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289 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE December 11, 1940 TO Mr. Sullivan FROM Mr. Blough The following items of interest relating to taxes appeared in the newspapers of December 10, 1940: 1. New York Times, page 28, column 2: "Joint tax return backed by court" discusses three Supreme Court decisions handed down December 9, 1940. The first two cases involved joint income tax returns of a husband and wife. In one case, the court decided that a husband and wife filing a joint return might deduct the losses of one in selling capital assets from the gains of the other. The second opinion stated that the statutory maximum for deductions for charitable contributions need not be applied to the two individually. The third decision held that reserves set aside by life insurance companies to meet disability claims could be combined with straight life insurance reserves in calculating the statutory income tax deduction allowed amounting to 4 percent or sometimes 3-1/2 percent of their reserves required by law. 2. New York Herald Tribune, page 39. column 1: "Wide revision of U. S. tax law code is advised" states that C. Oliver Wallington, President of the American Institute of Accountants, recommended a number of tax changes in a speech before the District of Columbia Institute of Certified Public Accountants. Principal changes suggested were: Creation of a nonpartisan commission to study the whole tax problem and to recommend a consistent and permanent policy of Federal taxation, removal of tax exempt feature of all future governmental securities, reduction of the higher surtax rates, permission to corporations to file consolidated returns, broadening of the tax base, and elimination or reduction of the tax on capital gains. 3. Journal of Commerce, page 3, column 2: "Amortization plan for labor is urged" reports that Isadore Lubin, United States Commissioner of Labor Statistics, appearing before the House Committee on Migrant Workers, suggested the use of consumers' taxes when full employment is reached to prevent inflation. 290 -4. The Wall Street Journal, page 3. column 1: An article entitled "Leading firms with large capital to pay little if any profits levy" discusses the effect of the excess profits tax on the tire and rubber industry. It is reported that the four large rubber companies, which account for about 80 percent of the industry's sales, will probably pay little if any excess profits tax this year because their earnings will be less than their invested capital credit. Smaller companies, which will probably select the average earnings option, are not expected to pay much either. 5. The Wall Street Journal, page 4, column 2: An editorial "Taxable government bonds" commends Secretary Morgenthau's decision to issue taxable Federal securities because "tax exemption is inconsistent with a system of graduated income taxation." The belief is expressed that the Federal Government should have the right to tax future state and local issues and vice versa, but the right should be obtained by a constitutional amendment. 291 December 11, 1940 11:25 a. m. Message from Mr. Rouse: Long bonds are drifting lower. The longest off 45/32nds. Volume light. The long notes now outstanding off 1/32nd. Talk in the market is that the new note should start off at about par 16/32nds. Some say at par 12/32nds and ranges to 20/32nds. The total subscriptions to date here is $140,000,000 -- only our subscription. National City is $65,000,000 which is their limit. The Guaranty Trust told me that they had not made a definite decision, but that the bond men in the Bank would recommend subscribing the limit. Another dealer told me that the reaction out of town did not appear to be as good as usual. That commercial banks outside the City said that they would subscribe, of course, but that they thought it was too thin and might not subscribe their limit. TREASURY DEPARTMENT 232 INTER OFFICE COMMUNICATION DATE December 11, 1940 TO FROM Secretary Morgenthau Mr. Cochran STRICTLY CONFIDENTIAL Sir Frederick Phillips, Under Secretary of the British Treasury. talked with me telephone from the British Embassy at 4:35 this afternoon. He told me that his neople planned a further vesting of United States dollar securities around Jenuary 4. He said that it would be possible to get out a vesting order covering a part of the by securities around December 14, if the American Treasury attached any importance to the British taking some action in this direction immediately. I told Sir Frederick that my first reaction was that it might be helpful if evidence were forthcoming now that the British are taking further steps to meet their dollar expenses through disposing of their dollar securities. The public might interpret such a step to mean that those securities already vested have been marketed. I added, however, that I desired to bring this matter personally to the attention of Secretary Morgenthau for an official pnever. I promised to speak with the Secretary as soon as possible and call Phillips back. Before I saw the Secretary at 5:10 this evening Mr. Pinsent mentioned the same subject to me by telephone He said that the purpose of a new vesting order WAS to increase the variety of securities being liquidated and thus broaden the base. The securities already vested have not yet been depleted. After speaking with the Secretary, I telephoned Sir Frederick Phillips at 5:15. told him that the Secretary thought it would be a good omen if the British proceeded with a vesting order around December 14, as suggested. I added that the Secretary honed Sir Frederick would bring up with him the whole matter of British sale of dollar securities on our market. Sir Frederick said that he would gladly do this and would be glad to have any suggestions. (The Secretary had told me that Assistant Secretary Forrestal of the Navy and Mr. Clarence Dillon had expressed their views to him on the I lack of efficiency in the present system being followed by the British. I did not cite this criticism to Phillips.) B.M.R. DEPARTMENT OF STATE 293 WASHINGTON In reply refer to EA 840.51 Frozen Credits/870 December 11, 1940 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and, referring to his communication of November 12, 1940, encloses a copy of despatch no. 6252 dated November 14, 1940 from the American Embassy at London, transmitting a copy of the Anglo-Uruguayan Payments Agreement. Enclosure: From London, November 14. 294 November 14, 1940 No. 6252 STRICTLY CONFIDENTIAL. SUBJECT: Anglo Uruguayan Payments Agreement. The Honorable The Secretary of State, Washington. Sir: Referring to the Treasury's telegram transmitted to this mission as telegram No. 3443, November 12 from the Department of State, I have the honor to transmit herewith copies of the Anglo-Uruguyan Payments Agreement 1940. Respectfully yours, Herschel V. Johnson Charge d'Affaires ad interim WCF:MJG ANNEX B. 295 MODUS VIVENDI BETWEEN THE BANK OF ENGLAND and the BANCO DE LA REPUBLICA ORIENTAL DEL URUGUAY. OPENING OF SPECIAL ACCOUNT. 1. The Banco de la Republica will open at the Bank of England a Special Account to which will be credited the most important sterling payments* from Sterling Area to Uruguay in respect of trade and current financial transactions. There will be debited:(a) Payments through usual service bankers in respect of federal and Municipal Debt and interest, dividend and other re- , mittances on British investments in Uruguay. (b) All other trade and current financial payments from Uruguay to Sterling Area. (c) Uruguay shall make no payments to the "sterling area" by any means other than from the Special Account, nor make payments outside the "sterling area" from the Special Account. 2. The Bank of England, in agreement with the Banco de la Republica may authorize the banks in Uruguay, authorized to deal in exchange, to open Special Accounts with their correspondents in the United Kingdom. (a) These Special Accounts will be subject to the same conditions as are laid down in Article 1 for the Special Account of the Banco de la Republica at the Bank of England. (b) Transfers between these Special Accounts and/or that of the Banco de la Republica will be freely permitted. 3. 4. When it considers it necessary the Bank of England may require from the correspondents in the U.K. of the Urugunyan banks who maintain Special Accounts, reports on the transactions and balances of those Accounts. Notwithstanding foregoing provisions of this agreement, the Bank of England may authorize opening or maintenance of accounts with banks in United Kingdom to be denominated "Uruguayan sterling area accounts" in name of persons resident in Uruguay but having close connexions with any territory in sterling area to which credits representing income arising in sterling area and transfers from an Uruguayan Special Account would be permitted. Sums standing to credit of these accounts may be used only (a) for payments to persons resident in sterling area other than payments in respect of An oral explanation of this made on November 12, 1940, by Mr. E. W. Playfair of the British Treasury shows that "the most important" should read "all", but that no formal change will be made in the text. (1) W.C.F. -2- goods exported from sterling area to Uruguay or remittances of 296 financial services and (b) payments to Uruguayan Special Account: they may not be paid to any other non-resident's account. Transfersbebetween not made. one Uruguayan sterling area account to another may B. TERMS OF SPECIAL ACCOUNT AT THE BANK OF ENGLAND 5. No minimum balance will be required on the Account: funds available will be employed automatically at interest in multiples of 1100,000. 6. Funds in excess of 1250,000 will be converted automatically into gold at the official middle price for gold in London of the day in multiples of approximately 1100,000, to be retained at the Bank of England for account of the Banco de la Republica. 7. Whenever the balance on the Special Account is below 1250,000, gold will be released at the official middle price for gold in London of the day in multiples of approximately L100,000 to feed it. 8. Gold will not be set aside as guarantee when the balance on the Special Account is less than 1250,000: nor when there are credits outstanding other than those of a purely commercial and self-liquidating nature. 9. Gold set aside will only be available for resale to the Bank of England at the official middle price for gold in London on the day of resale. The proceed may only be credited to the Special Account for use within the "sterling area". 10. At termination of payments agreement any gold set aside shall be re- sold to Bank of England at official middle price for gold in London and proceeds credited to the Special Account of the Banco de la Republica at the Bank of England for utilisation together with bal- ance on other Special Accounts for purposes laid down in clause 1. The resale of gold will be effected gradually and according to the Banco de la Republica's requirements of sterling on the Special Account. C. GOLD GUARANTEE OF FORWARD PURCHASES. 11. The Bank of England will grant to the Banco de la Republica a gold guarantee covering forward purchases of sterling in the Uruguayan market, subject to the following conditions:- (a) that forward sterling so acquired arises only from exports from Uruguay to Sterling Area, (b) that this gold guarantee will only cover such portion of the forward sterling as, adding together the outstanding balance of forward purchases (from which there will be deducted forward sales and any advances against forward purchases) and the balance on the Special Account at the Bank of England, is in excess of 1250,000, -3- 297 (c) that there are no credits outstanding other than those of a purely commercial and self-liquidating nature. 12. The Bank of England will give this guarantee on the basis of the official middle price for gold in London on the date of the relative exchange contracts but it shall not become effective until the sterling enters the Special Account at the Bank of England. 13. If the official middle price for gold in London is not altered the procedure set out in Articles 6 and 7 will be maintained. 14. In the event of an alteration if official middle price for gold in London amount of forward sterling to be entitled to gold guarantee at former price shall be established by adding on Special Account to outstanding net balance of forward purchases/sales and deducting total advances against forward purchases and sum of 1250,000. Such amount of forward exchange as is thus entitled to guarantee at former price shall, as and when it matures, be paid into a special suspense account in the name of the Banco de la Republica at Bank of England and shall be automatically converted to the nearest bar into gold at former price. 15. At close of business each day surplus of deficiency on Special Account will be dealt with in accordance with conditions established in Articles 6 and 7. 16. When total forward purchases of sterling entitled to the gold guarantee at former gold price shall have been liquidated method set out in Articles 6 and 7 will be resumed. D. FIXED RATES BETWEEN STERLING AND THE URUGUAYAN PESO 17. All payments between Sterling Area and Uruguay shall be contracted in sterling. 18. There shall be agreed rates of exchange between pound sterling and Uruguayan pesos which will be determined by current official middle price of gold in London (at present 168/6d per fine ounce, which is equivalent to one pound to 4.02-1/2 dollars) and current official Uruguayan rates for dollars. In the event of an alteration in the official price of gold in London or official Uruguayan rate for dollars, rate of exchange between pound sterling and Uruguayan pesos will be adjusted accordingly. E. MISCELLANEOUS 19. The Bank of England will facilitate to the correspondents of the Uruguayan banks in the U.K. authority to grant such lines of credit as may be necessary so that these banks may be able to make advances against forward exchange contracts when available sterling on the Special Account of the Banco de la Republica does not allow it to meet the demand for payments to the sterling area. 238 20. The duration of this agreement shall be for one year, automatically renewable for equal periods ao long as neither of the parties denounces it giving three months' notice. The 30th June, 1941 is fixed as the termination of the first year. 21. The sterling area comprises the United Kingdom, any part of His Majesty's dominions outside the United Kingdom (except Canada, Newfoundland and Hong-Kong) any territory in respect of which a mandate on behalf of the League of Nations has been accepted by His Majesty and is being exercised by His Majesty's Government in the United Kingdom or in any Dominion, any British Protectorate or protected state, Egypt, the Anglo-Egyptian Sudan and Iraq. Signed in duplicate at Montevideo this eleventh day of September 1940, in English and Spanish, both texts being equally authentic. Signed on behalf of the Bank of England Commercial Secretary of the British Legation. Signed on behalf of the Banco de la Republica Oriental del Uruguay General Manager Copy:1 bj Manager. 299 SUPPLEMENTARY NOTE TO THE MODUS VIVENDI It is agreed that:(a) The Banco de la Republica has the right to maintain its existing selling rate when the middle price of gold in London alters until such time as it has liquidated such balances as may exist in the Special Account without gold guarantee. (b) negotiations will be continued by this Legation on the point raised by the Banco de la Republica that the latter should have the right to grant quotas of free exchange for imports from the British Empire (not including the United Kingdom) when, owing to the shortage of sterling to cover essential imports from the Empire (other than the United Kingdom) it sells U.S. dollars to the United Kingdom control at the official rate. (c) all inward financial remittances (i.e. remittances to Uruguay) through the Special Account of sterling not arising from Uruguayan exports whether in payment of a sterling or reso debt shall be granted a rate not less favourable than the current selling rate for sterling (at present 7.63) less the usual bank commission. Signed on behalf of the Bank of England Signed on behalf of the Banco de la Republica Oriental del Uruguay General Manager Cory:bj Manager PLAIN HSM London 300 Dated December 11, 1940 Rec'd 10:50 a.m. Secretary of State, Washington. 4038, Eleventh. Mr. Butler, Parliamentary Under Secretary of State, for Foreign Affairs, made following statement in House of Commons yesterday in reply to a question whether attention of British Government has been drawn to financial assistance which United States propose to give to China and whether British Government has under consideration grant of similar assistance for China's sterling needs: "The United States Government announced on 30th November their intention to extend to the Government of China large credits for strengthening the United States dollar resources available to the Chinese monetary authorities and for other purposes. His Majesty's Govern- ment for their part, having regard to the importance of their financial and economic relations with China, have now decided to grant further financial assistance to that country. It is of course necessary for His Majesty's Government to conserve their gold and dollar assets for the essential war needs of the sterling area, and they cannot offer to China United States dollars or sterling which is convertible into United States dollars. Provided however that suitable arrangements can be made to ensure that sterling held in China is available only for use in the sterling area, His Majesty's Government are prepared in principle to made an advance of 15,000,000 to the Chinese stabilisation fund, and with the concurrence of the Dominion Governments concerned, to grant credits which will be available for purchases in any part of the sterling area within a maximum of a further 15,000,000. This decision has been communicated to the Chinese Government with a request that they will make arrangements -2- 301 for the early negotiation of the preliminary technical agreement on which the possi- bility of these further sterling credits depends." A similar statement was made in House of Lords by Lord Halifax. JOHNSON CSB LO LIFE LECHNICY OLFICE END DEC 18E velid is bit & ss 302 PLAIN JR London Dated December 11, 1940 REC'D 12:10 p.m. Secretary of State, Washington. 4045, Eleventh. FOR TREASURY. In response to a parliamentary question whether any "undertaking specific or implied has been or will at any time be given to the United States of America that this country will return to the gold standard after the war without first consulting the House", the Chancellor of the Exchequer replied "there has never been any question /giving any undertaking of the kind suggested." JOHNSON WSB No. 720. CHUNGKING, December 11, 1940 303 Subject: Transportation Conditions on Burne Road. Air mail Confidential The Honorable The Secretary of State, Washington, D. C. Sir: I have the honor to enclose for the Department's information P copy of A letter dated December 6, 1940, which I have received from Mr. J. E. Baker, an American citizen long a resident of Chine who is now employed by the American Red Cross for the purpose of facilitating the transport into China of medicines and cloth recently contributed to China. As the Department is aware, Mr. Bricer is something of an authority on the problem of transportation in China, and he has just completed a survey of the transport potentialities of the Burme road: I therefore believe that his findings and suggestions merit the serious attention of the Department, especially in the light of the recent American credits to China. But in transmitting his letter I do not wish to imply endorsement of his suggestion that "further purchase of trucks be conditioned on the purchase of an adeouate supply of spare parts and of repair machinery, and if possible the employment of an American suncrintendent of maintenance". It is possible and even probable that if Mr. Baker's suggestions were to be followed improvement in the transportation capacity of the highway would be realized, but I feel that basically the question of transport over the Burma road is one to be solved by the Chinese themselves and that external intervention is neither warranted nor advisable. Should the Chinese seek American advice or assistance in the matter of the improvement of transportation facilities I believe ve should of course do All in our power to assist them, but I do not think it would be wise or excedient to volunteer counsel or to impose conditions. During the past forty months of hostilities Chinese achievements in the field of transport have been considerable: I understand that the Burma road, which is a limited artery of traffic into China under the very best of conditions,* is constently undergoing improvement, and I gather that the deficiencies mentioned by Mr. Baker will be given due attention by the Chinese authorities. In expressing the foregoing opinions, I do not wish to be regarded as belittling the value of foreign transport advisers: on the contrary, it is apparent that Messrs. M. E. Sheahan, A. B. Bassi and C. W. Van Patter of the Keeshin Freight Lines, Inc., Chicago, and other American advisers have made many valuable contributions to the improvement of motor transportation in west China, and I believe the Chinese are among the first to recognize these contributions. Respectfully yours, Nelson Trusler Johnson Enclosure: 1/ Copy of letter from Mr. J. E. Baker dated December 6, 1940. -2304 Original and three copies by air mail to the Department Copy to Peiping 815.4 EFD:MCL *Embassy's report dated November 29, 1940; Kunming's despatches 124, September 26, 1940 and 142, November 15, 1940 to Department. Enclosure no. 1 to despatch no. 720 dated December 11, 1940 from American Embassy at Chungicing on subject of "Transportation Conditions on Burma Road". (COPY) Telegraphic Address AMERCOM. Chungking WEST CHINA CO-ORDINATING COMMITTEE of the AMERICAN ADVISORY COMMITTEE Chungicing, China December 6. 