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144 January 22, 1941. Dear Mr. Franks I - enclosing a letter which has been received by the Secretary of the treasury from Mr. Walter L. Morgan, President of the Wellington Fund, Incorporated. Canden, New Jersey. AS Mr. Morgenthan's direction. I - forwarding this for any action you may earn to take. Sincerely yours, (Signed) H.S. Klotz H. S. Klots, Private Secretary. Menerable Jereme N. Frank, Chairman of the Commissioners, Securities and Exchange Commission, Washington, D. 0. Inclosure. 145 January 22, 1941. Dear Mr. Frenks I - enclosing a letter which has been received by the Secretary of the Treasury from Mr. Walter L. Morgan, President of the Wellington Fund, Incorporated. Ganden, New Jersey. AS Mr. Norgenthau's direction, I - forwarding this for any action you may care to take. Sincerely yours, (Signed) H. S. Klotz H. S. Klots, Private Secretary. - Reservable Jereme N. Frank, Chairman of the Commissioners, Securities and Exchange Commission, Weekington, D. C. Inclosure. 146 January 22, 1941. Dear Mr. Franks I - enclosing a letter which has been received by the Secretary of the Treasury from Mr. Walter L. Morgan, President of the Vellington Fund, Incorporated, Camden, New Jersey. AS Mr. Norgenthau's direction, I am forwarding this for any action you may care to take. Sincerely yours, (Signed) H.S. Klotz H. S. Klots, Private Secretary. - Renerable Jereme N. Freak, Chairman of the Commissioners, Securities and Technology Commission, Washington, D. C. Reclosure. 147 WELLINGTON FUND, INC. A Mutual Investment Fund 645 Market Street Camden, New Jersey. January 14, 1941. Honorable Henry Morgenthau, Secretary of the Treasury, Washington, D. C. Dear Sir: I have been reading in the public press that you have been an intermediary in bringing together representatives of investment trusts and representatives of the British government with a view towards the possible purchase of British securities by an investment trust group. Wellington Fund is one of the smaller investment trusts. Nevertheless, it occurred to me that as these negotiations develop. Wellington Fund might well participate in event that certain British securities are available for purchase at what would prove attracive prices for shareholders. I would welcome the opportunity to participate in such a group and if you would be good enough to advise whom I might contact in this connection, I would appreciate it. Respectfully yours, (Signed) Walter L. Morgan President. PLAIN 148 LONDON Dated January 22, 1941 Rec'd 5 a.m. Secretary of State, Washington. 230, January 22. One. Two agreements were signed yesterday by the United Kingdom and Belgium concerning the Belgian Congo and Ruanda Urundi. The texts, which will appear in a white paper, will be forwarded shortly. Two. Under the purchase agreement the United Kingdom agrees to purchase, between September 1, 1940 and August 31, 1941 the following goods (including quantities already purchased during the elapsed portion of that period): 126,000 metric tons of copper, 20,000 long tons of cotton, 7,000 long tons of copal, 15,000 long tons of palm kernels, and all available supplies of palm oil (at least 15,000 long tons "of a quality not in excess of 6 percent free fatty acid".) The above cuantities are minima; other products are not precluded; and the United Kingdom will give "sympathetic consideration" to import license applications covering Belgian Congo goods, "consistent with the restrictions and limitations imcosed on them by the united war effort of the two contracting parties and in particular cotton if shipping space becomes available." Tin ore purchases are to be maintained at present level when existing contracts expire. The United Kingdom "will consider in March 1941 the possibility of purchasing sugar from the Congo." Purchases shall be made "at prices ruling in competent markets", subject to special arrangements for copper, palm kernels and oil. The United Kingdom will take steps so that the Congo products covered "shall not be placed as a result of customs duty in a position less favorable than British coloniel products." The Belgian Congo will enact legislation against commercial and financial transactions with "the enemy"; and their exports "will continue to be controlled for blockade purposes by a licensing system, coordinated in policy and practice with the system at any time prevelent in the British colonies in Africa." Because of Belgium's contribution of her merchant ships to the Allied pool, the United Kingdom will "do their utmost" to provide shipping space for connodities purchased, and on Belgian ships where possible. Three. Under the financial agreement, which brings the Congo into the sterling area, there is established an official rate of 176.625 Congolese france to the pound sterling; and the Congo monetary authorities' quotations "for currencies other then sterling shall be based on the official middle rate for the Congolese franc against sterling and the official buying and selling rates quoted in London for that other currency against sterling." The Congo is to have the necessary quantitative import control measures, while the United Kingdom guarantees to supply Congo needs from within the sterling area, or to provide means of payment to acquire goods not available in sterling area"on same terms as to British importers." The United Kingdom is to "take the necessary measures to ensure that the Congo shall be treated as a member of the sterling area for exchange control purposes." Please inform Treasury. EMB ch:copy JOHNSON 149 PLAIN KD London Dated January 22, 1941 Rec'd. 12:14 p.m. Secretary of State, Washington. 243, 22nd. An agreement relating to the French Cameroons, to be followed shortly by one relating to French Equatorial Africa, has been concluded with General de Gaulle's Council of Defence under which the British Government undertakes to purchase the total output of cocoa, palm kernels, palm oil, peanuts and beniseed, nearly the whole coffee output and a large part of the banana crop. A separate agreement on timber is foreshadowed. The rate of exchange is fixed at 176.625 francs to the pound. The TIMES notice of this announcement also states that "the British Government are already implementing their pledges of economic assistance to any French oversea territories which rally to the free French movement." Please inform Treasury. JOHNSON. TFV eh:copy 150 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Rio de Janeiro, Brazil January 22, 4 p.m. DATE: NO: 45 There is increasing interest being shown by European countries in holding dollar balances particularly in futures in the Bank of Brazil. The deposit of 10,000,000 of the Italian Government was traded yesterday for 3 to 6 months dollar futures. Half a million dollars was deposited today by a Swedish private bank. Half a million dollars was deposited yesterday by a Portuguese private bank. Yesterday 2,000,000 sight dollars were exchanged for future dollars by the Yokohama Specie Bank for delivery by the Bank of Brazil in one month. The recent deposit of 500 kilograms of gold by the French Embassy in the name of the Bank of International is Settlements was made on behalf of the Bank of France. M9 BURDETT RA:JSH 151 DELIVERIES OF AIRPLANES, BY PURCHASERS AND BY TYPES OF PLANES January 1, 1940 - January 18, 1941 Bombers Pursuite Trainers STRICTLY CONFIDENTIAL Other military Consercial planes planes Total TOTAL ALL PURCHASERS Jan. 1 July 6 July 7 July 20 July Aug. Aug. Aug. 17 589 946 630 108 420 2,693 AUR. 18 Aug. 31 Sept. Sept. 14 Sept. Sept. 28 Sept. Oct. 12 Oct. Oct. 104 116 206 419 Oct. 26 Nov. Dec. 10 113 134 Dec. Jan. Jan. 300 28 25 Jan. 18 97 Subtotal July 7 - Jan. 18 Total Jan. 1, 1940 - Jan. 18, 1941 701 1,320 2,167 97 637 4,922 1,290 1,950 3,113 205 1,057 7,615 50 532 ARMY Jan. 1 July 6 34 681 65 July July 20 July Aug. AUR. Aug. AUR. 18 Aug. Sept. 14 124 12 Oct. 14 112 10 110 Oct. Nov. Nov. Dec. Dec. Jan. Jan. Jan. 18 Subtotal July 7 - Jan. 18 Total Jan. 1, 1940 - Jan. 18, 1941 98 289 78 112 999 1,531 339 16 1,382 81 2,063 NAVY 42 3 Jan. 1 July 6 July 7 July 20 July 21 Aug. Aug. Aug. Aug. 18 Aug. 31 Sept. 1- Sept. 14 92 176 39 2 Sept. 15 Sept. 28 Sept. 29 Oct. 12 Oct. 13 Oct. 26 13 12 37 Oct. 27 - Nov. 9 Nov. 10 - Nov. 23 Nov. Dec. Dec. Dec. 10 11 Dec. 22 Jan. Jan. 5 Jan. 18 Subtotal July 7 - Jan. 18 Total Jan. 1, 1940 - Jan. 18, 1941 115 103 85 145 91 500 384 364 79 634 456 118 810 BRITISH EMPIRE AND FRANCE* 203 2 Jan. 1 July 6 July 7 July 20 July 21 Aug. Aug. Aug. 17 10 1,099 118 Aug. 15 Aug. 31 Sept. Sept. Sent. - Sept. 25 5) Sept. 29 Oct. Oct. 13 Oct. 26 124 69 73 Oct. - Nov. : Nov. 10 - Nov. 2) Nov. - Dec. 7 Dec. Dec. 112 126 152 166 Dec. 22 - Jane Jan. 5 Jan. 18 Subtotal July 7 - Jan. 18 Total Jan. 1, 1940 - Jan. 15, 1941 148 481 852 961 1,236 13 193 446 31 41 649 1,812 2,911 OTHER Jan. 1 July 6 July July 119 410 737 July Jan. Jan. 18 Subtotal July 7 - Jan. 16 Total Jan. 1, 1940 - Jan. 15, 1941 358 39 52 264 477 office of the Secretary of the Treasury Division of Research and Statistics, under French contracts were made up to June 30. 1940. 606 1,016 1,094 1,831 JANUARY 22, 1941. 152 BRITISH EMBASSY, WASHINGTON, D.C. PERSONAL AND SECRET. 22nd January, 1941. 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, Hark Bother The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. 153 Telegram from London of January 21. 1941. 1. Naval. During second air attack on Malta on January 19th the "Illustrious" sustained serious damage from near-misses. Port engine and one boiler-room out of action - second boiler room damaged and ship holed on both sides. No further casulaties. 2. A British ship (7,200 tons) bound for Alexandria was torpedoed in the Gulf of Athens on January 19th. It is hoped that she has reached Piracus. 3. Search for "Zealandic" and "Almeda star" has been abandoned. 4. Royal Air Force. January 20th and night of January 20th/21st. All operations cancelled owing to weather. 5. Ethiopia. On January 18th five bombers attacked grounded aircraft on Italian landing ground and on the night of January 18th/19th the submarine base at Massawa and a concentration of mechanised transport in Cassala sector were bombed. S. Albania. on January 19th six Blenheims attacked mechanised transport and military targets at Berat and started fires. 7. German Air Force. January 20th. Enemy activity consisting mainly of roconnaissance off our coast. only 10 aircraft come inland. Night of January 20th/21st. No enemy activity reported. / 8. 154 -2Aircraft casualties in operations over and from British Isles: 8. Enemy: by A.A. night of January 19th/20th. 5 destroyed. 1 probable. 2 damaged. British: Nil. 9. Home Security. Swansea. Night of January 17th/18th. Casualties now reported as 53 killed and 34 seriously injured. CONFIDENTIAL Paraphrase of Code Cablegram Received at the War Department 155 at 8:04, January 22,1941 London, filed 13:30, January 22, 1941. 1. Neither the Bember nor the Coastal Comuand conducted any operations from the British Iales during daylight hours of January 21 or the following night. 