Lockheed Aircraft Corporation See War Conditions: Airplanes Louisiana Collector of Customs: Maloney (Paul) recommended by Harrison at request of Louisiana Senators - 7/23/40 372 -MMaloney, Paul See Appointments and Resignations Martinique See War Conditions: Airplanes Merchant Ship Movements See War Conditions: Export Control Mexico Hochschild transmits reports - 7/22-23/40 161,379 NBook Page Nelson, Donald M. See Appointments and Resignations Netherlands See War Conditions -0 Oil See War Conditions: Export Control -RReconstruction Finance Corporation See War Conditions: Airplanes (Engines, Financing of) Revenue Revision Excess Profits Tax: Probable Yield: Sullivan memorandum - 7/22/40 285 Conference with Democratic members of House Ways and Means Committee: Sullivan memorandum - 7/22/40 41 42 Treasury draft of bill as prepared for presentation to Ways and Means Committee - 7/22/40 a) National Advisory Commission attorney, 58 Fred Eaton, tells Sullivan accord with Treasury on amortization (Vinson-Trammell Act) feature is important - 7/23/40 1) Sullivan states bill may be discussed 264 after it has gone to House Ways and Means Committee and has been printed Conference; present: HMJr, Sullivan, Foley, and Viner 7/23/40 265 Stam, of Joint Committee, intimates he was"acting under orders when requesting another week in which to consider Treasury plan" - 7/23/40 331 -SShip Movements See War Conditions: Export Control Spain See War Conditions: Export Control Sterling See War Conditions: Exchange market resume Sternberg, Fritz Gaston memorandum on availability for Washington assignment 7/22/40 a) Discussed at 9:30 meeting - 7/22/40 20 132 T Book Page 285 381 Taxation See Revenue Revision Unemployment Relief Works Progress Administration: Report shows slight increase in employment - 7/23/40 U.S.S.R. See War Conditions United Kingdom See War Conditions -V- Vatican See War Conditions Vinson-Trannell Act See Revenue Revision -WWar Conditions Airplanes: Bendix Aviation Corporation: Federal Bureau of Investigation report on impending strike Curtiss-Wright Corporation, Lockheed Aircraft Corporation, and Allison Engineering Company progress reports - 7/22/40 "Order from chaotic condition now existing" on purchases by Allied Purchasing Mission and United States discussed at conference in Stimson's office; present: HMJr, Knudsen, Purvis, McReynolds, Nelson, etc. - 7/23/40 a) Young memorandum on conference b) Purvis and HMJr discuss conference Martinique Planes: Return discussed by HMJr and Bell 7/23/40 3 182 206 252 255 257 a) French Ambassador wants funds involved "free and not frozen" b) Welles and HMJr discuss Engines, Financing of: Reconstruction Finance Corporation 295 authority adequate for lending funds "to manufacturers of articles and materials useful for national defense": General Counsel's opinion transmitted by HMJr to Knudsen - 7/23/40 a) Justice Department-Foley conversation on which opinion was based 190 259 -WBook Page 285 295 War Conditions China: Three-way arrangement between U.S.S.R., China, and United States discussed by HMJr and Welles; Welles considers time inopportune because of antagonism over freezing Latyian, Estonian, and Lithuanian funds - 7/23/40 Exchange market resume - 7/22/40 a) Sterling reports - 7/22-23/40 Export Control: Merchant Ship Movements: Resume of cases - 7/22-23/40.. Report on all vessels and cargo destined for Japan 7/20-21-22/40 sent to.FDR, Secretaries of War, Navy, and Interior, Admiral Stark, and Acting Secretary of State - 7/23/40 See also Book 286, pages 44,74,255 (7/23-24-25/40); 28 26,386 56,287 298 and Book 287, page 222 (7/27/40) Oil: Ickes and HMJr discuss entire situation; HMJr suggests that Ickes advise FDR against all exports - 7/22/40.. 124 Embargo Proclamation: Proposed amendment adding petroleum products transmitted to FDR - 7/22/40 Exports during first six months 1935-1940 185 336 Exports to selected countries during first six months of 1939 and 1940 Japanese ship carrying 84,000 barrels Diesel oil given departure permit - 7/22/40 Stimson tells HMJr of a precedent for embargo on oil to Japan that occurred in the last war - 7/23/40 a) HMJr tells FDR: See Book 286, page 34 Shipments to Spain discussed by Ickes and HMJr 7/23/40 Strategic Materials: HMJr's telegram to FDR at Hyde Park stating valuable supplies "slipping through our fingers daily"; asks that all licenses issued by State Department prior to July 5th be cancelled - 7/22/40 a) HMJr discusses cancellation with Colonel Maxwell - 7/22/40 Scrap Iron and Steel: Stettinius asked to work on justification for embargo - 7/23/40 294 297 317 368 1 120 366 France: Martinique Airplane Situation: See War Conditions: Airplanes Bloch-Laine inquires about re-entering United States should he now return to France - 7/22/40 35 Netherlands: Penetration by Germans and Austrians prior to invesion: Federal Bureau of Investigation report Oil: See War Conditions: Export Control 3 - W - (Continued) Book Page 285 292 War Conditions (Continued) Purchasing Mission: Haas report on cash disbursements on balances due June 30, 1940 - 7/23/40 Vesting Order: Official sales of British-owned dollar securities - 7/23/40 Strategic Materials: 385 See War Conditions: Export Control Tanks: Chrysler Corporation discusses additional plant facilities with Knudsen: Foley reports to HMJr 7/19/40 U.S.S.R.: 197 Three-way arrangement between U.S.S.R., China, and United States discussed by HMJr and Welles; Welles considers time inopportune because of antagonism over freezing Latvian, Estonian, and Lithuanian funds - 7/23/40 295 United Kingdom: Military Situation: Reports from London transmitted by Lothian - 7/22-23/40 30,271 Vatican: Earmarked gold account with Federal Reserve Bank of New York - 7/23/40 Works Progress Administration See Unemployment Relief 409 i July 22, 1940 TELEGRAM TO THE PRESIDENT HYDE PARK NEW YORK (VIA WHITE HOUSE TELEGRAPH) STRICTLY CONFIDENTIAL VALUABLE STRATEGIC MATERIAL SLIPPING THROUGH OUR FINGERS EVERY DAY. LICENSES ISSUED BY JOE GREEN OF STATE DEPARTMENT PRIOR TO JULY FIFTH. PLEASE INSTRUCT COLONEL MAXWELL TO CANCEL ALL OUTSTANDING LICENSES ISSUED PRIOR TO JULY FIFTH BY STATE DEPARTMENT. HENRY MORGENTHAU JR. 2 July 22, 1940 TELEGRAN TO THE PRESIDENT HYDE PARK NEW YORK (VIA WHITE HOUSE TELEGRAPH) STRICTLY CONFIDENTIAL VALUABLE STRATEGIC MATERIAL SLIPPING THROUGH OUR FINGERS EVERY DAY. LICENSES ISSUED BY JOE GREEN OF STATE DEPARTMENT PRIOR TO JULY FIFTH. PLEASE INSTRUCT COLONEL MAXWELL TO CANCEL ALL OUTSTANDING LICENSES ISSUED PRIOR TO JULY FIFTH BX STATE DEPARTMENT. HENRY MORGENTHAU JR. 3 July 22, 1940 Ny dear Mr. Hoover: This will acknowledge receipt of the following communications which you have been good enough to send no recently: July 15 - Operations of the I. G. FarbenIndustrie Aktien-Gesellschaft July 16 - Information furnished by Major Van Oosten relative to penetration of Holland by Germans and Austrians prior to the invasion of that country; July 17 - Strike to be called at Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana. Yours sincerely, (Signed) H. Morgeother, Jr. Mr. J. Biger Hoover, Director, Federal Dureau of Investigation, Washington, D.C. 4 July 22, 1940 My dear Mr. Hoover: This will acknowledge receipt of the following communications which you have been good enough to send me recently: July 15 - Operations of the I.G. FarbenIndustrie Aktien-Gesellschaft; July 16 - Information furnished by Major Van Oosten relative to penetration of Holland by Germans and Austrians prior to the invasion of that country; July 17 - Strike to be called at Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana. Yours sincerely, Mr. J. Edgar Hoover, Director, Federal Bureau of Investigation, Washington, D.C. 5 July 22, 1940 My dear Mr. Hoover: This will acknowledge receipt of the following smications which you have been good enough to send me recently: July 15 - Operations of the I. G. FarbenIndustrie Aktien-Gesellschaft; July 16 - Information furnished by Major Van Oesten relative to penetration of Holland by Germans and Austrians prior to the invasion of that country; July 17 - Strike to be called at Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana. Yours sincerely, Mr. J. Higar Heaver, Director, Federal Bureau of Investigation, Washington, D.C. 6 EDGAR HOOVER DIRECTOR Federal Surran of Investigation United States Department of Justice Washington, D. C. July 15, 1940 Personal and Confidential The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: Because of the World-wide holdings of the I. G. Farben-Industrie Aktien-Gesellschaft, Frankfort, and its close relationship with various chemical corporations in the United States, I have been endeavoring for some time to maintain a rather accurate and comprehensive check upon the operations of this corporation. I have today received from a source within Germany some data of a general nature concerning the operation of the parent corporation in Germany which I thought might be of interest to you. The financial report of the corporation for the calendar year, 1939, indicates that sales were very satisfactory. The balance sheet indicates that as a matter of fact a sales record has been established probably by reason of armament orders and military preparation. Sales within Germany have increased in synthetic gasoline, artificial fibre, rayons and other substitute products for which the Reich has much need in view of its armament program. of course, because of political developments, exports dropped particularly during the last quarter of 1939. Total exports for the last quarter of the year were however higher than for those of the same quarter in 1938. In order to replace overseas markets, exports in Europe have been pushed with Russia being the most importance purchaser. Through its far-flung and interwoven corporate structure, the parent corporation has encouraged its subsidiaries to build up stocks of merchandise in overseas countries in order to permit the subsidiary units to maintain the markets which they have established. The production of colors and accessories has reached a record with a pronounced increase in exports 7 The Secretary 2- of the Treasury particularly to Russia. The sale of by-products for use in the manufacture of textiles has been very large. Special attention is at present being given to cleaning products which reduce the use of fats. There is also an increase in the sale of chemical, pharmaceutical and photographic products; of rayon, artificial fibres, et cetera. The production of a fibre made of coal and chalk (PeCc) has commenced. The production of azote is larger than at any time in the past and the corporation has denounced its international contracts with other producers of azote in Europe. The following figures on the balance sheet at the close of business for the calendar year, 1939, may be of some interest to you. All figures are in millions of Rm. Assets 1939 624.8 Real Estate 1938 605 Merchandise 186.- 203.5 companies 12.2 Sundry debtors 207.- 11.4 184.2 companies 269.9 168.9 5.05 Shares of other Debts of affiliated 6.1 Sundry properties Stocks in Treasury 68.- 54.8 Money in bank 0 46.9 Liabilities Bonds Social obligations Supplies Credits of affiliated companies Bank loans Sundry creditors 307.- 58.7 182.7 53.6 84.1 76.5 66.9 57.6 107.6 31.6 48.3 94.4 8 The Secretary -3- of the Treasury Profit and Loss 1939 1938 386.2 363.1 1.6 0.3 Expenditures: Salaries and social expenditures Amortization on bonds, 1928 Interest Taxes Various reserves Retirement fund Statutory reserve Amortization, including 3.5 on holdings Net Profit Increase in net profit 13.171.4 7.5.- 9.9 125.- 2.2 5.- 5.7 2.3 171.2 135.7 56.1 55.1 18% 25% 786.3 667.2 24.7 19.6 8.3 3.6 Receipts: Gross profits From affiliated companies Interest Sundry receipts 2.3 8.7 Sundry receipts probably include profits on bonds sold from the treasury. The capital was increased in 1939 by 11 million RM. against a total authorized increase of 80 million Rm. At present the capital is 691 million Rm. as against 680 million at the end of 1938. The bonds sold plus discount were 102 million Rm. The total of the obligations is now 643 million Rm. against 449 million Rn. at the end of 1938. This shows the enormous financing for new arnament installations. The 9 The Secretary 4- of the Treasury net profit appears to have been adjusted at exactly the amount to maintain the dividend of 8% on the increased capital. The company has bought the whole stock (8 million marks) of the A. G. Carbidwerke Deutsch-Matret in Vienna. The Fabrique de peudre Skodawerke Wetzler Vienne now controls the Donau Chemie AG and has increased its capital to 12 million marks. The Bruckdorf AG Halle (lignite works) has been incorporated in the I. G. Farben. The Societe Internationale pour Entreprises Chimiques, allied with the I. G. Farben, showed for 1939 a profit of 10,395,935 francs and will pay 8% dividend against 8 1/2% last year. with expressions of my highest regards, Sincerely yours, jug Anover By Special Messenger N EDGAR HOOVER 10 DIRECTOR Federal Surran of Investigation Anited States Department of Justice Washington, D. C. July 16, 1940 PERSONAL AND CONFIDENTIAL The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: Major Van Oosten of the Royal Netherlands Indies Army has just furnished advice to this Bureau that, prior to the invasion of Holland, approximately 100,000 Germans and Austrians had peacefully penetrated the Netherlands. These persons were engaged as common laborers, domestics, and employees in munition factories which were built in the Netherlands in close proximity to the German border. Substantially all of the persons so employed remained entirely loyal to Germany and refrained from obtaining citizenship in the Netherlands. At the time of the invasion of the Netherlands there were 300 German citizens employed by the German Lega- tion. It is alleged that it was through this group Nazi activities were so well organized and for this reason Nazi domination over the Netherlands was facilitated. Major Van Oosten disclosed that plans for subduing the Netherlands were so complete and methodical that it was possible to dominate the Rotterdam Airport within twenty minutes from the time the first parachute troops arrived. He further disclosed that the German Legation in the Netherlands was located across the street from the Dutch Military Headquarters and that after the siege of Holland had been commenced it was learned a tunnel had been 11 -2- The Secretary of the Treasury prepared between the German Legation and the Dutch Military Headquarters in order that the latter might be destroyed. I thought you would be interested in receiving this information Sincerely yours, J Hoover BY SPECIAL MESSENGER EDGAR HOOVER 12 DIRECTOR Federal Surruu of Investigation United States Department of Justice lashington, B. C. PERSONAL AND CONFIDENTIAL BY SPECIAL July 17, 1940 MESSENGER The Honorable The Secretary of the Treasury Washington, D. C. My dear Mr. Secretary: I am transmitting herewith, as of possible interest to you, a copy of a statement dated July 16, 1940, containing information with regard to a strike to be called at the Bendix Products Division, Bendix Aviation Corporation, South Bend, Indiana, at ten o'clock on the morning of July 17, 1940. In view of the information set forth in the attached statement concerning possible sabotage occurring at this plant, I am causing inquiry to be made for the purpose of ascer- taining whether a matter within the investigative jurisdiction of the Federal Bureau of Investigation is involved. Sincerely yours, Allower Inclosure N 13 July 16, 1940 KENDRANDEM Information has been received that Mr. Nervia Boids, Personal Manager, Boutis Products Division, Dendle Aviation Corporation, South Bus, Indians, has indicated one hundred Communist plant have agreed so stage strike as 10 'sleek - Mr. Baids has a of / 1960. daily 17, the - - the Important of Neval Motorials Service that these one hundred employees be discharged. Mr. Heids has also allagedly indicated that on incident believed possibly attributable to cabolage July 19th. occurred at the plant yesterday, 14 July 22, 1940 12:18 p.m. Secretary Frank Knox: Hello, Mr. Secretary. H.M.Jr: How are you? K: I'm fine. I'm having lunch with you today. H.M.Jr: Wonderful. K: Where? H.M.Jr: Right in the Treasury in my office. K: All right, fine. Now how are you fixed for tomorrow night? Are you tied up? H.M.Jr: Well, I tell you, I'm going to that movie, "The Ramparts We Watch." K: oh yes, I see. All right then. How about Wednesday night? H.M.Jr: Well K: I'm thinking of dinner down on the boat and H.M.Jr: go down the river and have a little talk. Can I talk to you about it at lunch? I would love to go either Wednesday or Thursday whichever you were free. K: Well, Thursday I promised to go down and H.M.Jr: Can I take a rain-check on Wednesday? K: Yeah. Will you? H.M.Jr: Yeah. K: All right. That'11 be fine. H.M.Jr: Are you bringing Stark with you? inspect some of the Navy installations down the river. 15 -2K: Bringing whom? H.M.Jr: Stark today? K: Yes, I thought I would. H.M.Jr: Good. K: What about Johnny Sullivan? Would you like to bring him? H.M.Jr: No. I meant today at lunch. K: Oh, today at lunch. All right. H.M.Jr: No, there'11 be just you, Stark and I. K: All right then. Stark -- I left him up at the Capital but I think he'll be in for lunch all right. H.M.Jr: Well. Now today has nothing today with taxes, I hope, at least I haven't -- I want to talk about that meeting tomorrow morning. K: I see. H.M.Jr: I want a little help. K: Well, Stark will be there -- he planned to be there. H.M.Jr: Thank you. K: And we'll be at your office at 1 o'olook. H.M.Jr: Thank you. K: All right. 16 July 22, 1940 12:45 p.m. H.M.Jr: Ed? Ed Foley: Yes, Mr. Secretary. H.M.Jr: I talked to Bohn this morning, the head F: of the Cleveland Housing. Yeah. Ernie Bohn. H.M.Jr: Yeah. I told him that you were working on something to house single men. F: Yeah. H.M.Jr: Well, he's got some land -- some property there that has been given him for housing single women and he said if you knew how to fix -- get around the law so that you can house, as he put it, one-person families. F: Yeah. H.M.Jr: See? F: Yeah. H.M.Jr: Anything that you've done on it, if you'd send it to him he'd appreciate it. F: All right. That, of course, is up to the U.S.H.A. H.M.Jr: Yeah, that's what he knows. F: I think as a matter of law it's all right. As a matter of policy they may not want to do it. I explained that to Mrs. Morgenthau in a little note I sent to her over the weekend. H.M.Jr: ..... F: Yeah. said you had something on the law. 17 -2H.M.Jr: I told him what you were 'doing for Mrs. Morgenthau and he said if you could tell him what -- the Junior League up there had some property and houses where for years they' ve housed single girls and they've turned that over to him and he said if -- he's trying to interpret the thing to -- one-person family as one person. F: Yeah. H.M.Jr: If you had anything on it he'd All right. I had a little memorandum that I gave to Mrs. Doyle and I'11 send a copy of F: thatslong to Ernie with a little note. H.M.Jr: F: You know Henry is working for him. Yes, I know that. H.M.Jr: Right. F: Yeah. H.M.Jr: I just got a flash on the ticker that F: Annenberg has gone to jail. H.M.Jr: No. F: oh. H.M.Jr: No, this is just along the same lines, and Hanes and Lewis Douglas are forming a separate independent Democratic movement for Willkie. F: Well, that's where they belong -- both of them. (Laughs). H.M.Jr: Well, this is all -- what do you think of my little move onto the F: ..... business loane? H.M.Jr: Yeah. 18 -3F: I think it's fine. H.M.Jr: Yeah. Somebody has got to do something. F: Sure. It's good. 19 July 22, 1940 2:42 p.m. H.M.Jr: Hello. Operator: Mr. Welles. Go ahead. H.M.Jr: Hello. Summer Welles: Hello, Henry. H.M.Jr: Summer, if Herbert Feis saw those people W: I wonder if I could see him this afternoon so I could be brought up to date. He has not, Henry, because it was Saturday and they were none of them there. H.M.Jr: Oh. W: And then I haven't yet had a chance to check up with him. H.M.Jr: W: Well, I just -- before I went into that meeting I wanted to be up to date. Well, then there's nothing on that? There's nothing further on that. It'11 have to be taken up indépendently from now on. H.M.Jr: Well, the date's on at 6 then, isn't it? W: Yes, indeed. I spoke to Lothian on Saturday. H.M.Jr: Thank you. W: All right, Henry. Good-bye. 40 July 22, 1940. H MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston Fritz Sternberg is a German refugee who has been in this country for some time. His address is 49 Mayflower Avenue, New Rochelle, N. Y. and his telephone number is Hamilton 4379. Bruce Eliven, Editor of the New Republic, from whom I got this information, suggests that we write to Sternberg rather than phone him since he speaks rather broken English. Sternberg has been writing for The Infantry Journal and other military publications and is the author of one or two rather well known books, including #From Nasi Sources." Bliven is sure he would be pleased to come to Washington. 21 July 22, 1940. MEMORANDUR TO: Secretary Morgenthau FROM: Mr. Gaston Frits Sternberg is a German refugee who has been in this country for some time. His address is 49 Mayflower Avenue, New Rochelle, N. Y. and his telephone number is Hamilton 4379. Bruce Bliven, Editor of the New Republic, from whom I got this information, suggests that we write to Sternberg rather than phone him since he speaks rather broken English. Sternberg has been writing for The Infantry Journal and other military publications and is the author of one or two rather well known books, including "From Nasi Sources." Bliven is sure he would be pleased to come to Washington. HEG/mah 22 COPY Copy of paraphrase to TREASURY PARAPERASE OF TELEGRAM NO. 172, DATED JULY 22, NOON, FROM TEHRAN, IRAN. The Legation at Tehran reports on July 22, 1940, that an order of the Iranian Ministry of Finance has forbidden all banks to buy sterling. No reason is offered, other than that sterling is ostensibly not being quoted. 891.5151/199 23 TREASURY DEPARTMENT Washington Press Service No. 21-67 FOR IMMEDIATE RELEASE Monday, July 22, 1940 Secretary of the Treasury Morgenthau today announced the final subscription and allotment figures with respect to the current offering of 2-1/4 percent Treasury Bonds of 1954-56. Allotments on public subscriptions aggregated $630,719,850. This amount includes $39,110,300 allotted in full to subscribers for $5,000 or less who specified that delivery be made in registered bonds 90 days after the issue date. In addition to the amount allotted on public subscriptions, $40,600,000 of the bonds have been allotted to Government investment accounts, within the $50,000,000 reservation. Subscriptions and allotments were divided among the several Federal Reserve districts and the Treasury as follows: Federal Reserve District Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Treasury Government Investment Accounts TOTAL Total Total 628,019,500 2,924,302,650 393,641,000 449,152,250 221,241,700 204,688,950 771,165,850 156,315,200 89,506,900 113,212,450 143,390,750 502,503,150 7,931,200 $ 58,328,050 $6,605,071,550 $671,319,850 Subscriptions Allotted 270,526,400 38,626,150 42,981,200 22,349,350 20,114,450 75,625,650 17,315,600 9,717,100 13,200,350 14,497,050 46,526,600 911,900 40,600,000 24 July 22, 1940 Under Secretary Bell Mr. Cochran STRICTLY CONFIDENTIAL Reference is made to the attached nemerandus of July 16 from our Foreign Funds Control, requesting more detailed information from the First National Bank of the City of New York as follows: "Why are dividends to be paid is dollars in New York on the French, Belgian and Dansig issues of steekt "Has this procedure been followed regularly in the past? If not, when and under what circumstances was the present procedure adopted? "What is the source of the funds to be used in payment of dividends?" In accordance with an understanding with Mr. Pehle, I talked this marning by telephone with Mr. Leen Fraser, President of the First National Bank of New York. Mr. Fraser stated that the B.I.S. had informed his last March, as he recalled the date, that the B.I.S. desired this year to pay all B.I.S. dividends through American dollars. It has not been the practice is the past to pay all dividends in any one currency since the various issues of B.I.S. stock are specified in the currency of the country of issue. The B.I.S. dividend has, however. been paid on a gold basis steadily since the B.I.S. was created, and there has frequently been discussion of the desirability of paying this through one gold currency. This year 18 was decided that exchange conditions were se difficult and most currencies se violently fluctuating that it would be most convenient to use the dollar for paying all of the dividend checks. The First National was advised that this procedure is to be followed. Subsequently, however, it developed that the First National was only to pay dividends to American residents and to certain residents of non-invuled countries in Surape, most particularly Switserland. A - of dollars was transferred from the B.I.S. through the Federal Reserve Bank of New York to the First National sufficient to take care of the dollar payments which the latter is to make. In past years the First National has always received a special dividend deposit for the payment of these dividends specified in dollars, so the utilisation of the First National is entirely regular. Likewise the transfer of the dollars through the Federal is in strict accordance with B.I.S. regulations. one HMC:da:7.22.40 25 July 22, 1940 Union Secretary Bell Mr. Cederan STRICTLY CONFIDENTIAL Mr. Flotcher Warren. assistant to Mr. Borie in the Department of State, telephoned me this morning that a letter had Berle is his absence from Mr. Herbert L. Satteriee of 1 Deases Street, New York City. Mr. Batterice stated that he had applied for a license to cable $500 through Bergeas to New. Helen Read at General Delivery. Smoken, Nouth Girendo, France. Mrs. Hairs is as ord friend of Mr. Satterice. surried to a British retired office. This aged couple is now is cooperate circumstances, not being able to obtain any fents on letters of erolis or checks, and their hotel willing so longer to extend hospitality without payment. Mr. Berie's office wishes to know the status of this application. AMC HMO:dm:7.22.40 26 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE July 22, 1940 TO Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL Activity of the six reporting banks in official sterling was as follows: 1. Purchased directly from authorized banks in London Purchased from the Federal Reserve Bank of New York Total purchases I 15,000 15,000 L 30,000 2. There were no reported sales of official sterling. Of the above-mentioned purchases, 121,000 were bought by the banks on behalf of their customers; the other 19,000 presumably were added to registered account balances. The Federal Reserve Bank of New York also stated that a non-reporting bank purchased 182,000 in official sterling from the Federal. In the open market, sterling opened at 3.90-1/4 and moved steadily downward to 3.80-3/4 by mid-afternoon. It closed at 3.81-1/2. In execution of customer orders, the six reporting banks sold 66,000 and purchased 49,000. The other currencies closed as follows: Swiss franc Canadian dollar Lira 11-3/8% discount Reichsmark Cuban peso Mexican peso 9-15/16% discount .2272 .0505 .4004 .2015 bid, .2040 offered We purchased $6,000,000 in gold from the earmarked account of the Central Bank of the Argentine Republic. The Federal Reserve Bank of New York reported that the following shipments of gold were consigned to it: $26,783,000 from England, representing two shipments by the Bank of England, London, to be earmarked for account of His Britannic Majesty's Government. 1,800,000 from Portugal, shipped by the Bank of Portugal, to be earmarked for its account. $28,583,000 Total 27 2- The State Department forwarded to us a cable stating that Samuel Montagu, London, shipped gold from England to the Chase National Bank, New York, for sale to the U.$138,000 S. AssayinOffice. The Bonbay gold price advanced the equivalent of 7$ to $33.84. Spot silver in Bombay was equivalent to 44.064, up 3/16 In London, spot silver was fixed 7/16d lower at 22-3/16d. The forward quotation was unchanged at 22-1/16d. According to reports from that center, Indian interests resold, for spot delivery, silver which had originally been purchased for shipment. The U. S. equivalents of the London silver prices were 40.344 and 40.11 respectively. Handy and Harman's settlement price for foreign silver was unchanged at 34-3/44. The Treasury's purchase price for foreign silver was also unchanged at 35#. We made two purchases of silver totaling 100,000 ounces under the Silver Purchase delivery. Act, both of which were new production from foreign countries, for forward CONFIDENTIAL 28 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 19. 