1940 His Excellency, Nelson T. Johnson, American Ambassador, Chungicing. Dear Sir:- Since talking with you Tuesday, I have seen confirmation of the news that the U.S.A. has extended a further credit to China of $100,000,000 (U.S.) of which $50,000,000 will be used for purchases. These purchases will be of no avail unless they can be introduced to China. For that purpose the Burma road is practically the sole artery. At present more Chinese tonnage is already at Rangoon than can be transported at present rates in eight months. (56,000 tons e 200 tons per day, plus 100 tons gasoline will require 280 days) The volume over the road today is limited not so much by the number of trucks owned as by (1) insufficient repair facilities, (2) absence of dispatching organization, (3) traffic inspection and regulation en route. May I suggest that if you have not done so, you cable Washington suggesting that further purchase of trucks be conditioned on the purchase of an adequate supply of spare parts and of repair machinery, and if possible the employment of an American superintendant of maintenance. There are several shops for repair, but none are really adequate and there is no system to ensure adequate use of such facilities as already are at hand. Also a foreigner is needed to furnish the hard-boiled dispatching of traffic that is needed to get full use of the road. Several of the cabinet agree with me on this. Respectfully, (Signed) J. E. Baker. eh:copy 305 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Consul, Dakar. DATE: December 11, 1940, 9 a.m. NO.: 96. FOR THE TREASURY. Two sources which usually are well informed have told me that on December 4th, after nightfall, the French cruiser Primauguet came into port and took on a cargo of 50 tons of gold. It left port before dawn. WASSON EA:MSG 306 PARAPHRASE OF PORTION OF CONFIDENTIAL TELEGRAM RECEIVED FROM AMERICAN CONSULATE, RANGOON. DECEMBER 11, 5 P. M., 1940. The Reserve Bank of India, in connection with the drive of the British for dollar balances held either in the United States or in Burma, is requiring American citisens in Burna who hold such balances to make applica- tion for exemption individually. However, the Reserve Bank indicates all Americans will be accorded exemption from the requirement of transferring accounts in United States dollars with the exception specifically of American wives of British subjects, and possibly those Americans formerly engaged in business or in other activities who have retired. 84.50.5151/3 307 December 11, 1940 Memorandum To: Secretary Morgenthau From: Major Smith (Via Mrs. McHugh) pee ford m Report on Performance of the Curtiss P-40 Comparative flights have been made with the Curtiss P-40 and the Spitfire airplanes by our pilots. In these comparative flights, the Curtiss P-40 was equal to or better than the Spitfire in all its characteristics, such as high speed, climb and maneuverability. Both airplanes are so maneuverable that the rapidity of maneuverism is limited only by the physical capacities of the pilot to resist blackouts. While the Spitfire carries eight 30 calibre guns (303 calibre), the Curtiss model carries four calibre 30 and two calibre 50 guns. The 50 calibre gun has superior armor piercing characteristics; therefore, we believe that the combination of 30 and 50 calibre guns is a better armament for combat than the eight 30 calibre guns as mounted in the Spitfire. Mr. Fairey, a representative of the British Purchas- ing Commission and more than 30 years an aircraft manufacturer (not a pilot), stated that from his observation of the Curtiss P-40 that they were taking delivery on in September and October, they were between the Spitfire and the British Hurricane in combat efficiency. He further stated that he would like to have all the production from the Curtiss plant and if he did, the worries of the fighter command would be over. In brief, if the Spitfire can outfight the German Messerschmitt, then our Curtiss pursuit plane can do equally well. -2- 308 Statistics on P-40 High Speed Horsepower Rate of climb to 14,000 feet Time of climb to 10,000 feet Time of climb to 15,000 feet Note: 360 miles an hour 1090 300 feet per minute 3-1/2 minutes 5-1/2 minutes This from a recent report made by Major Timberlake, Air Corps, relative to comparison of the British and American Army airplanes. W. B. S. 309 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 11, 1940 TO Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns 180,000 610,000 Open market sterling remained at 4.03-3/4. Transactions of the reporting banks were as follows: Sold to commercial concerns -0Purchased from commercial concerns 11,000 The Canadian dollar, which weakened on some out-of-town selling yesterday, recovered somewhat today. The closing discount was 13-3/4% as against 14-1/8% last night. There was also some improvement in the Cuban peso discount, which had sidened to 9-5/8% yesterday on reports of the Cuban Ambassador's resignation and departure of part of the Cuban economic mission here. Today's discount was 9-3/8% Except for a slight easing of the Swiss franc rate no appreciable movement took place in the other currencies. Closing quotations were: Swiss franc Swedish krona Reichamark Lira .2320-1/2 Brazilian milreis (free) .2385 .4005 .0505 .2360 .0505 Mexican peso .2063 Argentine peso (free) The yuan in Shanghai was unchanged at 5-15/16 There were no gold transactions consummated by us today. The Federal Reserve Bank of New York reported that the Bank of Canada shipped $2,678,000 in gold from Canada to the Federal for account of the Government of Canada, for sale to the New York Assay Office. The Bombay gold price was equivalent to $33.83, R gain of 1$ over Monday's level. Silver in Bombay was equivalent to 42.69#. off 1/4 -2- 310 Cancelling yesterday's gains, the London spot and forward silver prices both declined 3/16d, to 22-7/8d and 22-13/16d respectively. The dollar equivalents were 41.54 and 41.42 Handy and Harman's settlement price for foreign silver was unchanged at 34-3/44. The Treasury's purchase price for foreign silver was also unchanged at 35$ The made five purchases of silver totaling 275,000 ounces under the Silver Purchase Act. Of this amount, 75,000 ounces represented a sale from inventory, and the remaining 200,000 ounces consisted of new production from foreign countries, for forward delivery. CONFIDENTIAL 311 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 11, 1940. Chemistry TO Secretary Morgenthau FROM Mr. Cochran On December 10 the Federal Reserve Bank reported that Bizzeria Co., Inc., had drawn a check for $264,000 against its account with the Chase National Bank, New York. Mr. McKeon called today and said that the correct name of the drawer of this check is Berizzi Co., Inc., and that its account is maintained with the Rockefeller Branch of the Chase National Bank of New York, BMP. 312 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 11, 1940 Champoon Secretary Morgenthau TO STRICTLY CONFIDENTIAL FROM Mr. Cochran The Federal Reserve Bank of New York reported the following transactions in Russian accounts maintained with the Chase National Bank. Principal changes in the State Bank of Russia's dollar account during the period December 5 to December 11, inclusive, were as follows: Amount Date Credited Dec. 5 $ 74,549.62 Amount Received From Debited Paid To Chase National Bank, N.Y., by order of Narodni Banks Ceskoslovenska, Prague 2,000,000 Chase National Bank, N.Y., by order of Banque National Suisse, Zurich Dec. 6 62,681.25 106,150 Commercial Letters of Credit $ 298,726.11 Commercial Letters of Credit National City Bank, N.Y., for account of A. Pines & Son, Inc. Dec. 7 349,104.90 Commercial Letters of Credit Dec. 9 484,073.29 Commercial Letters Dec. 10 Dec. 11 50,000 Amtorg Trading Corp. 1,600,000 of Credit Amtorg Trading Corp. -2313 On December 11 the balances of the State Bank and the Amtorg Trading Corporation were as follows: State Bank of the U.S.S.R. Cash Balance Cash commercial Letters of Credit Time deposits Total Changes in total since December 4 Amtorg Trading Corporation $ 11,348,600 $ 1,060,900 13,269,300 2,474,700 10,300 -0- $ 24,628,200 $ 3,535,600 - $ 783,900 t $ 231,600 me 314 DEPARTMENT OF STATE WASHINGTON reply refer to 838.51/4113 December 11, 1940 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and, referring to his letter of October 18, 1940 relative to remittances of coupons of the Haitian 1922 bonds to the United States for collection, encloses a copy of despatch no. 1121 dated November 25, 1940 from the American Legation at Port-au-Prince, in further reference to this subject. Enclosure: From Port-au-Prince, November 25, 1940. 315 Port-au-Prince, Haiti, November 25, 1940. No. 1121 Subject: Difficulties of the Haitian National Bank in Remitting Coupons of the Haitian 1922 Bonds to the United States for Collection. The Honorable The Secretary of State, Washington, D. C. Sir: With reference to the Department's instruction No. 905 of October 28, 1940, transmitting a communication from the Treasury Department dated October 18, 1940, with regard to the handling of coupons of dollar bonds of the Government of Haiti under the Treasury Department's ruling No. 5, I have the honor to forward 1/ herewith a copy of a communication from the Fiscal Representative dated November 23, 1940, in which he reports further difficulties in this matter. It would appear that the Federal Reserve Bank of New York has not been informed of the authorization granted it by the Treasury Department to release, without referring the matter to the Treasury Department in Washington, the coupons to the addressee without the necessity of requiring the filing of affidavits on Form TFA-1, except in special circumstances. The Department may wish to bring this matter to the attention of the Treasury Department so that the difficulties now being encountered may be avoided. Respectfully yours, Enclosure: Ferdinand L. Mayer 1/ From the Fiscal Representative, dated November 23, 1940. File: 851.6 EJS:MAK 316 November 23, 1940. The Honorable Ferdinand L. Mayer, American Minister, Port au Prince. Dear Mr. Mayer: Under date of September 13, 1940 I brought to the attention of the Legation the embarrassment and difficulty which was being caused here by the impounding by the customs officials of the United States government of coupons of the Republic of Haiti 6% 1922 bonds which were sent from here to the fiscal agent in New York to be cashed. As I pointed out at that time, it does not assist the credit of the Haitian government, and more particularly the credit of the Administration of President Vincent in Haiti if Haitian citizens owning Haitian bonds are unable to cash their coupons without going through all the formalities now applicable to European holders of foreign bond issues. The largest single holder of Heitian bonds is, of course, the Banque Nationale de la Republique d'Eaiti. Under date of November 4, 1940, the Legation COD- municated to me copy of a letter, dated October 18, 1940, sent by the United States Treasury Department to the Department of State. Reference is made to that letter. On November 11, 1940, the Banque Nationale de la -2- 317 Republique d'Haiti addressed a letter to The National City Bank of New York, enclosing coupons of the Republic of Haiti 1922 loan, in the total sum of $2,085.00, due on October 1, 1940. These were promptly impounded by the United States customs officials, acting with the Federal Reserve Bank of New York. They are still being held. Under date of November 19th, the Banque received a letter from James Wallace, Assistant Cashier of the National City' Bank of New York, asking that a sworn statement be sent up to be filed with the Federal Reserve Bank, in an endeavor to obtain a release of the coupons. Copy of this letter is hereto attached. An examination of the second paragraph of the letter of the Treasury Department, first above referred to, shows clearly that a filing of affidavits was not intended, except in special circumstances. It would appear, therefore, that neither The National City Bank of New York nor the Federal Reserve Bank of New York had received the letter of October 18, 1940, signed by John W. Pehle, Assistant to the Secretary, United States Treasury Department, or any similar advice, such as is contemplated by the Legation in its communication to me of November 4, 1940, wherein it is said, "You will observe that the Federal Reserve Bank of New York has been authorized, without referring the matter to the Treasury Department in Washington, to release to the addressee 318 -3- such coupons as are being sent to the United States for collection by, or on behalf of, residents of Haiti, without the necessity of requiring the filing of affidavits on form TFA-1, except in special circumstances. Since these coupons which were sent, and which have been impounded, as stated herein, are owned by the Banque Nationale de la Republique d'Haiti, and since we have asked the National City Bank of New York to cash them and credit the proceeds to our account, it seems that there has been a complete misunderstanding all round as to procedure in the United States. It is recommended that the Legation communicate the situation to the Department of State, with a view to a request being made to the United States Treasury Department that such steps be taken as are necessary to clarify the situation. If there is any special procedure which the Treasury Department wishes us to follow, I would be glad to have it communicated to us here as soon as may be possible, in order that similar difficulties may be avoided in the future. Very truly yours, Representant Fiscal SR:hm 319 THE NATIONAL CITY BANK OF NEW YORK New York November 19, 1940 AIR MAIL Banque Nationale de la Republique d'Haiti, Port au Prince, Haiti. Centlemen:- We refer to your letter of November 11 enclosing coupons of the Republic of Haiti 6% for $2085.00, which have been impounded by the Customs officials of the United States Government with the Federal Reserve Bank of New York. We can obtain a free release if you furnish us with a sworn statement stating that these dollar coupons detached from bonds of the Republic of Haiti are owned by residents of the Republic of Haiti, Such a sworn statement must be submitted to the Federal Reserve Bank of New York each time coupons of this issue are forwarded to us. When we receive the sworn statement from you, we will file it with the Federal Reserve Bank in an endeavor to obtain a relase of the coupons so that we can present them for payment and credit your account under our usual advice. Yours very truly, James Wallace Assistant Cashier COPY if COPY COPY 320 THE DAILY WASHINGTON MERRY.Go.RounD WASHINGTON, D.C. ORERT N. ALLEN Street DREW PEARSON 2820 Dumbarton Avenue December 11, 1940 Dear Mr. Secretary: Thank you very much for your very kind note. I appreciate much your taking the time and trouble to give me your views on the pension problem. I think there is no real basic difference of opinion between us. Possibly I unduely stressed the recovery angle in my memorandum. That was not my intention. I wasn't thinking in terms of economic recovery but in terms of creating a permanent economic cushion that would meet any condition that arose in the future. Also, aside from the question of economics, I feel very strongly that a uniform federal old age system is a matter of simple humanity. I am aware that some 2,000,000 people are now getting monthly pensions of some kind. But you will find on examining these amounts that in 75 per cent of these cases they are mere pittances and are indefensible. Personally, I would far rather see no pensions at all than this kind, because the system as it operates today is largely a foil to prevent just and human pensions. Finally, the time to set up a sound and decent pension system is now and not when a crisis should arise and it is urgently needed. It seems to me that one thing this Administration should have learned from the past eight years of experience is that the most difficult time to get anything through Congress is when you need it. I am sure I need not tell you, the one thing that can be fought out on a nonpartisan basis is a pension system. If the New Deal goes to bat for a real pension system, it will have a tremendous advantage of making any opposition that opposes the plan carry the onus for its defeat. This is one issue that the Administration can't lose on. It is also the one issue on which both political and economic dividends can be assured for a long, long time to come. Frankly, I have long felt that the Administration has been very short-sighted on the pension question. In my opinion, the attitude taken by Mr. Altmeyer and some of Mr. Henry Morgenthau -2- December 11, 1940 his "master minds" has been very stupid and reactionary. Unless the Administration does anap out of it and take the lead on this matter, someone else will and leave the Administration at the post. I never had any doubt that your heart was in the right place on this question. I know you feel strongly about the human factor and I am sure you can be a tremendous influence in bringing very urgent.about the received in the pension system that are with warmest regards, Sincerely, But Oth Mr. Henry Morgenthau Secretary of the Treasury Washington, D. C. 321 TREASURY DEPARTMENT 322 INTER-OFFICE COMMUNICATION DATE December 11, 1940. Secretary Morgenthau TO FROM Mr. Hear Attached 18 the material you asked me to assemble, covering the subjects listed below: Exhibit I - "Banker Consultants - Bank of America Situation" Exhibit II - "Transamerica Corporation" - de-listing by stock exchanges? Exhibit III - "Transamerica Corporation" - organization chart Exhibit IV - "Bancohio Corporation and Subsidiaries" - organization chart Exhibit V - "First Security Corporation of Ogden and Subsid- laries" - organization chart tax liability on corporations with selected amounts of net Exhibit VI - Comparison of amount of income and excess profits income under the United States Second Revenue Act of 1940 and under the British Finance Act of 1940" Exhibit VII - "Summary of Press Items on the Effect of Federal Taxes on Corporate Profits, week ending Dec. 8, 1940" Exhibit VIII - "Critical Comment on Two Articles in the New York Times for Sunday, December 1, 1940, with respect to the Effect of Federal Taxes on Corporate Profits" Exhibit IX - "Review of National Industrial Conference Board's Study on Corporation Profits and Taxes" Exhibit X - "Corporate Earnings" - National Industrial Conference Board Exhibit XI - "Net Profits after Taxes of Leading Industrial Cor- porations for the Third Quarter and First Nine Months of 1940, with Percentage Changes from 1939" - National City Bank of New York Exhibit XII - "Tabulation of taxes for 50 large corporations, National City Bank of New York" Exhibit XIII - "Quarterly Corporation Earnings, Standard Statistics Corporation Index, Unadjusted" Exhibit XIV - "Quarterly Earnings of 117 Industrial Corporations, Standard Statistics Corporation Index, Unadjusted" Exhibit XV - "Earnings by Selected Groups of Identical Companies, Giving Quarterly Averages by Years 1928-1939, and Quarterly Figures 1938 to Date" - Federal Reserve Bank of New York Exhibit XVI - "Some Fundamental Considerations With Respect to Defense Finance" - which might be used as a basis for a speech EXHIBIT I 323 Banker Consultants -- Bank of America Situation Mr. Tom K. Smith, Boatmen's National Bank, St. Louis, Missouri. Mr. Charles E. Spencer, Jr., First of Boston, Boston, Massachusetts. Mr. John K. Ottley, First National Bank of Atlanta, Atlanta, Georgia. The above-named persons attended meetings in the Secretary's Office on November 8 and December 2, 1939, and on February 2, 1940. Mr. Spencer did not attend the meeting on February 2, 1940, but attended the meeting on January 8, 1940. 324 EXHIBIT II Re: Transamerica Corporation. The question has been raised whether the governing boards of the New York and the San Francisco stock exchanges have not been negligent in their duties in respect of the registration of the stock of Transamerica Corporation on those exchanges, in that the governing boards have had available information similar to that which led the Securities and Exchange commission to initiate the pending proceeding to delist the registration of the stock of Transamerica Corporation on the ground that the Corporation's registration statements filed with the Securities and Exchange Commission have contained false and misleading information. It is doubtful that such a charge against the stock ex- changes could be proven, chiefly because much of the information upon which the Securities and Exchange Commission is acting is not available to the exchanges. We are informed that the agreements in accordance with which securities are listed do not, in general, give the governing boards of the exchanges any power of examining directly the books of corporations whose securities are listed thereupon. This is true of both the New York and San Francisco stock exchanges. In each case, the listing practice merely requires that the corporations submit periodic audited reports to the governing boards of the exchanges. Most of the information upon which the Securities and Exchange Commission acted in initiating its delisting proceeding was obtained either from national bank examination reports (which obviously are not available to the general public or to the governing boards of the stock exchanges), or by the exercise of power conferred upon the Securities and Exchange Commission by the legislation creating that agency, such as the subpoena power. It is true that copies of the 1937 registration statement of Transamerica Corporation were transmitted to the stock exchanges listing the securities of the Corporation, but the registration statement does not disclose upon its face that it is false or misleading. That the Securities and Exchange 325 -2- Commission itself considered the registration statement to be proper and true upon its face 18 indicated from the fact that the registration statement which is now alleged to contain false and misleading statements was filed with the Securities and Exchange Commission on August 7, 1937, while the proceeding to establish that the statement contained false and misleading information was not initiated until November 22, 1938, over a year later. Had the Securities and Exchange Commission considered the registration state- ment false and misleading on its face the Commission certainly would have initiated a proceeding immediately to establish judicially that fact and have the stock delisted before the public was misled. The very fact that the governing boards of the respective exchanges obviously lacked authority to ascertain the facts with reference to the condition of Transamerica is a strong justification for the establishment of an agency such as the Securities and Exchange Commission. 