2. Throughout the daylight hours of January 21 German air. craft activity over the British Isles was widespread, consisting mostly of single planes operating over the coastal area from Canterbury as far north as Kings Lynn. There was one small attack on the Firth of Forth and three alerts in London. There were no enemy operations that night. 3. It is now reported that during the night of January 19-20 German plane lesses were five confirmed, one probable and two damaged, all by antiaircraft fire. 4. British aircraft based in Egypt carried out a heavy bembardment on Tobruk and ground forces entered the fortifications about the town during the early morning hours of January 20. That night British planes bembed the airdrens at Catania, Sicily, dropping 2,000 incondiary and 11 tens of high explesive bombs. Very large fires were started and seven Ital ian aircraft were destroyed on the ground. During the day and night of January 20 the British bembed Valona, Albania, twice, setting fires and causing explosions. During all of those operations no British planes were lost. 5. In the Central Mediterranean there were small raids on the airdrom and harbor at Luga during the 20th and 21st. There have been no reports of damage. There were also small daylight raids during the 20th on Pirasus, Greese, and an airdrens in Crate. CONFIDENTIAL 156 CONFIDENTIAL 6. During the second daylight air attack on Malta on January 19 the British aircraft earrier ILLUSTRIOUS received further serious damage. On the same day a 7,000-ten British merchant vessel was terpedoed in the Gulf of Athens. 7. The British will soon put into effect an industrial registration by age groups, thus making a list of workers available for national industrial service. 8. The Government has suppressed the publication of The Week and The Daily Worker, both Communist papers, and last night operators from Seotland Yard raided their offices. SCANLON Distribution: Secretary of War State Department Secretary of Treasury Asst. Secretary of War Chief of Staff War Plans Division Office of Naval Intelligence AC-2 C.A.C. G-2 CONFIDENTIAL 157 RESTRICTED M.I.D., W.D. G-2/2657-220 No. 298 January 22, 1941 12:00 M. SITUATION REPORT I. Western Theater of War. 1. Air Force Operations. Bad weather prevailed. No important offensive operations on either side. German. Considerable daylight reconnaissance activity over England on the 21st. II. Greek Theater of War. 1. Ground. Strong local Italian attacks reported. Air. The Italians bombed four Greek towns outside the combat zone, including Saloniki. 2. III. African and Mediterranean Theaters of War. 1. Ground: Libya. The British launched their attack on Tobruk early on the morning of January 21, 1941, and by noon their troops, actively supported by the Royal Navy and Royal Air Force, had pene- trated the outer and inner defenses to a depth of over five miles on a broad front. Fall of Tobruk, garrisoned by two divisions, is probable, but is not yet confirmed. Sudan. In the Kassala area, the British troops are vigorously following up Italian forces which are continuing their withdrawal eastward into Eritrea. British pressure continues in the Metemma (Gallabat) area. Kenya. Patrol activity continues on the frontier. 2. Air: Libya. The R.A.F. attacked Tobruk continuously. Note: 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. RESTRICTED 158 January 23, 1941 Mr. Cochran Secretary Morgenthau It is entirely agreeable to me that the English release the publicity on Sir Edward Peacock any time they want to. I will leave the matter entirely in your hands. However, please inform Ferdinand Kuhn so that he will know about it. Confidential for Merle Cochran I read your memorandum about your conversation 1-22-41 with Mr. Gifford. I agree with him that that market seems a little bit weak, and I would be more than willing to see him stop selling stocks entirely for the rest of this week and see whether or not the British selling has been the cause of depressing our market. Please let me know what Gifford's reaction is to my suggestion. However, it really is his suggestion and I am simply concurring in what he himself has suggested. I only think that if he is going to refrain from selling that he do it for the balance of the week. author 1-23 159 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 23, 1941 Secretary Morgenthau FROM Mr. Cochran In accordance with the instructions given me in your memorandum of January 23 and in our conversation at 9:05 this morning, I telephoned Mr. Gifford and gave him at 9:20 this morning your idea with respect to selling of stocks for the remainder of the week. Mr. Gifford was happy to know that you concurred in his opinion with respect to the market. He told me that yesterday he had consummated a distribution sale and has one of these special transactions arranged for today in the Boston area. Since the plans are all made, he feels that he should go ahead and complete this. He will. however, see to it that no new transactions are carried out for the balance of the week. Mr. Gifford told me that he had rather plenned on greeting Sir Edward Peacock on his exected arrival tomorrow. but gladly accepts the invitation of the Secretary to come to the Treasury for a conference at 11 a.m. I have asked Sir Frederick Phillips and Mr. Pinsent to be present at the same hour, explaining that Mr. Gifford will be here. BMX 160 THE UNDER SECRETARY OF THE TREASURY WASHINGTON January 23, 1941 MEMORANDUM FOR THE FILES: Subject: Conference in the Secretary's Office at 9:30 A. M., January 23, 1941, concerning legislative program for increasing the debt limit, eliminating the earmarking of tax receipts for debt retirement purposes, and making provision for taxing income from all future issues of Federal securities. Those present besides the Secretary were the Secretary's father, Senators Barkley, Harrison, and George; Speaker Rayburn; Congressmen Doughton and Cooper; Assistant Secretary Sullivan, Mr. Foley, and Mr. Bell. The first matter discussed was the debt limit. Each person present was given a copy of the statement marked "Exhibit I," attached hereto, which gave the estimate of the public debt as contained in the 1942 Budget. This memorandum sets out the Treasury's program for the next eighteen months. There was a general discussion of the amount at which the debt limit should be fixed and there was also a general discussion as to the policy of repealing that provision of the Revenue Act of 1940 which earmarks the debt limit for National Defense purposes only and sets up a special fund into which earmarked taxes are deposited for the purpose of retiring any of the securities issued under the National Defense limitation. Senator George asked the Secretary what amount he had in mind at which the debt limit should be fixed. The Secretary said that he was willing to leave that to Congress, but pointed out that he had had a conference early in December with certain representatives of the Senate Finance Committee at which time the debt limit came up. Senator Byrd said at that time that he would go along with the Secretary on the debt limit if the amount were confined to the appropriations actually made by Congress in excess of the receipts expected during the two fiscal years under consideration. The Secretary asked me to explain just what amount would be arrived at on the basis of Senator Byrd's suggestion. 161 -2I presented a statement with the explanation that taking all appropriations which Congress has made to date, plus the estimates of appropriations included in the 1942 Budget, less the estimated receipts for the two fiscal years 1941 and 1942, the debt limitation would be fixed at $62,786,000,000. I added that this did not include any amount for supplemental appropriations which the Budget stated would be sent to this Congress, and which might amount to as much as $3,000,000,000; and that it did not include anything for the Lease-Lend Bill now before Congress. There was a great deal of discussion as to whether the limit should be fixed at $60,000,000,000 or $65,000,000,000. The group was told that the $65,000,000,000 debt would in all probability carry the Treasury through the fiscal year 1942, including supplemental items and aid to Great Britain: and that if additional taxes are not provided to cover the increased expenditures for 1943. the Treasury will certainly have to ask for another increase in the next session of Congress. I believe that it was generally agreed that the amount of the debt limit should be fixed at $65,000,000,000 without any partitions. Mr. Doughton asked if the Treasury had in mind recommending additional taxes. The Secretary said he thought there should be additional taxes passed at this session of Congress. Senator Barkley said he thought the time was propitious for another tax program as the country was alive to the necessity for increased national defense and that apparently it is willing to pay for it in the form of additional taxes. Congressman Doughton said he agreed with that in general but he also thought there was a strong sentiment throughout the country that expenditures for governmental functions other than national defense should be radically curtailed and that he thought Congress would be severely criticized if it levied additional taxes and did not take some steps to reduce non-defense expenditures. Almost every one present agreed with this statement. Another statement, marked "Exhibit II" and attached, was then passed around to the group. This statement explains the bill drafted in the Treasury with the amount of the debt limitation left blank. Mr. Doughton asked if this bill had been gone over by Mr. Beaman. The Secretary said it had not, that it was drafted in the Treasury for our own information and the information of this group but we would be glad to turn it over If to Congressman Doughton, who in turn could have Mr. Beaman go over it. the General there were any questions he might want to ask, he could come to Secretary. Counsel of the Treasury or Congressman Doughton could call the would The group was told that included in this bill is a provision which that the tax the income from all future issues of Federal securities and would question of reciprocal taxation on State and municipal securities be presented in a separate bill. I then passed around the statement marked "Exhibit III," attached, which is the other part of the program. of There great deal of discussion about the advisability Federal securiincluding in was the a debt limitation bill the provisions to tax ties. The Secretary made the point that we contemplate issuing approximately 162 -3$17,000,000,000 of Government securities in the next eighteen months and said he could not think of a more appropriate time to begin taxing income from Government securities than now. He thought it would certainly be bad if we issued this large amount of additional securities and then passed a law taxing income from subsequent issues. Senator George said there was no doubt that the more securities we issued bearing the taxexemption privileges, the greater the problem would become. The Secretary also pointed out that he discussed this matter rather thoroughly with representatives of Congress in