1940 TO Secretary Morgenthau CONFIDENTIAL FROM Mr. Cochran The foreign exchange market was quiet today, and the volume of transactions in both official and open market sterling remained fairly small. On the basis of the official rates of 4.02-1/2 and 4.03-1/2, the six reporting banks consummated the following transactions: 1. Sales of L2,000 to the British Control, effected directly through authorized banks in London. 2. Purchases of 173,000 from the British Control, of which 118,000 were acquired directly from authorized banks in London, and 55,000 through the Federal Reserve Bank of New York. So far as our reports indicate, none of the purchases from the Federal Reserve Bank ere made by the reporting banks on behalf of their customers. The sterling so acquired apparently is being used to build up the balances in the banks' registered sterling accounts. The Federal Reserve Bank also stated that non-reporting banks purchased $36,000 in official sterling from the Federal. The turnover in official sterling for yesterday and today reveals a noteworthy contrast between the amount of purchases and sales. Whereas American banks, during the two days, bought a total of 1229,000, they effected sales of only 17,000. The open market in sterling was very dull, although the rate experienced considerable improvement. From an opening of 3.81, it rose to a high of 3.91, and closed at 3.90. On behalf of their customers, the six reporting banks made sales of 135,000 and purchases of 452,000. The open market rate for the Canadian dollar again moved closer to the official level for that currency, closing at 11-1/4% discount. The official rates that have been quoted by the Canadian Foreign Exchange Control Board since last September are equivalent to 9-15/16% and 9-1/16% discount (rates at which the Board will buy and sell Canadian dollars respectively). The other currencies closed as follows: Swiss franc Lira Reichsmark Cuban peso .2272 .0505 .4004 9-15/16% discount .2015 bid, .2040 offered There were no gold transactions consummated by us today. Mexican peso -- 29 The Federal Reserve Bank of New York reported the following shipments of gold; 8,225,000 from England, shipped by the Bank of England to the Federal Reserve Bank of New York, to be earmarked for account of His Britannic Majesty's Government. 3,740,000 from Colombia, shipped by the Central Bank of the Colombian Republic to the Federal Reserve Bank of New York, to be earmarked for its account. 403,000 from England, shipped by Samuel Montagu, London, to the Irving Trust Company, New York. 400,000 from England, shipped by the Swiss Bank Corporation, London, to its New York agency. 140,000 from Portugal, shipped by the Bank of Portugal to the Federal Reserve Bank of New York, disposition unknown. $12,908,000 Total The Bombay gold price was slightly lower at the equivalent of $33.78. Spot silver in Bombay was equivalent to 43.86 up 1/8 In London, the prices fixed for spot and forward silver again rose 1/88 to 22-5/88 and 22-1/6d respectively. The U. S. equivalents were 41.13 and 40.11 Handy and Harman's settlement price for foreign silver was unchanged at 34-3/4*. he Treasury's purchase price for foreign silver was also unchanged at 35 We made two purchases of silver totaling 100,000 ounces under the Silver Purchase Act, both of which were new production from foreign countries, for forward delivery. HAM-CONFIDENTIAL 30 BRITISH EMBASSY, WASHINGTON, D.C. Personal and Secret July 22nd, 1940 Dear Mr. Secretary, I enclose herein for your personal and secret information a copy of the latest report received from London on the military situation. Believe me, Dear Mr. Secretary, Very sincerely yours, Lolaran The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D.C. Telegram despatched from London 3/ late on the evening of July Slot 1. The recent Angle-Italian navel setion took place in Antikishere Cheanel off northwest Crate. Early is action, "sydney" his the "Colleoni" is engine-room and stopped hers "sydney" then left some destroyers to sink the "Colleoni" and continued to chase the other eruiser, "yederice da Barbieno" of the same class. Chane leated 2 hours and "Sydney" obtained several hite but enemy retained her speed and drew out of range. Our destroyers fired 4 toryolooo at the "Colleeni", 9 his and east her. 845 survivors including the Captain were picked up by destroyers which were bombed durine sale operation without result. more were no essualties in His Majesty's shipe as . result of this action. Channel convey heavily attacked by about so enery aircraft yesterday afternoon. Destroyer "Brasea" his in engine FROM eaak later off Dover when in sow, 8 wounded. slight damage to one anti-submerine travier. s.s. "Fulberough" (1,000 tone) sunk, s.s. "Yestern" (700 tone) damaged and towed into Dover, no essuelties. 32 -2- Reported that battle cruiser "Oneisensu" left Trondjhem at 0900 hours July 20th. French S.S. "Ile de France" (43,500 tone) has been requisitioned at singapore. Believed that one-third of the crew will volunteer to serve. 2. Night of 19th-20th work of our heavy bombers difficult to observe owing to weather con- ditions. successful attacks made on oil plant at Gelsenkirchen, reilway target at Masen, air frame factories at Bremen, Wismar and Wengendorf, and S aerodromes in northwest Germany and Holland. single aircraft located and bombed warships "Scheer" and "Tirpits" at Wilhelmshafen, results unobserved. Attack on barges and shipping at Emden resulted in large explosion and several fires; terrific explesion reported at Harlingen. Two Messerschmitts 110 shot down during these operations. Yesterday 24 Blenheime despatched against specified oil target. aerodromes and aircraft factories its northwest Germany and to Kiel Canal; majority obliged to abandon tasks, one aircraft missing. One Hudson patrolling off Norwegian coast bombed wireless station at Utsire, wireless most collapsed, station also damaged. Last night 117 aircraft despatched as follows: 38 Wellingtons against oil and railway targets, 21 Whitleys against aircraft factories, 23 Hampdens to attack "Tirpits" in Wilhelmshafen dooks, 12 Blenheims against oil plants at Ghent and Vleardingen, 3 Hudsons to attack Emden Basin, 18/ 33 18 Nompdens and 8 Swordfish mine-laying in Copenhagen area, Sma River and Hubertgat. Reports avaited; two Wellingtons and three Hampdens missing, one Hampden down in sea off Middlesborough. s. Little enemy aircraft activity yesterday except at Dover. One bomb fell on British Oxygen Works at Cattedown, Plymouth, extensive damage, works out of production for some time. Last night very extensive minelaying operations off southwest coast and east coast, especially Harvich and Themes Natuary. Following ports closed today: Plymouth, Milford Haven, Preston, Newhaven, and Belfast. Few hombs dropped at Test Hartlepool, Lowestore, Harwich, Swanses, Mountain Ash and Haryport: casualties slight. Yesterday aircraft casualties in fighter operations: 9 enemy aircraft confirmed, 18 unconfirmed; our losses 5 Hurricanes and 1 systers. 4. Shipping losses:(a) By U-Boat: British "Woodbury" (4,500 tens) sunk in western approaches on 10th; British "Feerlmoor" (4,500 tons) sunk northwest approaches on 19th. (b)/ 34 (b) By Air: H.M. M/8 Trawler "Great Flower" sunk on 2gth off Inle of Eight. (e) By Mine: British "Troutpoel" (5,000 tons) sunk off Bangor. (a) By Reiders: "British Petrol" (7,000 tone) sunk on 14th West Indies. This German raider reported as ship of 9,000 tons painted in Swedish colours and armed with two 5.9 inch and two 8 inch guns and number of Dom-pome and machine guns. 5. Baypt. During the night of July 19th-20th Blenheims searched Tobruk Harbour for Italian eruiser chased by "Sydney": ship not located but shipping in harbour attacked by Blenheims and Swordfish, three direct hits, one causing major explosion. Mediterranean. Further arrival of 16 8.79 bombers at Rhodes increases total strength of bombers in the Dedecanose to 77. Reinforcements comprise 18 Stormo, reputed as italy's most - bomber formation. This Storme probably carried out recent Haifs raid. Reported German parachusists, engineers, and airmen have arrived in Lybia and more are expected. On 19th Wellesley aircraft Sudan. bombed Agardot and Barentu aerodromes; one enemy aircraft destroyed and others damaged as well as W/S station at Barentu. Kenza. On 18th four aircraft of S.A.A.F. blow up petrol dump destroying one enemy aircraft and severely damaged another at Neghelli aerodreme. 35 CONFIDENTIAL July 22, 1940 To: The Secretary From: Mr. Young When Mr. Bloch L'Aine was here last Friday, he told me that he felt it was his duty to return to France re- gardless of the conditions or the personal repercussions which it might involve due to his former position as an international banker associated with Lasard Freres, and his Jewish origin. He is the fourth generation of a family which has served France either in the Army or in the French Civil Service. He is convinced he must go back to see if he can help despite the hardships which he realizes he is bound to encounter. If it should turn out, however, that he could not be of help, it was his desire to return to the United States if it were still possible at that time for him to get out of France, It was this thought which he had in mind when he asked you as a personal favor to find out what the State Department might be able to do toward permitting him and possibly his immediate family to reenter the United States on a more permanent basis. He mentioned the possibility of coming in under some quota which was not too full, and he was quite prepared to go to Cuba or whatever place might be designated to wait his turn for admission. At the present time he has a diplomatic passport as well as an ordinary passport, the latter expiring July, 1942. Mr. Bloch L'Aine is planning to leave for France very shortly and is extremely anxious to clarify this situation before he leaves. He will be delighted to come to Washington at any time to confer with the State Department. P. 36 GRAY HR London Dated July 22, 1940 Rec'd 2:40 p.m. Secretary of State Washington 2329, July 22, 6 p.m. FOR TREASURY FROM BUTTERWORTH. Doctor Outrata who is in charge of financial matters for the Ozz ch-Slovak National Committee called at the Embassy today and explained that when he and other MEM- bers of the Committee left France they took with them and brought to this country French bank notes totalling 11 million france . This they have declared to the British authorities and deposited for safe-keeping in a British bank. Doctor Outrata stated that he was having discussions with the Bank of England regarding the possible Exchange of these france for pounds but that he would prefer to acquire dollars for the whole or at least a part of this sum and he requested that I communicate with Washington to nsoertain whether WE would be interested in such a deal. While acceding to his request I expressed my personal opinion that it was unlikely that WE could enter into such a transaction, particularly as France may at any time prohibit 37 HR -2- No. 2329, July 22, 6 p.m. from London. prohibit the importation of franc bank notes. I think it is for this same reason that Dr. 2 Outrata would like as quick an answer as possible and accordingly a prompt reply would be appreciated. KENNEDY OSB 38 GRAY HR Berlin Dated July 22, 1940 Rec'd 10 p.m. Secretary of State, Washington. 3100, July 22, 8 p.m. FOR TREASURY FROM HEATH AND FOR DEPARTMENT'S INFORMATION. In the Sunday issue of the DAZ, Winschuh, the financial Editor, discusses at length the gold problem of the United States under the title "gold boycott". Stating that the United States has broken the rule that a creditor nation must have a passive balance of trade he asserts that it must now face the day of reckoning with no sure solution of its gold dilemma. in sight. He quotes Secretary Morgenthau as having declared on May 3rd that "if the political situation of the world should undergo a drastic change then international trade and finance may assume the character of domestic trade and an independent monetary system would CEASE to Exist. Under such circumstances it might well be that gold would no longer be needed. Under these circumstances however life 39 HR -3- #3100, July 22, 8 p.m. from Berlin. life would be 80 different from its predication that the loss in the value of gold would be the least of our troubles" (it will be noted that in thus quoting from the Seorstary's speech Winsnhuh has omitted certain important phrases.) HE goes on to assert that the collapse of the value of gold would be a grave source of anxiety for the United States since it would also mean the loss of its prestige as an economically well advised, wise and successful great power. He concludes his article with the following argument: obviously the starting of European trade following the war would be substantially facilitated through the USE of gold. Obviously the reconstitution of European currencies and the organization of monstary cooperation is no Easy task and the notions of a "labor currency requires substantial development particularly as regards the thawing of the financial burdens of the war and the necessary return of balance between the consumption goods, Economy and industries working on Government orders. In addition, Germany wishes above all to have an Economy relieved as far as possible from bursaucratic 40 HR $3100, July 22, 8 p.m. from Berlin. bureaucratic fetters. Particularly in this respect is gold (i) may attract the business man with the prospect of being able to conduct his business without a "paper war". The question"whether or not return to gold" has in these times, however, assumed such fundamental im- portanoe and political dimensions that technical advantages of gold are not the only considerations involved. KIRK WWO 41 MEMORANDUM July 22, 1940. TO: SECRETARY MORGENTHAU FROM: MR. SULLIVAN This memorandum is supplementary to that of July 16 relating to the probable excess profits and yields of an excess profits tax. Assuming excess profits of $2,000,000,000, the following average effective rates would be necessary to yield the following amounts of revenue: $ 500,000,000 25% 1,000,000,000 50 1,500,000,000 75 100 2,000,000,000 The following bracket rate schedules would roughly approximate the above effective rates: Income bracket in per-: cent of invested capital Rates for: 2 : $5,000 plus 15% of invested capital $500,000,000 $1,000,000,000 $1,500,000,000; $2,000,000,000 20% 45% 70% 100% 40 60 85 100 40 60 85 100 Between 15 and 30% of invested capital Over 30% of invested capital It is again important to observe that the above figures are highly tentative and subject to very substantial revision. JLS 42 MEMORANDUM July 22, 1940. TO: Secretary Morgenthau FROM: Mr. Sullivan SUBJECT: Conference with certain Democrat members of the House Ways and Means and Senate Finance Committees from 2:00 to 4:15 PM, Monday, July 22, 1940. Present: Representatives Doughton, Cooper, Boehne, Buck and McCormack; Senators Harrison, Byrd, Connally and George; Messrs. Beaman and O'Brien from the office of the Legislative Council of the House of Representatives; Messrs. Stam, Myers, Price and Stratton, from the Joint Committee Staff; and Messrs. Sullivan, Tarleau, Blough and Eichhols from the Treasury Department. Chairman Doughton gave a brief summary of excess profits tax developments to date, including Congressional action on the Revenue Act of 1940, the message of the President to Congress on the excess profits tax, and the conferences of Congressional leaders at the Treasury and the White House. He indicated the desirability of having an agreement between the Treasury Department and the Joint Committee Staff, in order to save the time of the Ways and Means and Finance Committees. Messrs. Harrison and Cooper also said a few words. Mr. Sullivan then explained the main outline of the excess profits tax plans on which the Treasury had worked. In the course of his exposition, there were frequent questions from and discussion among the Congressmen. The most significant among the points raised are briefly indicated later in this memo- randum. Mr. Doughton asked Mr. Sullivan if the Treasury and the Joint Committee Staff were in agreement on all points. Mr. Sullivan replied that there were four points on which they were not in agreement, of which three were minor in character. On the inquiry of Mr. Doughton, Mr. Stam stated that the major point of difference was whether invested capital should be used as a basis of taxation as in the plan suggested by the Treasury. Mr. Stam said he felt that the use of invested capital would impose hardships on some taxpayers and was not entirely a fair method. He then said that he had understood that Great Britain and Canada had abandoned or were about to abandon the use of invested capital and were using a comparison of pre-war and current earnings to measure excess profits. He said be was not proposing such a plan, and that he had no plan to suggest which was free from serious difficulty. Mr. Stam stated that if the invested capital prin- ciple was to be used, he believed the Treasury proposal was the best method that had been suggested for applying it. Mr. Doughton then asked Mr. Sullivan if the Treasury was ready to proceed today. Mr. Sullivan assured the Committee that the Treasury was ready to proceed at once. Mr. Doughton then asked Mr. Stam if he was ready now, or wished 43 -2more time. Mr. Stam indicated that he would like the remainder of this week to continue his research. Mr. Doughton then expressed the view, which was supported by Mr. Cooper, that it would be well to have an agreement between the Treasury and the Joint Committee Staff and that time would be saved for the Committee if consideration was postponed until next week, when presumably an agreement would have been reached or in the absence of an agreement, Mr. Stam would have a definite plan to present. It was accordingly determined to reconvene the group at 10:30 Tuesday morning, July 30th. Among the important aspects of the excess profits tax discussed at the Conference were the following: Senator Byrd asked whether the depreciation of assets recorded on the books would not reduce invested capital to zero in many cases. It was explained that since the deduction of depreciation was offset by the increase in other assets, the capital would remain intact unless there were losses or distributions of the capital to stockholders. Mr. Buck was interested in the same problem and also in the analogous problem of depletion. Mr. McCormack, together with Senator Byrd, raised the question of whether the Treasury plan would arrive at an invested capital figure representing the true worth of the business. Mr. Sullivan answered that it might not, but that true worth was something on which reasonable men might have widely different opinions. The theoretical issue involved was not discussed and the administrative problems of determining the present worth of the business were raised in only a passing manner. Mr. McCormack suggested that rather than determine invested capital as proposed in the Treasury plan, the Bureau of Internal Revenue and the taxpayer should sit down together and arrive at a mutually agreeable figure for invested capital. Senator Connally expressed the belief that invested capital is necessary as a basis for excess profits taxation. He stated that he desired the tax to be imposed in time of peace as well as during an emergency period. In this, he was opposed by Mr. McCormack, while Senator George expressed the view that the tax would continue after the emergency. Senator Connally expressed doubt as to the desirability of including borrowed capital as part of invested capital. There was considerable discussion whether a tax could be applied only to certain industries which benefited specifically from the defense program. Senator Byrd and others expressed the belief that it would be impossible to segregate the benefiting industries sufficiently to permit the distinction to be made. Senator George appeared to be of the opinion that the tax should preferably apply only to profits in excess of those received during a base period. He expressed the opinion that if the invested capital basis were used, overcapitalized concerns (as examples he mentioned the United States Steel Corpor- ation and the railroads) would pay little tax while smaller concerns would be heavily burdened. JLS 44 July 22, 1940 m. livening Mr. will you kindly send the following california Americas Neberry, Transe. For Matthews from the Treasity Department. Reference year July 16 to Batternorth. to have talked with Phillips and about French balances in Great Britain. these officers assess that Menick and other neurous of the French Balancey no. according to Butternorth's massage of July 18, were then smiling for Presso, will be is a position to provide this information. Reference your 63. July 13, 3 D.M. Treath balances in the United States were subjected by - Insective Order dated July 27 to treatment similar to that accerded assets of Desmark, Solgina and other invested areas. No general Licenses envering official Fresch balances have been issued. The system is the same as explained to you whon in Washington. All pertinent regulations unios the centrol system have been mailed to you currently by this Treasury. has liberies been provided and states that he has kept the Treach Ministry of Pinance informed. In - you are advised that the following transactions with respect to property in which any interest, direct or indirect, is hold by Presso, or by any person deniedled in, or a subject. office or resident of Presse, its territories, dependencies and percessions, es or since - 17. 1990, except persons Conteiled or residing is the United States on - date, my be effected only parent to a Member (a) payments or transfers of credit involving - or more beaking institutions within the United States (b) exporte from the United States or assmoking of gold or silver currency OF bullion by any person within the United States (a) deelings in ovidences of indebtedness or emarehip w any person elthis the United Statest (c) any transaction designed to made the foregoing requirements. Application for each license may be sade to the Federal Reserve Beak of New York by the American beaks referred to in your communication or by say party to wash transaction, ahother or not in the United States. On July 19 good to treasury officiale a went w his to the Strench Ministry of Picuse as July 15 giving his interpretation 45 -2of American objectives of control as applied to French accets. No endersered to obtain confirmation from the American treasury officials as to the car- restness of his interpretation of the control, which ms refused. For your information, no did not consider his insappretation salisfastory." BMS 46 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 22, 1940 With TO Secretary Morgenthau FROM Mr. Gaston MERCHANT SHIP MOVEMENTS Matters Requiring Action by the Secretary of the Treasury None. Matters Not Requiring Action by the Secretary of the Treasury Closed Cases The Italian vessel ANTONIEITA requested on July 19, 1940, a departure permit for Philadelphia from Norfolk, Virginia. She carried 6,161 tons of scrap iron taken on at Port Arthur, Texas, and Pensacola, Florida, for Uenoa, Italy. On June 11, 1940, she put in at Norfolk and has remained there ever since. The ANTONIETTA is unarmed and under charter to en Italian concern controlled by the Royal Italian Government. Her first officer is an officer in the Italian Naval Reserve. On inquiry, it was learned that she intends to go to Philadelphia to unload the scrap iron and to pick up fuel. A departure permit was authorized on the morning of July 20, 1940. Pending Cases There is no change. in the status of the vessels described under paragraphs 2, 3, and 4 under "Pending Cases" in the July 17, 1940, report, nor are there any further developments on the normal peacetime consumption of petroleum products in Spain. 47 COFY Secretary Morgenthau July 17, 1940 Mr. Cairns MERCHANT SHIP MOVEMENTS Closed Cases 1. A departure permit was refused for the American Tanker ARYAN, carrying petroleum products to Spain. This vessel is owned by the Texas Company, and is at Port Arthur, Texas. 2. A departure permit was refused for the American Tanker NEVADA, carrying petroleum products to Spain. This vessel is owned by the Texas Company, and is at Port Afthur, Texas. Pending Cases 1. The Texas Company has submitted a request to export 610,000 tons of petroleum products to Spain for the balance of the year 1940. This would make a grand total of 1,076,000 tons for the year 1940. A memorandum of a conference with representstives of the Texas Company held on July 17, 1940, is attached. This matter is under consideration. 2. The Texas Company has requested advice as to whether or not the SS MONTE JAVALON, under Spanish registry, will be permitted to carry 5,000 tons of asphalt to Spain. The vessel will be loaded at Port Neches, Texas, some time between August 10 and the early part of September. This matter is under consideration. 3. Suspicious circumstances have arisen in connection with the departure of the SIMLA, a Norwegian vessel now at the port of Philadelphia. No departure permit has been requested, but a stop order has been placed against such a request when it is received. 4. The Lithuanian Steamship DENNY is now in Boston. The Lithuanian-American Import & Export Corporation, 157 Chambers Street, New York City, has requested that it be advised if a departure permit is asked for this vessel. The corporation desires to submit certain facts to the Treasury Department before such permit is granted. This matter is under consideration. (Initialed) H. c. HO/CP CC: Miss Chauncey Mr. Folay 48 July 22, 1940 Secretary Morgentime Mr. Gaston MERCHANT SHIP MOVEMENTS Matters Requiring Action by the Secretary of the Treasury None. Matters Not Requiring Action by the Secretary of the Treasury Closed Cases The Italian vessal ANTONIETTA requested on July 19, 1940, a departure permit for Philadelphia from Norfolk, Virginia. She earnied 6,161 tens of serap iron taken on at Port Arthur, Texas, and Penessale, Florida, for Genos, Italy. On June 11, 1940, she put in at Norfell and has remained there ever sines. The ANTOMIETTA is unarmed and under charter to on Italian concern controlled by the Reyal Italian Government. Her first officer is an officer in the Italian Nevel Reserve. On inquiry, it was learned that she intends to go to Philadelphia to unload the scrap iron and to pick up fuel. A departure permit was authorized on the morning of July 20, 1940. Pending Cases There is as change in the status of the vessels described under paragraphs 2, 3. and 4 under "Pending Cases" in the July 17, 1940, port, nor are there any further developments on the normal passetine consumption of petroleum products in Spain. (Signed) Herbert E. Gaston ml/ey 7/22/49 49 Secretary Morgenthan July 17, 1940 Mr. Caime HERGHANT SHIP NOVEMENTS Closed Cases 1, A departure posmit was refused for the American Tanker ARIAN, carrying potrolous products to Spain. This vessal is owned by the Texas Company, and is at Part Arthur, Tems. 2. A departure permit was refused for the American Teaker NEVADA, carrying potrolem products to Spain, This vessel is em by the Texas Company, and is at Port Address, Teams, Panting Cares 1. The Teams Company has submitted a request to export 620,000 tens of potroleum products to Spain for the balance of the year 1940. This would make a grand total of 1,076,008 tous for the year 1940. A amorandia of a conference with represents. lives of the Texas Company hold or July 17, 1940, is attached. This matter is under consideration. 2. The Texas Company has requested advice as to another or not the as MORTS JAVALON, under Spanish registry, will be permitted to earry 5,000 tome of asphalt to Spain. The vesual will be leaded at Port Neches, Texas, sees time between August 10 and the early part of September, This matter is under consideration, 3. Despisions circumstances have arises in commetion with the departure of the SDEA, a Horregian vessal now at the port of Philadelphia. No departure possit has been requested, but a stop order has been placed against such a request when a is received. 