309 ORGANIZATION OF TRANSAMERICA CORPORATION eD19 without -= == - - -- SEE - = THE - THE SEEFIE EXHIBIT IV 327 BANCOHIO CORPORTING ND SUBSIDIARIES Octbuy 1940 STRICTLY CONFIDENTIAL Baneio Corpotion LICKING COMPANY STATE INDUSTRIAL COMMERCIAL BANK AND 5TH AVE. SAVINGS BANK BANK NATIONAL BANK TRUST COMPANY Columbus, Ohio Columbus, Ohio Coshocton, Ohio 98.2% owned by 97.67% owned by 90% owned by FIRST NATIONAL Springfield, Ohio 99.20% owned by Bancohio Portsmouth, Ohio Newark, Ohio 95.19% owned by 98.50% owned by Bancohio Bancohio Bancobio Bancohio Bancohio NATIONAL BANK OF BANK FIRST NATIONAL OHIO NATIONAL FIRST NATIONAL FIRST NATIONAL TIFFIN NATIONAL UNION NATIONAL BANK BANK BANK Maryeville, Ohio Tiffin, Ohio Cadis, Ohio Chillicothe, Ohio Columbus, Ohio Delaware, Ohio 96.50% owned by Bancohio Bancohio 95.98% owned by Bencohio 92.67% owned by 966 owned by 99.73% owned by 90.67% owned by Bancohio FIRST NATIONAL PERRY COMPANY BANK BANK Washington New Lexington, Court House, Ohio Ohio 95% owned by 95.33% owned by Bancohio Bancohio BANK MADISONATIONAL CITIZENS NATIONAL BANK Londo 92.2 Ohio by BANK Bancohio Bancohio HOCKING VALLEY NATIONAL BANK Zanesville, Ohio Lancaster, Ohio 98.196 owned by 94.67% owned by Bancobio BANK Bancohio 1-134 EXHIBIT V 328 Febr AND OGDEN FIRST SECURITY CORPORATIONO SUBSIDIARIES STRICTLY CONFIDENTIAL 940 First Burity Corporition of WESTERN FIRST SECURITY 71.64 Common 99.0% Common 100% Common owned by FSC 89.49 Common owned by FSC 83.3% Preferred owned by FSC Ogden, Utah Salt Lake City,Utah Rock Springs, Wyo. Boise, Idaho INVESTMENT COMPANY BANK OF BANK BANK OF IDAHO (Inactive) owned by FSC FIRST SECURITY FIRST SECURITY TRUST COMPANY BANK OF UTAH, N.A. Salt Lake City,Utah FIRST NATIONAL FIRST SECURITY Ogden, Utah 100% Common 97.5% Common owned by FSC owned by FSC FIRST SECURITY BUILDING AND LOAN ASSOCIATION Ogden, Utah DESERET TRUST COMPANY (In Liquidation) 126 Dommon 406 Permanent owned by FSC Capital owned by FSC Total investment valued at 81 SECURITY-NATIONAL TRUST COMPANY (In Liquidation) 1006 Coumon owned by FBC Total investment FIRST SECURITY COMPANY Ogden, Utah 100% Common owned by PSG Management Company valued at s REAL ESTATE ED. D. SMITH COLORADO THATCHER Salt Lake City,Utah DEVELOPMENT 00. BROTHERS COMPANY Real Retain and AND SONS Insurance Provo, Utah MANAGEMENT COMPANY FIRST SAVINGS Asset Liquidating Logan, Utah Asset Liquidating INVESTMENT COMPANY Company Company 98.1 75 Common 54.98 Common 100% Common owned by PSC owned by FSC Total investment valued at 818 Total investment owned by FBC FRANKLIN Ogden, Utah INVESTMENT COMPANY Real Estate and Ogden, Utah Insurance 100% Common owned by FBC Asset Liquidating Asset Liquidating Company Company valued at $1 1-135 EXHIBIT VI 329 Comparison of amount of income and excess profits tax liability on corporations with selected amounts of net income under the United States Second Revenue Act of 1940 and under the British Finance Act of 1940 1 (Assuming current year net income before Federal and State income taxes is 25% greater than base period net income before Federal and State income taxes) 2 Total Excess profits tax tax : : : : tax : Income : : tax : income : : profits : State Great Britain : : Income tax : New York : : : : : taxes) Total Federal : Excess : United States Net income : (before Fed-: eral and State income: Amounts of income and excess profits tax liability 10,000 100,000 $ 1,000,000 10,000,000 $ 2,069 28,560 297,420 3,047,550 $ 1,469 22,560 225,600 $ 11,820 2,256,000 191,550 $ - 600 6,000 60,000 600,000 $ 5,400 54,000 540,000 $ 3,400 34,000 340,000 $ 2,000 20,000 200,000 2,000,000 5,400,000 400,000 6.00% 54.00% 34.00% 20.00% 6.00 6.00 6.00 54.00 54.00 54.00 34.00 34.00 34.00 20.00 20.00 20.00 Effective rates of tax 20.69% 14.69% 23.56 29.74 30.48 22.56 22.56 22.56 - 10,000 100,000 1,000,000 000.000 - 1.18% 1.92 Treasury Department, Division of Tax Research December 10, 1940 Assumptions made in the computation of tax are: (1) None of the earnings are distributed, (2) no dividends were received and no capital gains or losses realized, (3) current net income before income and profits taxes amounted to 12% of invested capital, (4) in the United States the corporation's income is before State income taxes and is entirely taxable in the State of New York, and (5) base period net income before Federal and State income taxes was subject to a 6% State rate and a 16% Federal rate. The income and profits taxes included are: For the United States, the Federal income and excess profits taxes and the New York State income tax: and for Great Britain, the income tax and excess profits tax. It should be noted that in the United States the income tax is an allowable deduction in determining excess profits net income, while in Great Britain the excess profits tax is an allowable deduction in determining net income subject to the income tax. Further, dividends received by individuals are taxable under the surtax rates in both countries and in the United States also under the normal income tax but in Great Britain such dividends are exempt from the income tax rates other than surtax. Base period net income in the United States is the average income for the years 1936-1939 and in Great Britain is the income for 1935 or for 1936 or the average of 1935 and 1937 or the average of 1936 and 1937. In the computations it was assumed that the corporations in the United States and Great Britain had the same base period net income. 1 EXHIBIT VII 330 Summary of Press Items on the Effect of Federal Taxes on Corporate Profits. Week Ending December 8, 1940 The following items of interest relating to corporation taxes and their effect on corporation profits appeared in the newspapers of the week ending December 8, 1940. Clippings of the articles are attached hereto. 1. New York Herald Tribune, December 2, 1940, page 1, column 3. An article entitled "Increase to 30 percent in Corpora- tion Taxes Forecast" reports Senator George as stating that the corporation income tax rate might be boosted 8.8 high as 30 percent before the national defense program is paid for. He indicated that increase in the corporation tax to that rate might possibly harm business to some extent, but added that there appears to be no alternative. 2. Wall Street Journal, December 3, 1940, page 3, column 2. An article entitled "Invested Capital Base to be Used by Most Companies for 1940 Year" reports that the majority of concerns in the paper industry will elect to use the invested capital base for the 1940 excess profits tax. It is reported that, because the paper industry as a whole, earned much less than 8 percent on invested capital over the past four years, most companies in the industry probably will elect to make their 1940 tax returns on the invested capital base. The outbreak of the European War in September produced a record-breaking demand for both paper and pulp. In 1939, 11 companies had earnings equal to only 5 percent of invested capital. Earnings for this year will probably range from 5 percent upward to as much as 27 percent. A majority of the companies in the paper industry are expected to have to pay out part of their 1940 earnings in excess profits taxes. 3. Wall Street Journal, December 4, 1940, page 3, column 1. An article entitled "More Firms Study Capital Revisions as Tax Benefits" discusses the tax saving possibilities of 331 -2retiring existing preferred stock issues and replacing that amount of capital with bonds or debenture issues. Such a change would result in reducing the income tax but might increase the excess profits tax. General Motors, for example, has outstanding 1.8 million shares of preferred stock callable at $120 per share. If this issue were replaced by bonds, it is estimated that, with no saving of interest, the income tax liability of the corporation would be reduced by $2.2 million. In the case of General Motors it 18 unlikely that this saving would be offset by any increase in the excess profits tax as the company will probably report for this tax on an average earnings basis. 4. The New York Times, December 8, 1940, Section 3, page 1, column 3. An article entitled "Makers of Machinery Show Rise of 72 Percent in Profits in Year" discusses the earnings of 73 concerns of machinery parts and equipment for factory construction, mining, road building and automotive and aircraft production during the first nine months of 1940 as compared with the similar period in 1939. It is stated that the increase of 72.1 percent would have been even greater were it not for the heavier tax schedule under the second Revenue Act of 1940. The generally declining trend of profits in the third quarter of 1940 is attributed to the effect of taking from that quarter's earnings all the taxes applicable to the first nine months of the year including, in many instances, provisions for excess profits taxes. Herald Tribung Increase to 30% In Corporation Taxes 12/2/40 Forecast Senator George Concedes Business May Be Hurt, but Sees No. Alternative By The Associated Press N. Y. Times 12/8/40 Makers of Machinery Show Rise Of 72 Per Cent in Profits in Year Combined Earnings of 73 Concerns in Nine Months Put at $74,985,372-Taxes Under 1940 Act Curb Increase WASHINGTON Dec. Senator Walter F. George, of Georgia ranking Democratic member of the Senate Finance Committee, expressed the view today that the cor. poration income-tax rate might be boosted as high as 30 per cent before the national defense program is By KENNETH L. AUSTIN The combined earnings of seventy Makers of outdoor machinery, three makers of machinery, parts numbering thirteen, had net profits and equipment for factory construc- tion, mining. road building and automotive and aircraft production in of $12,244,878 for the nine months, against $8,798,162 the year before, an increase of 39.17 per cent. They corporations with annual net in- comes of $25,000 or more. Smaller amounted to $74,985,372. compared with $43,570,332 in the 1939 period, corporations pay lower rates. an increase of 72.1 per cent. A are likely to expand more in rela. tion to increases in mining. oil-well drilling and general outdoor construction than in relation to direct munitions expansion in the United paid for. The present rate is 24 per cent on Senator George added that higher taxes on individual incomes also were very much in the picture for the future. He emphasized that he was thinking in long range terms and had no Idea whether any tax increases were in store for business at the next session of Congress. Congressional fiscal leaders said after a conference with President Roosevelt Friday night that no further retroactive taxes on 1940 incomes were contemplated. They left the ression, however, that in- the first nine months of 1940 larger rise would have been record- ed were it not for the heavier tax schedules under the Second Rev. enue Act of 1940. In this group the largest contingent comprises forty-six automotive George said, might possibly harm business to some extent He added however, that there appeared to be no alternative, The Senator advocated amortizing defense borrowing over a period of years-possibly twenty with provision for raising enough taxes to meet current expenditures and to make yearly payments on this debt. This was in line with a general policy goal reported to have been fixed at the Friday night White House conference, Some such plan is expected to be advanced in Congress early next session if the Treasury recommends an increase in the present $49,000. 000,000 debt limitation Henry Mor. genthau jr., Secretary of the Treas- ury, has said that he would like to see this raised to about $65,000,000.- 000. Little opposition to an increase expected, although Senator George d he though there probably would attempts to permit the additional borrowing only for defense purposes Senator Alva B. Adams, Democrat of Colorado, said he thought there would be no objection to defense borrow brought If other expenditures were line with revenues Nine makers of factory machinery showed a gain of 268.18 per cent for the nine months, with net profits of $6,538,836 comparing with quarter First quarter Fourth 1939 1940 Period Third quarter quarter $10,340,792 18,611,002 22,041,542 $19,625,432 THIRTEEN OUTDOOR MACHINERY 1940 makers of machine tools, treated First quarter separately, expanded profits 308.88 Fourth quarter $3,830,453 or $50,993,336, against $31,722,427. $5,208,327. against $1,273,794 in the nine months of 1939. Third quarter $2,090,595 and aircraft equipment and parts An increasing volume of national defense orders is being booked by many companies in this group and a entailed, involving more than $100.- increasing the corporation tax group: FORTY -SIX AUTO EQUIPMENT makers, whose combined gain over the 1939 period was 60.75 per cent. incomes both corporate and indirate to 27 1/2 or 30 per cent, Senator Results by quarters by companies in the various industries were as follows, beginning with the largest Third quarter large plant expansion program is vidual tooling-up stage $1,775,949 in the 1939 period. Five uld be expected on 1941 creas States, article at some future date and which are still in the design and 000,000 of new facilities in the De troit area alone. Cor les of this type plan to retain air automotive equipment business. which is likely to expand as the car and truck makers take orders for military and civilian customers alike until and unless pri orities requirements interfere with "peacetime" buying of cars. In addition, the equipment companies are expanding rapidly such aircraft business as It is possible for them to take and also enter into the national defense program as makers of tanks, machine guns, gun carriages and parts and many other articles of military necessity. Some companies will make and as semble complete wing units for Army and Navy planes built by the aircraft industry. per cent. showing net profits of In the factory equipment field the machine tool industry is perforce a 1940 quarter First quarter Fourth quarter changeable parts is possible without First quarter with record-breaking output and sales In view of the position of machine tools at the fountain-head of all modern American production, this industry has felt the impact of na. tional defense requirements earlier than other industries, and factory equipment also must be provided before new munitions can be turned out. The earnings results indicated therefore reflect a considerable amount of armaments requirements, unlike some Industries which are to turn out the finished Continued bn Page Six $3,591,785 FIVE MACHINE Third quarter power is under way simultaneously $1,340,844 NINE FACTORY MACHINERY star performer, since virtually no production in quantity or of inter- machine tools. Priorities have attached to this industry for some time and a tremendous expansion of productive facilities and of man $3,796.77 quarter TOOLS 1940 1939 quarte Fourth quarter $929,600 $264,015 *Net loss Usual seasonal factors which are reflected in companies supplying the automotive industry are not present in the case of the other companies except for some alo ness in the first quarters of end year. The generally declining trend! in the third quarter of 1940 hot ever. must be attributed rather to the effect of taking from that quarter's earnings all the new taxes ap plicable to the entire first nine months of the year. including in many instances provisions for ex- cess profits taxes. Wall St. Journal 12/4/40 * * Dore Firms Study Capital Revisions As Tax Benefits Continental Can Would Reduce Liability by Re- placing Preferreds With Bond Issues past week Continental Co. has action along these Within taken the lines, calling Can its $20,000,000 of $4.50 preferred stock issue, and financing the call through $21,000,000 of 3% 5-year debentures. The move by this company demonstrates that in some instances managements will choose Saving on Charges Also Possible Facing the prospect of a new revenue bill in 1940 which will increase their income taxes above the present 24% normal rate a number of leading industrial companies are in a position to reduce this prospective liability by revision of their capital structures. By retiring existing preferred stock Issues and replacing that amount of capital with bonds or debenture issues, a portion of income could be taken out of the taxable income category and moved for- ward to a point where it is not taxable. lew companies already have acted along lines; some currently are weighing the possibility of such a step: still others are await- ing a clearer outline of the forthcoming new Administration tax bill before reaching decision The saving would be accomplished because interest on bonds, debentures, or other similar obligations, is deducted before computation of the normal income tax. Preferred dividends, on the other hand, do not constitute such a charge. and therefore the income tax applies on the earnings which are used to make such dividend to reduce the normal tax liability in this way even reduce their the can taxinlaw. All stock invested capital excess though profits be it included will exemption preferred capital. under Only one-half of a debenture or bond issue is allowed as capital, however. Normal tax liability, of course, will continue year after year, while there is no certainty as how severe the excess profits tax will become or how long it will last. Continental Can will use the invested capital option in determining its 1940 tax, and directors seem to be of the opinion that it is better to be able to charge the debenture interest, amounting to about $630,000 annually, against earn- ings before normal tax. At 24% normal tax liability is thus reduced by a little more than $150,000 a year. This is in addition to the reduction to $630,000 for interest charges as opposed to $900,000 for preferred dividends this year. List of Companies The following table shows a number of preferred stocks, their approximate present prices and call prices, dividend charges, and the amount of tax under the normal rates which would be saved if the refunding were accomwith payments. General Motors is an outstanding example of & company which could accomplish such savings. With 1,853,644 shares of 5% preferred stock outstanding, dividends on this amount to $9,178,220 annually. If this capital issue were retired and replaced with a bond issue bearing the same interest rate, an amount equal to such dividends would no longer be subject to the tax This would reduce the tax bill by $2,202,773 annually at the present 24% rate. Saving on Fixed Charges Conceivably, there would also be a saving for many companies through reduction in the fixed charges ahead of the common stock, even though a premium must be paid on the retire- ment of the preferred stock. Any amount oy which the new interest charges failed to come up to the former dividend rate would represent a saving for the company. obvious disadvantage, of course, would fixed capital would be replaced by semipermanent capital, with a fixed annual charge which it would be obliged to meet. Such a change would influence a company's tax payments under the excess profits tax as be well as under the normal tax. For example, if a company's invested capital was entirely repre- sented by $5,000,000 of preferred and $5,000,000 of its invested capital base, of course, pre- with a bond issue size ferred would common, be issue $10,000,000. Replacement of similar of to the $7,500.- the Invested capital figure since only half the bond issue to offset of course, would 000, An would cut this, be is allowable the lower taxable income. Saturday, no saving of interest 12/3/40 THE WALL STREET JOURNAL Twees-The Paper Makers Invested Capital Base To Be Used By Most Companies for 1940 Year Majority of Concerns Will Pay have to pay out part, in some cases a substantial part, of their 1940 earnings in excess profits Excess Profits Levies on taxes. For instance, International Paper, after This Year's Earnings the nine months ended September 30. Its income and excess profits tax reserves were all deductions except income and excess profits taxes, reported net earnings of $19,675,598 for $7,461,046 for the period. or nearly 38% of the This is the fifteenth of a aeries of first figure. Calculated on Paper's operating income for the period the tax reserve was articles dealing with the excess profits tax bill (Second Revenue Act of 1940). Pre- nearly 271/2% With the normal tax rate 24% it appears that part of the tax reserve repre- pared by staff members of The Wall Street Journal. these discussions are designed to analyze from the viewpoint of the businessman and investor one of the most complicated pieces of tax legislation ever put on sents a levy under the excess profits provisions of the act. Assuming that International Paper is able in the closing quarter of the year to show net results before income and excess profits taxes the statute books. The articles appear twice equal to those reported in the third quarter, weekly. BY F B DEZENDORF Because the paper industry as a whole earned much less than 8% on invested capita or $7,516,279. its total net for the year before contribution to the federal government, would be approximately $27,200,000. Of this amount over the past four years, most companies . the normal taxes apparently would take $6,526.- with increased earnings this year, however, at least two companies will not be subject to the sheet figures which indicate a tax credit of $11,378,361 would absorb an additional $4.597,000, or a total income and excess profits for most of 1940 because its fiscal year did not is based entirely on published figures which may turns indu probably will elect to make their 1940 tax , na on the invested capital base. Even 000. and excess profits taxes, based on balance tax A third will not pay a tax on earnings tax bill of $11,123,000 Of course this estimate and until October 31, differ materially from those given in tax re- On the basis of Invested capital as indicated solely by capital stock, and capital and earned surplus, 11 companies over the past year have months were $7,461,046 and for the third quar- averaged earnings equal to only 5% of invested capital. For their current years however, earn. ings on this invested capital will probably range from 5% upward to as much as 27% The 1930s were years of relative depression for the paper industry. with 1937 and 1931 the Incidentally, taxes reported for the nine ter $3,578,626 indicating other things being equal, a total tax for the year very close to the amount based on balance sheet figures only years to show any real earnings Change In attempting to measure the effect of the excess profits tax on these companies only capital stock issues, capital and earned surplus have been considered Borrowed capital however, with the large 1937 earnings giving way to only nominal earnings or even actua. of the capital stock may differ materially from from depression to prosperity occurred rapidly losses in 1938. War Brings Higher Prices Last year most companies were showing ex. tremely small earnings until the outbreak of the European war in September produced a record-breaking demand for both paper and pulp. which immediately brought about higher prices The highly competitive situation in the paper industry is shown by the fact that the two companies whose average earnings over the past four years exceeded 8% on invested capital as determined above, were companies which de either trade-marked specialties or other mecialties Producers of such standard grades of paper as newsprint kraft paper or board, and white papers showed considerably smaller returns on invested capital Scott Paper Co and Sutherland Paper Co. the latter manufacturing a specialty board for small packages showed the best earnings on capital of the 11 companies So decided has been the recovery in earn- ings of the paper producers this year that If appears likely that the majority of them will and reserves which may be in use in the bustness have not been included The stated value the investment which it represents but it 18 impossible to correct these or other differences In the accompanying tables earnings after both normal and excess profits taxes for 1940 or for the current fiscal year have been projected for the full year on the basis of interim reports for the period so far at hand The table also shows invested capital and excess profits tax credits as indicated by the balance sheets of the several companies as well as average earnings for the base years. In most cases Interim reports cover the first nine months of 1940 but for West Virginia Pulp & Paper Co they cover the nine months ended July 31. The fiscal year of that com- pany ended on October 31, 1940, so that it will not be subject to the excess profits tax for earnings in that period Normally the third quarter of the calender year produces smaller business and profits than any of the other three quarters For that reason, projection of earnings for the full year on the basis of results for the nine months to the end of September may produce a figure smaller than actually will be shown for the year. Average Capital Company 5 mm 1940 Capital Champion Container Mead Corp Paper ended W Includes only capital stock Issues and capital fiscal ends net for 15 were ended August 18. 