December and explained that if there was any chance of his getting this legislation through early in the session, he would not borrow as much cash as he then needed and would not refund the March maturities amounting to $1,222,000,000, but would wait and issue these additional securities under the new legislation and would make them taxable. Everybody seemed to agree to that program as he then presented it, and advised him to go ahead on that basis. The Secretary said it might also be pointed out in this connection that if he had gone ahead in December, the rate would have been much lower than that at which he could refund at the present time. It was finally agreed that the taxation for Federal securities should be left in the debt limitation bill and an attempt would be made to get it through, and it would be explained to the Committee that the counterpart of this bill taxing State and municipal securities would be a separate question; that it would come along later, at which time it could be thoroughly debated in Congress. It was left that Congressman Doughton, after Mr. Beaman had been over the bill, would introduce it and that we would probably begin hearings on it on Wednesday of next week. swif 163 TREASURY DEPARTMENT WASHINGTON Exhibit January 22, 1941 PUBLIC DEBT The Budget document shows, based on the program set out therein, that the gross public debt will be $49,157,000,000 on June 30, 1941, and $58,367,000,000 on June 30, 1942. These two figures do not include the amounts of future accruals on Savings Bonds, nor is any provision made for contemplated aid to Great Britain. According to Treasury estimates, the balance of the borrowing authority under the combined debt limitations of $49,000,000,000 will be exhausted in May of this year. It will, therefore, be necessary for the Congress to grant an immediate increase in our debt limitation and it should at the same time eliminate the partition between the general debt limitation and the National Defense debt limitation, and repeal the provisions of the Revenue Act of 1940 which set up a special fund into which earmarked taxes are being deposited for the purpose of retiring, over a five-year period, any outstanding National Defense securities. The amount of the debt limitation should be fixed at whatever figure Congress determines to be necessary to permit the Treasury to finance within the next eighteen months any program enacted for our own national defense as well as for aid to Great Britain. The following table shows the Treasury's financing problem 164 -2for the next eighteen months based upon the present Budget program (exclusive of Savings Bonds, Treasury Bills and Trust Funds): January June, 1941 July, 1941 June, 1942 Total (In millions of dollars) Treasury: New cash Refundings $ 3,500 $ 6,750 1,726 1,464 560 1,000 $ 10,250 3,190 Governmental Corps. : New cash Refundings - $ 5.786 1,678 1,560 1,678 $10,892 $ 16,678 165 TREASURY DEPARTMENT WASHINGTON January 22, 1941 Exhibit II Explanation of the proposed bill to amend the Second Liberty Bond Act, increasing the public debt limitation, and for other purposes. -000- There is attached a draft of a bill relating to the public debt and the status of future Federal obligations from the standpoint of exemption from taxation. The bill entitled "A Bill To amend the Second Liberty Bond Act, as amended, and for other purposes," would accomplish the following objectives: (a) The amount of the limitation in the bill is left blank, It should be fixed at whatever amount is determined to be necessary to enable the Treasury to finance any program enacted by Congress for the next eighteen months, including any aid to Great Britain. This new limit would not, of course, include guaranteed obligations issued by the Reconstruction Finance Corpora- tion and similar agencies. (b) It would give the Secretary of the Treasury greater and more flexible authority over Savings Bonds as a financing medium by giving him discretion (1) to 166 -fix their denominations, (2) to determine the aggregate face amount which may be held by one person at one time, and (3) to issue them on an interest-bearing as well as a discount basis. (c) It would authorize the Secretary of the Treasury to issue, in the same manner as Savings Bonds are issued, a new obligation similar to the old Var Savings Certificate called a "Treasury Savings Certificate." (d) It would eliminate the partition between the general debt limitation of $45,000,000,000 and the National Defense limitation of $4,000,000,000, and would repeal that section of the Revenue Act of 1940 which earmarks certain taxes levied under that Act for the purpose of retiring, over a five-year period, any National Defense obligations issued under the National Defense debt limitation. (e) It would remove from all Federal obligations (including those of corporations and other agencies of the Government) issued in the future the privileges of exemption from Federal taxation which they now enjoy. 167 A BILL To amend the Second Liberty Bond Act, as amended, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the Public Debt Act of 1941. Sec. 2. Section 21(a) of the Second Liberty Bond Act, as amended, is hereby further amended to read as follows: "Sec. 21. The face amount of obligations issued under the authority of this Act shall not exceed in the aggregate outstanding at any one time." Sec. 3. Section 22 of the Second Liberty Bond Act, as amended (U.S.C., title 31, sec. 757c) is hereby amended to read as follows: "Sec. 22. (a) The Secretary of the Treasury is authorized to issue, from time to time, through the Postal Service or otherwise, United States savings bonds and United States Treasury savings certificates, the proceeds of which shall be available to meet any expenditures authorized by law, and to retire any outstanding obligations of the United States bearing interest or issued on a discount basis. The various issues and series of the savings bonds and the savings certificates shall be in such forms, shall be offered in such amounts, subject to the limitation imposed by section 21 of this Act, as amended, and shall be issued in such manner and subject to such terms and conditions consistent with subsections (b), (c), and (d) hereof, and including any restrictions on their transfer, as the Secretary of the Treasury may from time to time prescribe. "(b) Savings bonds and savings certificates may be issued on an interest-bearing basis, on a discount basis, or on a combination interest-bearing and discount basis and shall mature, in the case of bonds, not more than twenty years, and in the case of certificates, not more than ten years from the date as of which issued. Such bonds and certificates may be sold at such price or prices, 168 -2 and redeemed before maturity upon such terms and conditions IS the Secretary of the Treasury may prescribe: Provided, That the interest rate on, and the issue price of savings bonds and savings certificates and the terms upon which they may be redeemed shall be such as to afford an investment yield not in excess of three per centum per annum, compounded semiannually. The denominations of savings bonds and of savings certificates shall be such as the Secretary of the Treasury may from time to time determine and shall be expressed in terms of their maturity values. The Secretary of the Treasury is authorized, in his discretion, at any time or from time to time, by regulntion to fix the amount of savings bonds and savings certificates that may be held by any one person at any one time. "(c) The Secretary of the Treasury may, under such regulations and upon such terms and conditions as he may prescribe, issue, or cause to be issued, stamps, or may provide any other means to evidence payments for or on account of the savings bonds and savings certificates authorized by this section, and he may, in his discretion, make provision for the exchange of savings certificates for savings bonds. "(d) For purposes of taxation any increment in value represented by the difference between the price paid and the redemption value received (whether at or before maturity) for savings bonds and savings certificates shall be considered as interest. The savings bonds and the savings certificates shall not bear the circulation privilege. "(e) The appropriation for expenses provided by section 10 of this Act and extended by the Act of June 16, 1921 (U.S.C., title 31, secs. 760 and 761), shall be available for all necessary expenses under this section, and the Secretary of the Treasury is authorized to advance, from time to time, to the Postmaster General from such appropriation such sums US are shown to be required for the expenses of the Post Office Department, in connection with the handling of bonds, certificates, and stamps or other means provided to evidence payments. "(f) The board of trustees of the Postal Savings System is authorized to permit, subject to such regulations as it may from time to time prescribe, the withdrawal of deposits on less than sixty days' notice for 169 -3- the ur one of acquiring savings bonds and savings certificates which may be offered by the Secretary of the Tressury; and in such cases to make payment of interest to the date of withdrawal whether or not regular interest payment date. No further original issue of bonds authorized by section 10 of the Act epproved June 25, 1910 (U.S.C., title 39, sec. 760), shall be mode after July 1, 1935. "(g) At the request of the Secretary of the Treasury the Postmaster General, under such regula- tions 8 he may rescribe, shall require the employees of the Post Office Department and of the Postal Service to perform, without extra compensation, such fiscal gency services as may be desirable and practicable in connection with the issue, delivery, safekeeping, reden tion, or payment of the savings bonds nd savings certificates, or in connection with any stamps or other means provided to evidence payments." Sec. 4 (a). Notwithstanding any other rovision of law all obligations issued under authority of the Second Liberty Bond Act, as amended, and all oblinations which by their terms bear interest or which are sold on a discount basis issued under authority of any other law by any instrumentality, corporation or agency of the United States or by any other corporation or entity created by, organized under, or established pursuant to authority contained in, any Act of Congress shall, as to both principal and interest or other increment, be subject to all taxes now or hereafter imposed by the United States: Provided, That any such obligations which the United States or any such instrumentality, corporation, agency or entity has, prior to the effective date of this Act, contracted to issue at a future date, shill when issued bear such tax exemption privileges as are provided in the la authorizing their issuance. (b). The provisions of this section shall, with respect to such ob- 170 ligations, be considered as amendatory of and supplementary to the res- pective Acts or parts of Acts authorizing the issuance of such obligations, as amended and supplemented. Sec. 5. Section 32 of the Act approved June 13, 1898, as amended (U.S.C., title 31, sec. 756), section 6 of the First Liberty Bond Act, as amended (U.S.C., title 31, sec. 755); section 6 of the Second Liberty Bond Act, as amended (U.S.C., title 31, sec. 757); section 5(d) of the Second Liberty Bond Act, as amended (U.S.C., title 31, sec. 754(d)); and sections 301 and 302 of title III of the Revenue Act of 940 (54 Stat. 526); are hereby repealed. Sec. 6. Nothing contained in this Act shall be deemed to alter or amend in any way the terms of any of the obligations described in section 4 hereof, issued prior to the effective date of this Act, or to impair or otherwise affect any rights, privileges, or remedies accruing to the holders of such obligations under the terms thereof or under the laws authorizing their issuance. Sec. 7. This Act shall become effective on the first day of the month following the date of its approval by the President. 