4. The Kithmaire is now is Sestem, The 1 Import & Export Corporation, 157 Chambers Street, New York a has requested that is be advised if a departure possit is asked for this vessal. The corporation desires to submit certain taste to the Treasury Department before - permit is greated. This matter is under consideration. m/ (Initialed) N. e. 00g Miss Its Polay 50 July 22, 1940 My dear Mr. Nelsone I an sending you herewith a copy of the President's message to the Congress of May 16, 1940. I want to draw your particular attention to Page 4 where the President saids *For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. our immediate problem is to superimpose on this production capacity a greatly increased as ditional production capacity." I an sure I am correct in interpreting the President's message that when he referred to American made planes he meant the complete planes with encines. Yours sincerely, (Signed) H. Morgenthau, Jr. Mr. Denald M. Nelson, Coordinator of National Defense Purchasing Federal Reserve Building, Washington, D. C. By Messanger 310 51 July 22, 1940 My dear Mr. Nelsons I am sending you herewith a copy of the President's message to the Congress of May 16 1940. I want to draw your particular attention to Page 4 where the President saids "For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. ... "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity. I am sure I am correct in interpreting the President's message that when he referred to Americanmade planes he meant the complete planes with engines. Yours sincerely, (Signed) H. Morgenthau, Jr. Mr. Donald M. Nelson, Coordinator of National Defense Purchasing Federal Reserve Building, Washington, D. C. By Messenger 52 July 22, 1940 my dear Mr. Nelsons I am sending you herewith a copy of the President's message to the Congress of May 16 1940. I went to draw your particular attention so Page 4 where the President saids For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-rade planes to foreign nations which have ordered them, OF seek to purchase more planes. That, from the point of view of OUR own national defense, would be extremely shortsighted. ... our immediate problem is to superimpose on this production espacity a greatly increased asdisional production capacity." I an sure I am correct in interpreting the President's massage that when be referred to American made planes he meant the complete planes with excines. Yours sincerely, Mr. Denald M. Nelean, Complimator of National Federal Reserve Washington, D. C. By Messinger 53 July 22, 1940 My dear Mr. MoReynolds: I an sending you herewith a copy of the President's message to the Congress of May 16, 1940. I want to draw your particular attention to Page 4 where the President said: "For the permanent record, I ask the Congress not to take any action which would in any way hamper or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. . "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity. I an sure I am correct in interpreting the President's message that when he referred to Americanmade planes he meant the complete planes with enginee. Yours sincerely, (bagned) H. Morgenthau, Jr. Mr. William H. McReynolds, Secretary to the Advisory Council of National Defense, State Department, Washington, D. C. By Messenger 310 54 July 22, 1940 My dear Mr. MoReynolds: I am sending you herewith a copy of the President's message to the Congress of May 16. 1940. I want to draw your particular attention to Page 4 where the President said: "For the permanent record, I ask the Congress not to take any action which would in any way hamper OF delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the point of view of our own national defense, would be extremely shortsighted. ... "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity. I am sure I am correct in interpreting the President's message that when he referred to American made planes he meant the complete planes with enginee. Yours sincerely, (Signed) H. Morganthau J. Mr. William H. MoReynolds, Secretary to the Advisory Council of National Defense, State Department, Washington, D. C. By Messenger 55 July 22, 1940 My dear Mr. NoReynolds: I am sending you herewith a copy of the President's message to the Congress of May 16 1940. I want to draw your particular attention to Page 4 where the President saids "For the permanent record, I ask the Congress not to take any action which would in any way happer or delay the delivery of American-made planes to foreign nations which have ordered them, or seek to purchase more planes. That, from the paint of view of our own national defense, would be extremely shortsighted. . "Our immediate problem is to superimpose on this production capacity a greatly increased ad- ditional production capacity. I am sure I am correct in interpreting the President's message that when he referred to American made planes he meant the complete planes with angines. Yours sincerely, (Signed) H. Morganthau, JI: Mr. William H. MaRaynolds, Secretary to the Advisory Council of National Defense, State Department, Washington, D. C. By Messenger 56 - FOR THE SHORETARY July 22, 1940 B. 3. Folay, Jr. Subject: Legislative proposals for small business loans. There are two principal bills pending at this Session. One of them is a. 3511, which is entitled, A Bill "To establish a permanent industrial loan corporation to assist financing institutions in making credit smallable to commercial and industrial enterprises." The industrial loan corporation would discount for or purchase from financing institutions obligations of commercial or infastrial businesses and would also insure banks against lesses which they night sustain upon obligations of commercial or industrial businesses. The management of the corporation would be vested in a Board of directors composed of members of the Board of Governors of the Federal Reserve System, and its capital stock and supples would be composed of funds paid by the Secretary of the Treasury to purchase from each Federal Reserve Bank the stock of the Federal Deposit Insurance Corporation heretefore subscribed for by such bank. The amount to be paid by the Secretary of the Treasury would come from the miscellaneous receipts created by the increment resulting free reduction of the weight of the gold dollar. On June 25, 1940, the soting Secretary of the Treasury advised the Chairman of the Senate Bennittee - Banking and that the we 57 Secretary Bargarthes - 2 was already authorised to advance credit and capital to business enterprise and that the KFO was the proper agency through which to advance such assistance to business. I declimede initial this report. The other bill is s. 3343, (which is almost identical with s. 3839) and which is entitled A Bill "To amend section 13b of the Federal Reserve 100, as amended." This bill would amount section 13b which now authorises Federal Reserve Banks to make lease to established industrial or commercial businesses by eliminating the requirements that the lease be sade to established businesses, that they be made for the purpose of providing working capital, and would also eliminate the Limitation on the materity of the leans to five years. This bill also provides that the financing institution obligate stall for only 10 percent of any less sustained by the Federal Reserve Bank, instead of 20 percent as now provided. On June 12, 1940, the Acting Secretary of the Treasury delivered personally a report to the Chairman of the Committee on Beaking and Currency which suggested that instead of the bill, there be enacted ea which would discontinue entirely further advances of funds from the Treasury, requiring the repayment of advances heretefere add, and clarifying certain ambiguities now existing is the operation of section 13b. This report pointed out that the made amount of leans outstanding at my time under section 13b was less than 833,000,000, and that February 21 only 812,721,000 of loans were outstanding is addition to comitments of $6,698,000. I declinade initial this report. CLX:mp 7/22 40 (Initialed) E. H. 7., Jr. 58 July 22, 1940 This is the Treasury draft which was ready for presentation to the Ways and Means Committee on July 22nd, but the Committee postponed the meeting until July 30th. was not read to accept it + Wattowed considerate with - 30 m Treasury snopt 5:44 7-12 59 5-67-30. The following sections numbered 1 to 15. inclusive (Title I), are intended as an amendment to the Internal Revenue Code to be inserted as a new subchapter. The section numbers will be changed and quotation marks will be inserted later. The sections following the above mentioned sections (Title II) are intended as amendments to the Internal Revenue Code which are other than insertions of the new subchapter. They are necessary by reason of the new subchapter. They have been put in their proper places and surrounded by quotation marks. 60 -1TITLE I 1 EXCESS PROFITS TAX 2 3 4 5 6 7 8 9 10 SEC. 1. DEFINITION OF INVESTED CAPITAL. For the purposes of this subchapter the invested capital for any taxable year (including the taxable years in the base period) shall be the average invested capital for such year, determined under section 2, reduced by an amount computed under section 6. SEC. 2. AVERAGE INVESTED CAPITAL. The average invested capital for any taxable year (including 11 the taxable years for the base period) shall be the aggregate of 12 the daily invested capital for each day of such taxable year, 13 divided by the number of days in the twelve months preceding 14 the day following the close of the taxable year. 15 SEC. 3. DAILY INVESTED CAPITAL. 16 The daily invested capital for any day of the taxable year 17 shall be the sum of the equity invested capital for such day 18 plus the borrowed invested capital for such day. -2- 1 2 3 4 5 6 7 8 9 SEC. 4. EQUITY INVESTED CAPITAL. (a) Definition.--The equity invested capital for any day of the taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts -(1) Money paid in.--Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital; (2) Property paid in.-Property (other than money) previously paid in (regardless of the time paid in) for 10 stock, or as paid-in surplus, or as a contribution to 11 capital. Such property shall be included in an amount 12 equal to its basis (unadjusted) for determining loss 13 upon sale or exchange. If the property was disposed of 14 before such taxable year, such basis shall be determined 15 in the same manner as if the property were still held 16 at the beginning of such taxable year. If such unadjusted 17 basis is a substituted basis it shall be adjusted, with 18 respect to the period before the property was paid in, 19 in the manner provided in section 113(b)(2); 61 -3- 62 (3) Taxable stock dividends.-Distributions in stock - 1 2 3 4 5 6 7 8 9 10 11 (A) Made prior to such taxable year; and (B) Previously made during such taxable year to the extent to which they are considered distributions of earnings and profits other than earnings and profits of the taxable year; and (4) Earnings and profits at beginning of year.--The accumulated earnings and profits as of the beginning of such taxable year; less the sum of the following amounts -- (5) Distributions in previous years. --Distributions 12 made prior to such taxable year which were not out of 13 accumulated earnings and profits; 14 (6) Deficit in earnings and profits.- -The deficit in 15 accumulated earnings and profits as of the beginning of 16 such taxable year; and 17 (7) Distributions during the year.-Distributions 18 previously made during such taxable year which are not 19 out of the earnings and profits of the taxable year. (b) Rules for Application of Subsection (a).--For the 1 purposes of subsection (a) -- 2 (1) Distributions in stock. -The term "distribution 3 in stock" means a distribution by a corporation to its 4 shareholders in its stock or rights to acquire its stock. 5 To the extent that such a distribution was not subject 6 to tax in the hands of the distributee because it did not 7 8 9 10 11 12 constitute income to him within the meaning of the Sixteenth Amendment to the Constitution or was not tax- able to him under the applicable revenue law it shall not be considered a distribution. (2) Distributions in first sixty days of taxable 13 year.-In the application of such subsection to any taxable 14 year beginning after December 31, 1940, 80 much of the 15 distributions (taken in the order of time) made during 16 the first sixty days thereof as does not exceed the 17 accumulated earnings and profits as of the beginning of 18 the taxable year (computed without regard to this para- 19 graph) shall be considered to have been made on the last 20 day of the preceding taxable year. 63 -5- (3) Computation of earnings and profits of taxable 1 year. -For the purposes of subsection (a)(3)(B) and (7) 2 in determining whether a distribution is out of the 3 earnings and profits of the taxable year, such earnings 4 and profits shall be computed as of the close of the 5 taxable year without diminution by reason of any distribu- 6 tion made during the taxable year and without regard to 7 8 9 10 11 the amount of earnings and profits at the time the distribution was made. SEC. 5. BORROWED INVESTED CAPITAL. (a) Borrowed Capital. -The borrowed. capital for any day of 12 the taxable year shall be determined as of the beginning of such 13 day and shall be the amount of the outstanding indebtedness (not 14 including interest) of the taxpayer which is evidenced by a bond, 15 note; bill of exchange, debenture, certificate of indebtedness, 16 mortgage, or dood of trust. 17 18 (b) Borrowed Invested Capital.--Borrowed invested capital for any day of the taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts: 64 -6- 65 (1) An amount equal to that portion of the borrowed 1 capital for such day which does not exceed the excess of 2 $100,000 over the equity invested capital for such day; 3 . 4 (2)(A) If the equity invested capital for such day is less then $100,000, an amount equal to 66 2/3 per centum of 5 that portion of the remainder of the borrowed capital for 6 such day which does not exceed $900,000; or 7 8 9 (B) If the equity invested capital for such day is $100,000 or more and is less than $1,000,000, an amount equal 10 to 66 2/3 per contum of that portion of the borrowed capital 11 for such day which does not exceed the excess of $1,000,000 12 over the equity invested capital for such day; and 13 14 15 (3) An amount equal to 33 1/3 per contun of that portion of the borrowed capital for such day as exceeds the sum of (A) The amount ascertained under paragraph (1), 16 17 18 19 plus (B) 150 per centum of the amount ascertained under paragraph (2) -7- SEC. 6. ADMISSIBLE AND INADMISSIBLE ASSETS. 1 (a) Definitions.-For the purposes of this subchapter - 2 (1) The term "inadmissible assets" means 3 (A) Stock in corporations except stock in a foreign 4 personal-holding company; and 5 (B) Obligations described in section 22(b) (4) (A). 6 (B). or (c) any part of the interest from which is 7 8 9 10 excludible from gross income or allowable as a credit against net income. (2) The term "admissible assets" means all assets 11 other than inadmissible assets. 12 (b) Ratio of Inadmissibles to Total Assets.--The amount 13 by which the average invested capital shall be reduced as provided 14 in section 1 shall be an amount which is the same percentage 15 of the average invested capital as the percentage which the 16 total of the inadmissible assets is of the total of all assets. 17 For such purposes, the amount attributable to each asset held 10 at any time during the taxable year shall be determined by 66 67 ascertaining the adjusted basis thereof (or, in the case of 1 money, the amount thereof) for each day of the taxable year so held 2 and adding such daily amounts. The determination of such daily 3 amounts shall be made under regulations prescribed by the Commissioner 4 with the approval of the Secrotary. In the case of the taxable year 5 the adjusted basis shall be the adjusted basis for determining loss 6 upon sale or exchange as determined under section 113 of this title, 7 8 9 and in the case of a taxable year in the base period the adjusted basis shell be the adjusted besis for determining loss upon sale or 10 exchange as determined under the income tax law applicable to such 11 taxable year. 12 (c) Computation of Inadmissible Assets in Case of Capital Gain 13 or Capital Loss. -If an amount of capital gain or capital loss with 14 respect to an inadmissible asset has been taken into account in 15 computing net income for the taxable year, then, in computing the 16 total inndmissible assets and the total of all assets for such year 17 for the purposes of subsection (b), so much of the amount attributable 18 to such inadmissible asset (computed without regard to this sub- 19 section) as bears the same ratio thereto as the Amount of capital 68 gain or loss so taken into account bears to the sum of such amount 1 taken into account plus the dividends and interest on such asset 2 for such year, shall be considered as an admissible asset and 3 the remainder shall be considered as an inadmissible asset. 4 SEC. 7. EXCESS PROFITS NET INCOME. 5 (a) Taxable Years Beginning After December 31, 1939.-The 6 excess profits net income for any taxable year beginning 7 8 9 10 11 after December 31, 1939, shall be the normal-tax net income, as defined in section 13(a)(2). for such year except that the following adjustments shall be made: (1) Dividends received. -The credit for dividends re- 12 ceived shall apply, without limitation. to all dividends 13 on stock of all corporations, except dividends (actual or 14 constructive) on stock of foreign personal-holding companies; 15 (2) Interest. -The deduction allowable for such tax- 16 able yeer for interest shell be reduced by an amount which 17 is the same percentage of BO much of such interest as 18 represents interest on the indebtedness included in the daily amounts of borrowed capital (determined under -10- 69 section 5(a)) as the percentage which the sum 1 of the daily amounts of borrowed invested capital 2 (determined under section 5(b)) is of the sum of 3 the daily amounts of the borrowed capital; 4 and 5 (3) Income taxes. -The deduction for taxes allowable 6 for such taxable year shall be increased by an amount 7 8 9 10 equal to the tex under Chapter 1 payable for such taxable year. (4) Depletion deduction.-The deduction for depletion 11 shall not exceed the amount which would be allowable if 12 computed without reference to percentage depletion under 13 section 114(b)(3) or (4). 14 (b) Taxable Years in Base Period. --The excess profits 15 16 net income for any taxable year in the base period -(1) Taxable years 1936 and 1937.-In the case of a 17 taxable year subject to the Revenue Act of 1936, 18 shall be the normal-tax net income, as defined in section 19 13(a) of such Act: or -1170 (2) Taxable years 1938 and 1939.--In the case of any 1 other taxable year in the base period, shall be the special 2 class net income, as defined in section 14(a) of the applicable 3 revenue law; except that the following adjustments shall be made: 4 (3) Dividends, interest, and taxes.--The credit for 5 dividends received and the deductions for interest and taxes 6 shall be adjusted in the same manner as provided in subsection 7 8 9 (a) (1), (2), and (3). respectively; and (4) Disallowed capital losses.--There shall be added an 10 amount equal to the amount disallowed under section 117(d) of 11 the applicable revenue law by reason of the application of the 12 $2,000 limitation on the excess of losses over gains from the 13 sale or exchange of capital assets. 14 15 16 SEC. 8. EXCESS PROFITS CREDIT. (a) Definitions. --For the purposes of this subchapter (1) (A) The term "base period" in the case of any texpayer 17 (except A taxpayer described in subparagraph (B) of this para- 18 graph) means the taxable years beginning after December 31, 19 1935, and before January 1, 1940. -1271 (B) In the case of a taxpayer whose first taxable year 1 under this subchapter begins on any date in 1940, which 2 was in existence during only part of the forty-eight months 3 prior to such date, the base period shall be such forty-eight 4 months. 5 (2) (A) The term "base period net income" means the 6 aggregate of the excess profits net income for each of the 7 taxable years (except the years specified in subparegraph (B) 8 9 of this paragraph) in the base period, reduced, in the case 10 of each year in such period in which the deductions plus the 11 credit for dividends received exceeded the gross income, by 12 the amount of such excess. In determining the amount of 13 each such excess, the adjustments provided in section 7(b) 14 shall be made. 15 (B) In the case of a taxpayer the base period of 16 which is determined under paragraph (1)(B) of this sub- 17 section, the excess profits not income for any of the 18 taxable years the invested capital of which is computed 19 under paragraph (3) shall be the sum of (1) 10 per centum -13- of so much of the invested capital for such year as does 1 2 3 4 5 6 not exceed $500,000 plus (11) 8 per centum of the remainder of such invested capital. (3) In the case of a taxpayer the base period of which is determined under paragraph (1)(B) of this sub- section (A) The invested capital for each of the tax- 7 8 9 able years of twelve months (beginning with the beginning of its base period) during the whole of 10 which it was not in existence shall be the amount 11 determined under paragraph (5) (B) of this subsection; 12 and 13 (B) The invested capital for the taxable year 14 consisting of the remainder of that part of its base 15 period during which it was not in existence shall be 16 the amount determined under paragraph (5)(B) of this 17 subsection multiplied by the number of days in such 18 remainder, and divided by the number of days in the O twelve months preceding the first day of its existence. 72 -14 73 (4) The term #base period percentage" means the per- 1 centage which the base period net income is of the aggre- 2 gate of the invested capital for each of the taxable years 3 in the base period, but such percentage shall not be less 4 than 4 nor more than 10. 5 6 (5) In the case of a taxpayer which was in existence before the beginning of its first taxable year under 7 8 9 this subchapter, its lowest invested capital shall be whichever of the following amounts is the smaller: 10 (k) The smallest invested capital for any 11 preceding taxable year beginning after December 31, 12 1939: or 13 (B) An amount equal to the invested capital 14 as of the beginning of the first day of the tax- 15 payer's first taxable year beginning after December 16 17 31, 1939. reduced by the same percentage of re- duction as is applicable under section 6 in 18 reduction of the average invested capital of the 19 preceding taxable year. -1574 (6) In the case of a taxpayer which was not in existence 1 2 before the beginning of its first taxable year under this subchapter, its lowest invested capital shall be zero. 3 4 (b) Excess Profits Credit.--The excess profits credit shall be an amount equal to the sun of the following: 5 6 (1) With respect to that part of the invested capital for the taxable year which does not exceed $500,000 and does not 7 8 9 10 11 exceed the lowest invested capital, en amount which is a percentage thereof equal to the base period percentage or 6 per centum, whichever is the greater; (2) With respect to that part of the remainder of the 12 invested capital for the taxable year which does not exceed 13 the lowest invested capital, an amount which is a percentage 14 thereof equal to the base period percentage; 15 (3) If neither the invested capital for the tax- 16 able year nor the lowest invested capital is more than 17 $500,000, an amount equal to 10 per centum of the excess 18 of the invested capital for the taxable year over the 19 lowest invested capital; -16- (4) If both the invested capital for the taxable 1 year and the lowest invested capital are more than 2 $500,000, an amount equal to 8 per centum of the excess 3 of the invested capital for the taxable year over the 4 lowest invested capital; and 5 (5) If the invested capital for the taxable 6 year is more than $500,000 and the lowest invested 7 8 capital is not more than $500,000: (A) 10 per centum of the excess of 9 10 $500,000 over the lowost invested capital; 11 plus 12 (B) 8 per centum of the excess of the 13 invested capital for the texable year over 14 $500,000. 15 16 SEC. 9. IMPOSITION OF TAX. (a) Definition of Adjusted Excess Profits Net Income.- - 17 As used in this section, the term "adjusted excess profits 18 not income" in the case of any taxable year means the excess 19 profits net income ninus the sum of: 75 -17- 76 (1) Specific exemption. 1 specific exemption of $5,000, or, if the taxable year is a period of less than 2 twelve months, an amount ascertained by multiplying 3 $5,000 by the number of days in the taxable year and 4 dividing the result by the number of days in the twelve 5 months preceding the day following the close of the 6 taxable year; and 7 8 9 (2) Net long-term capital gain.-The amount of the net long-term capital gain, as defined in section 10 117(a)(8). 11 (b) Imposition. --There shall be levied, collected, and 12 paid, for each taxable year beginning after December 31, 13 1939. on the excess profits net income of every corporation 14 (except a corporation exempt, etc.) a tax equal to the sum 15 of the following: 16 (1) First bracket. -25 per centum of so much 17 of the adjusted excess profits net income as does not 18 exceed an amount equal to the excess of 15 per centum 19 of the invested capital over the excess profits credit; -18- (2) Second bracket.-40 per centum of so much 1 of the adjusted excess profits net income as exceeds 2 an amount equal to 15 per centum of the invested 3 4 invested capital; 5 6 7 8 9 10 capital and does not exceed 30 per centum of the (3) Third bracket.-50 per centum of so much of the adjusted excess profits net income as exceeds an amount equal to 30 per centum of the invested capital; plus (4) Net long-term capital gains. An amount of the 11 net long-term capital gain equal to a percentage thereof 12 which percentage is the highest rate applicable to any 13 part of the adjusted excess profits net income; but the 14 amount under this paragraph shall not exceed whichever of 15 the following amounts is the smaller: 16 17 (A) The sum of (i) 25 per centum of the amount of such net long-term capital gain, plus 18 (ii) the amount of the adjusted excess profits net 19 income in excess of 15 per centum of the invested capital; or 77 -1978 (B) The sum of (1) 40 per centum of the amount 1 of such net long-term capital gain, plus (11) the 2 amount of the adjusted excess profits net income in 3 excess of 30 per centum of the invested capital. 4 (c) Alternative Tax. -Where the adjusted excess profits net 5 income is less than 15 per centum of the invested capital, then the 6 tax imposed by this section shall be an amount equal to 25 per centum 7 8 9 of the amount by which the excess profits net income exceeds the sum of (1) the excess profits credit and (2) the specific exemption 10 provided in subsection (a) (1). 11 SEC. 10. CONSOLIDATED RETURNS. 12 13 (a) Definition of "Affiliated Group". --As used in this section an "effiliated group" means one or more chains of 14 corporations connected through stock ownership with a common 15 parent corporation if - 16 (1) At least 95 per centum of the stock of each 17 of the corporations (except the common parent corpora- 18 tion) is owned directly by one or more of the other 19 corporations; and -20( 79 (2) The common parent corporation owns directly 1 2 at least 95 per centum of the stock of at least one of the other corporations. 3 4 As used in this subsection the term "stock" does not include nonvoting stock which is limited and preferred as to dividends. 5 6 (1) An affiliated group of corporations, determined 7 8 9 (b) Filing of Consolidated Returns.- as of the beginning of January 1, 1940, shall file a consolidated return for the taxable year 10 of the common parent corporation under this 11 subchapter beginning after December 31, 1939. 12 and before January 1, 1941, in lieu of separate 13 returns. 14 (2) Corporations required to file a consolidated 15 return under paragraph (1) of this subsection shall 16 file consolidated returns for the taxable years 17 beginning after December 31, 1940, and before January 1, 1943, 18 in lieu of separate returns, except that any of such 19 corporations -21- (A) Which at any time during the first of such taxable 1 years would not be included within the affiliated group if 2 the percentage figure in subsection (a) were 80 per centum 3 4 in lieu of 95 per centum, shall not be included in the consolidated return for each of such taxable years, but shall 5 6 7 8 9 be required to file a separate return for such years: or (B) Which at any time during the second of such tax- able years would not be included within the affiliated group if the percentage figure in subsection (a) were 80 per 10 centun in lieu of 95 per centum, shall not be included in 11 the consolidated return for such taxable year, but shall be 12 required to file a separate return for such year. 13 (c) Regulations. -The Commissioner, with the approval 14 of the Secretary, shall prescribe such regulations as he may 15 deem necessary in order that the tax liability of any affiliated 16 group of corporations making a consolidated return and of each 17 corporation in the group, both during and after the period of 18 affiliation, may be determined, computed, assessed, collected, 19 and adjusted in such manner as clearly to reflect the base 80 -2281 period percentage, the invested capital, and the excess profits net 1 income, and to prevent avoidance of tax liability. 