1940 1911 b Based net for nine months ended Sept 30. 1940 July 1941 works ended October 31 EXHIBIT VIII 333 Critical Comment on Two Articles in the New York Times for Sunday, December 1, 1940, With Respect to the Effect of Federal Taxes on Corporate Profits 1. Tax Rise Wipes Out Gains by Utilities, by Thomas P. Swift. Mr. Swift states that "Virtually every dollar of gross revenues which the electric light and power companies have earned this year from increased sales of industrial power arising from the mounting demand for war materials has been lost to them through increased taxes. It should be noted that in this comparison Mr. Swift sets off the profits enjoyed by the utilities from the increase in a single class of their business -- i.e., industrial power -- against the increased tax load accruing on the whole of their business. It is often easy to make a striking comparison in this way. Mr. Swift presents figures showing that the taxes paid by the industry as a whole have risen from 9-1/2 percent of gross revenues in 1927 to an estimated amount of 17-1/2 percent in 1940. These taxes are not broken down into Federal, and State and local. He does state, however, that Federal taxes will have risen from one-third of all taxes in 1935 to one- half in 1940. His authority for this statement is not given. The maximum rate of the Federal corporation income tax has risen in this period from 13-3/4 percent to 24 percent. If the Federal taxes of the utilities have risen more than proportionately (which it 1s impossible to determine from the way in which the figures are stated in the Article) it can have been only because net incomes have so risen; since, as the author states, the electric utilities are little affected by the excess profits tax. (It should be noted that the capital stock tax and the old excess profits tax are, in essence, merely additional taxes on net income.) Finally it should be noted that the real net profits of the electrical utilities, -- i.e., those available for distribution to their stockholders after all corporate taxes -are determined principally by the fair return allowed the companies by the various State regulatory authorities. Such profits are, therefore, really independent of taxes -- these being, in effect, passed on to the consumers. The author's statement that the net profits of the companies will be only 2 percent higher in 1940 than in 1939 despite a 7 percent rise in power consumption should be read with this in view. -22. Chemical Trade Feels Tax Burden, by Kenneth L. Austin. The headlines and the implications of the article are to the effect that increased taxes are responsible for a dis- appointing showing of earnings in the chemical industry for 1940. As proof of this, the author has compared the increase in income in the chemical industry with the increase in income in such industries as steel, railroad equipment, metal works, aviation and automobiles. The author himself, however, indicates that earnings of the chemical industry "have been mounting steadily since the depth of the depression in the early Twenties, and have surpassed the levels which prevailed in 1929 and previous years." It is not surprising that industries such as steel, which were hard hit by the depression, show a relatively greater increase in profits this year than an industry such as chemicals, the profits of which were steadily increasing all through the depression period. The headline indicates that increased taxes have resulted in lower profits for the chemical industry. A more careful reading of the article itself, however, shows that reduced profits are due not only to increased taxes but also to high rates of depreciation, outlays for expansion, and mounting appropriations for development and research. The profits of the chemical industry in comparison with other industries mentioned in the article for the years 19361939 are shown in Table 1. A comparison of 1939 and 1940 profits for selected chemical, steel, aircraft and automobile companies is given in Table 2. Clippings of the two articles are attached. 334 335 Table 1 Net income of corporations in the chemical and other industrial groups, 1936 - 1939 Steel and Iron fetal fabrication ircraft automobiles and trucks : Number : Net income 1/ (in millions of dollars) of 1936 1937 24 194.5 27 14 companies: 6 12 1938 1939 204.6 116.6 188.8 51.4 80.4 14.4 10.2 2.3 3.6 251.9 - 2.3 - 1.7 : Chemicals : Industrial group 311.9 / After all charges and taxes. ource: Standard Earnings Bulletin, September 1940. 5.9 104.7 44.9 8.9 7.3 216.8 336 Table 2 Comparison of 1939 with estimated 1940 earninge 1/ per common share of stock for selected companies in the chemical, steel, aircraft, and automobile industries Earnings per common share 1/ 1939 :1940 (Est.) : Company Percent increase estimated 1940 earnings over 1939 Chemicals Air Reduction Corp. Allied Chemical Dow Chemical DuPont Monsanto United Carbon Union Carbide and Carbon $ 1.98 9.50 6.65 7.65 4.01 3.82 3.86 $ 2.50 10.05 6.40 7.75 3.50 4.30 4.50 + 26.3% + 5.8 + 1.3 - 3.8 - 12.7 + 12.6 + 16.6 Steel American Rolling Mill Bethlehem Steel cible Steel Insand Steel National Steel U. S. Steel Youngstown Sheet & Tube $ .69 5.75 2.54 6.73 5.71 1.83 2.50 $ 1.35 13.50 10.75 8.75 6.75 9.85 4.75 + 88.4% +134.8 +323.2 + 30.0 + 18.2 +438.3 + 90.0 Aircraft Curtise-Wright Douglas Aircraft Lockheed Aircraft Glenn L. Martin Co. North American Aviation United Aircraft $ .39 $ 1.35 4.04 3.15 4.25 1.25 5.25 4.81 3.75 2.06 3.53 15.00 +246.2% +211.8 - 22.0 + 13.3 - 39.3 + 48.7 Automobiles Chrysler Corp. General Motors Packard Motors Studebaker Corp. L $ 8.48 4.06 $10.40 4.00 .04 1.31 1.10 .10 After all charges and taxes. ree: Standard Earnings Bulletin, December 1940. + 22.6% - 1.5 +150.0 - 16.0 In Federal Taxes N. Y. Times 12/1/40 of the tax rise has in Federal Struction, accerding to Com which report TAX RISE WIPES OUT Jased 40 per cent since 1935 Federal taxes com- de-third of all taxes paid electgic utilities: last year it is parent from the annual reports that this ratio had risen to twofifths, and for 1940 It appears that Federal taxes on utilities will con- GAINS BY UTILITIES Power Industry Pays 337 171/20 Out of Every Dollar, Against 16c in '39 and 12c in '32 stitute nearly one-half of total taxes paid. " According to figures thus far pub- lished, Federal taxes applying to power companies in 1940 probably FEDERAL LEVIES HIGHEST will total $185,000,000 out of a grand total of all taxes of approximately $400,000,000. This compares with Federal taxes of $130,000,000 in Increase in Costs Expected to Reach $65,000,000 Based on 9-Month Results 1939 out of an over-all total of $340,000,000. Utilities did not fare so well under the recently enacted Defense Tax Bill. While they were not faced with any appreciable payBy THOMAS P. SWIFT irtually every dollar of gross Venues which the electric light ments under the excess profits pro- victons, the upping of the normal lac me tax from 18 per cent to 24.31 n cent has had its effect upon and power companies have earned the Industry. In addition to this, this year from increased sales of in- the 1 per cent excise tax upon retail dustrial power arising from the mounting demand for war mate. sales of electricity also was inOn the other hand, unlike most rials has been lost to them through other Industries, the utilities would increased mon taxes, according to the financial reports of lead- ing Licenses now appearing Based upon published statements of companies reporting for the first nine months of this year, taxes paid by electric light and power utilities will have increased in 1940 about $65,000,000. On the other hand, an analysis of the sales of Industrial power indicates that revenues from this source have increased approxdately the same amount. The fact that the new tax bill, patient late in September, was made retroactive to the beginning of the year has somewhat distorted the picture because, in many cases, the creased 10 per cent to 3.3 per cent. find it extremely difficult, If not 2. to launch a movement impo bward higher rates. look Steady Rise Is Shown The steady rise in the taxation of private electric light and power companies is shown in the following table. taken largely from sta- tistical bulletins issued by the Edison Electric Institute: Open Revenue Year Taxes Tax S of Rev. 9% est. its The figures for 1940 are based upon results so far reported which show that gross operating revenues charged with tax accruals for the first half in addition to its own of the electric utilities will amount to approximately $2,300,000,000. while taxes will be $405,000,000. share. Making allowance for this factor, however, and based upon the results shown so far, gross rev- that, when final calculations are made for the fourth quarter, net last half of the year has been From present indications It appears enues of the power and light Indus- Income of the industry for 1940 as creased $160,000,000, or 7 per cent. above 1939, despite the fact electric try for all of 1940 will have inover the previous year, while taxes will have increased $65,000,000, or nearly 20 per cent. For the power industry as a whole, taxes take 17% cents out of every dollar of revenue. compared with 16 cents last year and 12 cents in 1932. . whole will be only 2 per cent power consumption is at record levels and is still running better than 7 per cent above last year. Y. Times 12/1/40 CHEMICAL TRADE FINANCIAL 338HE N months of 1940 was $111,631,409 against $91,149,182 a year ago, the FEELS TAX BURDEN gain of 22% per cent is much years. On either basis. therefore it would appear that the chemical smaller than that of most other industries which have been reviewed industry was in a better position than most industries Except for a moderate setback in 1938 earnings have been mounting steadily since the depth of the depression in the early Thirties and have surpassed the levels which prevailed Steel gained 211 per cent, railroad Earnings Disappointing Also Because of Depreciation, Expansion, Research equipment 235 per cent, metal works 205 per cent. aviation 81 per cent. automobiles 18 per cent. Excess-profits taxes appear have been provided for in the third to quarter, covering the entire nine in 1929 and previous years chemical companies included in the the combined net profit of twenty. two companies representing sub- In the following table is shown months of 1940. by one-half of the 22.5% GAIN FOR 9 MONTHS $111,631,409 Income for 22 pmpanies Smaller Rise Than for Other Industries survey, but since two companies whose net profit makes up two thirds of the net for all the twenty stantial majority of the chemical industry, by quarters for the last two years: two companies adopted this policy, it is obvious that the influence of this particular tax has been important for the net results of the Third quarter Second quarter First quarter industry siderable outlays for expansion and these charges While most com- panies do not publish amounts provided for research and development 1940, against $1,371,400 in the 1939 for development and research have 1939 period. 1938. been eliminated for each of the pe riods reviewed Elimination of the in their quarterly returns. Ameri- caused a moderate setback in the profits of the chemical industry, measured by quarters, and are re sponsible for a disappointing showing of earnings for the first nine months of 1940, compared with the 1939 29,973,423 25,941,494 Income received by E I. du Pont de Nemours & Co. from their investment in common stock of the General Motors Corporation has show an increase of 12 per cent in can Cyanamid provided $1,828,300 40,289,953 1939 Depreciation and depletion provi- probably mounting appropriations 1940 $33,544.76 Fourth quarter $49,956,349 $31,766,083 sions of eight of the companies By KENNETH L. AUSTIN The increasing tax burden, the higher rate of depreciation, con- vested capital and has had unusually high average earnings in recent results of du Pont and the Union Carbide and Carbon Corporation for this purpose in nine months of shows the following results for twenty the field:second-rank companies in period. and Monsanto Chemical $898,400, against $910,700. Third quarter Additional Tax Burden quarter The additional tax burden on First quarter chemical company earnings never- 1940 $13,467 13,594,059 1939 1939 11,219,745 9,072,223 1938 Fourth quarter $15,340,259 $8,390,808 theless is surprising to students of In the group of twenty companies the industry since it possesses majority has not yet made any twenty-two companies for nine substantial amount of recently in- provision for excess-profits taxes. a a While the combined net profit of 339 EXHIBIT IX Review of National Industrial Conference Board's Study on Corporation Profits and Taxes A study of corporation profits and taxes by the National Industrial Conference Board, published in its Economic Record of November 23, 1940 (attached herewith), has been reviewed by the Division of Tax Research. This review is summarized as follows: 1. Exaggerated increases are shown in Federal income tax for 1940 as compared to increases in net income. The study reports that for the 116 companies analyzed, net income for the first nine months of 1940 increased 48 per cent as against a tax increase of 131 per cent. This increase exceeds the maximum increase possible for the Federal income tax of any one of the 116 companies. If a corporation's net income in 1940 increased 48 per cent over 1939, the maximum possible increase in Federal income tax would have amounted to 97 per cent, not 131 per cent. The attached tables indicate the maximum possible percentage increase in tax for certain increases in 1940 net income over 1939. 2. Tax reserve data are used, instead of tax collection or tax liability data. The amounts of income taxes reported for 1940 in the study are corporate tax reserves, that is, estimates by the corporation of what the tax liability for 1940 will be. Since these figures are estimates, they may, of course, contain a large margin of error. 3. Combined data for net income and deficit corporations are used instead of separate data. It is reported that increased corporate income taxes (exclusive of excess profits taxes) absorb 37 cents out of every dollar gained in earnings during the first nine months of 1940. Other statements are also made showing a disproportionate rise in income taxes as against income. Assuming an accurate estimate of tax liability, the relations indicated are meaningless because profitable and deficit corporations are grouped. Grouping of this type may yield fantastic results. For example: In an industrial group in 339 EXHIBIT IX Review of National Industrial Conference Board's Study on Corporation Profits and Taxes A study of corporation profits and taxes by the National Industrial Conference Board, published in its Economic Record of November 23, 1940 (attached herewith), has been reviewed by the Division of Tax Research. This review is summarized as follows: 1. Exaggerated increases are shown in Federal income tax for 1940 as compared to increases in net income. The study reports that for the 116 companies analyzed, net income for the first nine months of 1940 increased 48 per cent as against a tax increase of 131 per cent. This increase exceeds the maximum increase possible for the Federal income tax of any one of the 116 companies. If a corporation's net income in 1940 increased 48 per cent over 1939, the maximum possible increase in Federal income tax would have amounted to 97 per cent, not 131 per cent. The attached tables indicate the maximum possible percentage increase in tax for certain increases in 1940 net income over 1939. 2. Tax reserve data are used, instead of tax collection or tax liability data. The amounts of income taxes reported for 1940 in the study are corporate tax reserves, that is, estimates by the corporation of what the tax liability for 1940 will be. Since these figures are estimates, they may, of course, contain a large margin of error. 3. Combined data for net income and deficit corporations are used instead of separate data. It is reported that increased corporate income taxes (exclusive of excess profits taxes) absorb 37 cents out of every dollar gained in earnings during the first nine months of 1940. Other statements are also made showing a disproportionate rise in income taxes as against income. Assuming an accurate estimate of tax liability, the rela- tions indicated are meaningless because profitable and deficit corporations are grouped. Grouping of this type may yield fantastic results. For example: In an industrial group in -2- 340 1939 the profitable corporations, let us say, showed net income of $1,000,000 on which was paid an income tax of $200,000. The deficit corporations reported deficits of $500,000. On the basis of the Conference Board type of analysis, this industrial group would show for the year a net income of $500,000 and income taxes amounting to $200,000. In 1940, let us say, the profitable corporations become twice as profitable and with no increase in rates pay twice as much tax, that is, $400,000. The deficit corporations, let us say, report a deficit of $1,450,000. The picture, according to the Record for this group in 1940, would show a net income of $550,000, and income taxes amounting to $400,000. That is, it would be argued that while profits for the industrial group increased only $50,000 or 10 per cent, taxes increased from $200,000 to $400,00 or 100 per cent; that, in 1940, taxes took almost 75 per cent of the net income of the industrial group and that the tax increase absorbed four time the increase in profits. Further comment is not necessary on this type of fallacious reasoning. 4. Portions of the analysis relate to certain selected corporations without any indication as to the criteria used in the selection. It is stated that in a tabulation of 20 companies, Federal Government taxes would take 72 cents out of every dollar of increased income. No indication 16 given, however, of how profit- able these 20 corporations are. If, for example, by selection, corporations which had been earning 40 or 50 per cent on their invested capital were chosen, no serious inequity would result even if the fact stated were true. 5. No distinction is made between direct and indirect or shiftable and nonshiftable taxes in analyzing the tax burden. Considerable importance is attached to the finding that in some instances "Stockholders have a smaller amount available for dividends than that allowed for Federal taxes." The implication there is that taxes amount to more than 50 per cent of net earnings of the corporation. Obviously these data, if they relate, as they properly should, to net income corporations only, contain taxes other than income taxes. The bulk of Federal taxes paid by corporations are not borne by them since they may be included as a cost item and recaptured through price adjustments by the corporation. These taxes should be considered in the same manner as any other cost and have no more 341 -3effect on amounts available for dividends than do other costs. Since these taxes may be recaptured in price, they give no indication to what extent taxes have detracted from amounts which would otherwise be available for dividend payments. 6. Federal income taxes are not clearly distinguished from state and local taxes. The statistics themselves do not indicate whether the reserves are on behalf of Federal income taxes exclusively or also contain amounts for state income taxes, franchise taxes based on income, etc. The implication is, however, that the percentage increases are in no small part attributable to the increased Federal income tax rate, since no mention is made of taxes other than the Federal income and excess profits taxes. 342 Table 1 Federal corporation income taxes, Revenue Acts of 1939 and 1940 1/ and amount of net income remaining after income tax, for selected amounts of net income Net income: Income tax : Income re- : Income tax : Income rebefore in-: Revenue Act:maining after: Revenue Act:maining after come taxes: of 1939 1/ : income tax : of 1940 1/ : income tax $2.00 1 $ .36 $1.64 $ .48 $1.52 1.75 .315 1.435 .42 1.33 1.50 .27 1.23 .36 1.14 1.25 .225 1.025 .30 .95 1.00 .18 .82 .24 .76 .75 .135 .615 .18 .57 .50 .09 .41 .12 .38 Computed at the rate of 18 percent for 1939 and 24 percent for 1940. Does not include excess profits tax. 343 Table 2 Comparison of percent increase and net income 1940 over 1939 with percent increase in Federal income tax 1/ and percent increase of net income after Federal income tax Increase in net income after Federal income taxes : 166.7% 85.4% 75 133.3 62.2 50 100.0 39.0 25 66.7 15.9 100% O (Decrease) 10 (Decrease) 25 (Decrease) 50 1 : : Federal income taxes: Federal income taxes : income before Increase in : Increase in net 33.3 (Decrease) 7.3 20.0 (Decrease) 16.6 (Decrease) 30.5 (Decrease) 53.7 o (Decrease) 33.3 Computed at the rate of 18 percent for 1939 and 24 percent for 1940. Does not include excess profits tax. Note: Corporation earnings reported by the 344 National Industrial Conference Board show, for 399 industrial corporations, an increase of 26 per cent in the third quarter of this year over the 1939 level, and for nine months an increase of 41 per cent. Earnings of 483 corporations, including industrials, railroads, and utilities, were 18 per cent higher than 1939 in the third quarter, and 35 per cent higher in the nine months. EXHIBIT X 345 CORPORATE EARNINGS Thousands of Dollars 20,872 11,640 13,274 12 32 21 19,173 13 9,745 79,498 3,656 25 39 13 2,855 6 11 6,731 20 4,721 125 109,474 7,980 Beverages 5 Chemical products 21 Drugs 13 22 13 26 9 16 20,934 4,422 25,305 2,344 23,023 22,145 4,213 8,732 12 Miscellaneous 20 4,793 22 12 Public Utilities Electricity and gas Telephone and telegraph GRAND TOTAL 2,742 11,936 26,137 d1,109 27,246 12,540 +8 + 33 + 42 30,592 178,834 12,520 11,795 21,836 +147 + 39 4 + 57 +6 -8 10,205 30 -2 -5 + 89 + 54 27 +9 23,971 + 18 + 49 42,432 13,704 56,907 +123 +214 5,273 +137 10,289 + 15 8,716 8,127 +151 26 + 16 52,814 + 48 + 58 3,291 + 46 12,158 28,288 7,157 30,216 65,493 d3,982 69,475 34,563 4,718 9,171 SESS -7 -3 143,674 218,213 340,983 136,268 204,715 25,967 + 30 41,490 d9,144 408,538 + 18 1,499,299 1,107,078 481,385 66 +147 12 483 18 + 5,449 + 33,862 70 + + 24 2,349 42 69 + 86,193 24,138 73,318 3,180 - 41 44 107,011 78,184 11,327 27,885 87,247 4 353,721 19,584 137,160 27,558 + 307,573 23,739 69,388 13,472 - 17 775,239 661,294 357,155 26,149 + 10 32 33,353 161,666 45,624 28,314 63,218 84,067 36,029 5,376 111,758 40,535 71,223 Railroads Total 8,196 106,725 37,856 68,869 42 Total 11,422 34,062 Retail trade Finance 10 2,978 4,300 4,442 119,030 33,301 7,747 28,474 1,450 27,024 12,724 2,630 32 7,523 12,295 14,444 6,854 32,201 2,632 1,095,922 955,112 597,957 5 10,538 6 + 26 + 29 + 70 + 45 + 66 + 55 1 198 270,813 226,496 107,466 7,247 12,550 age Change 1 340,798 292,177 182,703 323 Food products Paper products Petroleum products Textile products Miscellaneous Mining Coal mining Metal mining and smelting. age 1939 Change 399 Automobiles Automobile parts Building materials Electrical products Machinery Metals, iron and steel Metals, nonferrous Office equipment Railroad equipment Miscellaneous Nondurable goods 1940 361,887 -2 -5 -8 + 33 + 21 + 4 + 14 + 33 + + + 6 7 1939 5 1940 panies Aircraft and parts Percent- Percent of Com- Industrials Total Manufacturing Durable goods First Nine Months Net Income Third Quarter Net Income 8 Number + 35 Net income minus net loss. deficit. Source National Industrial Conference Board, Economic Record, November 23, 1940. 