171 TREASURY DEPARTMENT WASHINGTON January 22, 1941 Exhibit III Memorandum on proposed bill to eliminate tax exemption from State and Municipal obligations -000- There is attached a bill relating to the status of State and municipal obligations from the standpoint of exemption from taxation. The purpose of the bill is to provide the balance of the legislation necessary to enable us to complete our program of elimination of tax-exempt securities. This purpose would be accomplished by: (a) Making obligations issued in the future by any State, Territory, municipality, or other public body subject to income taxation by the Federal Government. To permit public bodies to take advantage of favorable market conditions, provision has been made for the refunding of outstanding callable bonds with tax exemption for the same period as the original issue. (b) Consent to non-discriminatory taxation by States of the interest on all Federal obligations issued in the future. It is believed that this bill should be acted upon by Congress after the proposed bill dealing with the debt limitation and the taxable status of future Federal securities is enacted into law. 172 (The dates herein used are based on the assumption that the bill will be enacted in April, 1941, so that an interval of about 60 days will exist between its enactment and the date separating the taxable issues from the tax-exempt issues.) A BILL To provide for the reciprocal income taxation of public obligations, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the *Public Bond Tax Act of 1941. Sec. 2. Section 22(b)(4) of the Internal Revenue Code is amended to read as follows: "(4) TAX-FREE INTEREST.--To the extent provided in section 116(b), interest upon obligations issued by (A) a State, Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing; or (B) a corporation organised under Act of Congress, if such corporation is an instrumentality of the United States (as defined in section 116(b)): or (c) the United States or any of its possessions. Every person own- ing any of the obligations enumerated in clause (A). (B), or (c) shall, in the return required by this chapter. submit a statement showing the number and amount of such obligations owned by him and the income re- ceived therefrom, in such form and with such information as the Commissioner may require." Sec. 3. Sections 25(a)(1) and (2) of the Internal Revenue Code are amended to read as follows: 173 -2"(1) INTEREST ON UNITED STATES OBLIGATIONS.--The amount received as interest upon obligations of the United States if such interest is included in gross income under section 22, and if under the Act authorising the issue of such obligations, as amended and supplemented (including the amendatory and supplementary provisions of section 4 of the Public Debt Act of 1941), such interest is exempt from normal tax. "(2) INTEREST ON OBLIGATIONS OF INSTRUMENTALITIES OF THE UNITED STATES.--The amount received as interest upon obligations of a corporation organised under Act of Congress, if (A) such corporation is an instrumentality of the United States (as defined in section 116(b)); and (B) such interest is included in gross income under section 22; and (c) under the Act authorising the issue of such obligation, as amended and supplemented (including the amendatory and supplementary provisions of section 4 of the Public Debt Act of 1941), such interest is exempt from normal tax." Sec. 4. Section 116 of the Internal Revenue Code is amended by inserting after subsection (a) a new subsection to read as follows: "(b) TAX-FREE INTEREST.-Interest upon obligations issued (1) before July 1, 1941, by a State, Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing; or (2) by a corporation organized under Act of Congress, if such -3corporation is an instrumentality of the United States: or (3) by the United States or any of its possessions. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), and in the case of obligations of a corporation organised under Act of Congress the interest shall be exempt only if and to the extent provided in the respective Acts authorising the issue thereof, as amended and supplemented (including the amendatory and supplementary provisions of section 4 of the Public Debt Act of 1941), and shall be excluded from gross income only if and to the extent it is wholly exempt from the taxes imposed by this chapter. The term 'instrumentality of the United States' means instrumentality, corporation or agency of the United States, or any other corporation or entity created by, organized under, or established pursuant to authority contained in, any Act of Congress. For the purposes of this subsection: *(1) In determining whether an obligation is issued after June 30, 1941, and whether an obli- gation is issued after the date of enactment of the Public Bond Tax Act of 1941 (hereinafter called 'enactment date'), it shall in either case be considered to be issued after such date, if any part of the payment therefor is received by the obligor after such date, or delivery thereof is made by the obligor after such date. 174 -4"(2) Obligations which merely replace lost, mutilated, defaced, or destroyed obligations, or obligations of larger or smaller denominations, and obligations in registered form or with coupons which merely replace obligations with coupons or in regis- tered form, shall be treated as if they were the obligations replaced. "(3) (A) If the terms of an obligation issued before July 1, 1941, the saturity of which on enactment date is later than June 30, 1941, are, after enactment date, changed so as to increase the principal amount or interest rate or to extend the saturity, then such obligations shall (as to interest accruing for any period after the date of the change or June 30, 1941, whichever is later) be con- sidered as issued after such later date. "(B) In the case of an obligation issued after the enactment date and before July 1, 1941, such obligation shall (as to interest accruing for any period after June 30, 1941) be considered as issued after June 30, 1941, if any part of the proceeds of the issue of which the obligation is a part, or if any obligation of the issue, is devoted to the retirement or refunding of an obligation the maturity of which OR enactment date was later than December 31, 1941. For the purposes of this subparagraph, December 31, 1941, shall be considered the maturity, on enactment date, of an obligation the interest on which ceases to run before 175 176 -5- January 1, 1942, by reason of such obligation being called for redemption in accordance with the terms thereof as they existed on enactment date. "(4) If an obligation is issued after June 30, 1941 (hereinafter called 'refunding obligation'), and if -"(A) the issue of which it is a part (hereinafter called 'new issue') is issued for the purpose of refunding one or more obligations (hereinafter called 'refunded obligations'); and "(B) all refunded obligations have the same exemption expiration date, as defined in subparagraph (J); and "(c) no obligations, other than those of the new issue, have been issued for the purpose of refunding any of the refunded obligations; and "(D) the aggregate principal amount of the new issue is not in excess of the aggregate principal amount of the refunded obligations; and "(E) interest on each of the refunded obligations ceases (by treason of such obligation, being called for redemption, in accordance with the terms thereof as they existed on enactment date, or the date of issue, whichever is later) to run upon a date not more than seven months after the date upon -which interest on the refunding obligation begins to run; and "(F) interest on each of the refunded obliga- tions, for the period at the end of which it ceases to run by reason of such call for redemption, is considered as interest on an obligation issued before July 1, 1941; and "(@) the refunding obligation, in its terms, states the exemption expiration date of, and identifies, the refunded obligations; and "(H) the interest rate on the refunding obligations for any period ending on or before the exemption expiration date of the refunded obligations is not higher than the interest rate which any of the refunded obligations had, or would (if such obligation had not been called for redemption) have had, for the corresponding period; then the refunding obligation shall be considered as issued before July 1, 1941, as to so much of the interest as accrues for any period ending before or on the exemption expiration date of the refunded obligations, and shall be considered as issued after June 30, 1941, as to the remainier of such interest. For the purposes of this paragraph"(1) several obligations shall be considered as one issue, only if each is identical with all 177 178 - the others in maturity, interest rate, terms and conditions, and recitals, but the fact that the denominations differ, or that some are registered and some in coupon form shall be disregarded. "(J) *Exemption expiration date' means-- "(1) with respect to a refunded obligation issued before July 1, 1941, the date of maturity which the obligation had on June 30, 1941; "(11) with respect to a refunded obligation issued after June 30, 1941, the date as of which interest thereon would (if the obligation had not been called for redemption) have ceased to be considered as interest on an obligation issued before July 1, 1941." Sec. 5. (a) The United States hereby consents to the taxation, under an income tax, of interest upon, and gain from the sale or other disposition of, obligations issued after June 30, 1941, by the United States, any Territory or possession or political subdivision thereof, the District of Columbia, or any agency or instrumentality of any one or more of the foregoing, by any duly constituted taxing authority having jurisdiction to tax such interest and gain, if such taxation does not discriminate against such interest or gain because of its source. The consent given in this section shall not affect those obligations issued after 179 8- June 30, 1941 which the United States or any agency or instru- mentality thereof has prior to June 30, 1941 constimoted to issue at a future date with such tax exemption privileges with respect to taxation by any State, county, municipality, or local taxing authority as are provided in the law authorizing their issuance, as amended and supplemented. As used in this subsection, agency or instrumentality of the United States includes any corporation of the United States and any corporation or entity created by, organized under, or established pursuant to authority contained in, any Act of Congress. (b) For the purposes of this section-(1) In determining whether an obligation is issued after June 30, 1941, it shall be considered to be issued after such date if any part of the payment therefor is received by the obligor after such date, or delivery thereof is made by the obligor after such date. (2) Obligations which merely replace lost, mutilated, defaced, or destroyed obligations, or obligations of larger or smaller denominations, and obligations in registered form or with coupons which merely replace obligations with coupons or in registered form, shall be treated as if they were the obligations replaced. (c) The provisions of this section shall, with respect to any obligation, be considered as amendatory of and supplementary to the respective Acts or parts of Acts authorising the issue of such obligation as amended and supplemented. 