2 (d) Computation and Payment of Tax. -In any case in which a 3 4 consolidated return is made the tax shall be determined, computed, assessed, collected, and adjusted in accordance with the regulations 5 6 under subsection (b). (e) Foreign Corporations. 7 8 9 10 foreign corporation shall not be deemed to be affiliated with any other corporation within the meaning of this section. (f) China Trade Act Corporations. corporation organized under 11 the China Trade Act, 1922, shall not be deemed to be affiliated with 12 any other corporation within the meaning of this section. 13 (g) Corporations Deriving Income From Possessions of United 14 States.--For the purposes of this section c. corporation entitled to the 15 benefits of section 251, by reason of receiving a large percentage of its 16 income from possessions of the United States, shell be treated as a 17 foreign corporation. 18 19 (h) Allocation of Income and Deductions. -For allocation of income and deductions of related trades or businesses, see section 45. -231 2 3 4 5 6 7 8 9 SEC. 11. PERSONAL SERVICE CORPORATIONS. (a) Definition. As used in this subchapter, the term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of 10 whose gross income consists of gains, profits, or income 11 derived from trading as a principal. 12 (b) Election as to Taxability.--If a personal service 13 corporation signifies, in its return for any taxable year, 14 its desire not to be subject to the tax imposed under this 15 subchapter for such taxable year, it shall be exempt from 16 such tax for such year, and the provisions of Supplement S 17 of Chapter 1 shall apply to the shareholders in such corpora- 18 tion who were such shareholders on the last day of such tax- 19 able year of the corporation. 82 -241 2 3 4 5 6 7 8 9 SEC. 12. SPECIAL CASES. (a) Equity Invested Capital. Where the Commissioner determines that the equity invested capital as of the beginning of the taxpayer's first taxable year under this subchapter cannot be determined in accordance with section 4, such equity invested capital shall be an amount, determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary, equal to the aggregate of the adjusted basis, at such time, of the assets of the taxpayer 10 then held minus the indebtedness outstanding at such time. 11 The equity invested capital for each day in the taxpayer's 12 base period and for each day after the beginning of the tax- 13 payer's first taxable year under this subchapter shall be 14 determined, in accordance with rules and regulations prescribed 15 by the Commissioner with the approval of the Secretary, using 16 as the basic figure the equity invested capital as of the be- 17 ginning of such first taxable year. 18 (b) Foreign Corporations.--In the case of a foreign 19 corporation engaged in trade or business within the United 20 States or having an office or place of business therein, the 83 -25 invested capital for any taxable year shall be determined in 1 accordance with rules and regulations prescribed by the Com- 2 missioner with the approval of the Secretary, under which -- 3 (1) General rule.--The daily invested capital for 4 any day of the taxable year shall be the aggregate of the 5 adjusted basis of each United States asset held by the 6 taxpayer on the beginning of such day. In the application 7 8 9 of section 6 in reduction of the average invested capital (determined on the basis of such daily invested capital), 10 the terms "admissible assets" and "inadmissible assets" 11 shall include only United States assets; or 12 (2) Exception.--I the Commissioner determines that 13 the amount of United States assets of the taxpayer cannot 14 be determined, the invested capital for the taxable year 15 shall be an amount which is the same percentage of the 16 aggregate of the adjusted basis of all assets held by the 17 taxpayer as of the end of the last day of the taxable year 18 which the net income for the taxable year from sources within 19 the United States is of the total net income of the taxpayer 20 for such year. 84 -26- As used in this subsection, the term "United States asset" means 1 an asset held by the taxpayer in the United States, determined 2 in accordance with rules and regulations prescribed by the Com- 3 4 5 6 7 8 9 10 11 missioner with the approval of the Secretary. SEC. 13. EXEMPT CORPORATIONS. The following corporations shall be exempt from the tax imposed by this subchapter: (a) Corporations exempt under section 101 from the tax imposed by Chapter 1. (b) Foreign personal holding companies, as defined in section 331. 12 (c) Mutual investment companies, as defined in section 361. 13 (d) Personal holding companies, as defined in section 501. 14 (e) Foreign corporations not engaged in trade or business 15 within the United States and not having an office or place of 16 business therein. 17 SEC. 14. MEANING OF TERMS USED. 18 19 The terms used in this subchapter shall have the same meaning as when used in Chapter 1. 85 -2786 1 2 3 4 5 6 7 8 9 SEC. 15. ADMINISTRATIVE PROVISIONS. All provisions of law (including penalties) applicable in respect of the taxes imposed by Chapter 1, shall, insofar as not inconsistent with this subchapter, be applicable in respect of the tax imposed by this subchapter. TITLE II AMENDMENTS TO CHAPTER 1 OF INTERNAL REVENUE CODE SEC. 201. EARNINGS AND PROFITS OF CORPORATIONS. (a) Under Internal Revenue Code. -Section 115 of the 10 Internal Revenue Code is amended by inserting at the end 11 thereof the following new subsection: 12 "(1) Effect on Earnings and Profits of Recognition of 13 Gain or Loss and of Receipt of Tax-free Distributions.- 14 Gain or loss from the sale or other disposition (after 15 February 28, 1913) of property by a corporation shall increase 16 17 18 19 or decrease its earnings and profits (for .any period beginning after February 28, 1913) to, but not beyond, the extent to which such gain or loss was (under the law applicable to the year in which such sale or disposition was made) recognized -28- 1 2 3 4 5 6 7 8 9 in computing net income, or (in the case of loss) would have been SC recognized under such law if under such law the basis (including a substituted basis) for determining the loss had been the fair market value on March 1, 1913, if higher than a basis otherwise determined. Where in determining the adjusted basis used in computing such recognized gain or loss, the adjustment to the basis (or, in the case of loss, the fair market value on March 1, 1913, if such value is higher than the basis) is different from the adjustment to such basis 10 proper for the purpose of determining earnings and profits, 11 then the latter adjustment shall be used in determining the 12 increase or decrease above provided. Where a corporation 13 receives (after February 28, 1913) a distribution from a 14 second corporation which (under the law applicable to the 15 year in which the distribution was made) was not a taxable 16 dividend to the shareholders of the second corporation, the 17 amount of such distribution shall not increase the earnings 18 19 and profits (for any period beginning after February 28, 1913) of the first corporation in the following cases: 87 -291 2 3 4 5 6 7 8 9 10 11 12 "(1) No such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made. "(2) No such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received." (b) Effective Date of Amendment.--The amendment made by subsection (a) shall be applicable to taxable years beginning after December 31, 1938. (c) Under Prior Acts.-The following rules shall be 13 applied, for the purposes of the Revenue Act of 1938 or any 14 prior Revenue Act as if such rules were a part of each such 15 Act when it was enacted, in determining the earnings and 16 17 profits of a corporation for any period after February 28, 1913: Gain or loss from the sale or other disposition (after 18 February 28, 1913) of property by a corporation shall increase 19 cr decrease its earnings and profits (for any period beginning 88 -301 2 3 4 5 6 7 8 9 after February 28, 1913) to, but not beyond, the extent to which such gain or loss was (under the law applicable to the year in which such sale or disposition was made) recognized in computing net income, or (in the case of loss) would have been so recognized under such law if under such law the basis (including a substituted basis) for determining the loss had been the fair market value on March 1, 1913, if higher than a basis otherwise determined. Where in determining the adjusted basis used in computing such recognized gain or loss, the 10 adjustment to the basis (or, in the case of loss, the fair 11 market value on March 1, 1913, if such value is higher than 12 the basis) is different from the adjustment to such basis 13 proper for the purpose of determining earnings and profits, 14 then the latter adjustment shall be used in determining the 15 increase or decrease above provided. Where a corporation re- 16 ceives (after February 28, 1913) a distribution from a second 17 corporation which (under the law applicable to the year in 18 which the distribution was made) was not a taxable dividend 19 to the shareholders of the second corporation, the amount of 89 -31- such distribution shall not increase the earnings and profits 1 (for any period beginning after February 28, 1913) of the first 2 corporation in the following cases: 3 (1) No such increase shall be made in respect of 4 the part of such distribution which (under such law) is 5 directly applied in reduction of the basis of the stock 6 in respect of which the distribution was made. 7 (2) No such increase shall be made if (under such law) 8 the distribution causes the basis of the stock in respect 9 10 of which the distribution was made to be allocated between 11 such stock and the property received. 12 SEC. 202. TAX OF SHAREHOLDERS OF PERSONAL SERVICE CORPORATIONS. Chapter 1 of the Internal Revenue Code is amended by insert- 13 14 ing after Supplement R the following new Supplement: 15 "SUPPLEMENT S - TAX OF SHAREHOLDERS OF PERSONAL 16 SERVICE CORPORATIONS 17 18 19 "SEC. 391. APPLICABILITY OF SUPPLEMENT. - "If a personal service corporation (as defined in section of subchapter of Chapter _) is exempt under such 90 -32- section for any taxable year from the excess profits tax imposed 1 2 3 4 5 6 7 8 9 by such subchapter, the provisions of this Supplement shall be applicable with respect to each shareholder of such corporation who was a shareholder in such corporation on the last day of such taxable year of the corporation. "SEC. 392. UNDISTRIBUTED SUPPLEMENT S NET INCOME. "For the purposes of this chapter, the term 'undistributed Supplement S net income' means the Supplement S net income (as defined in section 393) minus the amount of the dividends 10 paid during the taxable year. 11 "SEC. 393. SUPPLEMENT S NET INCOME. 12 "For the purposes of this chapter 'Supplement S net 13 income' means the net income, except that there shall be 14 allowed as additional deductions - 15 16 17 " (a) The Federal income tax payable under this chapter for the taxable year; and "(b) In lieu of the deduction allowed by section 23(g), 18 contributions or gifts, payment of which is made within the 19 taxable year, to or for the use of donees described in section 91 92 -331 2 3 4 5 6 7 8 9 23(q) for the purposes therein specified, to an amount which does not exceed 15 per centum of the corporation's net income, computed without the benefit of this subsection and section 23(q). "SEC. 394. CORPORATION INCOME TAXED TO SHAREHOLDERS. "(a) General Rule.-The undistributed Supplement S net income of a personal service corporation shall be included in the gross income of the shareholders in the manner and to the extent set forth in this Supplement. "(b) Amount Included in Gross Income.-Each shareholder 10 who, on the last day of the taxable year of the corporation, 11 was a shareholder in such corporation shall include in his gross 12 income, as a dividend, for the taxable year for which or in 13 which the taxable year of the corporation ends, the amount he 14 would have received as a dividend if on such last day there 15 had been distributed by the corporation, and received by the share- 16 17 18 19 holders, an amount equal to the undistributed Supplement S net income of the corporation for the taxable year. "(c) Credit for Obligations of the United States and Its Instrumentalities.-Each such shareholder shall be allowed a credit -34- against net income, for the purposes of the tax imposed by 1 2 3 4 section 11, 13, 14, 201, 204, 207, or 362, of his proportionate share of the interest specified in section 25(a)(1) or (2) which is included in the gross income of the corporation. "(d) Effect on Capital Account of Personal Service 5 6 7 Corporation. -An amount equal to the undistributed Supplement S net income of the personal service corporation for its taxable year shall be considered as paid-in surplus or as a contribution 8 9 to capital, and the accumulated earnings and profits as of the 10 close of the taxable year shall be correspondingly reduced, 11 if such amount or any portion thereof is required to be included 12 as a dividend in the gross income of the shareholders. 13 "(e) Basis of Stock in Hands of Shareholders.-The amount 14 required to be included in the gross income of the shareholder 15 under subsection (b) shall, for the purpose of adjusting the 16 basis of his stock with respect to which the distribution would 17 have been made (if it had been made), be treated as having 18 been reinvested by the shareholder as a contribution to the 19 capital of the corporation; but only to the extent to which 93 94 -35- such amount is included in his gross income in his return, 1 2 3 4 5 6 7 8 9 increased or decreased by any adjustment of such amount in the last determination of the shareholder's tax liability, made before the expiration of seven years after the date prescribed by law for filing the return. "(f) Period of Limitation on Assessment and Collection.For period of limitation on assessment and collection without assessment, in the case of failure to include in gross income the amount properly includible therein under subsection (b), 10 see section 275(d). 11 "SEC. 395. NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS. 12 "In the case of a shareholder taxable under section 13 211(a) or 231(a), his distributive share of the undistributed 14 Supplement S net income of the corporation required to be 15 included in the gross income shall be considered as a dividend 16 received by him from sources within the United States. 17 "SEC. 396. SHAREHOLDER'S TAX PAID BY CORPORATION. 18 19 "If a personal service corporation is exempt for any taxable year under section of subchapter of Chapter -3695 1 2 3 4 5 6 7 8 9 from excess profits tax, it shall, at the time of filing its return, pay to the collector an amount equal to the amount that would be required by section 143(b) or 144 to be deducted and withheld by the corporation if any amount required by this Supplement to be included in the gross income of the share- holder had been, on the last day of the taxable year of the corporation, paid to the shareholder in cash as a dividend. Such amount shall be collected and paid in the same manner as the amount of tax due in excess of that shown by the taxpayer 10 upon a return in the case of a mathematical error appearing on 11 the face of the return." 12 13 14 15 16 17 18 SEC. 203. STATUTE OF LIMITATIONS IN CASE OF CONSTRUCTIVE DIVIDENDS. Section 275(d) of the Internal Revenue Code (relating to statute of limitations) is amended to read as follows: "(d) Constructive Dividends.-If the taxpayer omits from gross income an amount properly includible therein: "(1) Foreign personal holding companies.-Under 19 section 337(b) (relating to the inclusion in the gross 20 income of United States shareholders of their distributive -3796 shares of the undistributed Supplement P net income of 1 a foreign personal holding company); or 2 "(2) Personal service corporations.-Under section 3 4 of shareholders of their distributive shares of un- 5 6 7 8 9 394(b) (relating to the inclusion in the gross income distributed Supplement S net income of a personal service corporation); the tax may be assessed, or a proceeding in court for the collection of such tax may be begun withcut assessment, at any 10 time within seven years after the return was filed." 11 SEC. 204. CREDIT OF NONRESIDENT ALIEN OF TAX AS SHAREHOLDER 12 13 IN PERSONAL SERVICE CORPORATION. Section 216 of the Internal Revenue Code (relating to 14 credit against tax of a nonresident alien individual) is 15 amended by adding at the end thereof a new sentence to read 16 as follows: "A nonresident alien individual shall be allowed 17 as a credit against his tax the amount required by section 396 18 19 to be paid by the personal service corporation of which he is a shareholder with respect to his tax liability under Supplement S." 97 -38SEC. 205. CREDIT OF FOREIGN CORPORATION OF TAX AS SHAREHOLDER 1 IN PERSONAL SERVICE CORPORATION. 2 Section 234 of the Internal Revenue Code (relating 3 to credits against tax of foreign corporations) is amended 4 by adding at the end thereof a new sentence tc read as follows: 5 6 7 8 9 "A foreign corporation shall be allowed as a credit against its tax the amount required by section 396 to be paid by the personal service corporation of which it is a shareholder with respect to its tax liability under Supplement S." -29- 98 "(1) No such increase shall be made in respect of 1 2 the part of such distribution which (under such law) is di rectly applied in reduction of the basis of the 3 4 5 6 7 8 9 stock in respect of which the distribution was made. "(2) No such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received." (b) Effective Date of Amendment.--The amendment made by 10 subsection (a) shall be applicable to taxable years beginning 11 after December 31, 1938. 12 (c) Under Prior Acts.-The following rules shall be 13 applied, for the purposes of the Revenue Act of 1938 or any 14 prior Revenue Act as if such rules were a part of each such 15 Act when it was enacted, in determining the earnings and 16 profits of a corporation for any period after February 28, 1913: 17 Gain or loss from the sale or other disposition (after 18 February 28, 1913) of property by a corporation shall increase 19 or decrease its earnings and profits (for any period beginning 99 -28 in computing net income, or (in the case of loss) would have 1 been so recognized under such law if under such law the basis 2 (including a substituted basis) for determining the loss had 3 been the fair market value on March 1, 1913, if higher than 4 5 6 7 8 9 a basis otherwise determined. Where in determining the adjusted basis used in computing such recognized gain or loss, the adjustment to the basis (or, in the case of loss, the fair market value on March 1, 1913, if such value is higher than the basis) is different from the adjustment to such basis 10 proper for the purpose of determining earnings and profits, 11 then the latter adjustment shall be used in determining the 12 increase or decrease above provided. Where a corporation 13 receives (after February 28, 1913) a distribution from a 14 second corporation which (under the law applicable to the 15 year in which the distribution was made) was not a taxable 16 dividend to the shareholders of the second corporation, the 17 amount of such distribution shall not increase the earnings 18 19 and profits (for any period beginning after February 28, 1913) of the first corporation in the following cases: -271 2 3 4 5 6 7 8 9 SEC. 15. ADMINISTRATIVE PROVISIONS. All provisions of law (including penalties) applicable in respect of the taxes imposed by Chapter 1, shall, insofar as not inconsistent with this subchapter, be applicable in respect of the tax imposed by this subchapter. TITLE II AMENDMENTS TO CHAPTER 1 OF INTERNAL REVENUE CODE SEC. 201. EARNINGS AND PROFITS OF CORPORATIONS. (a) Under Internal Revenue Code.-Section 115 of the 10 Internal Revenue Code is amended by inserting at the end 11 thereof the following new subsection: 12 "(1) Effect on Earnings and Profits of Recognition of 13 Gain or Loss and of Receipt of Tax-free Distributions.- 14 Gain or loss from the sale or other disposition (after 15 February 28, 1913) of property by a corporation shall increase 16 17 18 19 or decrease its earnings and profits (for any period beginning after February 28, 1913) to, but not beyond, the extent to which such gain or loss was (under the law applicable to the year in which such sale or disposition was made) recognized 100 -26- As used in this subsection, the term "United States asset" means 1 an asset held by the taxpayer in the United States, determined 2 in accordance with rules and regulations prescribed by the Com- 3 missioner with the approval of the Secretary. 4 5 6 7 8 9 10 11 SEC. 13. EXEMPT CORPORATIONS. The following corporations shall be exempt from the tax inposed by this subchapter: (a) Corporations exempt under section 101 from the tax imposed by Chapter 1. (b) Foreign personal holding companies, as defined in section 331. 12 (c) Mutual investment companies, as defined in section 361. 13 (d) Personal holding companies, as defined in section 501. 14 (e) Foreign corporations not engaged in trade or business 15 within the United States and not having an office or place of 16 business therein. 17 SEC. 14. MEANING OF TERMS USED. 18 19 The terms used in this subchapter shall have the same meaning as when used in Chapter 1. 101 -25 102 invested capital for any taxable year shall be determined in 1 accordance with rules and regulations prescribed by the Com- 2 missioner with the approval of the Secretary, under which - 3 (1) General rule.--The daily invested capital for 4 any day of the taxable year shall be the aggregate of the 5 6 7 8 9 adjusted basis of each United States asset held by the taxpayer on the beginning of such day. In the application of section 6 in reduction of the average invested capital (determined on the basis of such daily invested capital), 10 the terms "admissible assets" and "inadmissible assets" 11 shall include only United States assets; or 12 13 (2) Exception.--If the Commissioner determines that the amount of United States assets of the taxpayer cannot 14 be determined, the invested capital for the taxable year 15 shall be an amount which is the same percentage of the 16 17 aggregate of the adjusted basis of all assets held by the taxpayer as of the end of the last day of the taxable year 18 which the net income for the taxable year from sources within 19 the United States is of the total net income of the taxpayer 20 for such year. -24m 1 2 4 5 9 of the taxpayer's first taxable year under this subchapter cannot be determined in accordance with section 4, such equity 6 8 (a) Equity Invested Capital. -Where the Commissioner determines that the equity invested capital as of the beginning 3 7 SEC. 12. SPECIAL CASES. invested capital shall be an amount, determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary, equal to the aggregate of the adjusted basis, at such time, of the assets of the taxpayer 10 then held minus the indebtedness outstanding at such time. 11 The equity invested capital for each day in the taxpayer's 12 base period and for each day after the beginning of the tax- 13 payer's first taxable year under this subchapter shall be 14 determined, in accordance with rules and regulations prescribed 15 by the Commissioner with the approval of the Secretary, using 16 as the basic figure the equity invested capital as of the be- 17 ginning of such first taxable year. 18 19 20 (b) Foreign Corporations.--In the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, the 103 -23SEC. 11. PERSONAL SERVICE CORPORATIONS. 1 (a) Definition. As used in this subchapter, the term 2 "personal service corporation" means a corporation whose income 3 is to be ascribed primarily to the activities of the principal 4 owners or stockholders who are themselves regularly engaged in 5 6 7 8 9 the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of 10 whose gross income consists of gains, profits, or income 11 derived from trading as a principal. 12 (b) Election as to Taxability.--If a personal service 13 corporation signifies, in its return for any taxable year, 14 its desire not to be subject to the tax imposed under this 15 subchapter for such taxable year, it shall be exempt from 16 such tax for such year, and the provisions of Supplement S 17 of Chapter 1 shall apply to the shareholders in such corpora- 18 tion who were such shareholders on the last day of such tax- 19 able year of the corporation. 104 -22- 105 period percentage, the invested capital, and the excess profits net 1 2 income, and to prevent avoidance of tax liability. (d) Computation and Payment of Tax. -In any case in which a 3 consolidated return is made the tax shall be determined, computed, 4 assessed, collected, and adjusted in accordance with the regulations 5 6 under subsection (b) (e) Foreign Corporations - A foreign corporation shall not be 7 8 9 10 deemed to be affiliated with any other corporation within the meaning of this section. (f) China Trade Act Corporations. corporation organized under 11 the China Trade Act. 1922, shall not be deemed to be affiliated with 12 any other corporation within the meaning of this section. 13 (g) Corporations Deriving Income From Possessions of United 14 States.--For the purposes of this section a corporation entitled to the 15 benefits of section 251, by reason of receiving a large percentage of its 16 17 18 19 income from possessions of the United States, shell be treated as a foreign corporation. (h) Allocation of Income and Deductions. -For allocation of income and deductions of related trades or businesses, see section 45. 106 CONFIDENTIAL. BUSINESS ADVISORY COUNCIL FOR THE DEPARTMENT OF COMMERCE Reodamendations of the Committee on Taxation on the EXCESS PROPITS TAX Approved in Substance Executive Committee Business Advisory Council July 12, 1940. 13154 107 The evident need for additional revenue legialation to help defray the cost of current and prospective expenditures for national defense and apparent popular opinion that such additional revenue should be derived from the increase in net profits or income attributable to expected improvement in business and industrial activity have resulted in a number of proposals for the levy of an excess profits tax during the emergency period. Members of the Tax Committee have reviewed a number of these proposals and have discussed the question generally with representatives of the Treasury Department, and in the event the Congress should decide to levy such a tax, recommend that it be imposed in conformity with suggestions as follows: 1. That the basis or measure for determination of the tax be made in all respects as definite and certain as may be. It is of primary importance that taxpayers know with reasonable certainty the burdens with which they are faced, and the importance of this fact increases with increase in tax rates. Heavy taxes affect prices, and uncertainties as to tax liability tend to cause price inflation to cover maximum rather than actual tax burdens. Moreover, high tax rates accentuate administrative problems and difficulties and increase risks of litigation, expensive to both taxpayers and government. Such difficulties and risks are substantially reduced by definiteness and certainty in the provisions of the law imposing the tax. 2. That the tax be imposed on all corporations and associations, other than personal service and exempt corporations, for a limited period of three to five years, the first taxable year to be the first calendar or fiscal year commencing after December 31, 1939. 13154 -2- 108 Due to difficulties of administration and the fact that individual surtaxes should provide an adequate means for taxing excess profits earned by individual enterprises, partnerships, personal service corporations, etc., it is felt that the excess profits tax should be limited to corporations and associations corporate in nature. It may be observed that an excess profits tax applicable to all taxpayers was tried for the year 1917, and presumably for such reasons was there-after limited to corporations and associations for 1918 and subsequent years. 