346 Note: The National City Bank reports that net profits after taxes for 284 corporations directly affected by war and defense orders were 49.7 per cent higher than the 1939 level in the third quarter, and 79.2 per cent higher in the nine months. For 256 corporations affected only indirectly by war and defense orders, earnings in the third quarter were 7.2 per cent below the 1939 level, while in the nine-month period they were 16.8 per cent above 1939. EXHIBIT XI 347 Net Profits after Taxes of Leading Industrial Corporations for the Third Quarter and First Nine Months of 1940, with Percentage Changes from 1939 (In thousands of dollars) Third Per cent Directly affected by war Nine Per cent Months change and defense program: Quarter change 16 Textiles $5,024 1,480 11,494 42,569 77,269 6,358 20,666 8,685 7,470 5,982 12,108 8,835 16,026* t 33.5 t 71.3 t 2.8 t 53.6 51,080* t 49.8 223,966 t 49.7 646,202 t 79.2 12 Wood products 23 Paper products (b) 26 Chemicals 35 Iron and steel 17 Electrical equipment 13 Building equipment 35 Machinery 13 Railway equipment 28 Auto equipment 8 Aircraft and parts 35 Metal products, misc. 23 Metal mining 284 Sub-total $16,005 3,369 34,224 138,612 172,650 13,950 68,870 25,529 23,267 32,306 t (a) - 0.1 t (a) t 34.2 t 33.9 t 30.2 t 58.1 t 27.7 t 62.0 t 19.6 t 48.4 t (a) t (a) t 20.6 t (a) t (a) t 56.8 t 78.6 t (a) t 50.7 37,234 t 76.1 29,106 Affected only indirectly by war and defense program: 11 Baking 26 Foods, misc. 8 Beverages 14 Drugs, soap, etc. 23 Petroleum (b) 24 Stone, clay, glass 12 Household equipment 10 Office equipment 13 Automobiles 31 Misc. manufacturing 13 Coal mining (b) 25 Misc. mining 4,815 - 16.2 19,909 - 18.9 8,151 12,334 31,162 11,943 1,980 4,001 15,640 5,330 661* 25 Trade 540 Total - 30.6 - 18.7 - 9.6 - 3.3 t 11.9 t 0.8 115,012 t 64.8 31,704 t 16.5 t 14.9 5,479 15,244 t 21.3 162,044 t 17.8 16,969 t 26.6 1,354* t (a) t 23.7 t 16.8 t (a) 18,674* t 18.6 - 2.8 28,807 - 12.3 10,420 134,201 - 7.2 $358,167 t 21.7 552,209 t 16.8 $1,198,411 t 43.8 (a) Increase of more than 100 per cent not computed. (b) Profits affected by special factors also. * - 15.4 - 3.2 - 7.6 43,386 - 4.0 5,958* t 25.7 - 24.6 9,684 t 60.9 2,633 21 Service & misc. 256 Sub-total 13,952 62,418 26,746 Before certain charges. Source: National City Bank of New York, December 1940. 348 EXHIBIT XII Tabulation of taxes for 50 large corporations, National City Bank of New York The National City Bank of New York has tabulated from reports to stockholders and other sources, tax data and earnings data for 50 outstanding industrial corporations, representing as many industries. Summary figures for this group of corporations are given as follows: Taxes Income taxes Other taxes Total Federal, State and local Net income Total before taxes Taxes, ratio to this total Total after taxes Taxes, ratio to this total Dividends Total cash dividends Ratio, taxes to dividends $186,221,000 $699,316,000 $885,537,000 $1,661,889,000 53.3% $776,352,000 114.1% $577,820,000 153.2% This survey of the National City Bank points out that "For most companies, the taxes based upon net in- come comprise only a minor portion of the total, while the major portion is made up of property taxes, social security taxes, unemployment taxes, excise taxes, franchise taxes, capital stock taxes and others, which are payable regardless of the amount of net income. Detailed figures of taxes paid last year by the fifty large companies reveal that income taxes (including state and foreign, as well as federal) of the group aggregated $186,000,000, or 21 per cent of the total, while 'other taxes aggregated $699,000,000, or 79 per cent." Note: The Standard Statistics Corporation 349 estimates that corporation earnings for the fourth quarter (including in their index 117 industrial corporations, about 138 railroads, and 13 utility companies) will exceed those of any other fourth quarter since 1928. These estimates are based on the net earnings available for preferred and common stock. 350 EXHIBIT XIII Quarterly Corporation Earnings* Standard Statistics Corporation Index, Unadjusted (1926 = 100) Year 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 First Quarter 71.1 70.9 Second Quarter 58.2 85.2 65.8 87.9 98.4 86.8 124.5 119.3 100.3 102.2 117.6 110.2 100.2 128.0 126.4 99.3 53.4 18.4 150.9 105.1 150.5 83.8 44.8 38.8 43.4 64.0 50.7 55.2 a 3.7 61.3 12.6 34.0 93.9 32.8 92.5 110.4 36.8 1939 1940 60.4 92.6 62.0 87.8 Fourth Quarter 56.4 91.2 91.1 92.6 99.9 1934 1935 1936 1937 1938 # Third Quarter 52.1 63.1 20.9 3.5 35.0 34.5 50.2 84.4 98.4 38.5 23.2 78.8 115.1 78.7 76.7 66.6 114.5 3.9 81.3est. 120.8est. Based on net available for preferred and common stock. Includes 117 Industrial Corporations, all Class I Railroads and 13 Utilities. 351 Note: The Standard Statistics Corporation estimates that earnings of industrial corporations in the fourth quarter of this year will exceed those of any other fourth quarter on their records, going back to 1924. The earnings index is based on net earnings available for preferred and common stock of 117 industrial corporations. 352 EXHIBIT XIV Quarterly Earnings of 117 Industrial Corporations, # Standard Statistics Corporation Index, Unadjusted (1926 = 100) Year 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 * First Quarter 74.2 70.2 Second Quarter 58.1 88.1 93.4 92.9 100.9 103.7 130.7 100.7 162.0 106.8 43.1 8.0 54.2 106.1 124.4 6.0 d Third Quarter Fourth Quarter 51.4 89.0 110.1 98.9 132.8 57.9 83.0 92.7 78.4 119.2 154.8 76.8 36.2 109.0 46.1 2.9 5.9 d 14.4 25.1 d 13.4 29.0 46.7 35.3 55.2 35.5 54.9 89.2 103.6 36.6 62.6 108.1 127.8 40.4 111.4 34.4 20.0 81.3 114.6 81.4 69.3 65.0 69.8 63.5 118.8 102.5 95.1 46.9 71.0 82.0est. 128.5est. Based on net available for preferred and common stock. 353 Note: Taking a group of 168 indentical industrial corporations, the Federal Reserve Bank of New York reports earnings of $184, 800, 000 in the third quarter, 88 compared with $142,000,000 in the third quarter of last year (30.1 per cent increase). While earnings in the third quarter were somewhat lower than in the second quarter, this was due in part to seasonal influences. In both 1938 and 1939, it will be noted, third quarter earnings showed a substantial reduction in spite of sharp upturns in business activity. Earnings of telephone companies, and of other public utilities, were somewhat lower than in the third quarter of last year, and below the earnings in the previous quarter. Railroad earnings, on the other hand, showed a seasonal increase, and the net income of $70, 600,000 for all Class I railroads compares with $57,700,000 in the third quarter of 1939 (an increase of 22. 4 per cent). EXHIBIT XV 354 Earnings by Selected Groups of Identical Companies, Giving Quarterly Averages by Years 1928-1939. and Quarterly Figures 1938 to Date After Fixed(In Charges andof Taxes, Except Where Otherwise Noted millions dollars) : Industrial Corporations : 19 17 12 1, : : 13 mining : Steel leum 13 11 55 : : : by years 1931 291.4 337.2 190.7 68.4 108.0 96.6 45.8 22.0 1932 -24.9 -12.2 1933 42.7 77.2 139.4 224.0 244.5 97.8 185.8 21.3 23.7 1934 1935 1936 1937 1938 1939 Earnings by quarters 1938 1 2 3 4 1939 1 2 3 4 1940 1 2 3 70.0 82.0 59.4 179.6 146.9 158.0 142.0 296.2 246.6 226.0 184.8 56.3 87.2 70.8 24.9 59.9 4.6 22.9 -6.2 78.4 6 69.5 64.0 14.4 91.7 92.9 72.3 19.4 23.8 30.2 22.7 17.3 10.0 16.1 20.0 24.8 30.5 34.0 21.5 32.2 16.6 16.8 21.8 30.7 24.2 26.4 32.5 45.7 37.1 32.9 6/30.4 22.1 25.3 23.3 20.5 14.9 16.6 18.0 16.9 20.7 19.4 18.9 20.4 16.0 19.2 19.9 20.4 15.8 20.3 22.2 23.2 17.1 21.0 17.7 12.2 15.4 8.9 1.0 - 3.6 6.0 3.9 77.2 6.4 55.1 63.5 38.1 41.5 63.3 69.5 67.7 -30.8 - 3.4 56.1 1.1 - .9 .9 2.1 7.3 2.9 4.1 6.0 2.1 3.6 - .5 16.5 - 9.6 1.3 1.6 14.0 18.3 10.0 10.4 41.4 1.5 23.4 16.5 52.4 28.7 59.7 51.8 47.1 50.0 47.7 44.8 42.1 -106.3 - 74.9 54.1 53.7 54.5 51.4 - 43.6 46.8 57.7 126.1 1.9 13.6 1.0 11.1 4.1 5.6 1.5 4.1 10.7 - 1.8 - 7.3 - 7.3 4.7 10.3 5.6 7.6 6.2 2.7 7.0 3.3 10.7 9.0 9.0 8.3 6.2 4.5 11,9 16.3 15.9 3.9 4.7 2.1 7.4 22.1 1 Thirteen companies between September 1939 and February 1940. 4 5, Less than $500,000. 6, Preliminary 7 Partly estimated. .9 45.7 11.2 47.8 50.2 19.0 32.1 12.9 12.9 14.9 25.4 17.3 24.2 28.6 44.7 12.1 57.7 35.1 38.1 8.8 58.9 36.6 Office of the Secretary of the Treasury, Division of Research and Statistics. 2, Number has varied slightly. 3 Net operating income, before fixed charges. Not available. 63.1 62.7 41.3 5.6 25.1 5.4 6.2 5.4 55.8 59.7 56.7 -15.2 5.7 3.6 7.4 68.2 2 60.2 49.7 42.3 40.9 44.0 49.5 51.5 47.2 7.7 Source: Federal Reserve Bank of New York. 2 45.1 .5 5.7 2/ 19.2 21.0 4.4 6.5 10.3 13.3 income 3/ :(net income) (net income) 8.1 - 1928 1929 1930 Telephones :Other public: Railways, :net operating: utilities : Class I Misc. : acces.: cale :beverages: ery 28 : : No. of companies: Quarterly averages 168 :Autos &: Chemi-:Food and :Machin-:Metals &:Petro-: : Total 35.0 36.7 52.8 50.5 56.5 56.4 60.4 60.3 61.8 62.5 61.9 55.9 54.4 61.4 52.0 44.5 29 - 38 -7 3 5. 41 25 - 31.0 3.4 48.2 12.8 1.6 70.6 December 10, 1940. EXHIBIT XVI 355 Some Fundamental Considerations With Respect to Defense Finance Adam Smith says in the first sentence of the Wealth of Nations, "The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes This is as true of war as of peace, and is the key to an understanding of defense finance. With very minor exceptions, the produce of "the annual labor" of a nation -- that is, its national income -- consti- tutes the sole fund with which it can prepare for war, and the possibility of successful defense finance depends almost solely upon the adequacy and flexibility of this income. If the national income is sufficient in amount and flexible in kind, almost any type of technical defense finance can be successful -- that is, successful in attaining its main purpose of creating an adequate national defense. Under such circumstances, the object of good defense finance is to attain this end with the minimum of inequity and of disturbance to the economy at the end of the defense emergency. If, on the other hand, the national income is either inadequate in amount or inflexible in kind, then it will be impossible to build up an adequate national defense, however favorable may be the financial auspices or however skilful the technical financial administration. An economy concentrating on a national defense effort differs from a peacetime economy in three principal respects: first, its needs for goods and services are more urgent and it requires different kinds of goods and services; and third, a much larger proportion of the total output of goods and more insatiable than those of a peacetime economy; second, services must be purchased by the Government than in normal times of peace. It follows that an economy may be success- fully placed upon a defense basis according as (1) its total production may be enlarged, its civilian consumption contracted, or both; (2) the character of its production shifted from peace to defense needs; and (3) the requisite purchasing power placed in the hands of the Government to enable it to secure possession of the goods produced for the defense effort. Accomplishing the first two of these objectives constitutes defense finance on the physical level, accomplishing the third constitutes defense finance on the monetary level. It is on the physical level that the major real problems lie, and 356 2- if these problems can be solved, then the problems on the monetary level are all potentially soluble, and are very unlikely to stand in the way of successful national defense. Indeed, many of the problems on the monetary level are merely the reverse faces of problems on the physical level. For example, if the national income is sufficiently adequate in amount 80 that the civilian population can live on half of it, and the other half can be made to consist of defense goods, such as machine guns, airplanes, and soldiers' uniforms, it is most unlikely that the Government will fail to find a way to get possession of these goods. If, on the other hand, the national income is adequate for only the bare subsistence of the civilian population even in ordinary times, or, even if it is more than adequate for this, if it cannot be converted into the kinds of things suitable for national defense, then no amount of purchasing power expressed in money will avail the Government in building up an adequate national defense. It is clear from these considerations that the United States today, both as compared with its own condition in past times and with the condition of other nations immediately before the outbreak of the present war, is in an exceptionally favorable position to embark upon a successful program of defense finance. This is because: (1) Our national income can be greatly enlarged with our present supply of labor and capital and with our present standards of hours and working conditions merely by the use of labor and capital now unemployed, and might be yet further enlarged by reasonable emergency increases in the duration and intensi ty of labor. In this respect, our present position differs sharply from what it was at the outbreak of the World War and from that of Great Britain at the outbreak of this one, in each of which cases practically full employment prevailed at the beginning of the war and only the second recourse (increased duration and intensity of labor) was available to increase total income. It differs even more sharply from that of Germany at the outbreak of this war when even the second recourse had been largely tapped. (2) Our standard of living is the highest of any major power. This is, of course, of assistance to a potential defense effort only insofar as it constitutes a fund available to be reduced in order to free productive resources for national defense. The American 357 -3people can be counted on to do this if they consider their national security threatened. We are fortunate that such a reduction is physically possible to the extent that it is in this country. A national income is available for defense or war at all, only as it exceeds the minimum living requirements of the people. In our case, this excess constitutes a very large proportion of the total income. Contrast this, however, with the cases of Russia or China, to take extreme examples - or of Italy or Japan, to take less extreme ones. (3) Our economy is the most self-sufficient in the world, and our industry - given time to retool - is probably the most flexible and the most capable of shifting its output from peacetime production to defense production, It appears, then, that the United States today is especially finance. Its defense finance can hardly fail, therefore, on the monetary level. If matters have been successfully handled on the physical level, the Government will not fail to get its favored in the real things which make for successful defense defense goods and services. The main objectives on the monetary level are to avoid inequity and disturbance to the economy following the passing of the defense emergency. The main instruments of defense finance on the monetary level are taxation and borrowing. In seeking these objectives and in wielding these instruments, it is almost inevitable that the principal theme is "How to avoid inflation, and yet, in so doing, not interfere with the physical production of goods? This, then, is the main problem of defense finance on the monetary level. II. In applying the conclusions reached in the preceding discussion with respect to the physical level of defense finance and in working out further the technical problems presented at the monetary level, the questions which first present themselves are "Where do we stand at the present time?" and "Where do we go from here?" 4 358 An inflation 1s only possible when more purchasing power is currently offered in exchange for goods and services than there are goods and services to be had at the then price level. Under such circumstances, if labor and capital are fully employed -- 1.e., if production 1s at capacity -- the additional purchasing power can be absorbed in no other way than by an increase in the prices of the amounts of goods and services then being produced, which is what we mean by an inflation. If, however, additional purchasing power 18 thrown on the market while substantial amounts of labor and capital are unemployed, its principal effect is to increase the physical quantities of things produced, rather than to increase their prices. This is not inflation, but recovery, which is something we all desire. Production in the United States today 18 not at capacity, and there is very little prospect that it will be in the near future. It is true that bottlenecks exist here and there, particularly in those national defense industries requiring skilled labor and specialized types of capital equipment. These bottlenecks may cause the present capacity of these industries to fall short of effective demand, and so cause an intermediate rise in the prices of the products involved. The cure for these bottlenecks, however, like their cause, is technological and not monetary. As they were not brought about by a monetary cause (1.e., a redundance of general purchasing power), so they cannot be cured by a monetary remedy (1.e., a restriction of general purchasing power). Under present circumstances, it is entirely proper, therefore, that fiscal policy should be directed, as far as possible, to the objective that the demands of the Government for goods and services should be additional to those of private citizens, and not merely substitutionary for demands which private citizens would have exercised had they not parted with their purchasing power to the Government. It is such additional demand which is, in effect, created when the Government borrows funds which would otherwise have lain idle. There can be no objection to such borrowing, therefore, at the present juncture, although caution ought to be observed that too much of such borrowing should not go into the banks, and so present a problem of future credit control. 359 -5- III. The problems faced today are not those of defense finance conducted in an economy operating at capacity. They would be moved sharply in that direction, however, by any one of three developments: (1) a substantial business recovery such that the intensity of defense spending now under way would compete with civilian requirements for the capacity production of industry; (2) a marked intensification of defense production; or (3) the actual entrance of the United States into war. If any of these things should happen, new techniques would be required at the monetary level of finance. The first necessity for the application of new techniques would occur when the labor and capital goods now idle had become substantially all reemployed -- or reemployed over a sufficiently wide field of industry, 80 that an increased flow of purchasing power would be more likely to cause higher prices than higher physical production. At such a time, it would be desirable that as much of the purchasing power in the hands of the Government as possible should be substitutionary for that which would otherwise have been exercised by private citizens, rather than additional to it. For this reason, increased emphasis should be placed at such a time upon taxation, and such borrowing as was necessary should take place as far as possible by the sale of bonds to individual investors. Such a transition is difficult, par- ticularly on the tax side, and would require courage to face. Fundamentally, however, it is not quite as hard as it seems when it is taken into consideration that the principal factor inhibiting us today from levying taxes adequate to balance the budget -- 1.e., the repressive effect which such taxation would have upon employment and the level of industrial production -- would at such a time be removed. An all-out defense effort implies, however, an all-out participation by all sectors of the economy. All sectors of the economy ought to undertake equally the burden of contributing to national defense through taxation, and of repaying the debt incurred for national defense purposes. This means the cessation of further issuance of tax-exempt securities. There must be no slacker money in the defense effort. Money invested in Government bonds should not be allowed, in 360 -6effect, to settle for all future taxes by a small reduction in the current interest rate. On the contrary, it should, like all other moneyed capital, be prepared to take it on the chin as much as may be necessary for the future defense effort. A universal liability to pay taxes is the same guarantee of national solvency as strong military forces are of national security. 361 BRITISH EMBASSY, WASHINGTON, D.C. Personal and Secret December 11th, 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, horte Bother The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. 362 Telegram received from London dated December 9th, 1940 1. Naval. The gale continues round the coasts, several convoys are scattered. Submarine reported aground yesterday has been refloated and at the same time two merchant ships in difficulties yesterday have arrived in harbour. 2. His Majesty's Submarine "Sunfish" reports having sunk a 4,000 ton merchant ship off the Norwegian coast on the fifth and probably hit 4,000 ton tanker on the seventh; a British destroyer sustained slight damage from 8 mine off east coast on the evening of the 8th. 3. Shipping Casualties. A British ship of 7,500 tons has been reported sunk by raider in the Eastern waters on November 11th and "Hartford" of 11,000 tons was mined off southern Australia on December the 7th but is still afloat. 4. Royal Air Force. Night of the 8th/9th. 112 bombers were despatched to attack the following targets: Locality Number of Targets Aircraft Bombing Reports Dusseldorf Blast furnaces 16 heavy and Bordeaux Enemy Naval 41 heavy and Lorient, Docks and Enemy Naval Units 3 heavy 18 medium Good Aerodromes 17 medium Good France, Low Countries Breat Units good 12 medium Very good 5 medium In/ 363 -2- In addition six aircraft were detailed to lay mines and two heavy bombers to drop leaflets in Northern France. 5. Attack on Bordeaux was very successful. A direct hit being claimed on a submarine and near misses on others. Two heavy bombers missing. The remaining aircraft have returned safely. 6. Greece. On December the 7th eight Blenheime attacked Valone, one bomb bursting on a large ship and remainder in dockyard area. Subsequent attacks by 14 Blenheims on same target were hampered by very bad weather and by fighter opposition and results could not be observed. An enemy fighter was destroyed and two Blenheims were shot down and three are missing. 