180 January 22, 1941 3:29 p.m. H.M.Jr: Preston Hello. Delano: Hello, Sir. H.M.Jr: Delano, Speaker Rayburn just called me up and he says you've got a Chief Examiner down in Dallas by the name of Collier. D: H.M.Jr: D: That's right. He's 70, he's very hard of hearing, and he's going to retire. That's right. We're planning on retiring will retire him. him. He wants to continue but I think we H.M.Jr: Have you picked his successor? D: No, we haven't. H.M.Jr: Have you ever heard of a man by the name of Sanelin? D: Yes, he's down there. H.M.Jr: Is he any good? D: He's a good man. H.M.Jr: Is he good? D: Yeah. H.M.Jr: You're sure he's good. I mean, he's all right. As far as I know he is. Now I've been con- D: ducting a very careful examination into him, Mr. Secretary, because I wanted to be sure. There is some pressure to have him appointed. H.M.Jr: Well, all things being equal, if you could appoint him, it would make Sam Rayburn very happy. 181 -2D: He's called me too you know, and I appreciate that. I was going to talk it over with you before I did anything. H.M.Jr: Well, the Speaker is coming in here at 9:30 D: All right, sir. I'11 go right after it. H.M.Jr: Thank you. D: Right-o. tomorrow. I don't want to rush you but if you did know between now and tomorrow morning it would be helpful. File this as of 1/23/41 rubbor copy is filed 1/27/41 January 27, 1941 182 MEMORANDUM FOR THE SECRETARY'S DIARY On Thursday, January 23, at 3:30 p.m., Secretary Morgenthau and Ed Foley attended a meeting of the Subcommittee of the Senate Committee on Foreign Relations called by Chairman George, in the Committee Room in the Capitol. Others present were Secretaries Hull, Stimson and Knox, Senators George, Harrison, Connally, Johnson and La Follette. Senator George announced that the purpose of the meeting was to discuss arrangements and procedures for the Hearings before the full Committee on the Lease-Lend Bill which were to commence on Monday, January 27, at 10:00 a.m., in the Democratic Caucus Room in the Senate Office Building. He suggested that Secretary Hull be the first witness, to be followed by Secretary Morgenthau. Senator George said that since the Senate Hearings were following so closely on the heels of the House Hearings, no new formal statements were necessary and that the witnesses present themselves for questioning. However, he thought time would be saved by having each witness send down twenty or twenty-five copies of his formal statement to the House Committee so the Senate Committee members would have an opportunity to 183 -2peruse the statements prior to the opening of the Hearings on Monday. Secretary Morgenthau pointed out that he had submitted no formal statement to the House. Senator George said under those circumstances it would not be necessary for him to send anything but be prepared to present his financial tables and data to the full Committee when he appears. Socretary Knox said that it was necessary for him to be in Chicago on Wednesday and Thursday. There was a dis- cussion as to whether Secretary Knox would appear ahead of Secretary Stimson on Tuesday so that he might keep his engagements, or appear after he returned on Friday. Senator George said he would leave it tentatively for Secretaries Hull and Morgenthau to appear on Monday and Knox and Stimson on Tuesday. However, Senator George said if there were delays it would be possible for Secretary Knox to keep his Chicago engagement and appear when he returned. Senator Harrison asked if Secretary Jones had been called in the House. When he was told that Secretary Jones had not appeared as a witness before the House Committee, he made no further suggestion. Senator George said he might want daily attendance of someone from each Department to sit as a consultant or adviser. 184 -3It was agreed that someone satisfactory to Senator George would be designated from each Department. Senator George asked Mr. Folay if he would have a radio address of about twenty to twenty-two minutes length prepared for him on the Bill. The Senator said he wanted to have a brief explanation of the Bill, a discussion of its constitutionality, and a general summary of the policy and the alms to be achieved by the Bill. Mr. Foley promised Senator George that such a speech would be prepared and be put in his hands early Monday morning. The meeting broke up at 4:15 p.m. (Initialed) E. H. 7., Jr. KHFJr.:vls - 1/27/41 185 January 23, 1941 4:15 p.m. H.M.Jr: When you and I used to be over at Farm Credit there was a fellow by the name of Campbell, the wheat king, I loaned him $15,000 to buy gasoline to harvest his 10,000 acres of wheat. He also failed and I think owes National City $1 million or more. Ask Farm Credit if they could give you his whole history of Campbell, the wheat man. George Haas: Yeah. H.M.Jr: Down to date if they have it. H: From the beginning right on down. H.M.Jr: Yeah, and get his income tax statement for H: Yeah. I'11 do that. Do you have any dead- the last three or four years. line on it? 186 January 23, 1941 4:27 p.m. H.M.Jr: Hello. Operator: Justice Frankfurter. H.M.Jr: Hello. Felix Frankfurter: Henry. H.M.Jr: Well, I see you've been effective as usual. F: What are you talking about? H.M.Jr: Acheson. F: H.M.Jr: What a man! That's very good, isn't it? I just got back after being out for four hours and I expect to call him now. F: Good for you. Henry. H.M.Jr: Yes, sir. F: Two things. One, I congratulate you on trying to make a statesman out of a Texas pawnbroker. H.M.Jr: F: Oh, you heard about it. Say we're on the Supreme Court. We've got a Gestapo. H.M.Jr: Have you heard about it? F: Yeah. H.M.Jr: Isn't it marvelous? F: It certainly is. No. 2 - that's very, very, very important. No, 2, Henry, about London. H.M.Jr: Yeah. F: I don't know what the latest situation is but I'm making two assumptions as a result of a recent talk. 187 2 H.M.Jr: F: H.M.Jr: F: Yeah. One, that Bill Winant 18 going and two, I mean that it's planned, and two, that that hasn't happened yet, has it? No. And the other is Averill Harriman. You know about that? H.M.Jr: Well, I heard about it. I's not at all F: No. H.M.Jr: You know who I suggested? F: I do. That's why I'm talking to you - orazy about it. John Wiley. H.M.Jr: F: H.M.Jr: F: That's right. Now listen. You're going to see the President at least twice today Once more. Once more and you're going to talk to him maybe eight times and I'd like to pass on a piece of information to you that you may use. H.M.Jr: Right. F: He really ought to send your man to London as Minister. He ought to send him just because he's sending Winant, whom I know very, very, very well. He's a very dear and old friend of my wife and mine and I know his fine human qualities and also his limitations, and John Wiley would fit in beautifully. Now, I have every reason for believing through a that Averill Harriman doesn't want to go as message that came to me from an intermediary a Minister. He wants to go, but not as a Minister. He would feel restricted. He'd like to go free, not as Ambassador. He d like to just go. See? Just something nothing - just go. In fact he doesn't want 188 -3to go as a Minister. Now I wonder why that isn' t an ideal arrangement, to have John Winant go as Ambassador and have Averill Harriman go as consultant at large and make John Wiley Minister. I thought you ought to know that Averill Harriman is most unwilling to go as a Minister. He wants to go but not as a Minister. H.M.Jr: I see. F: What's the trouble with Wiley? H.M.Jr: With Wiley? No trouble. F: I mean, what's the opposition ? H.M.Jr: Well, they don't like him. He's a New Dealer, he's for Roosevelt. F: Who? H.M.Jr: John Wiley. F: Who doesn't like him? H.M.Jr: I don't know. F: I thought that Roosevelt was making the appointment. H.M.Jr: Well, I'm just quoting Roosevelt. I mean, Roosevelt said to me yesterday, they think - what he said was that everywhere that Wiley goes, there's trouble, which is damn nonsense and the President says 80. F: H.M.Jr: Well, I thought that Roosevelt was appointing these people. Am I wrong about that? I think you are. F: I am wrong. H.M.Jr: Yeah. F: (Laughs). Well, one lives and learns. You're telling me. H.M.Jr: 189 F: God, wouldn't you like to be elected for the Third Term and have some appointments to make? (Laughs). H.M.Jr: F: Well, I ask morning, noon, and afternoon, who won themyself election? Well, it may make a difference, but it's perfectly absurd, seriously speaking. That's a most ridiculous argument. Most ridiculous argument. H.M.Jr: F: Yeah, and this idea of sending our Ambassador to Cuba over there, I think it's terrible. Well, I think that's out. Henry, in view of what you said, will you find out for me whether I'd better resign or let John Davis take my place? H.M.Jr: (Laughs). This is a bad hour to pick on me, Felix? F: Why? H.M.Jr: From 4:00 to 5:00 is my lowest hour. F: I'm not picking on you, I'm picking on some- body else. H.M.Jr: Yes, you are. I have no comeback. You win. F: I'm not picking on you, I'm serious. H.M.Jr: I rest my case. F: I called you up because I thought there was a chance - I feel very strongly about John Wiley. H.M.Jr: Well, as usual, you and I are together. F: Yeah. Well, I thought you might have a chance H.M.Jr: to talk to him and tell him that. This happened today - about Averill. I don't know whether my pronunciation is getting good, but we're a couple of mockers, is that right? 