3. That the tax for each year be made the smaller of two tentative taxes as follows: (a) A tax based upon net profits in excess of average net profits for a defined base period preceding the emergency period; and (b) a tax based upon net profits in excess of a specified percentage of invested capital, a specific credit of $3,000 to be allowed in either case. While it appears that the levy of tax upon net profits in excess of average net profits for a base period would be the simplest and most uniformly desirable type of levy for a limited emergency period, it would evidently result in substantial hardships in certain cases. The necessity for some type of equalisation is readily seen when you compare the inadequate base period income of such businesses as heavy goods, railways, and the like, with more adequate incomes of other business with comparatively small investment in base period years. It is believed that the alternative methods of determination would eliminate substantial inequalities of application in the great majority of cases. It is suggested that the taxpayer, by regulation or otherwise, be afforded an option to report and pay the tax computed by either method, waiving the benefit of the alternative computation. The specific credit of $3,000 is suggested for the relief of small corporations and corresponds to a similar credit allowed under the 1918 and 1921 Revenue Acts. 13154 -3- 4. That the tax be imposed at rates substantially as follows: Net Profits Bracket Method (a) Tax Rate 0 - 100% of average net profits for base period 100% - 150% Over Method (b) 109 150% of average net profits exempt for base period 20% for base period 40% of average net profits 0 - 8%* of invested capital 8% - 20% of invested capital Over 20% of invested capital exempt 20% 40% Plus specific exemption of $3,000. The rates suggested under method (b) are the same as the excess profits tax rates levied under the 1921 Revenue Act. It is believed that such rates should be considered maximu peace-time rates under that method, especially in view of the current normal income tax rate of 20.9% which reflects an increase of 10.9% over that imposed for 1921. The net profits brackets and tax rates suggested under method (a) are recommended for study by the Treasury Department. 5. That net profits for the taxable year and for each year of the base period be the normal tax net income for such year less the amount of normal income tax due thereon, and that the definition of invested capital for the taxable year be substantially the same as the definition thereof in the 1921 Revenue Act. Administrative problems incident to determinations of invested capital would be minimized for the Treasury Depart ment and for numerous taxpayers by having such determinations vary as little as may be from those formerly required under the 1921 Act. 6. That the base period be the four calendar years, 1936-1939, or the four fiscal years commencing during such calendar years, and that the average net profits for such period be the average net profits for any three of such four years selected by the taxpayer. 13154 4- 110 It is felt that the privilege of omitting one year from the four-year period would to a great extent obviate the inequity arising from years of subnornal profits. Corporations in existence for less than the full base period should be permitted to use average net profits for the full calendar or fiscal years included in such period of existence, unless resultant hardship indicates proper handling in accordance with suggestion 7. Corporate successors of transferses following non-taxable reorganisations or liquidations effected during or after the base period should be permitted to use average net profits of their predecessor corporations in the determination of average net profits for such period. 7. That the excess profits tax law include provisions similar to those of Sections 327 and 328 of the 1921 Revenue Act. This recommendation is made for the purpose of avoiding exceptional hardships or marked inequalities due to abnornal conditions affecting either net profits or invested capital. 8. That net profits and invested capital of affiliated corporations, for both excess profits tax and income tax purposes, be required to be determined upon a consolidated return basis. Consolidation of net profits and invested capital for the determination of income and excess profits tax was required during the World War period. As a result, numerous groups of affiliated corporations have a history of determination of invested capital on a consolidated basis which, from the viewpoint of administrative economies for taxpayers and government, would be the normal starting point for determinations required under the proposed excess profits tax law, due to settlement of many controversial points in their earlier history. It is felt that consolidated returns would not result in any material loss in revenue for 1940 and subsequent years, and that any such loss would be more than compensated by the avoidance of numerous administrative difficulties and controversies relating to intercompany profits, investments and accounts between affiliated corporations. 9. That the foreign income and profits tax credit be allowed against the domestic income and excess profits taxes combined rather than against the domestic income tax only. 13154 111 -5 The more liberal application was allowed corporations in computing income, excess profits, and war profits taxes payable during the World War years, and would prevent the possibility that corporations might, in certain instances, be required to pay combined domestic and foreign taxes at effective rates of more than 100%. 10. That in the event the alternative levy of the tax upon net profits in excess of average net profits for the base period is not adopted, consideration be given to the desirability of including in the invested capital of a corporation any indebtedness represented by its securities. Many corporations, especially those engaged in trans- portation and mining activities, are financed substantially through borrowed capital as distinguished from equity or investment capital. Since the invested capital represented by the equity securities of such corporations would in many instances be relatively nominal, there is some question whether the uniformity of application of an excess profits tax necessarily correlated with capital investment would not be improved by according the same treatment to corporate bonds and other obligations and interest paid thereon as is provided for capital stock and dividends paid. 11. That the capital stock and excess profits taxes now in effect be repealed and that, in lieu thereof, there be imposed on all corporations and associations now subject to capital stock tax an excise tax measured by 1-1/4$ of the excess profits tax credit; 1. 0., 1-1/4$ of the average net profits of the corporation for three years of the base period or 8$ of its invested capital, whichever is the smaller. Adoption of this provision should result in approxi- mately the same amount of revenue as is derived from the capital stock and excess profits taxes now in effect. It would, moreover, remove the guess-work basis of wide-spread objection to the present capital stock and excess profits taxes and could apparently be administered with even less difficulty. and expense both to the Treasury Department and to the taxpayer. M. B. FOLSOM, Vice Chairman 13154 Business Advisory Council July 18, 1940 Title III 1 Repeal of Profit-Limiting Provisions of 2 Vinson-Trammell Act and Merchant Marine Act 3 Sec. 301. The provisions of section 3 of the Act of March 27, 4 1934 (48 Stat. 505, 34 U.S.C. sec. 496), as amended, beginning with 5 6 the first proviso thereof, and section 2(b) of the Act of June 28, 7 1940 (Public, No. 671, 76th Cong., 3d sess.), shall not apply to any 8 such contracts or subcontracts for the construction or manufacture 9 of any complete naval vessel or any Army or Navy aircraft, or any 10 portion thereof, as are entered into after the date of enactment of 11 this Act or are completed in a taxable year beginning after December 31, 12 1939, and any agreement to pay into the Treasury profit in excess of 13 10 per centum, 12 per centum, or 8 per centum, as the case may be, of 14 the contract prices of any such contracts or subcontracts shall be 15 16 without effect. Sec. 302. The provisions of section 505(b) of the Merchant 17 Marine Act, 1936 (49 Stat. 1998, 46 U.S.C., Sup. 5, sec. 1155), as 18 19 amended, shall not apply to any such contracts or subcontracts for the construction, reconditioning, or reconstruction of any vessel 112 113 1 as are entered into after the date of enactment of this Act or are 2 3 completed in a taxable year beginning after December 31, 1939, and any agreement to pay to the United States Maritime Commission profit 4 in excess of 10 per centum of the total contract prices of any such 5 contracts or subcontracts shall be without effect. Title IV 114 1 Amortization of Cost of Defense Facilities 2 SECTION 401-Amortization of cost of defense facilities. 3 Section 23 of Chapter 1 of the Internal Revenue Code (relating 4 to deductions from gross income) is amended by adding at the end 5 thereof a new subsection reading as follows-- 6 "(t) Amortization of cost of defense facilities- 7 (1) In the case of a corporation (at its election) a deduction 8 9 for amortization of the adjusted basis (computed without the application 10 of this subsection) of any emergency facility constructed after July 10, 11 1940 and during the continuence of the emergency declared to exist by 12 the President on September 8, 1939. Except as provided in paragraph (3). 13 such deduction shall be computed on the basis of a period of sixty 14 months. The amortization period shall (at the election of the taxpayer) 15 commence either (1) with the beginning of the taxable year during which 16 the emergency facility is constructed or (2) with the beginning of the 17 next succeeding taxable year. The failure of a taxpayer to claim a 18 deduction for amortization in its return for the year during which 19 the facility is constructed shall not deprive it of the deductions for 20 such year provided under section 23(1), relating to depreciation. 115 (2) A corporation may discontinue its deduction for emortisation 1 ne to any emorgency facility AS of the beginning of any month by filing 2 prior thereto a notice in writing with the Commissioner of Internal 3 Rovenuo designrting such month. In such E. case, it shall be entitled 4 to the deductions provided under section 23(1), rolating to depreciation, 5 beginning with the first dry of the month following such discontinuence, 6 but it shr11 not be entitled thererftor to any further deductions under 7 8 9 this subsection for emortization with respect to such emergency facility. (3) If within sixty months from the beginning of the amortization 10 period with respect to any emorgency facility, eithor (1) the Prosident 11 hrs proclaimed that the omorgoncy referred to in the President's message 12 of Sopterber 8, 1939 has censed to exist or (2) the Secretary of War or 13 the Secretary of Nevy hrs certified to the Commissioner of Internal Revenue 14 that any emergency facility is no longer necessary in the interest of 15 national defense, the corporation may elect to terminate the amortisation 16 period with rospect to such emorgency facility as of the date of the 17 President's proclamation or as of the date of the certificate of the 18 Socrotary, by filing amonded returns for all taxable years for which it 19 claimed aportization under this subsection, and the amortisation deduction shall be recomputed on the basis of the amortization period as so 1 2 3 4 6 7 8 10 terminated. Notwithstanding any other provision of law, any overpayment resulting from such recomputation of the amortization deduction shall be credited or refunded to the taxpayer if claim therefor is filed with the Collector of Internal Revenue for its district within one year after the 5 9 116 date of such termination of the amortization period. (4) During the amortization period, the allowances under this sub- section with respect to any emergency facility shall be inclusive of all deductions for exhaustion, wear and tear, and obsolescence with respect to such facility. 11 (5) Deductions made pursuant to this subsection shall be reflected 12 in the corporation's financial books of account, in its reports to share- 13 holders, and in its reports to the Federal Government or any of its agencies. 14 15 (6) The provisions of this subsection shall apply only to such emergency facilities as the Advisory Commission and either the Secretary 16 of War or the Secretary of Navy certify to the Commissioner of Internal 17 Revenue are necessary in the interest of national defense during the 18 emergency referred to in the President's message of September 8, 1939. 19 The issuance of such certificate shall be subject to such regulations as 20 the President may prescribe. 117 (7) When used in this subsection-The term "emergency facilities" means buildings, machinery and equipment; 3 The term "constructed" means constructed, reconstructed, erected, 4 installed or acquired; 5 The term "Advisory Commission" means the Advisory Commission to 6 the Council of National Defense. 7 8 9 10 (8) The provisions of this subsection shall be applied in computing net income for purposes of excess-profits taxes as well as income taxes. (9) Any taxpayer taking deductions for amortization of emergency 11 facilities pursuant to the provisions of this subsection may not thereafter 12 destroy, demolish, or by any act impair the productive capacity of such 13 emergency facilities without the consent in writing of the Secretary of 14 War or of the Secretary of Navy. In the event such consent is not given 15 within a period of ninety days from the date of receipt of written request 16 therefor, the Secretary of War or the Secretary of Navy, as the case may 17 be, shall and he is hereby directed to purchase such facilities at a price 18 which he shall fix. The taxpayer shall have an option to repurchase such 19 facilities at the price which he was paid before such facilities are 20 resold to any other person. . 118 THE FOREIGN SERVICE OF THE UNITED STATES OF AMERICA AMERICAN EMBASSY Berlin, July 22, 1940. H. Merle Cochran, Esquire, Office of the Secretary of the Treasury, Washington, D. C. Dear Merle: The new Counselor of the Estonian Legation, Albert Tattar, who arrived here about three weeks ago, told me that he had a $200 check drawn by the Bank of Estonia on the National City Bank and asked me whether there was any likelihood that we would block the credits of the Baltic countries in the United States and whether it would be advisable for him to cash his check immediately. He said that the German banks would accept it only for collection. I told him that I would inform him if we did take action against Estonian credits in the United States, which has since occurred. About a week ago he was called back to Estonia for consultation. He was supposed to have returned yesterday but has not done so and, with the news this morning that the three countries have been definitely taken over by Russia, he probably never will get out. He left this check with his wife who asked me today through the Estonian Minister here if I could send it by pouch for collection. Under normal circumstances I would have refused the request but did not feel that I could in the present instance. He left her with relatively little funds and she may never see him again. Could you ask the appropriate section of the Treasury which deals with blocked credits of occupied countries to permit payment of this check and, if such permission is granted and there are funds to cover it, could you have it deposited to my account No. 122282 in the West End Branch of the Washington Loan and Trust Company and then send me a brief telegram, "Estonian check deposited". In the contrary case, if there are no funds to cover the check or if for some reason it cannot be cashed, will you telegraph briefly the facts? I enclose a check for $3.00 which I trust will cover the cost of your cable. Sincerely yours, (Signed) Donald R. Heath Donald R. Heath. First Secretary of Embassy 119 -2Upon receipt of your affirmative advice that the check is good and deposited to my account I will pay over the proceeds in dollar currency to the Estonian Counsellor, if he returns, and if he does not, to his wife. (Initialed) D.R.H. 120 July 22, 1940 2:50 p.m. H.M.Jr: Hello. Operator: Colonel Maxwell. H.M.Jr: Hello. Colonel Maxwell: Colonel Maxwell. H.M.Jr: M: This is Morgenthau speaking. Yes, Mr. Secretary. H.M.Jr: How are you? M: Fine, thank you. H.M.Jr: M: Colonel, what is the status of the proposal to cancel all outstanding licenses issued prior to July 5th. Well, the Secretary of State is quite anxious not to have anything -- make that necessary. Now, we've looked over -- as I told you the last time we talked about it -- I've looked over the outstanding ones on Sweden which H.M.Jr: was the case in question at that time and they're not material amounts -- they're no great amounts of anything that are in that category of outstanding and incompleted licenses. Have you got a list of outstanding and incompleted licenses which were issued? M: Well, I have only in the case of Sweden. H.M.Jr: Have you got them for the rest of the countries? M: No, we haven't -- we haven't asked for that on any country except Sweden. H.M.Jr: Well, I'd like to ask you something unless you ask me not to, because I've discussed this again with the President and I got the distinct feeling that he wanted to do this for all -- not just Sweden, and I wondered 121 -2if you would mind putting it up to him once more and let him decide. M: H.M.Jr: Well, I most certainly will do that. Because he's holding me responsible for not letting this stuff go and I'm in an impossible position and I talked to him about it and he gave me the distinct feeling that he wanted to cancel all outstanding licenses. As a matter of fact, at this Council of National Defense meeting at which the Cabinet was present he made the statement that that had been done and I didn't want to contradiot him because I figured it was up to some of the other people to do that. I think that was last -- well, whenever this thing met the last time. So if you would do that and then let him decide. M: Yes. Well, of course, that's exactly -- when we talked before and I developed the Swedish situation, I put it up very definitely so there shouldn't have been any misunderstanding and I had the message back that the matter was being discussed with you again. H.M.Jr: M: Well, since then though I've had another discussion with the President and I got this impression. And could I also ask that you have a complete list of outstanding licenses which are -- remain? Is that very difficult? Well, I think it would take a little time to compile it. It's not H.M.Jr: Well, could it be done but in the meantime, whatever this would be, Directive No. 6 or 7, could it be sent up to Hyde Park to the President? M: You mean the -- insofar -- the one we discussed before. H.M.Jr: M: No, I mean the one for everything. I see. 122 -3- M: I mean, to put on his desk a Directive, I think that's what you call them, which would cancel all outstanding licenses issued prior to the 5th of July. Well, your contention is that you feel that H.M.Jr: Would like. H.M.Jr: that is his understanding what he expects to be done. M: H.M.Jr: Yes, and he's up there and he can decide quietly whether he wants to do it or not, but I got that distinct impression from him that's what he does want to do -- and that's personally what I hope he 11 do. M: H.M.Jr: M: H.M.Jr: Yes. Because it'11 make my job here on Customs and these ships much, much easier. Yes. Yes, well I appreciate that. Now to show you the confusion, for instance. Last Saturday we let one of these vessels go; Wednesday Mr. Hull calls up, why hadn't we let the Swedish vessel go? Well, we told him we had let it go the previous Saturday and by Friday it reaches Admiral Stark and he calls up on the same thing. M: (Laughs). Well, of course, that's hopeless. H.M.Jr: Yes. Well, may I ask, will you send it up to M: Yes, sir. I'll go into the question right the President? away and I'11 let you know how it comes out. H.M.Jr: And I'm talking on all outstanding licenses just not M: Yes. H.M.Jr: And then would you also have somebody begin to prepare a list of these in case the President 123 should say, well, what does this mean and who will it hit? M: Yes. Well, he undoubtedly would ask that H.M.Jr: Yes. M: question. And that'11 of course take a little time to do in view of all the other rush of business that the license people have over there. H.M.Jr: But just to get out this Directive and put it in the pouch oughtn't to take more than fifteen or twenty minutes. M: Yes. Well, that I'11 take care of. H.M.Jr: Thank you so much. M: Yes, sir. H.M.Jr: Thank you. 124 July 22, 1940 3:24 p.m. H.M.Jr: Hello. Operator: Secretary Ickes is busy talking on long H.M.Jr: O. K. distance. I'm waiting for him. 3:25 p.m. H.MJr: Hello. Operator: Secretary Iokes. H.M.Jr: Hello. Secretary Ickes: Hello, Henry. H.M.Jr: How are you? I: Very well. H.M.Jr: Harold, a couple of weeks ago I brought up the question at Cabinet in connection with oil to Spain and at that time you said you had in preparation a statement which could be used if necessary showing that on conservation grounds no oil should leave this country. I: No. What I said was that I had a -- was having a study made and a report was then being written showing about the situation with respect to oil along the Atlantic sea coast in the event of an emergency. It just reached my desk here now. H.M.Jr: That couldn't be interpreted so by you that I: I haven't looked at it yet. 125 -2H.M.Jr: Well, I tell you, I'm working terribly hard I: Yeah. H.M.Jr: And if you could see your way clear, if necessary and the President wanted to use it, to say that no oil should leave this country for national defense and conservation, I mean, on this thing, see? it would be terribly helpful, if he wished it. I: Yeah. H.M.Jr: What? Hello? I: Yes, I get you. H.M.Jr: See? I: Yeah. (Aside -- before Holland and Swanson and the other man go down there I want to see them. Hold them, also hold Commissioner of General Land Office.) I'm sending for them now. H.M.Jr: Oh. Well, the thought is, I'm working up something -- the possibility of being able to control the oil and I: It ought to be done. and I'm sending up now for you only a proclamation of the President to stop -- H.M.Jr: add oil and oil products to his list, plus scrap iron, but I need your help I: All right. H.M.Jr: ..... I: All right, I've just sent for my people now on it. Did you hear him tell Hull that he wanted to H.M.Jr: on the stuff inside the United States. handle Central America and South America? I: Yes. 126 -3H.M.Jr: Well, from that day until Friday they've I: Well, that's to be expected. H.M.Jr: I: never done a damn thing over there. And in discussing this with the President, I recommended that if we do this oil thing that he let you handle it, 80 Well, why didn't you suggest somebody that H.M.Jr: he'd be willing to let handle it? Well, that's what I thought I was doing. I: Yeah. I mean, I used helium as an example. I: Somebody's got to do this that's got the Oh, hell! It ought to have been done then H.M.Jr: Well, anyway I: The way they piddle around here. H.M.Jr: Will you I: I'll let you know, Henry. H.M.Jr: Thank you. I: All right. H.M.Jr: first. 127 July 22, 1940 GROUP MEETING Present: 11:45 a.m. Mr. Thompson Mr. Sullivan Mr. Haas Mr. Young Mr. Sohwars Mr. Foley Mr. Coohran Mr. Gaston Mr. Viner Mr. Bell Mr. Graves Mrs Klots H.M.Jr: I will unload first. Dan, I read this memorandum of yours - hello, Viner - on Treasury financing in '41. I think I understand it. I read it twice very, very carefully. I think -- Bell: H.M.Jr: I read it over carefully to myself and it was a little jumbled because I can only spend five minutes at a time on it. It isn't up to your standard. Bell: It isn't clear. H.M.Jr: You had better make it simple for me. I think this, gentlemen: I think it is terribly important that in connection - if I have to make an appearance on the Hill, that I state frankly and openly what the situation is on the financing, you see, because I think the Congress and the people of the United States are entitled to it and because the way Bell has it, he has got a perfectly feasible way - if you don't mind my using the word - to circumvent the situation if the debt limit is not raised above 45 and I think that what we ought to do when we go up just as soon as possible is to say, Now, we can do it two ways. We can - under the existing law this is the only way we oan do it. Ox if Congress wants to and we recommend they can raise the debt 128 -2limit from 45 to 'X', whatever we decide it should be," but I think we ought to come right out in the open and say it and I think with that in mind, if you could sort of rewrite a formal statement for me and that gets down to the fact - after all, I don't draw the distinction between money appropriated and money permitted to be con- tracted for in this bill. Bell: H.M.Jr: The only distinction is that you need to draw it. You don't need a debt increase for the contractual obligations until some time maybe in '42. Eventually you will need it, but you don't need it now. You can think it over personally. You can tell Congress that they ought to take into consideration that that is being contracted and whoever is here will have to go up to Congress twice a year to get a debt increase. They ought to increase the debt sufficiently to take care of the money which is to be spent and money to be out of here. I think that is - if I may use the word - rather statesmanlike on my part. Wouldn't you think so, Viner? Viner: I think you might say you would like to endow your successor, if there is to be one, with that freedom of action. H.M.Jr: Because what he has to go through to cir- cumvent that situation is childish and very poor policy. If you would write something and take advantage of Viner's being here to have him go over it, I think it would be very good and then that leads me to your (Sullivan's) proposals - questionmark - with a five million dollar appropriation, how much taxes we want to raise, which all was part and parcel of this picture, and I don't know the answer, but I don't think talking - I mean, I have had time to think about it. I don't think we will be able again to say it is five billion dollars 129 -3 and sell five billion dollars of five-year notes. If I had a table from you (Sullivan) showing the five hundred million, a billion, and a billion and a half, what this excess profits tax would do, I could sort of soak notes on top of the already outstanding it up. Sullivan: You have. H.M.Jr: No. Sullivan: You asked for that Friday afternoon and it H.M.Jr: I am sorry. I have got every piece of paper Sullivan: H.M.Jr: Sullivan: came in Friday afternoon. here that anybody gave me. I sent it in Friday afternoon. I don't know where it went, John, and I don't know how you got it, but the stuff I wanted and asked for, I got. I did not get that. I will find out what happened to it, because it left my office something before 1:00 o'clock. H.M.Jr: Two people can get it, Mrs. Klotz or McKay, and it didn't come to me. Sullivan: H.M.Jr: I sent it to MoKay, one sheet of paper. Well, I have read everything I took with me. Klots: Well, I will look for it. H.M.Jr: Well, shall I give this to Viner to read and then he can return it to my file? Well, you can keep that and I will give Viner a copy and talk to him about it. Well, you see I missed - will you (Sullivan) put into Bell's hands after you leave this Bell: H.M.Jr: room a copy of the memorandum and then he 130 4- can take that and let's evolve something as a fiscal policy, you see, looking forward to what Congress is voting, how we are going to finance it and how we are going to raise the money, but I would like to take advantage of Viner's being here in the next day or two. As a matter of fact -- Bell: I will talk to him. H.M.Jr: I would like to meet on this at 8:30 tomorrow morning when I am fresh. Is that all right with you, Jake? Viner: Yes. H.M.Jr: I think you (Sullivan) ought to be here. Sullivan: Yes, sir. H.M.Jr: If you can make it. What, not until 8:30? Sullivan: H.M.Jr: I will make you a little bet you aren't here by 8:30. Sullivan: What is the bet? H.M.Jr: A package of my Camels against your stink weeds. Sullivan: It is a bet. H.M.Jr: If I can get you here on a package of cigarettes, it will be a good investment. Now, that much for that. I find myself doing a lot of talking, but I have got a lot of stuff. Now, Merle, I read this thing from Irigoyen and if I sent this to the President he would say, "Well, why don't you send it down to Mr. Hull?" be Mr. Hull. I think the first to get it should Cochran: I thought someone should have it while they are down there. 