7. Libya. on December the 7th eleven heavy bombers attacked Italian aerodrome near Tripoli. Direct hits were obtained on petrol and oil dumps, administration quarters and on all of the five hangars, two of which exploded and caught fire. At least 8 dispersed aircraft were destroyed. Many others damaged. 8. Ethiopia. On December the 6th four of our aircraft attacked Italian aerodrome near Lake Tana. Buildings were hit and a large petrol fire started. One of the aircraft was lost but the crew baled out in enemy territory. 9. German Air Force. Daylight December the 8th. In spite of fine and clear weather there was no enemy activity over the country except for reconneissance flights by single aircraft one of which was destroyed off Portamouth. 10./ 364 -3- 10. Night of December 8th/9th. About 390 enemy aircraft were operating almost entirely over southeast England and a heavy attack was made on London for more than 13 hours. Two enemy aircraft were shot down by ant1-aireraft fire and a third was probably destroyed by fighters off the East coast. 11. Enemy attack was chiefly directed against Southeast London and dockyard area. A large number of incendiary bombs were dropped and many fires caused but all are reported under control. From preliminary reports casualties appear heavy. Some industrial key points were hit but reports so far do not indicate heavy damage. Some dislocation was caused to suburban railway services and amonget public buildings damaged were Houses of Parliament and B.B.C. Building, the latter seriously. Public utility services seemed to have escaped almost entirely. 12. Aircraft casualties in operations over from British Isles: Destroyed Probable Damaged Enemy by day Fighters By night Bombers Total one -- -- two one -- Three One -- British: two bombers missing. CONFIDENTIAL 365 Paraphrase of Code Radiogram Received at the War Department at 12:50 PoM., December 11, 1940 London, filed December 10, 1940 1. In Egypt a British force of two divisions plus supporting treeps attacked the Italian forces at Sidi Barrani with a wide envolopment of the south flank. Naval vessels supe parted the attack along the eeact. General Wavell reported that at 2:00 P.M., December 9, his advance elements had crossed the read paralleling the coast at Bugbug. 2. This operation is being carried out to test the fighting power of the Italians in Egypt. If the Italians do badly, General Wavell expects to capture everything east of Dugbug and be able to held sidi Barrani, utilising the captured Italian installations and supplies. If he cannot reach a decision within three or four days, he will be forced to retire because of the difficulties of maintaining his supplies in the desert. This is rendered more difficult by the fast that his administrative installations are incomplete. LES Distributions Military Aide to the Presidents Secretary of War State Department Secretary of Treasury Asst. Secretary of War Chief of Staff- 2 War Plans Division Office of Naval Intelligence as CONFIDENTIAL 366 Paraphrase of Code Radiogram Received at the War Department at 3:25 p.m., December 11,1940 CONFIDENTIAL Rome, filed 16:21, December 11, 1940 With respect to telegram No. 435 from your office Italian marale, both in the populase and in the armed forces has been deeply affected by the defeats in Albania, the disaster at Terante, and by the resignation of Marshal Badoglie. Beth the any and the people have always had full confidence in the merchal. It is Fascist policy to hold him responsible for the failure in Albania. No is branded as an incompotent prefiter by ward and presinct leaders. While this does not partand revolution but is a matter of internal politics only, it will nevertheless affect Italian war efforts abversely. FISHE Distribution: Military Aide to the President Secretary of War State Department Secretary of - Asst. Secretary of - Chief of Staff 2 War Plane Division office of Naval Intelligence CONFIDENTIAL Paraphrase of Code Radiogram 367 Received at the War Department at 9:55 A.M., December 11, 1940 CONFIDENTIAL London, filed December 11, 1940 1. Forty-ene aircraft of the Bember Command during the night of December 9-10th carried out successful attacks against three large aircraft fasteries in Northern Germany and four French neval bases. The proceding night a total of 112 bembers were dispatched, of which two were lost. During daylight hours of December 10th the Coastal Command carried out its routine patrols and at tasked an enemy radio station and four German vessels off the eeast of Norway. In the Egyptian theater British aircraft bombed Italian command posts, communications and troops. British bembers based in Greese bombed Valena. 2. During daylight hours of Tuesday, December 10, about 65 German planes operated over Britain, but that night no enemy planes appeared. 3. The German attack on London during the night of December 8-9th caused considerable but not vital fires in the deek areas. The British Breadcasting Company building was seriously damaged and the House of Parliament was also hit. There were lim ited damages to same key industries. There was substantially no damage to the public utilities systems. 4. The British attack on the submarine base at Bordeaux during the night of December 8-9th was reported to be extremely successful. or the 122 planes operating that night, two were lost. CONFIDENTIAL CONFIDENTIAL 368 5. Italian plane lesses in Naypt were eight confirmed and three probable. At home one German plane was destroyed and one damaged. 6. In the Pacific shipping was attacked by an enemy raider on December 8th and a 6,400-ten British vessel was burned near Naura (2000 miles north of New Zealand - G-2). 7. The nowly appointed commander of the Royal Amouned Gerpe in General Martel. In the last war he was the real brains in the Tank Corps and is now the Army's annoured fighting vehicle genius. No will now have a real opportunity, since up to this time he has been sidetracked in command of an Infantry division. The Carden-Lleyd tank is largely his creation. 8. Lord Beaverbrook, Minister of Aircraft Production, was yesterday openly charged with carrying out intrigue with the purpose of disrupting the Reyal Air Force as it is organised at present. A donand was made that his actions be debated. 9. Prime Minister Churchill announced in Commons yesterday the considerable enlargement of the Coastal Command and stated that hereafter it will operate under the operational policy of the Admiralty but that the Air Ministry will be consulted. 10. Several times I have suggested to responsible British officials that they could not expect the United States to put its industrial machine into high goar se long as it was periodically stated that about 780,000 British warkman were employed. of course many are always employable and it was suggested that if CONFIDENTIAL CONFIDENTIAL 369 this was the case the British should publish a breakdown of their employment figures. This morning such an analysis appears in the papers. It shows that of the 359,000 male unemployed 48% had been unemployed loss than 14 days and 53% less than one month. or the total male unemployed 154,000 were between the ages of so and 64. There were 257,000 unemployed females between the ages of 16 and 59, of whom 50% had been unemployed less than six weeks. This breakdown indicates that the hard sore of unemployed consists of about 68,000 of both sexes. This tabulation puts a much better face on the subject of employment and also stire up added interest in the manpower situation. 11. In my opinion the question of manpower is second in importance only to that of merchant ship lesses, the third most important being money. The elegan "War of Mashines" must be accepted with care. The smaller divisions require more manpower for equipping, maintaining and fighting than the old larger ones. In the British Army about 37,000 men are required for each division all the way from the front to the rear. LEE Distributions Military Aide to the President Secretary of War State Department Secretary of Treasury Asst. Secretary of War Chief of Staff - 2 War Plans Division office of Naval Intelligence as Air Gerps - 2 CONFIDENTIAL 370 Paraphrase of Code Rediegres Received as the War Department at 11:45 p.m., Des. 11, 1940. CONFIDENTIAL Ankers, filed December 11, 1940. Reference to telegram No. 183, received December 10 from your office At Zenguldak there is one regiment. In the Samsun area there is one division supported by another division in the neighborhood of Sives. There is one regiment at Trebisend, two divisions in the area around Kars, and four divisions in the areas with detachments along the coast. In the visinity of Zengaldak, Seasum, and Trebisend, there are medical field fertifications. During the winter months, sudden storms on the Black Sea make Landing operations extremely difficult. KLUBS Distributions Military Aide to the President Secretary of War State Department Secretary of Treasury last. Secretary of War Chief of staff -2 War Please Division office of Naval Intelligence CONFIDENTIAL CONFIDENTIAL 371 Paraphrase of Code Radiogram Received at the War Department at 9:55, December 11, 1940 Rome, filed 14:22, December 11, 1940 With reference to telegram No. 453 from your office Assistance given to the Greeks by the British is believed here to consist of air force material with ground crows, naval support, specialists and staff officers with only enough combat ground troops to constitute a token. The situation as regards supplies is very serious. The evasuation of Valona is issuent. The line of communication being used runs from an Italian port in the northern Adriatic to Alesia and Durasso. FISKE Distributions Military Aide to the President Secretary of War State Department Secretary of Treasury Aest. Secretary of War Chief of Staff War Plans Division Office of Naval Intelligence CONFIDENTIAL 372 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS TENTATIVE LESSONS BULLETIN MILITARY INTELLIGENCE DIVISION No. 76 G-2/2657-235 WAR DEPARTMENT Washington, December 11, 1940. NOTICE The information contained in this series of bulletins will be restricted to items from official sources which are reasonably confirmed. The lessons necessarily are tentative and in no sense mature studies. This document is being given an approved distribution, and no additional copies are available in the Military Intelligence Division. For provisions governing its reproduction, see Letter TAG 350.05 (9-19-40) M-B-M. EXCERPTS FROM THE OFFICIAL GERMAN ARMY YEARBOOK SOURCE All sections of this bulletin are quoted directly from the 1940 edition of Das Buch Vom Heer, a yearbook published by the German Army for the enlightenment of civilians. CONTENTS 1. THE CORPS OF OFFICIALS 2. MOTOR TRANSPORT REGIMENTS 3. MOTORIZED MACHINE GUN BATTALIONS 4. PIONEER PLATOON OF THE INFANTRY REGIMENT NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS -1- 373 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS 1. THE CORPS OF OFFICIALS Officials play an important part in the activities of the German Army by performing many of the duties assigned to commis- sioned officers in other armies. They are not full-fledged soldiers according to German legal conceptions, but they occupy, rather, a double position. As officials of the German Reich, they are subject to transfer from one division of the civil government to another; hence, they may be serving one year in the Ministry of Agriculture and in the next year in the Army or Navy. While serving with the armed forces, they are subject to general laws governing officials of the German Reich and also to most of the laws and regulations for officers and soldiers. They wear a uniform closely akin to that of a soldier while on duty with the Army, but their uniform is distinguished from that of the soldier by the dark green color of the epaulets and cuff distinguishing marks. Civil officials serving with the Army fall into four general categories. a. Officials of higher classification; b. Officials of upper middle classification; C. Officials of lower middle classification; d. Officials of lower classification. It is not possible for a German official to be promoted from one of these group classifications to another. Then a German desires to enter upon a civil official career in the German government, he is classified in one of these four groups according to the general level of his education and the degree of excellence with which he has passed the required examinations. In general, all officials of the higher service have passed examinations equivalent to those required for graduation from an American university. Army officials perform a variety of different tasks. The two principal classifications into which their duties fall are the technical engineering and the administrative. The following are the principal divisions of the administrative service: Intendance (QMC) Finance Military Architecture Military Pharmacy NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS -2- 374 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS Archives Libraries Psychology Sport Teaching Chemistry Military Agricultural Service Military Museums Service Military Forestry Army Radio Reception Service Remount Service Mobilization Service Army Motion Picture Service Army Clothing Service Judge Advocate General's Department Army Chaplains Corps Army Trade Schools Branches in the engineering and technical classifications are as follows: General Technical Service Artillery Sound and Flash Ranging Service Fortress Engineer Service Motor Transport Service Signal Service Gas Protection Service Pioneer Service Topographical Service Ordnance Service German officials, while on duty with the Army, are not given military titles, but each position has a title of its own. Thus, the Chief Intendant of the German Army has the title of Generalstabsintendant, while the Chief Intendant of the Corps Area has the title of Generalintendant. All officials of the higher and upper-middle classifications have social position equal to that of an officer within the Army, while those of the lower-middle and lower classifications are treated as noncommissioned officers. 2. MOTOR TRANSPORT REGIMENTS The largest motor transport unit of the German Army is the motor transport regiment. This regiment is organized as follows: Headquarters Military Police Squad NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS -3- 375 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS 3 Motor Transport Battalions, each consisting of: 1 Reconnaissance Company 5 Motor Transport Companies 1 Motor Repair Platoon 1 Independent Passenger Car Company All motor transport trucks of the German Army are fitted to carry either material or personnel. Every truck carries with it folding benches and ramps in order that the truck may be converted from a cargo carrier to a personnel carrier without delay. A certain number of the trucks of a heavy motor transport company are so equipped that the sides can be raised and horses can be carried. The march speed of a motor transport column is set at 25 miles per hour on level land in daylight. All motor transport regiments form a pool at the disposal of the Commander-in-Chief of the Army. In the campaign in Poland in September, 1939, motor transport regiments were used largely for the transport of material. During this campaign, it was not unusual for motor transport battalions and regiments to perform daily marches of between 200 and 250 miles. The officers and men of motor transport regiments mobilized in September, 1939, were almost exclusively reservists. During the winter of 1939-1940, a large number of motor transport regiments were released to the civil authorities for moving coal from the Ruhr and Upper Silesian districts to large German cities. 3. MOTORIZED MACHINE GUN BATTALIONS Personnel of motorized machine gun battalions of the German Army belong to the Infantry. Each battalion consists of the following units: Battalion Headquarters 1 Motorcycle Machine Gun Company 2 Machine Gun-Rifle Companies 1 Heavy Company. Machine gun battalions are fully motorized, and in action they are directly under the command of higher headquarters. A peculiar characteristic of these battalions is that their companies can be used either as machine gun companies or as rifle companies, NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS 376 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS depending upon the mission of the battalion and the tactical situation confronting it. In case they are used as rifle companies, they have a lesser combat strength than normal companies. The machine gun-rifle companies of the battalion are generally carried on halftrack, lightly armored vehicles. The motorcycle machine gun company is an especially mobile unit, available for a variety of uses. Its principal mission, however, is reconnaissance and security. The heavy company of the machine gun battalion consists of an antitank platoon and a trench motor platoon. Operating with the battalion headquarters is a signal platoon larger than the normal. Each company of the battalion also has a signal section. 4. PIONEER PLATOON OF THE INFANTRY REGIMENT Every German Infantry regiment contains a pioneer platoon, which is directly subordinate to the regimental commander. The platoon is trained to execute simple pioneer labor and is equipped with necessary material to carry out these missions. This equipment is carried in a number of wagons or automobiles, depending upon whether the regiment is motorized or horse-drawn. NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS -5- 377 RESTRICTED G-2/2657-220 SITUATION REPORT No. 267 M.I.D., W.D. December 11, 1940. 12:00 M. This military situation report is issued by the Military Intelligence Division, General Staff. In view of the occasional inclusion of political information and of opinion it is classified as Restricted. I. Western Theater of War. 1. Air Force Operations. The German Air Force was practically inactive offensively over England. Last night the R.A.F. raided an aircraft factory in Bremen, naval installations at Lorient and docks at Boulogne. II. Greek Theater of War. Greek pressure, apparently making some progress on the west flank, continues to be exerted all along the front. Air activity was light and included small raids on Corfu and Valena. III. Mediterranean and African Theaters of War. The British drive in the Sidi Barrani region was made on a front of some 25 miles, has succeeded in enveloping the Italian south flank and some elements have reached the coast in the vicinity of Buqbuq, about 35 miles west of Sidi Barrani. The operation still shows the characteristics of a raid, but it is believed that the British are prepared to exploit an Italian collapse on this front. Strong British air support of the attack continues. RESTRICTED 378 - UNITED STATES TREASURY DEPARTMENT AMERICAN CONSULATE GENERAL HONG KONG OFFICE OF THE TREASURY REPRESENTATIVE December 11, 1940. The Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Dear Mr. Secretary: I have the honor to forward herewith, for your perusal, an interesting article on REWI ALLEY OF CHINA, written by Edgar Snow, author of "RED STAR OVER CHINA" and other books on China. The article on ALLEY will be published in the SATURDAY EVENING POST during either January or February 1941. I am sending it to you at this time because I am preparing for your information a memorandum on the "Chinese Industrial Cooperatives" and I believe Snow's article on Alley will be a good prelude to my memorandum. Respectfully, M.R.N.Chocora Treasury Attaché 379 UNITED STATES TREASURY DEPARTMENT November 28, 1940 OFFICE OF THE ATTACHE CONFIDENTIAL MEMORANDUM SHANGHAI REWI ALIEY OF CHINA By Edger Snow Rewi Alley is unique because he has achieved greatness in a country where few foreigners over managed to create an authentic ripple. He means to China today at least as much as Colonel Lawrence meant to the Arabs and perhaps he means more. Where Lawrence brought to Arabia the destructive technique of gurrilla warfare, Alley is teaching China the constructive organization of "guerrilla industry." Probably few Chinese will fully appreciate the Alley ripple for another decade - which is one secret of his success. He knows how to lead mon by showing them how to lead themselves. That is really about all his femous vest-pocket industries are doing for the thousands of men and women whom they have converted from destitute refugees and unemployed into producers and useful citizens. In July, 1938, when the Chinese Government took this New Zealand blitzbuilder away from the Shanghai Settlement Council to become chief advisor of Chinese Industrial Cooperatives, that organization was only a name. It did not own a single factory, lathe, OF even a chisel. Over 90 percent of China's prewer industry was already destroyed or immobilized. Alley began literally from scratch. He picked up the pieces and improvised a system to provide jobs for thousands of idle people in a new conception of industry - and native products to fill "Free China's" empty marksts. Today Alley's "Indusco" - the decentralized Industrial Cooperatives - are growing so fast that most data is stale before it is printed. Early in November there were over 2,400 of these factories spread across 16 provinces, or an area nearly as large as all Europe, under the technical guidance of -270 branch depota. An "Indusco Line" extended from guerrilla territory 380 behind enemypositions into Chine's deep rear, and from the Mongolian plateau to the highlands of Yuman. An army of over 250,000 people was directly dependent on Indusco for a livelihood, and work was being created for thousands more. The danger of complete blockade - even before the Burma Road reopened - was no longer the nightmare it had been in 1938. Rewi Alley is something now in China's relations with the foreign devil. A "barbarian" who knows the Celestial language better than most Chinese. An advisor who drews his dividends from the thrill of rehabilitating human life. A missionary whose churches are the workshops of China. And a captain of industry whose headquarters are where the day's end finds him - a passant's rude hut, a mileteer's inn, and sometimes simply the green bank of a stream. But this World War hero sees himself primarily as part of a great human adventure. "To create production and livelihood where there were none before, he says, to find better ways of living and working together, to build growing things out of chaos - this is the greatest and most satisfying edventure of our time!" Who is this Merco Polo in reverse, who does not carry off the secrets of Cathay, but helps the oldest society on earth to discover new powers of its own? I never imagined that I would some day write such paragraphs about Rewi Alley when I first not him far up in Inner Mongolia in the arid June of 1929, and yet I know that he was something rather unusual. We were the only foreigners on a "famine special" going into the country west of Kalgan, where 3,000,000 people eventually starved to death. Except for the service car in which I rode with a Chinese politician there were only open carriages and wagons bursting with peasants and freight. Out of the latter I was astonished to see a European crewl for a breath of air at one of the stations. I went up and introduced myself. 