190 -5F: H.M.Jr: F: That's very good. O. K. Well, Henry, you can count on that being absolutely true, that Averill Harriman does not want to go as a Minister and that he'11 go if he's just sent at large. H.M.Jr: Well, don't lean too heavily on me because I doubt if I get a chance to talk to the President tonight. F: Well, I didn't mean tonight - maybe tomorrow. H.M.Jr: All right. F: And something is holding the thing up anyhow. H.M.Jr: Right. F: Well, you go in and have a rest before your dinner. H.M.Jr: Thank you. F: Good, Henry. H.M.Jr: Good-bye. January 23, 1941 4:42 p.m. 191 Leon Henderson: Hey, I'm going away tomorrow night - H.M.Jr: Yeh. H: For several weeks. H.M.Jr: Yeh. H: And - here's what I - as a personal favor, here's what I wish you'd do for me. H.M.Jr: H: What's that? I'd like to have Dave Ginsburg and John Ham who are going to be in charge while I'm gone H.M.Jr: Yeh. H: - that will be John Ham as the Deputy - H.M.Jr: Yeh. H: - be able to call you up when there's any threat against my Division, as there's likely to be when I get out of town, and come over and tell you about it and also come and talk to you if we get into any tough situations. Well I consider it a great compliment.- H.M.Jr: H: H.M.Jr: H: H.M.Jr: Operator: I'd - that you just paid me. I'd I say it's a great compliment. ? H.M.Jr: Hello. H: Yeh. H.M.Jr: I consider it a compliment. H: Well thanks, that pleases me very very much. H.M.Jr: Sure, I'll watch it for you. H: These fellows - there are things going on - that if I stayed around I'd just - I'd just buck, that's all. -2H.M.Jr: H: 192 Well - And 80 far, they've left my Division alone and I'm out. just full of it and I'd better get to hell H.M.Jr: Well, you tell them any time they're worried while H: All right. I'll tell them - suppose I drop a note I'm here to come over and see me. 80 that they can get through to you if they have to. H.M.Jr: H: That's all right. All right. I'11 leave word. And when you - say, you know that lumber chart that George prepared for you? H.M.Jr: H: Yeh. I had it photostated. I had on a running mate of it the day I went down and talked to the lumber people. H.M.Jr: Yeh. H: You'll see it in the paper. Well, I told them the only thing I understood was the price situation and - I said to the Chairman - "Have you seen this?" He said, "Oh yes, oh yes." "Well," I said, "the newspaper men haven't." So I gave them all copies. H.M.Jr: H: H.M. Jr: H: Yes. And then I told them what we were going to do what I was going to do if lumber prices didn't come down some more. And you 11 probably see about it - I've seen it on the ticker and I'm tickled to death. I think it's wonderful. I gave all (Laughs) - I gave everybody in sight a copy (Laughs) - H.M.Jr: Wonderful. H: - of George's chart so that there would be no doubt about it. H.M.Jr: If you have time, call up George and tell him. Well, John Ham is going to do it, you see, because H: I want George and him to be en rapport. 193 3 H.M.Jr: Good. That's swell. H: All right, Henry. H.M.Jr: Get some rest. H: All right. H.M.Jr: Good bye. H: Bye. 194 January 23, 1941 Dear Leons I have your letter of January 16, 1941, in which you indicate that, despite the flaxibility granted by present regulations, Government agencies are death to exercise the right granted them in the application of spocifications for lumber. The matter has been referred to the Procurement Divi- sion with instructions to take up through the Federal Specifinations Division the development of the action that should be taken. IS is obvious that before any agencies are authorised to wake inspections of lumber for use by the Federal govern- meat they - be property qualified. The Procurement Divisiem will Look into the subject and develop the full facts with regard to 10. Sincerely yours, (Signed) E Secretary of the Treasury Mr. Love Benderson, Constructions, The Minisury Commission to the Comeil of National Defense CC to Mr. Thompson cry & 195 January 23, 1941 Dear Leons I have your letter of January 16, 1941, in which you indicate that, despite the flexibility granted by present regulations, Government agencies are death to exercise the right granted them in the application of specifications for lumber. The matter has been referred to the Procurement Division with instructions to take up through the Federal Specifications Division the development of the action that should be taken. It is obvious that before any agencies are authorised to make inspections of lumber for use by the Federal governsent they aust be properly qualified. The Procurement Divi- sion will look into the subject and develop the full facts with regard to it. Sincerely yours, (Signed) E. Jr. Secretary of the Treasury Mr. Loon Nonderson, Commissioner, The Advisory Commission to the Council of National Defense 196 THE ADVISORY COMMISSION TO THE COUNCIL OF NATIONAL DEFENSE FEDERAL RESERVE BUILDING WASHINGTON D.C. January 16, 1941 The Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D. C. Dear Henry: In your letter of December 23, 1940, on the subject of lumber prices and grade marking, you called my attention to the fact that regulations of the Procurement Division provide complete flexibility in the basis of lumber specifications used by Government buying agencies. Since then I have gone into the matter a little further and find that while agencies may depart from the specifications, they are loath to do so without more positive suggestions from the Procurement Division. In keeping with this thought it has been suggested that private inspection agencies other than those mentioned in the specifications be permitted on approval of the Procurement Division, and that the Procurement Division maintain a list of such approved private inspection agencies, notifying all constructing agencies of such a list. Mr. Mack and Mr. LeFevre have indicated that they would favor maintaining a list of approved inspection agencies if you approve. I think this will have a greater bearing on purchases in the future since the limited approved inspections now contained in the specifications, which have rightly or wrongly been accepted as the only sources, have had a tendency to maintain certain undesirable features in the lumber setup. Sincerely yours, Leon Leon Henderson Commissioner Copy to Mr. mack 1.27.41 197 January 23, 1941 Dear Mr. Harrimans Thank you for your letter of January 21. I am glad to note the uniform drop in prices of lumber at Camp Knox as between November 6th and January 15th. Yours sincerely, Mr. W. A. Harriman, Industrial Materials Division, Advisory Commission to the Council of National Defense, Washington, D. C. 198 January 23, 1941 Dear Mr. Harrimans Thank you for your letter of Januany 21. I as glad to note the uniform drop in prices of lumber at Camp Knox as between November 6th and January 15th. Yours sincerely, (Signed) Mr. W. A. Harriman, Industrial Materials Division, Advisory Commission to the Council of National Defense, Washington, D. c. 199 January 23, 1941 Dear Mr. Harriman: Thank you for your letter of Januany 21. I am glad to note the uniform drop in prices of lumber at Camp Knox as between November 6th and January 15th. Yours sincerely, (Signed) E Morganitas. Jr. Mr. W. A. Harriman, Industrial Materials Division, Advisory Commission to the Council of National Defense, Washington, D. C. 200 THE ADVISORY COMMISSION TO THE COUNCIL OF NATIONAL DEFENSE WASHINGTON, D. C. January 21, 1941 Honorable Henry Morgenthau, Jr Secretary of the Treasury Treasury Department Washington, D. C. Dear Mr. Secretary: Knowing of your personal interest in the question of lumber prices, I am enclosing for your information a tabulation comparing the delivered prices of certain types of lumber for Camp Knox, covering purchases made November 6 and January 15. Sincerely, N. Harriman D.G W. A. Harriman Industrial Materials Division Enclosure 1201 ss W 201 Comparison of Delivered Prices on Camp Knox November 6 January 15 Difference 1940 1941 x - 8 16 $34.25 $29.91 - 4.34 x 10 16 34.46 30.02 4.44 x8 10 16 36.40 32.90 - 3.50 x10 12 16 37.48 31.50 - 5.98 x10 20 43.50 41.50 2.00 x12 12 18 40.48 34.75 5.73 x6 T&G 37.16 34.14 3.02 166 - 8 - 10 - 12 S4S or T&G 37.13 34.22 2.91 38.80 34.70 4.10 34.88 30.23 4.65 2 Common Drop Siding #105 x3-4-5 T&G 1001 SECURITY 202 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 23, 1940 10:15 A.M. TO FROM Secretary Morgenthau W. H. Hadley Market Estimates on New Note Salomon Bros. 100.12-15 Discount Corp. 100.16-20 Devine 100.12 new 203 PLAIN JT LONDON Dated January 23, 1941 Rec'd 4:17 p.m. Secretary of State, Washington. 266, twenty-third. FOR TREASURY. Mr. Bevin's speech in the Commons on Wednesday (a summary of which is being cabled tomorrow) and the two days' debate which was replied to yesterday by the Prime Minister COVERED production and manpower policy, the USE of compulsory POWERS and the new machinery commented upon in the Embassy's telegram No. 58 of January 7, the announce- ment of the latter having been made during the Parliamentary recess and the reaction to it having indicated that anxisty regarding the government's policy on manpower, production and wages was still widespread, lent special importance to the debate. The Prime Minister's lucid Explanation of the fact that it takes time to build and Equip factories, many of which are now coming or about to COME into production, Explains much of the apparent delay in compelling the closing down of non-essential industries and the transfer of labor to munitions and aircraft, Etc. production, while Bevin's 204 -2- 266, January 23, from London Bevin's outline of plans for industrial registration, the USE of women labor, restriction of dismissals from nationally important works, personnel management, etc. has been welcomed, (though it is strangely reminiscent of countless Editorials published in the early WEEKS of war). His statement that the reservoir of workers, 80 far as men are concerned "is practically dry" is significant but renders the still published though misleading unemployment returns EVEN more meaningless than was thought. Though his plans contain SOME instances of the USE of compulsion, such as the order about to be issued which will forbid Employers to dismiss workers and workers to leave jobs in a "national industry" (to be defined in the order) his preference to USE compulsory powers "more in a directory SENSE than in what is generally understood to be the compulsory SENSE" leaves most of his critics unsatisfied, especially in view of his statements regarding wages. HE said, "To those who suggest there is no wage policy, my reply is that a wise step was taken in relying on the SENSE of responsibility of the organizations in industry. Wage-negotiating machinery has been Expanded Enormously in the last quarter of a century. That BENSE of responsibility is made evident by the careful consideration given by these bodies to Each adjustment which has been made, and honorable members will be interested to compare the increase of 205 -3- 266, January 23, from London of wage rates 80 far granted with the cost-of-living increase. Wage rates should not be confused with earnings; where workpeople increase their earnings as a result of increased production that is a thing which ought to be encouraged." HE urged that conditions of labor and differences in wage raises also had to be considered and claimed that the wages and arbitration order has prevented stoppages "one of the greatest testimonies to the wisdom of the policy followed". HE concluded his remarks on wages as follows: "Another advantage of this procedure is that it is not static. The parties are now considering whether there should be any change in method, and in handling this question it is