131 -5H.M.Jr: Well, what I would suggest is, I think it is important enough that if you will fix me up a letter right away and have this oopied - this was given to me Saturday and he must get a pouch from the State Department. Cochran: I think they might be disposed to cable H.M.Jr: I think it ought to go, if you will take care of it. And then will you see that in strict confidence a copy of this is furnished part of that if we would send it in a letter to Mr. Welles. to Mr. - what is the coordinator on South America? Foley: Forrestal. H.M.Jr: And ask him after he has read it if he will Coohran: Yes, sir. Then by accident - I don't get anything from H.M.Jr: talk to me. the State Department. Ambassador Lothian gave me this memorandum, which I would like Bell and the people on his committee to read, Bell: stating that the British have decided that they are not going to let any food of any kind get into either occupied France or free France. Now, the State Department - I think it is outrageous. They never furnish me with this. Lothian asked me whether I had seen it and I hadn't, so he sent me another copy. It is very important in connection with this decision you have to make. H.M.Jr: There is no such thing as the State Department ever furnishing me with anything. Where is Philip Young? Phil, if this is an order, just return it to Mrs. Klots. If I have to do anything, let me know. (Handing letter from Secretary of Wax under date of July 18 to Mr. Young). 132 6 This is also for your committee, Bell, Settlement Committee on funds in Hongkong. Herbert, in the July 15th issue of the New Republic, the War of Factories by Fritz Sternberg - I wish through Secret Service and any other sources that you have, literary or otherwise, you could find out who Fritz Sternberg is. I don't know if anybody else knows. It is one of the best articles - and you (Sullivan) ought to read it, particularly on the tax thing, and anybody else interested in taxes. The main thing that it shows - the German production - they show that as the Ger- man production both in dollars and velocity increased the last five years, the earnings stayed stable but the taxes just absorbed the increase in the earnings. In other words, if a man had a turn-over of a million dollars in '34 and his taxes were a hundred thousand dollars and the turn-over went to ten million dollars in '39, his taxes went up and his net profit stayed the same. It is very, very and if Sternberg is here and he is okay and everything, I would like that fellow to come down, because we are going to have to do some publicizing on our tax methods and this is one of the most intelligent things I have read. I will lend it to you if you will give it back to me. And if anybody has not yet read in that issue, "If You Were President", who is interested in anything fiscal, I recommend that also. Gaston: July 15, New Republic. H.M.Jr: And Ed, I am going to do something about loans to small business men. Now, whoever is working on that for the present, if they could polish it off and have a little meet- ing in my office at 9:00 o'olock tomorrow morning, invite Tom and Ben to come, will you, at 9:00 o'clock? And polish off what is there. I am thinking in terms, now, so we don't have any misunderstanding, of 133 -7loans to men of $25,000 or under. I am not thinking of anything else, you see. The only one that I know of that at all appealed to me was the plan of the PHA insurance, but where the risk is spread over the whole amount and not just asking the banks to take the first ten percent, it. We have got to do something about it. If they wanted to talk about an industrial which is silly. I would like to go into bank long-term loan to industry, we could do it, but I suppose with RFC we can't. But I would like to discuss it anyway. I mean - what do they call that bank in France, Jake, the one that does that? Viner: The Credit Mobilier, the real estate bank? No, industrial bank, long-term loans. Credit Foncier. Cochran: That is a mortgage bank. H.M.Jr: No, I mean industry. It is intermediate Viner: H.M.Jr: credit to industry. Are they fairly punctual, those boys? Viner: There was a Bank of England set up in England. Sullivan: They both smoke. H.M.Jri Are they fairly - well, tell them a quarter of 9:00. Do you want to sit in on it, Jake? Viner: As an observer. H.M.Jr: Bell? All right, a quarter of 9:00. Will you polish it off and see what we have got? Foley: Yes. H.M.Jr: What else did I write down? 134 -8Bell: Is that tomorrow morning? H.M.Jr: Yes. Viner: You are not going to work back on your H.M.Jr: No, we start at 8:30 when Sullivan gets here on the tax thing and then we will invite Corooran and Cohen to get here at a quarter of 9:00 and we will meet them schedule, are you? at 9:00. Bell: And expect them to show up at 9:00. H.M.Jri Yes. And Herbert, I want to compliment Coast Guard on the best Federal building I have seen since I have been in Washington at that Coast Guard Lifesaving Station. Gaston: Is that so? The new one at -- H.M.Jr: Yes. I almost stayed there. They have a guest room which is on the lake, which is -the best room there. If you go out there I will have them arrange that. And that architect, if we have any more Treasury work, I want to grab him. They say he does a job and then goes on a binge for so long, and then another job. Gaston: H.M.Jr: Gaston: Is he a Government architect? H.M.Jr: No, Cleveland. He is a man over 70, graduated from the French School of Architecture, and that is the best looking building I have Gaston: ever seen. It is monolithio conorete. It is really beautiful. I think that is a good idea instead of so many brick buildings. H.M.Jr: It is the best looking thing you ever saw. 135 -9Gaston: I was about using that at the talking station to in Waesche New London. H.M.Jr: It is so much better than anything I have seen anywhere; I don't that will compare withknow it. of anything Viner: Can it? we get to see some good photographs of Gaston: I will get some of it. H.M.Jr: There are pictures inside. Thompson: I have nothing. H.M.Jr: Incidentally, I came in from Cleveland in an hour and a half this morning. We hit 248 with a tail wind. Gaston: Ground speed? H.M.Jr: Yes. My ears are all stopped up. Bell: We have a copy of a cable which came to the Federal Reserve Bank from the State Bank of Russia -H.M.Jr: You have got to talk a little louder, Bell, my ears are all stopped up. Bell: I say we have a copy of a cable which the Federal Reserve received from the State Bank of Russia. It says, "We consider Executive Order of July 15 mentioned by you as having no con- nection to gold required by State Bank of Russia and being its property. In consequence, delay in execution our instructions which we suffer losses or which we hold you responsible." H.M.Jr: Bell: Who is this from? "We insist upon immediate execution our in- structions. Awaiting information regarding execution." 136 - 10 This was in reply to a wire which the Latvian, Lithuanian and Esthonian Banks had sent to the Federal Reserve to transfer their gold balances to the State Bank of Russia. H.M.Jr: Who sent this? Bell: The State Bank of Russia. H.M.Jr: They are going to hold us responsible? Bell: The Federal Reserve Bank in New York. H.M.Jr: Wonderful. Bell: The Federal Reserve Bank replied they couldn't execute the orders because they had to apply to the Treasury for a license and they con- sider themselves as having no connection. Bell: Offset it against our debt, the Russian debt. It is quite interesting. We are prepared -- Viner: Do you want us to let the State Department H.M.Jr: Bell: Cochran: H.M.Jr: Bell: know about that? I don't know whether they know about it or not. No, I don't know. Besides our own legal boys, show that to Professor Chamberlain. We are prepared to discuss now an Executive H.M.Jr: Order regarding securities that may have a foreign stamp of some kind on them, get out an Executive Order and require a stamp something like that (showing sample) to be attached to each security. We have been working on it for some time. Marvelous. Who is this? Bell: Marshall. 137 - 11 H.M.Jr: I don't know why he was ohosen. Bell: Harold says they have an engraving of Marshall and he hasn't been used on a security or on currency. H.M.Jr: Robert Marshall, isn't it? Graves: John. H.M.Jr: John? Klots: That isn't good looking. Bell: Robert Morris. I would like to discuss that today or tomorrow, if I could. H.M.Jr: What are you doing at 9:30 tomorrow morning? Viner: You should have gotten a stamp - one of the stamps used by the Treasury during the "NonIntercourse Act. Bell: When was that? Viner: 1810 to '14. H.M.Jr: They have done a lot of work on this one now. Bell: Yes. H.M.Jr: That is good enough. What else? Bell: Did you see the letter that came from Secretary Hull regarding the - sending over a letter from the German Charge d'Affaires? H.M.Jr: No. Bell: Commenting on the Netherlands decree. H.M.Jr: No. Bell: It says - I will read one paragraph. 138 - 12 "In the name of my Government I have the honor to call attention to the fact that the measure of the refugee Netherlands Government mentioned above lacks any legal basis and consequently is to be considered an arbitrary act which is in the most outraged contradiction itself to the principles of the inviolability of private property. Recognition of the orders of the refugee which could not belong to it would render Netherlands Government concerning assets the depositories of such assets liable for damages.' H.M.Jr: You had better let both Foley and Professor Chamberlain - when is Chamberlain coming down again? Foley: I don't know when he expects to be back, do you, Dan? Graves: I saw him this morning at the Cosmos Club. Foley: He is probably back here. He went back Friday afternoon and I didn't see him be- fore he left. Thompson: He expected to be here this morning. Bell: He didn't go back home. He went down in Virginia over the week-end. H.M.Jr: Well, I want to go over things with him tomorrow. will you tell him 3:00 o'clock tomorrow, if he is here? Bell: All right. H.M.Jr: Or 11:00 tomorrow morning. 11:00 will be better. I will be fresher. will you let MoKay know? Bell: Yes, sir. That is all. H.M.Jri And when he is here, will you let him sit in at your 4:00 o'clock meeting? 139 - 13 Bell: He is sitting in. H.M.Jr: Harold? Graves: I would like to stay behind to ask you a H.M.Jr: That is all right. Graves: I have nothing. H.M.Jr: George, I want you to get into this small Haas: All right. H.M.Jr: So get busy, see, and the thing that I was question. business stuff. thinking of, the best way to do this thing would be if we could send one of George's men to a Federal Reserve field office, an RFC field office and let each of them sit there for a week and go through their applications and see the people that come in, what kind of stuff do they want. Pick Baltimore and let a fellow go to Baltimore and go through this stuff, both the RFC and Federal Reserve stuff. George has been all through this for me and we will not let Jesse pick stuff to send over here the way he did to Bill.Douglas, but let us - let George or just sit there and go through these files. somebody go to Baltimore or Richmond and We ought to do it openly; let them know we are going to go there; be there when the fellows come in. You have got enough help, haven't you? Haas: Oh, yes. We will switch somebody around to do what is necessary. H.M.Jr: Well, the point is if you actually had a week's experience and then the people argued about the credit, all right, but if you are there and go through the files and see the people that come in and have a talk with them, that is the best way to do it, isn't it, Jake? 140 - 14 Viner: It is the only way really to know what the H.M.Jr: Viner: And I would start that today. The only point is, do the people know - is that a going organization now on that point, will there be applications and so on? H.M.Jr: They say they take care of everything. Viner: But does the public know? H.M.Jr: If they don't - well, I don't know and I thing means. am part of the public, but we have got to do something in the next four years for the small business man. This is a long viewpoint. Gaston: Don't smile when you say that. H.M.Jr: Just so I don't -- Viner: You have waited eight years. I don't see why you should be so impatient. H.M.Jr: That is just the reason. I had a talk today with a fellow. He was saying that we have done this for the sharecropper and this man, and so forth and so on, how about doing some- thing for the small business man. I have had this down for three days. Either Richmond or Baltimore or both. One at a time will be enough. And do it openly. I mean, get letters from Jones and Ecoles, we are going to do it above board. Haas: H.M.Jr: Haas: H.M.Jr: He may not be very busy. Who? I mean the man we send to those places. The applications may be few and far between. Viner had a lot of experience. We went all through that in '34. 141 - 15 Bell: Wonder if it wouldn't be better for them to look Board at these Reserve has.statistics the Federal Viner: Yes, that is what I had in mind. Bell: And the various Federal Reserve Banks. Viner: And also I would factories in it. pick out an area with small H.M.Jr: All right, George. Haas: I am okay. Excuse me a second. Viner: I think if -- Haas: I have something more. H.M.Jr: Phil, please prepare the same kind of letter for Mr. Nelson that we did, showing part of the President's statement on May 10 or May 16. You know the letters that went out. (Mr. Haas handed report to Secretary) I think we had better have Nelson here tomorrow at 10:00 o'clock and MoReynolds. Otherwise, suddenly we agree on everything and then Nelson didn't hear about it and he wants priority. What else do you know? Young: No thing else. H.M.Jr: Oh, would you - between you and Mrs. Klotz - I want a little statement of what Bloch-Laine wants so that I oan mention it to Mr. Welles at 6:00 o'clock tonight when he oomes to the house. Did you take care of Mr. Purvis coming in from Canada? Did they ask you anything about it? Young: H.M.Jr: No, sir, I haven't heard anything about it. When I go home at 6:00 I want to take something with me. The P-40's for the Allies are piling up? 142 - 16 Haas: Allies, that is right. H.M.Jr: It doesn't say so. Haas: H.M.Jr: Haas: It says on the top the British contracts. It isn't clear, George. Six hours a day for the English or both English and -For the English, Mr. Secretary. That isn't clear, I see now. It is for the English. By September 1, the P-36's requiring the Wright Cyclone engine will be all completed, he estimates. And then from that time on they will be producing six airplanes, these P-40's, and unless they have six Allison engines a day, they are just going to pile up in storage. He says -H.M.Jr: Why is the Wright Cyclone so far behind? Haas: Well, they had a little delivery trouble there, too, but Mr. Vaughn was up there at the plant and he has promised them to come through with that, so he says that situation will get better rather than get- ting worse. The Allison people have made some promises, H.M.Jr: Haas: too, but he is very skeptical about getting the engines. He says the Army is getting them all, as you know, so far. Well, Lockheed isn't so bad, is it? No, but he had none except that one almost complete waiting for two engines. The Allison didn't do so well last week. There is another item I noticed. You will notice the figures for deliveries this week when you get the report will be down. The Wright plant took a week's vacation. H.M.Jr: They did? Haas: That is what they said on their report. 143 - 17 H.M.Jr: Well, that is nice. Chick? Schwarz: I have two matters here. Tomorrow morning T.D. which gives up the green duplicate copy on the income tax returns which Mr. Sullivan has worked on and I suggest you may wish to have a short piece to hand in the Federal Register will appear the out at the press conference this afternoon. H.M.Jri Sohwars: Well, take care of it. I will do that. The other matter involves the first of the new shipments of gold from New York to Fort Knox. They begin Thursday. Is that right? Graves: The 25th. H.M.Jr: I wouldn't say anything. Graves: I wouldn't think so, either. Mrs. Ross, of course, is eager to -If she does anything like that, she gets Schwarz: H.M.Jr: Schwarz: H.M.Jr: Viner: fired. I like to have your moral support. Let her take a ride with a motorcycle cop. Why not put her on one of the trucks and take photographs? Gaston: That has been done. H.M.Jr: Seriously, tell Mrs. Ross I will be very much annoyed if there is any publicity. Graves: I will tell her. H.M.Jr: Where were we? You have taken oare of "Seeing Hellie Home", haven't you? That is Harold Graves' assignment. 144 - 18 Cochran: Mr. Brady of the American Consulate at Rangoon is coming in to see me this afternoon. H.M.Jr: Who? Cochran: Mr. Brady. H.M.Jr: From where? Cochran: Rangoon. He on hasChinese been sending in some pretty good reports -- H.M.Jr: He is a Consul? Cochran: Yes, sir. Will he be here all week? Yes, sir. I would like to see him. H.M.Jr: Cochran: H.M.Jr: Cochran: Do you want to suggest a date or shall I see Mac? H.M.Jr: Mac. Cochran: All right, because he has stayed over, hoping that he could -- H.M.Jr: Maybe we can work it in tomorrow between 8:30 and 9:00. Cochran: All right. That is all I have. H.M.Jr: John? Sullivan: Mr. Helvering was in this morning. He is anxious to leave this afternoon. H.M.Jr: My God, he has been away -- Sullivan: To August 8. I think he had some talk with you and you suggested he report back here today. H.M.Jr: How long has the man been away? 145 - 19 - Sullivan: I don't know, sir. H.M.Jr: My understanding was he was going to go home first then go to the Convention and I thought he was coming back to go to work. Sullivan: I don't know, I wasn't here when he left and I don't know what the understanding was. H.M.Jr: I really don't remember. I didn't remember Sullivan: He hoped to get away this afternoon. H.M.Jr: I think he ought to stay here while this bill is on the fire. Sullivan: Well, he spoke of that and he said from what he could gather he would be more valuable here later on. H.M.Jr: He has worked pretty hard. When he works, Sullivan: Oh, there isn't any doubt about that at all, sir. He did look tired this morning. He really did. H.M.Jr: I suggest a week-end in Cleveland. Sullivan: He was at the Convention all week. I should think he would be tired. H.M.Jr: All right. Sullivan: There is a meeting this afternoon at 2:00 o'clook on the tax bill which there has been that he was going away again. he works hard. some talk about. Mr. Doughton and Mr. Cooper and Mr. Harrison and, I think, Senators King and George will be there, too. Bell: Is the bill ready? Sullivan: What do you mean, ready? Bell: It is past the deadline. 146 - 20 Sullivan: At five minutes of 9:00 there wasn't anybody to deliver it to (handing bill to Secretary). H.M.Jr: Where were you at five minutes of 9:00? Sullivan: Right here, sir. H.M.Jr: Did you come down with Knox? Sullivan: Certainly. H.M.Jr: And you came down this morning? Sullivan: We were right here at five minutes of 8:00. H.M.Jr: Sullivan: And you left New Hampshire this morning? Ten minutes past 6:00. H.M.Jr: Traveling with Knox gets you up, doesn't it? Sullivan: Well, it is a hard habit to break. Gaston: It gets him up or keeps him up? H.M.Jr: Both. I am all for Knox. He is a good guy. That is very sweet of you. Did you have any trouble getting that nice ribbon? Sullivan: H.M.Jr: No, no trouble at all, sir. All right. Anything else? Sullivan: No, sir. H.M.Jr: Ed? Foley: Here are those papers for the safe which you gave me on Friday. Knudsen called up on Friday and he wanted an opinion as to the RFC's powers to make loans both under the 1940 National Defense amendment of the RFC powers and under the GlassSteagall Amendment of 1938 powers to cor- porations in the United States for national defense purposes where the facilities will 147 - 21 - be utilized both for us and for the British, and I have this opinion that holds that they have adequate power under both sections to make that type of loan. Now, the opinion, like all our opinions, is addressed to you. Is it all right to give it to Mr. Knudsen? H.M.Jr: Yes. Foley: He will use it in his talks with Jesse, but I am confident that the Attorney General will sustain us. I think on a thing like that, before you give it to him you ought to show it to the Attorney H.M.Jr: General. Foley: All right. H.M.Jr: Or what you could do to save time, give it to him and say you are sending one over to the Attorney General, but I would give it to the Attorney General. Foley: All right. H.M.Jr: On third thought, I would not give it to him until the Attorney General has passed on it. Foley: Okay. H.M.Jr: I would let the Attorney General pass it. It is really up to the Attorney General. I have a reason. Foley: Yes. H.M.Jr: All right? I have a reason, a good reason. Anything else, Ed? Foley: I would like to talk to you about a couple of Executive Orders. I have them in the alternative. One would add oil and petroleum products to the list of products within the embargo. The other would add oil and petroleum products and scrap iron and I think we ought to -- 148 - 22 H.M.Jr: Let me have those. Foley: produce one or the other, because we need them to implement our ship control. H.M.Jr: I want those for lunch. Foley: We can't control oil to Spain simply through the control of the ships, I think that oil ought to be added to the -- H.M.Jr: Can you release it then? Foley: Sure, all you have to do is issue a license. Gaston: That question was considered quite extensively in one of the meetings to frame that proclamation, but they decided they wouldn't include petroleum and wouldn't include anything that wasn't actually short or urgently needed, critical for national defense. H.M.Jr: Gaston: H.M.Jr: Gaston: Leaving the Treasury representatives out of it, there isn't a man on that committee -I know, they are terrible. who can see beyond the end of his nose. That is right, and if only some of the other departments besides the Treasury would recognize the fact that the way to keep us out of H.M.Jr: war is to keep England fighting, we would get much further ahead in much less time. Let me handle this at lunch. Foley: Yes, I think it is very important that our Gaston: Yes, I know. H.M.Jr: Let me take care of this. What else? hand be implemented by having oil and petroleum products added to the list of embargoed products. We are holding ships, Herbert. 149 - 23 Foley: Nothing. H.M.Jr: Herbert? Oh, I won't give you this. I read this thing that Cox prepared for Nelson. As far as I am concerned, it is all right. H.M.Jr: I think that gives us the control we need. I would like you (Thompson) to read it and then return it to my files. It is an administrative matter. Gaston: Here is that report that Cairns got up. H.M.Jr: That is good. Foley: Gaston: H.M.Jr: There is a case of a ship to load asphalt for Spain, Texas Company. I don't know of any reason why a cargo of road asphalt shouldn't be shipped to Spain. I would let it go. All right, now. Harold wants to whisper in my ear and Mr. Gaston will stay a minute. 150 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION CONFIDENTIAL DATE July 22, 1940 Secretary Morgenthau TO FROM Mr. Haas DA. Subject: The Business Situation, Week ending July 20, 1940. Conclusions (1) The national defense program is providing increasing support to industry through new construction awards and new industrial orders. For example: (a) Heavy construction awards, chiefly for Federal defense projects, established a new high record last week. (b) Structural steel awards have increased to the highest figure, with one exception, since September 1938. (c) New orders of the U. S. Steel Corporation have risen to 149 per cent of capacity, from 109 per cent the previous week. (d) New orders for lumber have reached the best levels since last fall. (2) Eventually the defense orders will become a major business factor. For the time being, however, business activ- ity is tending to slacken, as evidenced by the failure of their late-June levels. There is no evidence, 80 far, that the FRB index in July will exceed the June figure of 114. weekly business indexes in the second week of July to equal (3) While prices of industrial raw materials (including steel scrap) declined somewhat further last week, a firmer undertone was noted near the end of the week in some markets. This may foreshadow a strengthening trend in commodity prices. The BLS all-commodity price index has risen gradually in the two weeks ended July 13. 151 Secretary Morgenthau - 2 The general situation The recent slackening tendency in business activity, which has been accompanied by some weakness in prices of industrial materials, became more evident in the week ended July 13, when weekly indexes of business activity failed to equal their late-June level. The New York Times index in that week (see Chart 1, upper section) showed no recovery from the decline registered during the Fourth of July week, and stood at an FRB equivalent of 113. This compares with an FRB index of 114 in June. The levelling out in production rates is reflected in a number of important industries. (Lower section of Chart 1). Steel ingot production has held practically unchanged over the past two weeks, when the seasonal trend should be upward. Automobile production has declined rapidly in preparation for an early changeover to 1941 models. Cotton mill activity in the second week of July (after seasonal adJustment) was slightly lower than in the last week of June. Lumber production (adjusted) has not made a normal recovery from the holiday shutdown. The levelling-out in business activity seems to indicate a tendency in many industries to await actual defense orders before stepping up production further. Uncertainty over the present war situation, particularly with respect to its influence on the continuation of export war orders, has apparently also been a factor. Defense orders increasing rapidly Defense orders are rapidly coming into the foreground as a major business factor. This fact was particularly evident in the volume of awards for heavy construction pro jects in the United States and outlying possessions last week. (See Chart 2, upper section.) According to the Engineering News Record, "Never before in history has such a volume of construction contracts been let in one week as were placed on the books in the seven days ending Tuesday, July 16." The total amounted to $217,000,000 (including $47,000,000 in outlying possessions), which compares with a previous record figure of $182,000,000 in one week of March 1930. Naval base projects accounted for the bulk of the awards. Structural steel awards (lower section of Chart 2) have likewise shown a pronounced upturn. The total for fabricated structural steel, fabricated steel plate, sheet steel piling, 152 Secretary Morgenthau - 3 and reinforcing bars during the week ended July 16, amounted to 64,560 tons, more than double the previous week's figure. with one exception, this 18 the highest since September 1938. Steel orders gain markedly New orders reported by the U. S. Steel Corporation for the week ended July 11 jumped to 149 per cent of capacity, as compared with 109 per cent in the previous week. (See Chart 3, upper section.) Since this is far in excess of re- cent production rates, as shown on the chart, it indicates an increased backlog of unfilled orders. Steel production this week is scheduled at 88.2 per cent of capacity, an increase of 1.4 points over last week's rate, and a new high for the year. A greater concentration of orders in the field of heavy steels has apparently given the U. S. Steel Corporation a production advantage over most of the independent companies. In the past week, this Corporation has operated at 90 per cent of capacity, as compared with an average of 85 per cent for the independent companies. (Lower section of chart) Steel scrap prices declined further last week, notably at Youngstown, Pittsburgh and Buffalo, with the Iron Age composite price off 33d a ton to $18.38. Japan has completed buying about 300,000 tons of scrap, according to press reports, apparently including some stocks on the Eastern sea- board originally destined for Italy. Recent reports that'a shortage of pig iron is beginning to handicap Canadian steel production attracts attention to the fact that the Dominion has only 10 blast furnaces and, over the last ten years, has produced only 2.5 per cent as much pig iron as the United States. New orders index improves Our weekly index of new orders for the week ended July 13 recovered strongly from its holiday dip, aided both by increased steel orders and by increased orders for miscellaneous products, particularly for building materials and electrical equipment. 