381 3 He was a strange figure in that dark sickly crowd, his sunburned face covered with dust beneath a reddish bush of upstanding hair. He was only of medium height, but under his khaki shorts I saw a pair of tremendous rugged legs. When he stood with those giant's legs spread apart, in a characteristic attitude, he seemed somehow rooted to earth. But is was the man's head that struck me. It had a profile like something curved from Stone Mountain. Later on it made the some impression on the British sculptor, Francis Shurrock, who did a bronze bust of Alley for the Royal Academy of London. He called it "Profile of Tomorrow." I was only a horrified observer of the famine but he had chosen the spot for his holiday. He worked all summer among the typhus-infested people, distributing relief grain, helping them build canals and irrigation ditches, and nursing their loan children back to health. "Why?" I asked myself. He was obviously no evangelist. I did not quite "get" the driving urge behind this one-man salvation army. He seemed put together in a new way. It was the first time I had ever seen men die of hunger and I soon had enough and returned puzzled to Peking where I wrote a dispatch for my paper, describing the tragedy. I remember that a little New York boy read the story and sent me a dollar bill clear from America, to give to the starving boys and girls in Suiyuan. For all I know that is the only good my effort did. But Alley worked a lot harder and be came out with more. The next time I saw him he was the foster father of an orphan lad whose parents had perished in the famine. Not long afterward he was loaned by the Shanghai Municipal Council to Sir John Hope Simpson, to help rebuild the Yangtze dykes after the great flood in 33. Again I wrote some stories and again Alley came out with a famine orphan - and a brother for his first son, Alan. He christened his second son Michael and put them both in good schools in Shanghai. 006 352 "It's getting to be a habit," remarked his British friends in Council circles, where the Family Alley was considered something quite "extraordinary." One of them told me it all came about because of a "busted romence." "Alley couldn't get the girl so he decided to have a family anyway." But in a few years the white schibs who would not sit down with a ooolie at their tables, not to mention adopting one, had to admit that Alley was a successful parent. The two peasant lads grew into model young men of whom any bone fide father could be proud. In middle school they led their elasemates in study and sport. Finally, at St. John's University, Alan was elected president of his class. I know Alley some time before I realized that it was no amatory rebound but a congenital horror of waste, that made him unable to resist a chance to save a human life. One day he told me of an experience he had which perhaps explains quite a lot about him. "In the depth of winter in 1917", he said, " I marched out of Ypres one night beside another New Zealand boy of 18. A tough kid named Jeff. He had led a horrible life; his mother was a character in a hotel back home. We all had a low opinion of him. I had got dysentery and so had he and on the way to the front lines we fell behind the others. Suddenly we came upon a very bad corner. Huge shells throw up gaysers of and as they struck very near us. We began to run and stumbled over one of the man we were to relieve. He was lying face down in the and, unconscious. I started to go around him. 'Wait', Jeff yelled at me. "Is he dead?' . 'Sure,' I mattered, anxious to get on. "But the tough boy stopped me and then stood deliberately examining the wounded man. *No! he finally said, the is still alive'. And then he turned on me and in that sea of and under bursts of shell fire he gave me a lecture, the most humiliating I ever got. 'You may think human life is of no value when you see it thrown away as 383 5 11 is here,' he said, 'but that is not so. This man's life was worth as much to him a few minutes ago as ours is worth to us now. One thing you must remember. Life is precious to everybody.' He went on, and ended up, 'Give me a hand, let's pull this fellow out.' "We did pull him out. He was still breathing and we saved his life. I never forget this lesson, given to me by a man I had imagined my inferior." Perhaps it is only after such an experience, in which one's own ego, for a moment suspended in eternity, appears in its true microscopic relation to the vast unity of life, that one can begin to see other people and their misery as an organic part of one's own daily existence. Some deep injection of fellowship evidently took place in Alley. I don't mean that he become in any sense a soul-saver; as far as I know he never enters a church and nobody is more im- patient with the religious zealot. Yet you cannot be around this man long without absorbing some of the tremendous energy which springs from his profound enthusics for human life. And it is that, it seems to me, which explains his amazing talent for evoking the priceless response of creative personality from raw material so crude that most of us would discard it as useless. with his penetrating long-view eyes, as somebody called them, his fiery hair, and his hawklike English nose. Alley is the perfect image of the kind of foreign devil to frighten the wits out of Chinese children. Yet he is probably the here of more of them today than any foreigner. Boy accurs, factory apprentices, "little devile" in the army, in one way or another A1 LA has helped hundreds of them, from Shanghai to Mongolia. There is, as but one example, the famine victim he took from one of those "orphan homes" in Shanghai which are in reality slave-labor or white-alave rackets. Alley taught the lad to be his cook; and from there Ah Heiang went ahoad by himself. Through diligent night-study he learned English and got some technical training. Today he is an able organizer in the "Indusco" system and carries large responsibilities. 384 "The trouble with the rulers of this country," Alley keepe repeating, "is that they don't know the capacities of their own people. You can take any boy from the streets of China and make a good man of him. All he needs is a break." And for the skeptic, Alley has a hundred case histories to prove his point. His own sons are of course Exhibit A. They became for him an open sesame to the youth and the heart of China. He had adopted them and they were determined that China should now adopt him. They went on long trumps together across the fields and mountains and canals; and he learned to read and write the language with them. Thus he was initiated into the intimacies of Chinese village and city life, and learned the strength and weakness of Chinese character and society. Behind the myths of "inscrutability" he discovered in the so-called "yellow" race a bundle of aches and pains and hopes fundamentally not very different from the white man. And unknowingly he prepared himself for a leading role which an accident of war was to assign to him - and incidentally to both his sons. It was a long time before I learned much about Alley's early life. He rarely talks about 11 or about himself and his modesty amounts almost to selfeffacement, with none of the superior ways which offend Oriental temperament. He is a kind of self-generating dynamo energizing other people to action, draw- ing from his steady flow of power. It was characteristic that I should know him for a decade, for example, before I learned - from somebody else - that he was one of his country's outstanding heroes, decorated by the former Prince of Wales with half a dozen other New Zealanders for distinguished bravery in action. A bachelor now 42, Alley is descended from line of English and Iriah trail-breakers, who helped settle the United States as well as New Zealand. Two of his great uncles volunteered with the northern armies in the American civil was and one was among the founders of Lincoln, Nebraska. His mother was one of the organizers, and is the only survivor, of the group who won suffrage for New Zealand women. Rewi's own father, a freehold farmer, schoolmaster and amateur 7 385 scientist, fostered much of the progressive legislation of New Zeeland. Devoted to causes, he spent the last 20 years of his life working for rural cooperatives and the "factory farm" in agriculture. He preached a future society that would reconcile the factory with man's necessary contact with the soil. A combination of agriculture and industry would ultimately restore a balance, he thought, between the city and the farm. Practicing what he preached, the elder Alley turned his own lands over to his sons and other youths and made them spend their holiday learning to "work together." He taught them to improvise ways of meeting their own needs, and to experiment with different methods of dividing labor. The result was that they all learned to coordinate mental activity with physical performance - which is perhaps the secret of initiative and self-reliance. He was no bigot or chauvinist, but taught his sons to admire courage and genius in any race. Thus he named the second of his seven children after the Maori chieftain, Rewi To Monipoto, who defeated the Redcoats with guerrilla tactics similar to those used by the American revolutionaries - and by the Chinese today. Once, when To Manipoto was surrounded and pparently faced extermination, the Redcoats sent him a message demending unconditional surrender. The old guerrilla, who regarded the British as thieves and tyrants, replied in one simple but now glorious sentence: "WE will fight on forever and ever!" New Zealanders were proud to make an honorable peace with such a foe. And "We will fight on forever and ever" is perhaps the slogan which best epitomizes Alley's own "fighting industries" in China today. The harsh New Zealand frontier built up in To Menipoto's name sake a physical strength to match that spirit. "A wild hard country," Rewi told me, "with sweeping cold winds that blow through the tussocks and the wild Irishmen among them. Gorse in a blaze of yellow, rabbits by the million, and the swift Oreti river - where as a boy I more than once nearly drowned. But it was a good life. The land was fertile, there was plenty of game. We kids used to spend days -8- 386 living like Indians, trapping and hunting, or catching trout and cooking them on hot stones. I never wore a pair of shoes and sooks till I was sent to a new school in the city - and how I hated them!" "I suppose I inherit my desire to fix things from my mother. She is now 75 but still climbs apple trees to prune them. My grandmother did the same thing at 94. Even today my mother cannot stand to see anything in disrepair. The carbureter on the car, the cream separator, the sewing machine, or the electric motor that pumps the water - she can put any of them right, and cook a meal for 15 people on the side. You will usually find some tramp eating pie in her kitchen - and working it out on the woodpile. She hates waste of any kind - and probably I get that from her, too." From such a home Alley enlisted, with his elder brother who was later killed in France, to enter the first world war. He came out still convalescent from severe wounds and gas, and "glad to return to growing flowers," as he puts it. Before joining up it had seemed to him a grand adventure, but he was now disillu- sioned. Years later he was to discover true adventure at last - in building, not destroying. With an old friend who had been an air pilot in Egypt he next took up a two thousand aoro section in heavy forest, which they cleared for sheep renching. "Eager to forget the war, we worked like any American pioneer, felling bush, putting up fences, making roads and bridges. On borrowed money we bought our cross-bred sheep, and for a while did ensouragingly well. life shot wild pige and other game, we worked out ways of using by-products, and we found plenty of time to read and study. Suddenly the bottom dropped out of the wool market. Our land and our fine sheep became worthless. Wool would not pay for the cost of cartage to town. In the end we tossed hundreds of pounds of wool into the river - while millions of man were in rags elsewhere! The war, I had realized, was an utter and senseless waste of men and the fruits of their toil. Here was the same thing in peace. Why?" Broke and bewildered, Alley gave his half interest in the ranch to his 9 387 partner and set out for the city. Eventually some former war comrades offered him a job as factory inspector in the Municipal Council of Shanghai, and his previous technical training having qualified him for the work he decided to accept. It was a few remove from the limitless freedom of the New Zealand frontier. But here again he was to be confronted with a familier phenomenon, more forcibly than ever before - the orime of waste. Alley found in Shanghai the paradise of the world's most unconscionable brokers in human life. Here were fewer taxes, laws and industrial restrainte than in any great city. Here unserupulous little gangsters with a few machines and the money to run them made as much as 150 percent in annual profits, impos- ing their own hours and wage scales on the luckless boys and girls who came in- to their power. Three-fourths of China's industry was located in this industrial ulcer of the East. Nearly 800,000 workers huddled in the dark tonements and rickety shope to produce goods cheap enough to undersell Japan. Tens of thousands of underfed children, from nine to 15, rarely drew a breath of unpolluted air. Alley see on his rounds hundreds of children suffering from beri-beri and pellagra, and from chemical poisoning, destroying them by degrees. In rooms meant to hold a single family he wew three or four dozen unpaid apprentices slaving 14 hours a day over unguarded machines which frequently clipped off fingers or hands from exhausted operators. often the workers elept on filthy bedding beneath the machines which dominated their lives. Many were literally locked in the factory premises at night. "Tragedy, day after day," he wrote to me once, "and most of it easily avoidable. Rubber plants blown up, and girls' corpaes by the soors. Panic in a cotton mill: all doors barred and many crushed to death. Rows of young girls in silk filiatures standing 12 to 14 hours a day over basins of boiling water, their fingers red and swollen, the overseer behind them with a length of wire, the kids sometimes crying as they work. so much unnecessary secrifice! All for - 10 " 388 20 cents Mex a day. It would be better to have no industry than to compete in this way - bringing children into the cities, starving them, working them longer hours than any horse could stand. Most of the stuff does nobody much good. It goes overseas to lower wage and living standards everywhere." "Factory inspector" had always been a racket in Shanghai before Alley took command as chief inspector seven years ago. Some of his corrupt predeceasors had retired with nest fortunes. But Alley made factory reform a serious business. He travelled to London, to Berlin, to Paris and New York, to study the industrial systems in the most advanced countries. Returning to Shanghai he had new indus- trial regulations adopted and began a campaign to clean up the city. Factory owners had to spend a little money to protect the lives they used, and sometimes to pay for the hospital expenses of injured workers or even to improve their diet. But his authority was very limited. Chinese could be brought to book only in courts full of bribery. Foreigners were protected by extraterritoriality. Progress was ended by the war in 1937. I well remember stumbling through the burnt-out shell of the Shanghai industrial world with Alley after the Japanese occupation. Over 140,000 business and factory buildings and houses were demolished; in Chapei alone five miles were burned. China's main industrial base, such as it was, lay immobilized after but three months of battle. To Alley it was the wreckage of his own decade of effort to inject a little decency into Asiatic industry, and under his terse comments the twisted iron and shattered masonry took on dying breath and body. He knew the personal stories of hundreds of workers and techioians now thrown out of jobs and the life stories of many of the shops. "It wouldn't be so bad," he would dourly observe, "to have demolished this wretched circus, if something better would take its place, That's the worst of it. Japanese conquest means organized degradation on a really efficient scale, doping workers with morphine and heroin instead of giving them wages, and re- ducing life to unbelievable levels of bestiality. Before the war we picked up an average of 30,000 unidentified corpeses from the streets every year. Under the 11 389 Sun Goddess myths the number will be doubled." China was docmed, Alley warned officials and technicians, unless she found a method to mobilise her labor power and resources in a scientific way, eliminating waste of human life and materials, before the New Order of Slevery completely engulfed them. Eventually he himself offered the solution. It was his idea of a now type of production, fitted both to war-time needs and the social structure of China: small decentralized industry spread over the towns and villages instead of concentrated in the cities, industry in which labor and capital could "work together" instead of endlessly conflicting, industry that could not only win the war but also win the peace. Alley became convinced that his plan for Industrial Cooperatives could canbine speedy war-time reconstruction, productive refugee relief to supplant soup kitchens, the training and spiritual mobilisation of labor, and a means of quickly opening up the hinterland to defend it against both military and soonomic conquest. Several basic realities favored the scheme. First, the war blocked off most of interior China, so that domestic industry was for the duration guaranteed an expanding market. Second, China's labor power, with millions of refugees fleeing before the Nipponese hordes, was almost unlimited. Third, the greater part of China's rich resources and FOR materials lay in backward areas not likely to be occupied for years. Government plans ignored some of these fundamentals. Orthodox Chinese economists, trained abroad, could think only in terms of big factories and modern machinery in Chungking and Running and a few cities in the west. Indusco enthusiants, a group of whom soon formed around Alley, argued that China had neither the money nor time nor technical facilities to build big industry. And they prudently advised against too many eggs in one basket, for it was clear that all big industrial concentration would be bombed as soon as the whole country fell within range of Japanese planes. Most important of all, they believed that the preservation of national morals required a balanced production to coordinate 390 12 resistance over the widest possible areas. The Japanese could not bomb every village and farm in China, and it was there that industrial cooperatives would be built. Thousands of them - 30,000 was the goal - camouflaged neatly to fit into the rustic scene. Finally, it was necessary not only to mobilize idle labor and capital quick- ly, but to train and educate labor in its duties of citizenship, to give it a stake in national independence. For this reason Alley insisted on a cooperative plan which involved a kind of partnership between the workers and the owners of capital. In all this he saw more than a war-time measure. He envisaged a healthier industrial life of the future - and perhaps that reconciliation of industry with the fresh air of the countryside of which his father had dreamed. One morning I went with Alley to see the British Ambassador, Sir Archibald Clark-Kerr. He had been interested in the Indusco scheme by one of the younger members of his staff and had asked me to bring on the New Zealander. It was an odd interview and seemed to me to leave everything unsaid, but I suppose it was typically British. Sir Archibald made a judgement of Alley's character in five minutes; from then on he gave his complete support. He staked his reputation and prestige to persuade the Generalissimo and Mme Chiang to adopt the Indusco plan and to engage Alley to carry it out. China's own economic experts were inclined to scoff. The Old China Hands also rediculed it. Chinese "work together"? They were individualists and slaves of the family system. They could not cooperate. But the Generalissimo listened attentively to Alley when, after the Ambassador secured his release from the Shanghai Council, he came to Hankow at the Government's invitation. "The old Chinese guild was a kind of cooperative, "Alley said. "The Chinese family itself is a primitive cooperative. Very well, let us carry over these traditions into industry. In this way we can broaden social consciousness and industry can become part of the natural life of the people." The Generalissimo and Mma.Chiang were impressed. So was Mme. Sun Yat-sen, who 13 391 saw in Indusco the epitome of Dr. Sun's Principle of Livelihood. Her astute banker brother, T.V.Soong, backed the project as a practical method of quickly restoring production, while Alley's Australian countryman, W.H.Donald, the Generalissimo's trusted friend, also fought hard for the plan. As a result Alley got a cautious green light to go ahead, under the direct supervision of the nation's Premier. Never before, I believe, had a foreigner been given such wide responsibility for the actual organization of a socio-economic movement in China. Alley's strategy divides a teritory about the size of Europe into three great "zones of industrial defense" - from very light and even "mobile" front-line industries near or behind enemy lines, to third-line, or rear area primary industry. Built in small compact units these workshops dovelop their own sources of rew materials and power, and their own transport, and operate training schools and marketing organizations. Such a comprehensive plan required for quick success the leadership of able, courageous and patriotic engineers and skilled technicians. Alley mobilized the necessary brain trust from a group of American-returned students, who call themselves the "Bailie-Ford Boys" after the reversed missionary, Joseph Bailie, and Henry Ford, who trained them. old Bailie was an eccentric American who believed that the test of Christian- ity lay in its ability to improve men's livelihood - an idea to which he won a hard-headed convert in Detroit. Henry Ford agreed with him that scientific knowledge, given to youths indoctrinated with a Christian concept of industry, could do more to bring about social progress in Asia than any amount of evangelism. They made an agreement whereby Ford financed a kind of post-graduate facory school, for a number of "ethically conditioned" Chinese graduates of American engineering colleges. Alley had found a bond of sympathy with Bailie and with many Bailie-Ford students. They all hated waste and to them Shanghai industry was wasteful and inefficient from beginning to end. They believed it should not be in Shanghai 14 392 at all, but rationally developed near China's own raw materials in the interior. But these ideas got a poor reception from the bureaucrats and mandarins, and