essential that the state and industry should march together and maintain mutual confidence. Personally I am not attracted by the idea of creating a condition which leads to mass movement in wages and political settlement." These few generalities on the wages question tend only to increase the anxiety regarding prospects of an inflationary price rise (which has been frequently mentioned in these telegrame recently, BEE Nos. 3945 of November 4, 3978 of DECEMBER 6, 1940 and 41 of January 6 and 58 of January 7, 1941). An Example of typical press comment is the following from the MANCHESTER GUARDIAN of January 22: "Mr. Bevin's sketchy speech would appear to be something of a stopgap, otherwise it is incredible that he should have omitted 206 -4- 266, January 23, from London omitted to say anything of the effects on the non-war industries and that he should run away from a declaration on wage policy. There is, or should be, a clear connection between the indefinitely Expansible earnings of munition workers (which Mr. Bevin professes to regard with such pleasure) and the gradual strangling of the industries making consumer goods on which the munition workers will try to spend their money". Furthermore the nature of Mr. Bevin's statement on wages must be regarded as particularly significant in view of today's announcement of the National Arbitration Tribunal's decision that an addition of 3s. 6d. PER WEEK should be made to the wages of Engineering and shipbuilding workers, (the former's demand for 10s. and the latter's for 12s. had been rejected by the Employers on the grounds that the increases would DE contrary to the national interest). As a TIMES Editorial points out today, the tribunal gave no reasons whatEVEr for its decision. Did it overrule the Employers' objection, regard that consideration as outside its jurisdiction, or was its decision based on the desirability of attracting labor to these two particular industries? "There has been no Endeavor to lay the foundations of a national wage 8 policy (or, if there has, it is a secret), and according to Mr. Bevin, a national wages policy is not desired by the government. Without doubt the tribunal's decision will give 207 -5- 266, January 23, from London give an impulse to a series of wage applications which may spread through industry and enter into cost of living and thud give rise to further wage increases and so ad infinitum - or to inflation." Indeed the whole government position as put by Mr. Bevin and the Prime Minister himself, omits any reference to the problem of inflation or to any aspects of the financial situation. While admittedly finance must be regarded as secondary to the vital problems of physical production, the avoidanos of an inflationary impetus is now becoming increasingly urgent as shop shortages are becoming prevalent and the cost of living continues to increase. Even if the government is relying upon the full impact of the purchase tax and the shortages of many articles in the shops to force curtailment of consumption, there SEEMS to be no ground for supposing that curtailment of the spending of the rising money wages will result or that savings will not increase proportionately. (END SECTION ONE) JOHNSON WSB 208 PARAPHRASE, SECTION TWO, TELEGRAM NO. 266 OF January 23, 1941, from the American Embassy, London Doubtless the Government 18 fully aware of all the factors involved; however, up to the present it has not seen fit to recognize publicly that financial policy inevitably has farreaching effects on economic problems, and that all economic problems have their financial aspect. The critics of the Government assume this interrelation in urging the case for economic coordination, but their arguments 80 far have been for the most part ignored both in the formulation of policy and in the composition of the machinery. END OF MESSAGE. JOHNSON. 3S EA:LWW RECEIVED 209 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, (Paris) Vichy DATE: January 23, 1941, noon Rec'd 8:25 a.m., Jan. 24. NO.: 94 As the Embassy previously informed the Department, the Germans postponed until the thirty-first of January the date on which they will begin to open safety deposit boxes in the occupied territory by force. When the boxes are opened, gold, foreign currency, and unset precious stones which are found in the boxes voluntarily opened for examination are set aside in a special blocked deposit with the bank where the holder has his box. The German authorities have the "right" to requisition those holdings, and they can pay for them, at prices fixed by themselves, in French francs. It is stated by the Finance Ministry and the Vichy representative of banks which have branches in the occupied zone, that the Germans have not up to the present, with the exception of a few isolated instances, begun to requisition the gold securities and other items found in the boxes. However, it has been necessary for the inhabitants of the "annexed" provinces of Alsace-Lorraine to turn over the gold, foreign exchange and foreign securities which they held, complying with the regulations which are in force in Germany itself. The 210 2The Embassy about the safety Belgium. It Norway 18 has been get probable that and MESSAGE. LEAHY. EA:LWW information Netherlands and in covering in Vichy. END 211 DEPARTMENT OF STATE WASHINGTON reply refer to 893.5151/817 January 23, 1941 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and encloses herewith copies of the paraphrase of a telegram received from the American Consulate General at Shanghai, dated January 17, 1941, concerning rumors to the effect that the Chinese financial authorities may request the American Treasury to freeze private Chinese dollar holdings. Enclosure: From Shanghai, no.77, January 17, 1941. 212 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Consulate General, Shanghai, China. DATE: January 17, 1941, 3 p.m. NO. : 77. In connection with recurrent rumors that financial authorities of China may request the United States Treasury to freeze private Chinese holdings in the United States of United States dollars in order to prepare for possible nationalization of such funds, or the prevention of the acquirement of United States dollar exchange through the exchange market in Shanghai by the Japanese or puppet regimes in China, the opinion is expressed by certain Chinese local commercial bankers that if such action is taken it would not prove to be effective. These bankers maintain that practically all of the larger United States dollar accounts in American banks held by government officials of China, wealthy individuals and leading commercial banks already have been transferred to the nominal credit of financial institutions in American or nationals of America under deeds of trust or other arrange- ments to avoid their being nationalized or frozen. It is stated, therefore, that it is likely that such a measure would effect the small holders only, their life savings in many cases being represented. It is believed that in the aggregate only a small fraction of the total of such credits would be represented. LOCKHART PEG EA:VCL Copy:bj 213 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Berlin, Germany DATE: January 23, 1941, 5 p.m. NO.: 252 CONFIDENTIAL. Reliable information has come to the Embassy that the German military command in Belgium has issued orders that there be placed at its disposal by the Belgian Ministry of Finance the sum of 2.5 billion france as a further instalment on the German Army of Occupation's expenses. This would make a total, up to the thirty-first of December, 1940, of 5.5 billion france. The new instalment, the Belgian Treasury is informed, would cover the costs of the Army of Occupation for November and December only. It WAS informed also that the previous instalment had not covered the occupation costs up to the last day of October in full, but that it might not necessarily be that the future monthly charge would average 1 1/4 billion francs. Should the rate for the months of November and December continue for the costs of the occupation army, the German military administration will have to be provided by the Belgian Government with about 15 billion francs each year, or at the present official exchange rate, roughly $500,000,000. The average pre-war budget of Belgium was 11 billion francs; the budget estimates of expenditures during 1940 total 19 billion francs, as against 12 billion france 214 -2france for receipts. The German military command's last demand for indemnity of 1 1/4 billion france monthly, or roughly $40,000,000, contrasts with the monthly indemnity of only 40,000,000 gold francs, or roughly $8,000,000, which was demanded by the Germans during the occupation 1914-1918. Efforts are being made, it is understood, by Belgian officials to have the demands for indemnity reduced, but it is not believed that there are promising chances that they will succeed. You are requested to inform the Treasury of the foregoing. MORRIS. EA:LWW 215 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 23, 1941. Secretary Morgenthau CONFIDENTIAL FROM Mr. Cochran Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns 184,000 55,000 Open market sterling remained at 4.03-1/2. Transactions of the reporting banks were: Sold to commercial concerns Purchased from commercial concerns L 5,000 After opening at the current low of 17-1/4% discount, the Canadian dollar in- proved during the day, and closed at 16-1/4% The Argentine free peso further improved to close at .2380, as compared with the level of .2360 which prevailed prior to January 21. Closing quotations for the other currencies were: Swiss franc Swedish krona Reichsmark Lira Brazilian milreis (free) Mexican peso Cuban peso Chinese yuan .2321-1/2 .2385-1/2 .4005 .0505 .0505 .2066 7-13/16% discount .05-1/2 There were no gold transactions consummated by us today. No new gold engagements were reported. The Bombay gold price declined 2$ to the equivalent of $34.06. Silver was 1/8 lower at the equivalent of 44.76 In London, the prices fixed for spot and forward silver were both unchanged, at 23-3/16d and 23-1/8d respectively. The dollar equivalents were 42.10 and 41.994. 