153 Secretary Morgenthau - 4 (See Chart 4.) Lumber orders recovered to about the level reached in the last week of June, which was the highest since early October of 1939. New orders reported by the General Electric Company in the week ended July 13 rose sharply to the highest weekly figure on our records, going back to 1933. It is reported that both this company and Westinghouse have the largest backlog of electrical equipment orders on record, and are booked at capacity for a year or more on heavy products. In view of this situation, according to press reports, the new British powder plant in the South has been obliged to utilize second-hand electrical equipment from a western utility company Prices of basic commodities decline Spot prices of both raw industrial materials and food products declined somewhat further last week. (See Chart 5.) Near the end of the week, however, some evidence of a firmer tendency was noticeable in the futures markets for a number of commodities, namely wheat, sugar, wool, rubber, tin, and zino, which may foreshadow a revival of demand. The BLS allcommodities index improved gradually during the two weeks ended July 13, following a 6-weeks' downward trend. Among the industrial raw materials, rubber prices last week moved upward, in contrast to the group average. Uncertainty about Japanese intentions regarding the Dutch East Indies was a bullish influence, but in the long run many traders believe that Japanese control in the Dutch islands would make for larger production and lower prices, since British restriction would then be impossible. Deliveries to Continental Europe have apparently been much reduced in June and July, increasing the amount potentially available for United States delivery. Hides futures prices have declined considerably because of fears that exports of hides from South America would bring added competition to domestic production. Cotton spot prices were lower last week, partly because of reduced exports. For the second week in succession no cotton moved to any country on the Continent, a situation which is unprecedented since the first few weeks of the World War. The crop outlook, on the other hand, has become more unfavorable because of excessive rains and 0001 weather. 154 Secretar Morgenthau - 5 Copper futures last week showed definite weakness, pre- cipitated by the award of a Navy contract to Kennecott for 2,000,000 pounds of Grade A copper at a price fully threequarters of a cent lower than the regular producers! Market price. Tin prices were little changed last week, when nega- tiations looking toward the smelting of Bolivian ore in the United States were reported. Although Bolivian output alone could not supply United States consumption, which last year was estimated at 70,460 long tons, assurance of a part of the necessary supply would be a safeguard. Bolivia now produces about 36,000 long tons of tin annually, which is smelted in the United Kingdom where operating costs are reduced by the mixing of Nigerian ore with Bolivian ore, and by other factors. At present the United States has two experimental smelters with a combined annual capacity of slightly over 1,000 long tons per year. Cost of living The cost-of-living index of the National Industrial Conference Board has held generally steady since last Sep- tember, with a slight rise in the past three months due almost entirely to an increase in food prices. The June index of 86.4 exceeds by 0.5 point the figure for last September. Weekly business indexes Business activity as measured by the New York Times in- dex in the week ending July 13 failed to regain the loss suffered in the previous holiday week, and in fact declined 0.2 point to 100.2. This figure is 2.7 points below that of the pre-holiday week. The principal factors in this slight decline were sharp and cotton mill activity, with the indexes of miscellaneous freight car leadings and steel ingot production also lower. The decline in the index of cotton mill activity followed decreases in the adjusted indexes of automobile production six consecutive gains which had carried the index to a high level. Conversely, a sharp advance in the index of lumber production, and a substantial gain in the index of electric power production, partly retraced unusually sharp dealines of the previous week resulting from holiday influences. 155 Secretary Morgenthau - 6 Barron's index of business activity for the week ending July 13 showed a greater downturn than the Times index, falling 1.3 points to 112.2. Preliminary data for the week ending July 20 reveal further moderate declines in the indexes of steel ingot and automobile production. Although actual steel operations held up well they did not come up to seasonal requirements, and it is now estimated that a decline of about 3 points occurred in the adjusted index. Automobile production during the week ended July 20 was reduced nearly 12,200 units to 53,020, a figure about 100 units below the corresponding week of 1939. While this merely re- flects preparation for an early changeover, it will reduce the seasonally-adjusted New York Times index of automobile production. Actual retail sales tendencies, according to Ward's Reports, continue highly encouraging. General Motors' retail sales in the first 10 days of July were only 29 per cent lower than in the last period of June, as compared with a decline of 40 per cent at that time last year. SELECTED BUSINESS INDICES BUSINESS ACTIVITY PER Seasonally Adjusted CENT Est. Normal=100 120 110 40 100 39 90 33 80 N.Y Times 70 JAN. MAY MAR. STEEL INGOT PRODUCTION Per Cent of Capacity PER CENT JULY NOV. SEPT. AUTOMOBILE PRODUCTION U.S. and Canada CARS THOUSANDS 150 80 40 125 140 39, 60 100 75 40 29 50 38 20 25 38 Amer and 4 Inst Word's Eat. JAN MAR. MAY JULY SEPT. NOV MAR. MAY JULY SEPT. NOV. JAN LUMBER PRODUCTION 1929-31=100, Adjusted D 0 COTTON MILL ACTIVITY PER PER Est. Normal . 100, Adjusted CENT CENT 160 100 40 39 40 140 39 80 120 W 60 30 38 100 40 80 N Times 60 20 JAN. MAR. MAY JULY SEPT. NOV. N.Y. Times .......... JAN. MAR MAY mum JULY SEPT. NOV. 156 CONSTRUCTION AND STRUCTURAL STEEL ORDERS DOLLARS NOV. SEPT. JULY MAY MAR. JAN. DOLLARS WILLIONS . MILLIONS Heavy Engineering Contracts Eng. News Rec., Daily Ave. 40 40 35 35 30 30 25 25 1940 20 20 1939 15 15 10 10 5 5 JAN. MAY MAR. TOMS THOUSANDS TORS THOUSANDS Structural Steel Orders 80 80 60 60 1939 No 40 40 20 20 MAY 0 MAR. . JAR. JULY - INCLUDING OUTLYING SESSIONS OF THE U.S. 0 1940 SEPT. NOV. 157 5 1 STEEL INGOT PRODUCTION AND U.S. STEEL CORPORATION ORDERS 1938 JULY MAY MAR. SEPT NOV. JAN. 111 LESS THE JANA 1939 MAR. MAY JULY SEP NOV. JAN. 1940 MAR. MAY SEPT. TITTE NOV. PER PER DENT DENT U.S. Steel Orders and Total Steel Output 160 160 (EXPRESSED IN PERCENT OF CAPACITY) 140 140 120 120 ORDERS. U.S. STEEL CORPORATION IN TERMS OF U.S. STEEL CAPACITY 100 100 80 80 TOTAL STEEL OUTPUT 60 60 What 40 III 20 JAN. MAR. JULY MAY SEPT. NOV. JAN. THE MAR. III MAY JULY SEPT. NOV. JAN. MAR. 40 III LILL BELLII MAY JULY SEPT. 1940 1939 1938 20 NOV. 100 100 Steel Output (EXPRESSED IN PERCENT OF CAPACITY) 80 80 INDEPENDENT COMPANICS 60 60 40 40 U.S. STEEL CORPORATION 20 am JAN. LEGLILL MAR. MAY JULY 1938 Mad Secretary the Transary SEPT. NOV JAN. MAR MAY JULY 1939 SEPT. NOV. JAN. MAR. MAY JULY 20 SEPT. NOV. 1940 I -48-B INDICES OF NEW ORDERS Combined Index of New Orders and Selected Components 1938 PERCENTAGE PERCENTAGE POINTS POINTS 160 160 150 150 140 140 130 130 Total (combined Index) 1036 100 120 120 110 110 100 100 M 90 90 60 80 70 70 60 60 Total excluding Steel and Textiles 50 50 40 40 Steel Ordere 30 30 20 20 10 10 Textile Orders 0 A s 0 . M 1938 1939 D o 940 Treasury I 85 - c BUSINESS ACTIVITY AND PRICES OF RAW INDUSTRIAL MATERIALS AND FOODSTUFFS THE SEPT. BEST PER 5 JULY TTLE PER GENT 12 26 19 2 MAY 16 9 MAR. PER Wookly 152 21 28 11 18 25 ************ LIIII Daily 122 122 148 106 PER GENT DENT (PRICES) 106 14 111 CENT (BUSINESS) AMOUNT JULY 30 23 7 JAN. NOV. JUNE KAY 4 SEPT. 1940 1940 1939 120 120 BUSINESS ACTIVITY N.Y. TIMES. EST. BOGMAL 100 AND. 144 104 118 118 PRICES of RAW INDUSTRIAL MATERIALS B.L.S. AUG. 1939 - 100 140 102 116 116 136 100 114 114 PRICES OF RAM INDUSTRIAL MATERIALS 96 132 B.L.S. AUS. 1939 - 100 112 112 128 96 110 110 n 124 94 4 92 108 W 108 120 106 90 PRIORS or FooDsturns B.L.S. AUG. 1939 - 100 106 116 104 104 88 112 PRICES or FOODSTUFFS S.L.S. AUG. 1939 -100 102 102 86 108 100 100 84 104 98 LIMITED NOV. 1939 JAN. LLL MAR. LLL MAY 1940 96 JULY SEPT. 96 lum IIII m 5 SEPT. 19 12 MAY 26 2 E 9 so 96 16 JUNE 23 30 1940 7 100 14 JULY 21 28 4 82 11 18 96 25 MUST *FIVE DAY AVERAGE FOR PRICES Office of the Secretary of the Treasury - - and Statistics C - 310 - A 161 July 22, 1940 Dear Harolds Thank you for the July 16th letter from Mexico city. I should be delighted 1f you would continue to send - these reports as I enjoy reading them very much. with kind regards, Yours sincerely, Henry Mr. Harold Hochechild, American Metals Company, 61 Broadway, New York, N. Y. 162 July 22, 1940 Dear Harolds Thank you for the July 16th letter from Mexico City. I should be delighted if you would continue to eand me these T8- parts as I enjoy reading them very much. with kind regards, Yours sincerely, Henry Mr. Harold Kechachild, American Metals Company, 61 Broadway, New York, N. Y. 163 July 22, 1940 Dear Harolds Thank you for the July 16th letter from Mexico City. I should be delighted if you would continue to send me these re- ports as I enjoy reading then very much. with kind regards, Yours sincerely, Henry Mr. Harold Hochschild, American Metals Company, 61 Broadway, New York, N.Y. From Mr. H. K. Hochschild 164 Copy of letter or July 16. 1940 from Mexico City Last Thursday, the day of the recounting of the votes, passed without incident. The Almazanistas refused to go to the official counting as they were afraid of personal attacks and other rough handling, which for reasons I declare later on, they are trying to avoid under all circumstances. The machine brought in a number of #pistoleros" from the rural districts, which fact is simply mentioned to show that the labor unions and Lombardo Toledano are not trusted any more by the party. The Almazanistas met at secret places and issued 150 certificates for their own deputies, which the Government tried to avoid but without success. So we have now a double amount of deputies holding certification of their having been elected, and the old Chamber will have to decide which ones are legal and which ones are not, some time in August. The reason why Almazan is trying to avoid blood shed is to avoid persecution of his party. Undoubtedly long before the election the old trick to try and make it appear that an unfriendly candidate is trying to make a revolution and then take this as a reason to liquidate him, did not work in Almazan's case, and for this reason also he is trying to avoid blood shed. The logical result will probably be that Avila Camacho will be President, but to avoid the sting of a clear imposition, the party will have to cede a lot of seats in the Chamber to Almazan, of course, less than the majority. Many indications point toward this settlement and it remains to be seen if Almazan will be satisfied with it. Somehow or other, I believe he will be, as I do not know what else he is going to do unless, of course, politics in your country or influences from Washington should determine otherwise. In this connection I point out the fact that the Government observers declared that in five districts of the twelve electoral districts in Mexico City the elections were held in illegal form. Some optimistic people believe that this will give Avila Camacho a chanc to get out of the Chamber such politicians who belong to the party whom he wants to get rid of, specially the communists, and at the same time they will satisfy the Almazanista voters who were so overwhelming, especially in the big cities and in Mexico City. Economically there are no news whatsoever. The exchange remains at 5 with practically no transactions, demand and offers leveling themselves fairly well. Business is going somewhat back into normal fallen lines and merchants assure me that their sales, while having off considerably in the last few months, are now slowly and gradually picking up. this Klog tel H.H. Injury reading there letters 165 PLAIN RDS Budapest Dated July 22, 1940 REC'D 3:19 a.m., 23rd Secretary of State, Washington. 167, Twentysecond. Futura very anxious know result Legation's 161, July 6th. Please reply. STCOR MONTGOMERY EMB 166 PLAIN JR Oslo Dated July 22, 1940 Rec'd 3:48 p.m. Secretary of State, Washington. 783, twenty-second. Presluft Incorporated Oslo requests license transfer 3000 dollars from Realbankens account with NEW York Trust Company to American manufacturers for consignment stocks. Norges Bank approves transfer. Matter urgent. Stcor. PRESTON CSB 167 PLAIN ATP LONDON Dated July 22, 1940 Rec'd 1:56 p.m. Secretary of State, Washington 2328 July 32, 5 p.m. FOR TREASURY FROM BUTTERWORTH 1. The Government's weekly deficit, which averaged pounds 29.7 million in April, pounds 35 million in May and pounds 52.3 million in June, was during the first two WEEKS in July respectively pounds 53.1 and pounds 43.6 million. The Manner in which the deficit WB.B met in the quarter Ended June 30 was reported in my No. 1913 of July 1. Since that date, as reported in my No. 2094 of July 10, the weekly EXCHEQUEI returns have omitted all details of money raised by creation of debt but the following figures have been published for the periods stated: between July 2 and July 9, from savings certificated pounds 9.4 million; baby bonds pounds 17 million; and interest-free loans pounds 7.4 million: between July 1 and July 16, from 2-1/2 percent bonds pounds 67 million: in the three WEEKS ended July 19, from increases in tender treasury bills issued pounds 41 million: and by the new deposit certificates described in my No. 1992 of July 5, pounds million 10 on Friday June 28 pounds 20 million on July 168 -2- #2328 July 22, 5 p.m. from London July 5, but for the two subsequent Fridays nil. The good receipts from 2-1/2 percent "on tap" bonds, naturally heavy in the first WEEKS of the issue as they absorb accumulated savings, have evidently put the EXCHEQUEI temporarily in funds to a sufficient degree to enable 10 to repay the Bank of England ways and means advances of about pounds 20 million at the 30th of June, to under allot by pounds 4 million on July 18 the pounds 65 million of treasury bills tenders for which WETE invited, and to refrain from borrowing from the banks by special deposits on the last two Fridays. The higher level weekly returns from savings cerificates and baby bonds (which averaged about pounds 4 million per WEEK in April and May and OVER pounds 11 million per WEEK in June and July) as well as amounts offered free of interest, have also assisted. 3. The Bank of England has requested the stock Exchange to advise members that the word "France" which appears twice in the declaration contained in action 2 of forms D and B should in future be deleted. (SEE revision pages 53 0 and D enclosed with despatch No. 5362 of June 6). Forms D. and B (the latter used for bearer securities) filsable for transfers of BEOURITIES between United Kingdon residents 169 -3- #2328 July 22, 5 p.m. from London residents carry a declaration which must be made by the transferee to the Effect that no Enemy, or Enemy subject living outside the United Kingdon, Palestine or France. will have any interest in the security. The deletion of the word "France" means in Effect that any interest by an Enemy subject residing in France would render approval of the application for transfer of the security illegal. KENNEDY CSB 170 July so. 1990 STRICTLY CONFIDENTIAL the Honorable Seaner Volles, setting secretary of State. Year Mr. Searcharge I have please is transmissing as of you able interest to the Department of state and also to Secretary Ball as I a - of a - abidab we delivered to the / Department w a. Internet legentias Noosente and Financial and stated w his to represent a personal message from the Minister of Piesso of sugartias to specif. Very touly (Signed) H. Morgeathan.Jr. Secretary of the - Enc. amp - 7/22/40 By Mecompa 405 171 (Personal note from the Simister of Please of Argentino to the Secretary of the delivered at 19 - on July 20 w Mr. Integrae to Mr. is the Pressury) the our and Medinde have speet the equilitation is the international transactions of Augentian. As a result of - policies of the bolligerent nations we have accumulated substantial balances is blocked currencies on the other hand the balance of payante is true currencies - show a deficit of sere than - william peece is the next twelve months. our reserves of gold and foreign enchange hold abroad - to approximately - million posse. Uniter the present rate of deficit accumulation the will to is the seas five worth. The country - expert is wher to - for Importe. Even if we adopt a policy of assotic cartailment is imports 18 is not possible to reduce them beyond cortein limite. Horeover, consitments arieing from the importation of certain vital - take presente over and above - other commitments. the Government to as this assess contemplating the adoption of certain measures is order to sistaine the droin on the foreign exchange reserves. these - will to tabus solely with that purpose is view and are to to considered as of - nature. Importe of goods payable is free exercises. which is this case - chiefia toporto from the United States. will to reduced directionly. Certain Importe 1 as jeveley, sure. funitions, perfuses, saye, etc. will to prohibited alteration 172 Reports 1the Sweing making building materials, electrical transportation equipment, to metics only the meet Saverteal will so variously release to w so percent of the total Seported last year. Iron and stool, Industrial equipment, full, etc. will continue to - is as horotofore. 40 . account step to to take at a - later stage the Government so studying the possibility of Medical off prima and corporate financial treators to m free - contribute n is expected that this 0111 receive to a further - of - republy depleting foreign - - The Government also Satends to take come Satesam account such as old to foreore and other groups which are feeling . eeroge christage to their inconclusive We are - that this end the - expenditures will yes a - streis - our but they are convoldable If we desire to processe our present internal political and overal - We consider the preservation of our inesstansions as of - Supertense in order to mistain internal peace and be able to cooporate in continental affeire. so - - 15hmly that If active vertise - to Baroge in the - felore our I with that continued will w carried out under - that will not permit a repid correction of the I estimation the - of - will probably to and / closing w barter agreements, which actually will present the - of our free currencies position. 173 so to of special interest to note that the Conta - bee recently approvided our - with a view of starting again the operation of the elearing agreement between both countries which was exception in September sea. m expect to to is a position to Degis perchases and shipments towards the end of September n I - to add that to - present situsing - bayer of - products would be release. and so to also to point out that there so no is the Argentine that could refuse so trade with - today without expecting shools to the most serious canctions - the part of opinion with the staml polisioni no would to unfair to our trivale is the United States Government If - ass an continge express m feeling provides is our country as so the possible outseee of the - - our Government is willing to w see above is twinging about cooperation in a continental scale. But just experience have leaght as the afficilities involved is 1 . - and public opiaton is the Augustine to Highly about se to - tongibile and ingressment of the 1 sticution resulting from the moting Shore to as we is - state that the most contractive stey that the United States - could take to help we w was the present - would to to sale perclases of - of - explasse 1 as - ml. address - 174 1 - 1 - w the you of the Bassed States would - result is as Sensitate Suprevental is our position 1 would also to instrumental is winging about the proper extric of cooperation is - long some plane that night to developed is this continued. Any energency action on the part of the United States of the nature mentioned above should w follows - Immediately w come prestical and comprobessive trade - between the too countries resulting in as increase of - sales is the American makes, - well - is greater perchases of American goods " - part. 10 is to the organization of - sales here that w must altimately look to find the - to most the payments for - importe as well as of all other obligations to this - 175 may a. spine STRICTLY CONFIDENTIAL Sequire, American to the President. Reventals have - is attaching, for your statetest a - of a - which - detivesed Email Reportment w w. Brigger, Augustins and Financial Commonles, and states w his so - a personal - from the Maletu of of Augustim to syself. Twey waly yours, (Signed) H. Morgenthan. Jr. Secretary of the / Ence. RIP By Manager 425 176 July 22, 1940 2:11 p.m. H.M.Jr: Hello. Operator: It will take about three or four minutes to get Mr. Purvis to the telephone. H.M.Jr: That's all right. Operator: Right. 2:15 p.m. H.M.Jr: Hello. Operator: Mr. Purvis. Go ahead. H.M.Jr: Hello. Arthur Purvis: Hello. Good afternoon. H.M.Jr: How are you? P: Very well, thank you. H.M.Jr: P: Well, can you hear me all right? I have to thank you very much for an extremely nice photograph which I'm going to put up immediately and value enormously. H.M.Jr: P: H.M.Jr: Well, I hope you'll give me one of yours. (Laughs). Oh, that's very nice of you. I'd like to have one also. P: That's very nice of you. H.M.Jr: You know, I never heard about Mrs. Purvis wanting to come in. 177 -2P: No. As a matter of fact, I tell you why I didn't worry you about it. When I telephoned her a little later that day, she told me that she had got a permit. H.M.Jr: P: Oh. What I did wonder though was as to whether I might bring her passport down -- but I'11 have a word with Mrs. Klotz about it -- to see whether I could get some sort of H.M.Jr: P: ..... Visa? visa that would be all right when she goes up and down with all these children coming. H.M.Jr: P: Well, we could do it on our end I'm quite sure. Well, that's the only end that would -- I'11 bring it down and talk with Mrs. Klotz 1f I may. H.M.Jr: Yes. She's my expert on passports. P: (Laughs). H.M.Jr: And how to get by the State Department. P: (Laughs). Yes, that's right. That has more applications than passports. H.M.Jr: Right. Well, I -- still on the personal vein before I get to the other -- I am seriously thinking of taking my family somewhere to Canada the middle of August. P: Oh, yes. H.M.Jr: And I'd like to get some suggestions from you tomorrow. P: Middle August. I'll do a little thinking about that. H.M.Jr: Will you? 178 -3P: Do you want to go far or do you want to go -I mean, is it a traveling trip or is it a trip on which you would want to settle down in one place. H.M.Jr: Well, we'd like to settle in one place -- some place where we could be fairly comfortable. You know -- the wilds all outdoors and the comforts of home. P: That's right. How many would there be? H.M.Jr: Well, I think there'd be the whole family -there'd be five of us. P: Five and that would be middle August? H.M.Jr: Yes, for a week. P: Let me do a little thinking there. H.M.Jr: will you? P: I will. H.M.Jr: Good. Now, without saying anything to you I've been following Curtiss at Buffalo every week. Have you got a pencil? P: H.M.Jr: P: H.M.Jr: Yes, I have. Well, on the week ending July 13th they had for you eleven P-40's without any engines. Yes. That's right. No Allison engines and they had 43 P-36's with no Wright engines. P: That's correct. Yes. H.M.Jr: Now on the week ending the 20th they had 16 P-40's with no Allison's and 49 P-36's with the Wright Cyclone engines missing. P: H.M.Jr: P: 49? 49. Yes. 179 -4 H.M.Jr: P: H.M.Jr: Now I thought that that might be something to bring up tomorrow when they're crowding you about getting all the engines. Yes. Yes, because actually there is a definite shortage there. You've got it. I don't have to draw you a picture do I. P: No, not a bit. (Laughs). H.M.Jr: All right. P: Excellent. H.N.Jr: What? P: Excellent. H.M.Jr: I thought that you might be able to use that. P: I got that pretty quickly. (Laughs). H.M.Jr: P: H.M.Jr: P: H.M.Jr: P: Now tomorrow there'll be Secretary of War, Navy and Mr. Knudsen and I've also brought in Mr. -- oh, this man from Sears Roebuck oh, Nelson. Yeah, because I don't want to have another session of having him say he's the ozar You're quite right. It just hits us again, that's all. of all priorities so I'm having them all in at one time and I'd like to bring down if I may Maurice Wilson with me. H.M.Jr: oh, fine. P: I think that's the best one instead of the H.M.Jr: other fellow. Yes. And also on Allison, last week ending the 20th they dropped back to 11 engines -the week before they had done 18. 180 -5P: oh, yes. H.M.Jr: So it doesn't look very hopeful. I wonder what's happened there. I'd better ring Loan. I'm going to call him also because there's P: Uh-b H.M.Jr: P: H.M.Jr: something wrong there. And FOR might find out also -- you can do it bett than I can -- how is Wright going to catch on those engines for you, because afte 11 if you could lay your hands on 49 P-36 right now they'd be very useful. P: Exao 45.8 Oh, yes, anything is useful just now. H.M.Jr: To say nothing of 16 P-40's. P: Exactly. Yes, it's a big lot. H.M.Jr: Right. Well, I'll be seeing you tomorrow. P: All right then. That's at 10 a.m., isn't it? H.M.Jr: Right. P: Thank you very much. H.M.Jr: Good-night. P: Good-night. 181 Division of Research and Statistics Treasury Department D To: Date July 22, 1940 Secretary Morgenthau From: Mr. Haa YOU 182 STRICTLY CONFIDENTIAL CURTISS - WRIGHT CORPORATION Airframes held in storage awaiting engines: British Purchasing Commission contracts Week ending July 13 - 11 P-40s (requiring Allison engines) 43 P-36s (requiring Wright Cyclone engines) Week ending July 20 - 16 P-40s (requiring Allison engines) 49 P-36s (requiring Wright Cyclone engines) Comment by Mr. Jansen, Plant Manager: The Army is now taking all the Allison engines. The P-40s are piling up at the rate of approximately one a day and will reach about 55 by the end of August if no engines are received in the interim. The situation with regard to the P-36s, which require Wright Cyclone engines, will probably not get any worse as increased deliveries of these engines are expected. Mr. Jansen pointed out that by the first of September the Wright Cyclone engine planes will all be complete, and the Curtiss-Wright Corporation will require at that time 6 Allison engines per day. LOCKHEED AIRCRAFT CORPORATION Mr. Carr, Production Control Manager, stated that they have no airframes in storage awaiting engine deliveries. He mentioned, however, that one twin-engine, Army interceptor is practically complete and will be held up unless 2 Allison engines are received shortly. Mr. Carr added that the lack of Allison engines was, however, holding up some plant work, and that this situation would get worse if the engines are not received in the very near future. STRICTLY CONFIDENTIAL 183 ALLISON ENGINEERING COMPANY Deliveries of Airplane Engines Actual Estimated deliveries on existing orders deliveries : : : : 1940 January May 1 - 23 May 24 - June 1 June 2 - 8. June 9 - 15 June 16 - 22 June 23 - 30 June 30 - July 6 July 7 - 13 July 14 - 20 10 10 5 4 8 11 8 6 18 11 July 21 - 31 August September October November December 1941 January February March April May June July August September October November December 121 160 310 351 331 332 362 416 416 414 408 437 320 294 431 45 45 45 1942 January February Office of the Secretary of the Treasury, Division of Research and Statistics. 25 21 July 22, 1940. 