the engineers had little opportunity to practice their principles before the war. After Bailie died Rew1 Alley became a kind of spiritual force holding the group together; from the start he counted on their assistance to make Indusco succeed. These mon and their apprentices from Shanghai started out with little but a common faith and enthusiasm, backed by a small administrative fund from the Executive Yuan. It was Alley's mottoes, "Get things moving", "First things first ", and "Work Together" that prevailed. Rather naive and pathetic in a brutal scene of destruction, they seemed; small wonder that many people smiled at their faith and idealism. But the remarkable thing about this "idealism" was that it produced realistic results. Before long, attracted by the direct non-political methods of this "unorthodox" foreigner, dozens of professional people, returned students and gifted technicians, began to volunteer to work for wages that scareely paid for their food and shelter. Trained minds, disgusted with politicians and bureaucrats, here got a chance to use their brains and their initiative. Alley's spirit of "the new heroism of construction" proved contagious. "The engineer and the educated man," he preached, "can find in the job of bringing industry to the frontier, to the backward province and to the people, the real work of mon - true pioneering. Every undeveloped resource is a challenge to the youth of China: the unused water power, the untouched minerals, the un- trained millions around us - all these are the only means of building better men and women, better families, and a better society. We must realize that to make our own little machines that do the job required is better than sitting with folded hands because we cannot import big modern turbines. We must learn to see the adventure in creative work - and in courage without spurs and pretty uniforms and public notice." Hundreds of youths have now responded, to become organizers and technicians, 15 000 383 and to tackle the tremendous task of educating the people to a new idea. Thousands of skilled craftsmen have been mobilized and thousands of new ones trained from refugees and farmers. Thousands more await only capital to put them to work. At a recent Indusco exibit in Chungking officials were amazed to see the range of articles produced, including virtually every consumer necessity, and representing over 50 different types of industry. Secondary war supplies are being turned out in increasing quantities. Alley promises that Indusco can eventually make China's guerrilla armies self-sufficient in light arms - if it receives the necessary backing. Behind this swift recovery are countless individual expics of the tenacity and ingenuity of hundreds of industrial organizers and adult workers and courageous factory apprentices. Alley himself speaks only of them. But - and this is surely amazing - as I trace back the greatest of those stories I see that scareely one can be told independent of the inspiration and energy of Alley's own personal- ity. He is at once the center of unity and the catalyzer of the whole movement. Try to imagine someone like Lin Yutang as the main coordinator of a new type of mass education in America - and succeeding at it; Alley's role is only alightly less incredible in China, Where other advisors, and most Chinese officials, try to apply theories and mandates from bureaus remote from the people, Alley seeks his solutions by living the job with the man in the field. What's wrong with the match factory in Hunan? It needs an engineering renovation and Alley brings down the right man for the job, Elsewhere certain dyes can no longer be imported. He remembers an old craftsman who know the secrets of the ancient Chinese dyes, and somehow induces him to do the work. In another place he sees refugees starving while tons of strew and bamboo are wasted. A hurried note in Chinese brings an expert in to start a paper industry - and printing and publishing and other shops follow. Is a resourceful lad required to smuggle essential tools past enemy lines to equip a new machine shop? Alley calls upon a whimsical London-born "Cockney" Chinese who, after a 16 394 dozen narrow escapes, reports that he has "outwitted the other swine" to complete the task!. A research institute and a statistical department are needed: appeals roll off the Alley typewriter, between air raids, to mobilize native and foreign talent and money. The project becomes a reality in less time than an official might take to entangle the request hopelessly in red tape. The magnitude of his effort can perhaps best be gleaned from the travels of "this perpetual motion machine", as Clark-Kerr calles him. During the first two years he covered more than 18,000 miles, or a distance about three times the width of the United States. And believe someone who has covered a little of this bomb-torn land, with practically no railways and few motor roads, 18,900 miles is something to boast about! Pedalling bicycles, hitch-hiking from village to village on army trucks, riding an ambulance or a horse into combat zones, but more often stomping along on his own tireless lega, Alley leads the C.I.C. staff to carry the message of "working together" into the fartheat corner of the country. He himself organized many of the existing shops, from those in the guerrilla armies near Shanghai, to Vohammedan spinners and weavers in distant Kansu. And always under skies dark with enemy bombers - who have curried out over 11,000 raids against China, about half of them behind the front. "What is the biggest thrill you've had in those two years?" I asked him one day, expecting to hear of one of his many narrow escapes. But he chuckled and replied: "One winter morning we were leaving a little village on the edge of Mongolia when we heard tinkling bells and stepped aside as a long caravan of camels came out of the mist, their breath turning to frost in the bitter air. As they went by we were amazed to see the lead camel carrying the huge silk banner of Indusco, and our blue and red triangle amblazoned on the big boxes of freight. "It was a camel pullers' cooperative, hauling guerrilla product. The men with me, who had come up from the warm south, suddenly realized they were part 335 17 of something that covered a whole nation. How they cheered those camels as they snorted past into the dawn! Yes, that was a thrill!." The only thing comparable to it, Alley continued, was the welcome he received in a little town in southern Kiangsi. Here he came unexpectedly upon a crowd of crippled soldiers herded into a depressing camp with nothing to do. Now it happened that during the Shanghai war Alley had helped organize these same soldiers in a temporary home, to which he used to take me occasionally to show me some new progress in the line of orthopedics - his idea of an interesting afternoon. "They keep asking for work to do," he would say with the most astounding sense of personal responsibility. "If only we had some shops where they could make things, they could recover their self-respect. The best crutch you can give a wounded man is a job of work to do." And now in Kiangsi be came upon his friends again. They had been waiting for weeks to petition him and already know all about Indusco. Under the skilled men in their midst they organized themselves so well that Alley had little to do but put his technicians to work finding tools and machines and rew material for them, and leaning the necessary capital to add to the tiny sums they had carefully saved from their pensions. Today the crippled soldiers' co-ops are the model workshops of that region, doing printing, bookbinding, weaving, cigarette-making and half a dozen other jobs. "This is the best orthopedics yet discovered," Alley told the generals - who are now taking the hist in other camps. Few Chinese have seen as much of the country at was as Alley has. His journeys take him through spate infested with bubonie plague, relapsing fever, and other optimies. Last year in Kiangsi he came down with typhoid. For a month, during daily air raids, he had to be carried, dripping with fever, from an improvised hospital (in a kerosons store!) to a refuge across a river in the fields. Somehow he came out of it as ubiquitous and energétic as ever. 18 396 During this illness the Generalissimo sent his son Ching-kuo personally to look after Alley, and to inform him that he was "more valuable than a general." The Bishop of Hongkong sent in by plane a foreign specialist to save Alley's life. After sharing the perils and the food there, the specialist came out vowing never again. But for days he went about Hongkong talking of Alley. "A saint," he told everybody in an awed tone of voice. "I went in there and found a saint." Alley let out a hearty roar when he heard that. "What about the 400 million Chinese who have been living the same way ever since the war began?" he asked. "What about the soldiers who can't get a bandage for their wounds? There aren't any saints in this life. There are only people who do the job required of them." But to the Chinese there-abouts Alley is better known as Mr. Big Nose. The story come to me from Alley himself. He was riding in an ancient bus one day when a bearded elder in front of him spoke to the youth alongside. "Chinese make better aviators than foreigners," he said, "they can see on all sides." The youth grinned and asked, "Is that really true?" "True enough," the old man exclaimed. "If you don't believe me just take a look at that Big Nose behind us. Do you mean to tell me a man can see around an obstacle like that?" And he shook his head with profound akepticism. Where such a remark might offend most foreigners Alley knows that no insult is intended and in fact it is in just such simple ingenuousness of the people that he finds his daily "adventure." Once he wrote to me, between air raids, "It's not bad here except for the voracious rats. They keep carrying off my soap, shoes, clothes and papers." I saw him in Chengtu not long ago, far over in western Szechuan. He had just walked back 80 miles from the Tibetan Sungp'an, across moutain trails where few Chinese dare go unaccompanied by armed escort. Not a word of complaint of nights in the filthy inns or the diet of maize and buttered tea; but an outburst of enthusiam about the gold in the streams and the highland sheep - and the Living -19- Budda. He had just won over that god to Indusco. Incredulous, I asked him how he had done it. 397 "The Tibetans still spin their wool with their hands, in the ancient Egyption manner, and the old gentleman had never even seen a modern spinning whell," Alley said. "These is no power there at all and only handicraft industry is possible. I took one of our new wheels with me and it brought him out of his depression. He said he was bored with being a Living Buddha and wanted something useful to do. so we make him head of our first depot in the Sungp'an Valley. Wonderful wool there. In a few years we'll have power and a good spinning industry." But I heard elsewhere that the thing which really converted the Tibetans was Alley's night ride across the narrow moutain trails with the wild horsemen there. He demonstrated his ability to "take it" in the local manner - which consisted of seilling down their torchy brandy, passed from horse to horse on the gallop. Sad lapse in conduct of a saint! On the trail of the Alley adventure, now workshops sprout as behind a sower of wheat. He has a sharp eye for details that everyone else misses. Thus he wrote to me from Kansu: "The industry we are starting here will permeate throughout the whole Northwest. Splendid wool, all we need to equip the army." And then abruptly: "We want a button industry There are still Japanese buttons, tooth brushes and such being sold at terrific prices: overcoat buttons, a dollar a pair! Yet just outside the city the dust heaps are covered with animal bones. I'm getting some expert button and knife makers here to start work. Have to bring them in with my own money - no time for the red tape of a requisition at Chungking. I've spent $12,000 Mex. of my money on this kind of thing, but it has to be done and no time losti" Up in the northern guerrilla districts Alley has several hundred "mobile" industries operating. The "scorched earth" policy has been improved. When, under Japanese attack, Chinese forces temporarily withdrew from a town, industry How goes with them. Organized in compact units, the guerrilla shops can move all their 20 398 machines and operators to safety within a few hours. In a Shanai town behind the Japanese lines Alley not up a printing shop with 600 young men who can shoot as well as set type. Among other things that plant prints a daily paper with a circulation of 30,000. Recently the Japanese invaded the area on a "mopping up" expedition. The whole plant, Alley tells me, was moved by the operators in one night - and the next day's paper Game out on time! It is quaint reports like these that cheer Alley's fighting Irish soul as he tramps across China's backlands, a restless indomitable figure. Hatless and coatless, once away from the official world, his favorite attire is a pair of worn khaki shorts and a brief tunic. It is a figure familiar to hundreds of villages where new wheels and machines turn, and as much the symbol of Indusco as the little triangle that hangs over the thresholds of 2,400 workshops, their hospitals, schools and clubhouses - and their training centers, for refugees and orphans, which are closest to Alley's heart. Production value has at this writing renched a rate of about Ch. $150,000,000 annually. New capital of $40 millions was recently made available by Chinese banks, at last convinced of Indusco's comercial success in light industry. Alley predicts that if further necessary help is forthooming production will reach a figure of a billion dollars annually within three years. "The war has taught China that she must industrialize in a decent way or perish as a slave or coolie nation. Demoreratic cooperative industry is the way out not only for China but for all the backward Oriental countries, if they want to avoid disastrous class wars. with the general rise in living standards and purchasing power that this type of industry can bring - and the principle can be applied to all kinds of production - there will be more security for labor in the industrialized countries of the West. It is the only sensible way to industrialiso the Orient because it raises Asiatic living standards, by doing away with slave labor-- instead of compelling us to lower our standards to compete with theirs." 21 339 With his demonstration that these ideas will work, Alley has become an international figure and Indusco is being closely studied by other Oriental leaders. Jewarhalal Nehru, India's No. 2 Nationalist, flow to Chungking for his first official visit - before he was recently incarcerated. When he stepped from the plane the man he asked for was not the Generalissimo - but Rewi Alley. Not long afterward a Burmese delegation, after a study of Indusoo, returned to Rangoon to recommend a similar method of industrializing. From England came Sir Stafford Cripps, the famous labor barrister, who studied Alley's work and urged that the idea be applied in India. Over in our own Philippines, about to be out adrift from America, Nacionalists planners have modified earlier ideas of industrialization to work out a scheme influenced by Indusco in China. Who can say that in the end Rewi Alley's achievement may not prove of more lasting benefit to mankind than the current battles of empire - may not, in fact, be the most constructive result of the battle for Asia itself? As for Alley, he says the effort has only begun. "It isn't what we have done, but what we can yet do," he keeps repeating. "Our goal is still 30,000 workshops fitted into the background of the vast landscape of rural China. When we reach it the Japanese will then roll up their funny little swords in their bedding mats and take themselves back home and begin copying China again." Measured by American standards all the industry of China is small change indeed and its problems bear little resemblance to ours. But measured against the emergenoy needs of its own people Indused looms large the valley of hope between survival and extinction. Judged against the difficulties already over come the experiment surely stands as a living monument to a great people's courage and resourcefulness and its apparent readiness to "fight on forever and ever!" And to one man in particular, who loves human life as much as he hates waste, and admires work above all things. Which is, I suppose, why Alley likes to call himself - "China's Number One White Coolie": November 5, 1940 WITH THE COMPLIMENTS OF HAROLD K. HOCHSCHILD Copy of Letter from B, Mexico City, December 11,1940 400 fee The inauguration festivities over, we are gradually drifting back to normal and the new Secretaries of State are beginning to show activity. Our guests of honor have partly returned to their respective countries or are still here enjoying a rest, as in the case of Mr. Wallace, who is spending some time on the Michoacan Ranch of his friend Ing. Vazquez del Mercado. It is stated that Mr. Wallace intends to remain in Mexico for several more weeks. He has made several official calls before starting for Michoacan, and has had some intimeteconversation also with the new President. The first problem to be tackled by the new Secretary of Economy was that of the severe power shortage existing in this central section of the country. A reduction in power consumption was imposed on consumers as follows: Mining and milling 10%; other industries 20%; Mexico City street cars 7% General voltage reduction of 5% Suspension of power and light service during Sundays. Clocks were set one hour ahead beginning last Monday, and ornamental and street lighting to be turned off at 10 PM. Office hours at Government Offices are from 9 to 4. With these restrictions there is a faint hope to tide over until the next rains, which will not come until June. The statements made by the new Secretary on the subject are far from encouraging and it is possible that we shall have to face worse conditions at a later time of the dry season. The blame goes to previous administrations, which in spite of their knowledge of these conditions have done nothing except talking, writing and planning. A problem as old as this one could have been disposed of intelligently for some time, considering that millions of pesos have been collected by the Government for the purpose during the last few years in form of a 10% surtax on all power and light bills. Everybody is now hoping that the new Government will do something to definitel remedy the situation, which for years has been a serious setback for this whole section, where no new industries could be installed or old ones expanded for lack of power. The Secretary of Communications is reported to have submitted to the President a project whereby the Administration of the National Railroads will be taken away from the Labor Union to be turned over to a new administration, which is to be formed by representatives from the Govern- ment (Economia, Hacienda and Comunicaciones), the Labor Union and the Chambers of Industry and Commerce. Everybody, inside and outside of the Government, is convinced that a change in the administration of the Railroads is imperative. The utter lack of discipline in the Union has brought about such disastrous results that the Union itself is at the end of their wits. They only saw salvation in endless increases of fréi rates, and they made a last strenuous effort to obtain authorization for new increases a couple of days before the old Government ended its term. As we had expected, this endeavor died a natural death. We however, that something will be done about the Railroads, and a believe, like the one of which we spoke above would seem quite acceptable, on scheme account of the different counterweights provided by such a wide repre- sentation. From the Labor Department comes word that the new head of the De- -2- 401 partment will soon take a hand in pending matters, amongst which the Rosita strike and the Real del Monte contract discussions are of major importance. While nothing has been done so far, one of the Real del Monte lawyers told us that the Union had adopted a much softer attitude since the change of Government. In regard to Finances, the Government's overdraft with the Banco de Mexico will be covered by a bond issue. And other new bond issues are under consideration. The exchange seems pegged at 4.85. 402 THE COMMANDANT GUARD TO TREASURY DEPARTMENT AC-606 601 UNITED STATES COAST GUARD HEADQUARTERS WASHINGTON 11 December, 1940 MEMORANDUM FOR ASSISTANT SECRETARY GASTON: The Norfolk District reports that at about 12:40 p. m., Eastern Standard Time, Tuesday, 10 December, 1940, the Navy submarine S-25 passed the Coast Guard Cutter CALYPSO off Cape Henry, Virginia. The S-25 semaphored and asked the CALYPSO when she was going in - that she had some mail she wanted to send ashore. The CALYPSO replied by semaphore that she would be able to send mail ashore in the very near future. The S-25 semaphored back that she would like to send her mail in. The two vessels were about 500 yards apart when semaphoring. The CALYPSO said she would send a boat over to the submarine for the mail, but the S-25 semaphored not to send a boat - that she would put mail on board with a heaving line. The CALYPSO semaphored she would stop and let the submarine do all the maneuvering. From that time on the CALYPSO remained hove-to dead in the water. The submarine circled to come up on a converging course, that is, to the leeward. The CALYPSO was lying in the trough of the sea as the submarine approached. Apparently the submarine went right rudder instead of left. The CALYPSO heard the commanding officer of the S-25 say full left. At that time the CALYPSO realized that the submarine was going so fast that it would hit the CALYPSO. Full speed ahead was rung up on the CALYPSO with full left rudder, attempting to swing stern away from the submarine. The submarine's bull nose struck the CALYPSO amidships at frame 40, starting in three frames, including a deep frame, tearing away one plate from the frame and driving in 4 or 5 rivets in the oil tank. All of this was about three feet above the waterline. Oil is leaking both inside and outside and there is a hole about a foot long and 2 or 3 inches deep on the port side of the engine room. The submarine came out clear and apparently suffered no damage. The commanding officer of the submarine reported no damage and asked what damage the CALYPSO had sustained. The CALYPSO advised the S-25 and reto quested her to standby. Realizing that the damage was not sufficient disable the CALYPSO the submarine was advised by the CALYPSO that no further assistance was required. The commanding officer of the S-25 semaphored his regrets and requested that CALYPSO advise him by letter as to 403 what damage was sustained by the CALYPSO. The S-25 then stood out to sea from Cape Henry. The CALYPSO then proceeded slowly to District moorings at Berkeley, Virginia, without taking water, where Captain Ker was waiting to look at the damage and make a report. L. &. COVER Acting Commandant Helervell