184 TREASURY DEPARTMENT Washington Press Service No. 21-67 FOR IMMEDIATE RELEASE Monday, July 22, 1940 Secretary of the Treasury Morgenthau today announced the final subscription and allotment figures with respect to the current offering of 2-1/4 percent Treasury Bonds of 1954-56. Allotments on public subscriptions aggregated $630,719,850. This amount in- cludes $39,110,300 allotted in full to subscribers for $5,000 or less who specified that delivery be made in registered bonds 90 days after the issue date. In addition to the amount allotted on public subscriptions, $40,600,000 of the bonds have been allotted to Government investment accounts, within the $50,000,000 reservation. Subscriptions and allotments were divided among the several Federal Reserve districts and the Treasury as follows: Federal Reserve District Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Treasury Government Investment Accounts TOTAL Total Total Subscriptions Allotted 628,019,500 $ 58,328,050 2,924,302,650 393,641,000 449,152,250 221,241,700 204,688,950 771,165,850 156,315,200 89,506,900 113,212,450 143,390,750 502,503,150 7,931,200 270,526,400 38,626,150 42,981,200 22,349,350 20,114,450 75,625,650 17,315,600 9,717,100 13,200,350 14,497,050 46,526,600 $6,605,071,550 $671,319,850 911,900 40,600,000 185 July 22, 1940 My dear Mr. President: As you know, for about a week or ten days, pur- suant to our control of ship movements, we have been holding up two Texas oil tankers loaded with oil products for the Spenish Government oil monopoly. At your suggestion, after consulting with the Navy Department, we offered on behalf of the Nevy to buy these two cargoes of oil free the Texas Company. Since making this offer, we have had no definite answer from the Texas Company. In order to implement our authority so that we may continue this policy, not only for Spain, but pos- sibly in other parts of the world I am inclosing a proposed amendment for your signature adding petroleum and petroleum products and serap metals to your existing list of strategic materials subject to embargo, pursuant to Public 703. Signing of this proposed amendment to the outstanding Enbargo Proolamation does not necessarily mean that we will immediately stop the export of all petroleum products and scrap metals. It dees mean. however, that we may do so if you decide it is in the Interest of national defense policy. Yours sincerely, s-H. Margenthan, Jr. The President, STRICTLY CONFIDENTIAL The White House. 2 Incle. Copy to Mr. Foley 7/83/40 By Messenger 3:35 186 July 22, 1940 My dear Mr. President: As you know, for about a week or ten days, pur- suant to our control of ship movements, we have been holding up two Texas oil tankers loaded with oil products for the Spanish Government oil monopoly. At your suggestion, after consulting with the Navy Department, we offered on behalf of the Navy to buy these two cargoes of oil from the Texas Company. Since making this offer, we have had no definite answer from the Texas Company. In order to implement our authority so that we may continue this policy, not only for Spain, but possibly in other parts of the world, I am inclosing a proposed amendment for your signature adding petroleum and petroleum products and scrap metals to your existing list of strategic materials subject to embargo, pursuant to Public 703. Signing of this proposed amendment to the outstanding Embargo Proclamation does not necessarily mean that we will immediately stop the export of all petroleum products and scrap metals. It daes mean, however, that we may do so if you decide it is in the interest of national defense policy. Yours sincerely, s Margenthau, Jr. The President, STRICTLY CONFIDENTIAL The White House. 2 mels. By Messenger 3:35 187 1 (its DRAFT My dear Mr. President: Stinted As you know, for about a week or ten days we have been holding up two Texas oil tankers loaded with oil products for the Spanish Government oil monopoly. At your suggestion, after consulting with the Navy Department, we offered on behalf of the Navy to buy these two cargoes of oil from the Texas Company. Since making this offer, we have had no definite answer from the Texas Company. implement your In order to have the necessary authority w con- tinue this policy, not only for Spain, but possibly in a proposed amendment other parts of the world, I am inclosing herewith an amended proclamation for your signature adding petroleum (metals strategic Public and petroleum products and scrap iron to your existing list of materials) (mugic "Signing to of this proclamation hurmand does not necessarily mean for example, that we will 703, immediately stop the export of all petroleum products however and scrap iron, bt does mean, that do so if you decide it is in the interest of national defense policy. from Yours sincerely, the ahmag Cambange 188 AMOUNTMENT OF REPUBLICIONS GOVERNING THE IMPORTATION OF ARFIGLES UNIVER THE PRESIDENT'S PROCESSATIONS ISSUED PURSUANT TO PROVISIONS or SEOPION 6 or PUBLIC-Ho. 703-76th B. R. 96997 Permant to the authority vosted in me by the you visions of Section 6 of Public-Ho. 703--76th Congress H. . 9850 I hereby grescribe the following commitments and additions to the regulations issued by no on July 2, 19401 I. After subsection s and before - section h under the heading #Chemicals as follow is addeds "61 Petroleum and potsolous products." II. After subsection . under the heading #Products as follow is addeds us. Scrup iron and other scrap metals." THE WITTE HOUSE July , 1940 189 ADMINISTRATION OF SECTION 6 OF PUBLIC-HO. 703-- 76th CONGRESS ACT SAN ADT TO E PHOTOS THE BERMIORHIMING OF THE NATIONAL - APPROVED JULY 2, 1940 BY THE PROCEDURE or THE WITHD STATES OF AMERICA AMERICAN or PROOF. the Production issued w no on July 2, 1940 under Section 6 of Public-. 703-76th Congress (H.S. 9030) is - end application as follows 1. After subscrition s end before submitted a of Section 32 there is addition Possible and potsclow products." II. After subsection . of Section 4 there is edded eg. Besup from and other eerep notal." IN NEWARDS WHEREOF, I have hereanto - my head end canced the 1 of the United States of America to be offined. DONE at the City of Washington this day of July, in the year of our Lose staction Insurance - and of the Independence of the United States of Imerios the - hundred and sisty-fourth, By the Presidents Secretary of State. 190 July 23, 1960 Dear Mr. Kundsens In accordance with your request, X the opinion of - General Counsel to the offect that the Reconstruction Finance Corporation has authority to 100m funds, either under the 1940 I or under the 1938 Class-Stangell - to manifacturers of articles and materials with national defense who have contracts to supply - artisles and anterials to the United States and to Group Britain, Sincerely years attentment Separable William a. Commission to the Commil of National Defense. Federal Becare Building, Packington, D.C. - 7/23/40 ctm Thompson By Massager 3rd 191 July 23, 1940 My dear Mr. Secretary: The X Company, a manufacturer of articles and materials useful for national defense, has contracted to supply the Government of the United States and the Government of Great Britain with cer- tain of those articles and materials. In order to fulfill those contracts it is necessary that the X Company increase its productive capacity by plant construction, expansion, and equipment. Those now plant facilities will be used for the fulfilment of the above-mentioned contracts. While it is not known what use will be made of those facilities after the completion of those contracts, presumably they will continue to be available for fulfilling future contracts of a similar nature, if that becomes necessary for the national defense. It is understood that the X Company desires to obtain the capital for that expansion from the Reconstruction Finance Corporation by way of a loan and has, in order to secure the repayment of the loan, offered to execute to the Corporation a mortgage without recourse covering the new plant facilities. You have inquired whether the Reconstruction Finance Cor- poration may lawfully lond that capital to the I Company for those purposes. It is ny opinion that, as a matter of law, the propriety of such a loan is beyond question. -Section 5d of the Reconstruction Finance Corporation Act, as anonded (U.S.C., Sup. V, title 15, sec. 606b), as added to by section 5 of the Act of June 25, 1940 (Public, No. 664, 76th Congress, 3rd Sess.) provides in part: "In order to aid the Government of the United States in its national-defonso program, the Corporation is authorized-"(1) To make loans to, or, when requested by the Federal Loan Administrator with the approval of the President, purchase the capital stock of, any corporation (a) for the purpose of producing, acquir- ing, and carrying strategic and critical materials as defined by the President, and (b) for plant construction, expansion and equipment, and working capital, to be used by the corporation in the nanu- facture of equipment and supplies necessary to the national defense, on such terms and conditions and with such naturities as the Corporation nay determine; In ny opinion, the above statuto confers complete authority on the Reconstruction Finance Corporation to nake the loan in question. Under the torns of the statute the lonns which the Reconstruction Finance Corporation is authorized to make, in aid of the national defense program, are for plant construction, expansion, and equipment, which in turn are to be used for the manufacture of articlos "necessary to the national defense". The plain.purpose of those words is simply to define the kind or type of equipment-and supplies which will be produced by the plant. There is no language used which would require the United States to purchase all or any of those products. The language of the statute is clear and 192 193 -3unistakable that so long as a plant produces equipment and sup- plics of a type "necessary to the national defense", a loan for the construction, expansion, or equipment of the plant falls within the authority of the Reconstruction Finance Corporation. One of the most prossing problems with which the Congress was concerned in providing for the nation's defense was the expansion and augnentation of private plant capacity which could be used in producing not only the articles and materials which are needed at the present tine to strengthen our arned forces, but also for fulfilling the needs of an uncertain future. The Congress in enacting section 5d(1) was not concerned with the acquisition of specific articles and materials for defense purposes; various appropriation acts were passed for that purpose. See: Act of June 13, 1940 (Public, No. 611, 76th Congress, 3rd Sees.); Act of June 15. 1940 (Public, No. 635. 76th Congress, 3rd Seas.); Act of June 26, 1940 (Public, No. 667. 76th Congress, 3rd Sess.); Act of July 2, 1940 (Public, No. 703. 76th Congress, 3rd Sess.). See also the statute to expodite the acquisition of naval equipment - the Act of June 28, 1940 (Public, No. 671, 76th Congress, 3rd Sess.). The problem of expanding existing private plant capacity beyond the nation's imediato noods was known to the Congress. The President had repeatedly brought the problem to the attention of the Congress, and he had specifically pointed out to the Congress that the production of war materials in this country for export would -4increase our plant capacity and our skilled personnel to the advantage of our national defense, since the increase in plant capacity and the additional skilled personnel would be available if and when the tine for their need should arise. In an address delivered personally to a Joint Session of the Congress, on September 21, 1939, the President stated: "From a purely material point of view, what is the advantage to us in sending all manner of articles across the ocean for final processing there when we could give enployment to thousands by doing it here? Incidentally, and again from the material point of view, by such employment we automatically aid our own national defense." ((1939) 85 Cong. Rec. 10; H. Doc. No. 474) In an address on national defense delivered personally to a Joint Session of the Congress, on May 16, 1940, the President said: "From the point of view of our own defense, therefore, great additional production capacity is our principal air requisite. 'For the permanent record, I ask the Congress not to take any action which would in any way hanper or delay the delivery of American-nade planes to foreign nations which have ordered then, or seek to purchase more planes. That, from the point of view of our own national defense, would be extrenely shortsighted. "During the past year American production capacity for war planes, including engines, has risen from approxinately 6,000 planos a year to more than double that number, due in greater part to the placing of foreign orders. "Our immediate problem is to superinpose on this production capacity a greatly increased additional production capacity. I should like to see this Nation geared up to the ability to turn out at least 50,000 planes a year." (Underscoring supplied.) (86 Cong. Rec., May 16, 1940, at 9534: H. Doc. No. 751) 194 195 -5In a message to the Congress, transnitting a request for additional appropriations and authorizations for the national defense, the President said: "Over and beyond the acquisition of this actual material is the evident requirement for the innodiate creation of additional production facilities to neet possible future emergencies as well as present deficioncios in the naking of munitions, such as guns, annunition, and fire-control equipnont. These facilities require a long time to create and to reach quantity production. The increased gravity of the situation indicates that action should be takon with- out delay. "In the national effort for defense upon which we are now engaged, it is imperative that we nake full and effective use of the nighty capacities that lie in our population. Here as yet undevoloped lie the ability and the strength nooded in the building up of our arnanents to provide a suro industrial foundation for the neeting of any and all defense requirements. Without the full development of those skills, our national defense will be less than it must be in the critical days which lie ahead. Without the full contribution of our people, our defense cannot attain the invulnorability which the Nation demands and which we are determined it shall have." (86 Cong. Rec., May 31, 1940, at 11055 and 11087; H. Doc. 799) It appears from the debates on the bill in the Senato that the concern of the legislators was to encourage the establishment of private enterprises rather than the creation of Government corporations to supply the Government with needed materials for national defense. (86 Cong. Roc., June 15, 1940, at pages 12597-12615) The same appears in the debates of the House of Representatives. (86 196 -Cong. Rec., June 14, 1940, at pages 12497-12520). The debates of the Congress are, of course, relevant to show a common agreement on the purpose of a statute. Wright V. Vinton Branch of the Mountain Trust Bank of Roanoke, (1937) 300 U.S. 440, 464 n. See also the hearings on S. 3938, 76th Cong., 3rd Sess. (1940) 38-71, a companion bill to H.R. 9958, 76th Cong., 3rd Sess., which became the Act of June 25, 1940. It would have been inconsistent with that purpose for the Congress to have refused to authorize loans to private industry for the enlargement of its productive capacity except upon the condition that all the output be sold to the United States Government. Furthermore, it would have been a shortsighted policy indeed which would have limited plant expansion to exactly that necessary for the immediate needs of the Government. The events happening in Europe were such that no person could undertake to say what the needs of the United States Government would be at any time in the future. It is well known that a plant expansion cannot be carried out over night. The erection of new buildings, the installation of new machinery, and the organization of such a plant require time. The Congress could not have intended that the placing of future orders should await additional expension in the future. That is especially true when it is realized that, since every order which is filled for customers other than the United States will also bear a portion of the cost of that increased expansion, such expansion can be had at less 197 -expense to the Government. If it be argued that the Congress could not have intended that the increased plant capacity, achieved by capital provided by the Reconstruction Finance Corporation, should be available to fulfill contracts for others than the Government of the United States because such other contracts might hold up production for the United States, a complete answer is to be found in section 2(a) of the Act of June 28, 1940 (Public, No. 671, 76th Congress, 3rd Sess.), which provides, in part: deliveries of material under all orders placed pursuant to the authority of this section and all other naval contracts or orders and all Army contracts and orders shall, in the discretion of the President, take priority over all deliveries for private account or for export:* . #* Under that section it is clear that all increased plant capacity will be available for the fulfilment of contracts of the Government if the President should find that necessary. Since but a few days elapsed between the passage of those Acts, the Congress must have enacted each in the light of the other. It is, therefore, selfevident that all augmentations of plant facilities made with the 1 See also section 120 of National Defense Act of 1916, 39 Stat. 213 (U.S.C. title 50, sec. 80), granting the President similar (but more drastic) authority when war is imminent or during time of war. 198 8- use of loans by the Reconstruction Finance Corporation will be available for the national defense. II. It is not necessary, however, to rely solely on the paragraph added to section 5d of the Reconstruction Finance Corporation Act by section 5 of the Act of June 25, 1940, for authority to make the loan here under consideration. Authority to make the loan may also be found in section 5d of the Reconstruction Finance Corporation Act, as amended by the Act of April 13, 1938 (the Glass-Steagall Act) 52 Stat. 212 (U.S.C., Sup. V. title 15. sec. 606b), without the new paragraph. That section provides, in part, as it appears in the Code: The Corporation is further authorized and empowered to purchase the securities and obligations of, and to make loans to, any business enterH* prise when capital or credit, at prevailing rates for the character of loan applied for, is not otherwise available: Provided. That all such purchases of securities and obligations and all such loans shall be, in the opinion of the board of directors, of such sound value, or 80 secured, as reasonably to assure retirement or repayment; may be made or effected either directly or in cooperation with banks or other lending institutions through agreements to participate or by the purchase of participations, or otherwise; shall be made only when, in the opinion of the board of directors, the business enterprise is solvent; and shall be made under such terms, conditions, and restrictions as the corporation may determine: Pro- vided further, That in carrying out the provisions of this section, the Corporation may purchase securities and obligations, and may make loans, with such maturities as the Corporation may determine, notwithstanding any other provision of law.* . on 199 -9- The language of that section clearly would seem to authorize the Corporation to make a loan, taking as security a non-recourse mortgage, provided that the loan is of such sound value or is so secured that repayment or retirement will reasonably be assured and that the business enterprise to which the loan is made is, in the judgment of the board of directors of the Corporation, solvent. It is understood that capital or credit, at prevailing rates for the character of loan applied for, is not otherwise available, There is nothing in the Act which, if the enterprise be solvent, either requires security for all loans, or requires security of a particular type to be taken. This is borne out, not only by the plain language of the statute quoted, supra, but also by the evidences of Congressional intent appearing in the legislative history of the Act. The language in the Act before the Glass-Steagall amendment was as follows: Such loans shall, in the opinion of the board of directors of the Corporation, be so * secured AS reasonably to assure repayment of the loans, Section 10 of the Act of January 31, 1935, 49 Stat. 5. That the Congress intended to liberalize that portion of the Act by providing "sound value" as an alternate basis for a loan, 80 that security need not be the sole condition therefor, is plain from the statements by Representative Steagall, Chairman of the Committee on Banking and Currency. who introduced the measure in the House. In (1938) 83 Cong. Rec. 4674-4675, he stated: The bill has another provision which liberalizes the authority of the Corporation in making business loans of all types. Under existing law the Corporation, in making industrial or business 200 - 10 - loans, is required to take security that will reasonably insure the repayment or liquidation of the loan. Under this bill the Corporation may make loans on a different basis -- and I will read the language 60 as to be sure that I am entirely accurate: "Such loans or obligations to be of such sound value or 80 secured as reasonably to assure retirement or repayment. , "It is quite clear from this language that it is the agreed purpose of the bill to authorize the Corporation to make loans upon a basis of soundness on the one hand, or to purchase obliga- tions, make advances, or still as under existing law, to make such loans where repayment is reason- ably assured. There is not in the present bill the arbitrary requirement that no loan shall be made except where its repayment is secured by collateral. We have departed from that requirement of existing law. That is quite a marked change and constitutes e very lerge liberalization of the act. "Mr. STEAGALL. I have tried to make it clear that this bill authorizes loans to be made without the customary collateral or security requirements. The basis is soundness. Any loan that is of sound value, whether it is to an individual, a partnership, or a corporation, would be considered, "The purpose of that is to permit the Cor- poration to deal with actualities in these trans- actions and to grant extensions from time to time. There is no limit here within which maturities are to be established under contracts for loans, the purpose being to permit the Corporation to so liberalize its policies and its prectices that it may come to the aid of any city, corporation, or partnership that hns security of sound value upon which they cannot secure accommodations through ordinary channels. That is the whole purpose of the bill. 201 - 11 - "Mr. SADOWSKI. The purposes of the bill are good, but it seems to me that all of the provisions of the bill seem to rest upon the kind of rules and regulations the R. F. C. will promulgate. What assurance has the gentleman or the Members of this House it is going to bring out such rules and regulations that the Nation will be able to benefit under the provisions of this bill? "Mr. STEAGALL. May I say to the gentleman, in answer to his question, that the whole matter was discussed by the committee in the hearings held on the proposed legislation. Statements have been made that it probably would not be helpful to publicize. The committee will bear out this statement, that delinquencies and foreclosures by the Corporation upon industrial loans show that the Corporation has gone further than was ever contem- plated under either the language, the letter, or the purpose of the law by which they were acting. That is the reason we have liberalized the law in this instance, to prevent immediate foreclosures, to permit extension of obligations from time to time, and to permit loans without rigorous rules of collateral." During the hearings on H.R. 10055 (which was superseded by S. 3735, a bill which, except for the addition of a paragraph not relevant here, was identical therewith, and which became the Glass-Steagall Act), some disagreement was expressed upon the interpretation of the words "of sound value". Most of the Committee members, especially Mr. Steagall, took the view that the addition of the new language liberalized the making of loans, so that collateral security need not be required in all cases, provided there was "sound value". The Chairman of the Reconstruction Finance Corporation, Mr. Jesse Jones, and the General Counsel of the Corporation, Mr. Claude Hamilton, Jr.. took the narrower position that the proposed legislation 202 - 12 - pade no change in the security requirements at all; that "of such sound value" referred only to purchases of obligations, and not to loans: and that loans must still be secured. That difference of opinion will be found on the following pages of the Hearings on (1938) H.R. 10055, 75th Cong., 3rd Sess. : 13, 15, 19. 20, 25, 32, and 34-35. It is manifest from the hearings that the Congress was trying to liberalize, while the Chairman of the Reconstruction Finance Corporation was attempting to restrict, the security requirements for loans to be made under the proposed statute. The anonalous situation was thus presented of an administrative officer of an agency attempting to restrict powers which it was intended to bestow upon that agency. The only member of the Committee who appears to have accepted the interpretation of Messrs. Jones and Hamilton with relation to the phrase "of such sound value" was Mr. Williams. Chair man Steagall, however, in his explanation of the bill on the floor of the House of Representatives, quoted, supra, did not accept the interpretation of Mesars. Jones and Hamilton. 2/ Expository statements by the sponsors of legislation may be used as aids in the interpretation of that legislation. Wright V. Vinton Branch of the Mountain Trust Bank of Roanoke, (1930) 300 U.S. 440, 463; United States V. Even in the face of Mr. Steagall's statement, Mr. Jones, in a speech made after the passage of the Act, declared that loans made by the Reconstruction Finance Corporation under the Glass-Steagall Bill must 2 be secured. See (1938) 83 Cong. Rec. (Appendix) 1641-1642. 203 - 13 - The American Trucking Associations, (No. 713, U.S.S. Ct., May 27, 1940). There can be no doubt, then, of the Congressional intent in the Act of April 13, 1938, to remove the requirement of security as the sole condition upon which a loan may be granted. If the Reconstruction Finance Corporation has power to make loans without requir- ing any security, it cannot be argued that, when security is offered, it must be security of a particular type. The Act itself does not specify what kind of security shall be taken if security is offered. It merely requires that the security shall reasonably assure repay- ment. The Corporation has not in practice restricted itself to one specific type of security. During the hearings which are mentioned above, many kinds of security acceptable to the Corporation were mentioned. At page 13, thereof, Mr. Hamilton stated, in response to a question, that the security might be a pledge of personal property, assignment of accounts receivable, or a mortgage on real estate. On page 17, he indicated that an inventory would be good security for a loan to a retail store, if the state law permitted. On page 28 Mr. Jones said that the usual security for an industrial establishment was a mortgage on the plant. On page 44, Mr. Jones made the following statement: "We want to make any sound loan where we think the credit is good and the money will be repaid. We do not care what the security is. We would be glad to make the loans. What we are trying to do is to promote work and business." (Underscoring supplied.) 204 - 14 - In the Senate Hearings before the Committee on Banking and Currency on (1938) S. 3735. 75th Cong... 3rd Sess. 4, Mr. Jones said: * the We want to say: 'All right; if some- body needs some money in any community, and they can give us security and put the money to good use, and not use it to pay some present-existing debt, but to buy something and hire someone, then we want to make the loan'." Nowhere in the hearings was indication given that any security other than that which would reasonably assure repayment was required, Under section 5d of the Reconstruction Finance Corporation Act, as amended by the Glass-Steagall Act, it is my opinion, therefore, that the Reconstruction Finance Corporation would be acting wholly within its powers in making the proposed loan to the X Com- pany if the X Company is solvent and the prospective loan is "of such sound value" as to reasonably assure repayment, or if the mortgage without recourse, covering the proposed additional plant facilities, reasonably assures repayment. It should be pointed out, however, that what constitutes "sound value" and what loans are secured "reasonably to assure re- tirement or repayment" are matters left solely to the discretion of the Board of Directors of the Reconstruction Finance Corporation and are not subject to review by any other governmental agency except possibly the Federal Laon Administrator under his general supervisory powers. 205 - 15 - It is my opinion, therefore, that there is adequate authority in the Reconstruction Finance Corporation to make the proposed loan either under the 1940 National Defense Amendment, supra, or under the 1938 Glass-Steagall Amendment, supra. Very truly yours, (Signed) E. H. Foley, Jr. General Counsel. The Honorable The Secretary of the Treasury.