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 -2- 216 We made four purchases of silver totaling 350,000 ounces under the Silver Purchase Act. Of this amount, 50,000 ounces represented a sale from inventory, and 150,000 ounces consisted of new production from foreign countries, for forward delivery. The remaining 150,000 ounces represented part of a shipment of 821,747 ounces which was shipped to this country early in the month from Rangoon, India, by the Central Bank of China. So far, we have purchased 250,000 ounces of the Chinese shipment. CONFIDENTIAL 217 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 23, 1941 Mrs. Klotz FROM Mr. Morgenthau See Offanes memo of 1/39/41 I want Harold Graves to get together with Professor Odegard and begin to study what kind of an administrative setup we need for a popular drive on United States securi- ties. I am going to look to Harold Graves for the administrative setup, and I expect him to put this machinery in order and start it going. I also want Harold Graves to concentrate on this beginning with today and work shoulder to shoulder with Professor Odegard as this is one of the next important steps which I want to take. Carbon copy to Mr. Graves on 1/23/41 at 9:15 a.m. 218 MEMORANDUM January 23, 1941 TO: The Secretary FROM: Mr. Young RE: British Planes Awaiting Shipment in New York I have been informed by the British Purchasing Commission that there are twenty Curtiss P-40'8 now on hand in New York, and that sixteen additional P-40's were shipped on Tuesday. I expect to receive information as to other types of planes on hand in New York later today, and arrangements are being made to secure this information regularly once a week. R. 219 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 22, 1941 TO FROM Mr. Young Secretary Morgenthau Please let me know how many Curtiss P-40s there are in New York awaiting shipment now, and while you are asking the English for that information, you might as well find out how many other planes there are awaiting shipment in New York. I would like to have this informa- tion from now on regularly once a week. 20 + 16 1/21 Draft of 1/23/91 220 EXECUTIVE ORDER ESTABLISHING A CIVILIAN ECONOMIC DEFENSE COMMITTEE, REGULATING TRANSACTIONS IN FOREIGN EXCHANGE, PORSION PROPERTY AND FOREIGN BUYING, CONTROLLING THE EXPORT AND OTHER DEALINGS IN DEFENSE MATERIALS, THE RE UISITIONING THEREOF, SHIP MOVEMENTS, AND THE PROTECTION OF DEPENSE PRODUCTION FROM RESTRAINTS AND FORMION CONTROL, AND RELATED WATTERS. By virtue of and pursuent to the authority vested in me by the Constitution, by section 1 of Title II of the Ast of June 15, 1917 (40 Stat. 220), by section 5(b) of the Act of October 6, 1917 (40 Stat. 415), as smended, b section 2(a) of the Act of June 28, 1940 (54 Stat. 676), by section 6 of the Act of July 2g 1940 (54 Stat. 714), by the Act of October 10, 1940 (54 Stat. 1090), and by virtue of all other authority vested in no, and by virtue of the continued existence of a period of national econgency, and finding that this Order is in the public interest and is necessary in the interest of national defence and security, it is hereby ordered as follows TITLE I Section 1. There is hereby established a Civilian Economic Defense Committee (horeinafter referred to as the Committee*). The Committee shall consist of the Secretary 221 of State, the Secretary of the Treasury, the Atternay General, the Federal Loan Ministrator, and a member of the Office of Production Management to be appeiated by it. The Commit- too, with the assent of the Secretary of State is respect of policies under Titles II and III hereof, and asting either directly or through such subcomittees, agencies or personnel as the Committee may designate or employ, shall formulate policies relating to the carrying out of the purposes of this Order. Section 2. Subject to policies formulated by the Committee (a) Titles II and III of this Order shall be administered by the Secretary of the Treasury, and (b) Title IV of this Order shall be administered by the Attorney General. Title II Executive Order No. 8389 of April 10, 1940, as amended, amending Executive Order No. 6560 of January 15, 1934, is amended to read as follows Section 9. Notwithstanding any of the provisions of sections 1 to s, inclusive, of this Order, all of the following transactions are prohibited, - as speakfinally authorised by the Secretary of the Treasury by means of regulations, rulings, instructions, licenses, or otherwise, if involving property in which any foreign country designated is this Order, or any national thereof, has at any time on or since the effective date of this Order had any interest of any nature whatsoover, direct or indirects 222 -30 A. All treatfore of credit between any I ing institutions within the United States and all treasfers of credit between any banking institution within the United States and any banking institu- tion outside the United States (including any principal, agent, home office, branch, or correepresent outside the United States, of a banking institution within the United States), 3. All payments by or to any banking institaties within the United States, c. All transactions in foreign exchange by any person within the United States, D. The export or withdrawal from the United States, or the emairing of gold or silver eain or bullion or currency by any person within the United States, E. All transfers, withdravals or exportations of, or dealings in, any evidences of indebtotness or evidences of ownership of property by any person within the United States and F. Any transaction for the purpose or which has the effect of evading or evoiding the foregoing prohibitions. Section 10. A. All of the following transactions are prohibited, - as specifically authorised by the Secretary of the Treasury by I of regulations, 223 -4- rulings, instructions, licenses, or otherwises (1) The acquisition, disposition or treasfer of, OF other dealing in, or with respect so, any security or evidence thereof on which there is stamped or imprinted, or to which there is effixed or otherwise at tached, a Bax stemp or other stamp of a foreign country designated in this Order or a moterial or similar seal which by its comtents indicates that is was stamped, impristed, affixed or attached within such foreign country, or where the attendant circumstances disclose or indicate that such stamp or seal my, at any time, have been stamped, imprint- ed, affixed or attached thereto; and (2) The acquisition by, or transfer to, any person within the United States of any interest is any security or evidence thereof if the attendent circumstances disclose or indicate that the security or evidence thereof is not physically situated within the United States. B. The Secretary of the Treasury may investi- gate, regulate, or prohibit under such regulations, rulings, or instructions as he my prescribe, by means of Licenses or otherwise, the sending, mail- ing, importing or otherwise bringing, directly or indirectly, into the United States, from any 224 -5- foreign country, of any securities or evidences thereof or the receiving or holding in the United States of any securities or ovidences thereof so brought tabe the United States. Section 11. The term "foreign country designated in this Order means a foreign country included in the following schedule, and the term "effective date of this Order means with respect to any such foreign country, or any national thereof, the date specified is the following schedules (a) April 8, 1940 Mercey and Desmarks (b) May 10, 1940 the Netherlands, Belgium and lexesbourg; (e) June 17, 1940 France (a) July 10, 1940 - Lativia, Batonia and Lithmanias (a) October 9. 1940 Summits; and . 1941 - (s) Albania, Austria, Bulgaria, Caochoclevakin, Dearis, Financial, Managery, Italy, LiceMonstein, Paland, Portugal, San Marine, Spain, Seadon, 225 -6- Switserland and Yugoslavia. The "effective date of this Order with respect to any foreign country not designated in this Order shall be deemed to be , 1941. Section 12. A. The Secretary of the Treasury may require, by seens of regulations, rulings, instructions, or otherwise, any person to furnish under oath, in the form of reports or etherwise, from time to time and at such time or times as he may designate, complete infor- nation relative to any transaction referred to in section 5(b) of the Act of October 6, 1917 (40 Stat. 415), as assended, or with respect to the interest of any foreign country or any national thereof in any property, including the production of any books of account, contracts, letters, or other papers, in connection therewith, is the custody or control of such person, either before or after such transaction is completed, and the Secretary of the Treasury may, through any agency that be may designate, investigate any such transaction or act, or any violation of the provisions of this Order. B. Every person engaging in any of the transac- tions referred to is sections 9 and 10 of this Order shall keep a full record of each such transaction gaged in by him, regardlers of whether such transaction is effected pursuant to license or otherwise, and such 226 .7. record shall be available for emaination by a representative of the Treasury Department for at least one year after the date of such transaction. Section 13. so The term "transections . .. involving property in which any foreign country designated in this Order, or any national thereof, has . : any interest* shall include, but not by way of limitation, (1) any payments or transfer to such foreign country or any national thereof, (11) any export or withdrawal from the United States to such foreign country and (111) any transfer of credit expressed in terms of the currency of such foreign country. B. The term "foreign country* shall include, but not by way of limitation, the state and the government thereof on the effective date of this Order as well as any political subsivision, agency or instrumentality thereof or any territory, dependency, colony, protestomate, made, dominion, possession or place subject to the jurisdiction thereof) - shall also include any other government (including any political subdivision, agency, or instrumentality thereof) to the extent and only to the extent that such government emercises or alains to emercise de juro or do fasto sovereignly over the area which - such effective date constituted such foreign country) and shall further include any person to the extent that such person in, OF has been, or to 227 the extent that there is reasonable - to believe that such person is, or has been, since such effective date, asking or purporting to not directly or indirectly for the benefit or on behalf of any of the foregoing. C. The term *national* shall include any person who has been deniciled in, or a subject, citisen or resident of a foreign country at any time on or since the effective date of this Order, but shall not, eept as harvinafter provided, include any individual dentailed and residing in the United States at all times on and since such effective date, end shall also include any partnership, association, corporation or other organization organised under the laws of, or which - or since such effective date had or has had its principal place of business in such foreign country, or which on or since much effective date was or has been controlled by, or a substantial part of the stock, shares, bonds, debenturos, noten, drafts, or other monities or obligations of which - or has been c or controlled to directly or indirectly, much foreign country and/or one or more nationals thereof as herein defineds and shall further include my person to the extent that such passes is, or has been, since such effective date, esting or purporting to not direct- by or indirectly for the benefit or on behalf of 1 foreign country or national thereofs and shall further instate any other person who there is reasonable cause to believe is a as herein defined. In - 228 -9case in which by virtas of the foregoing definition a person is a national of more then one for ign country, such person shall be deemed to be . notice of each such foreign country. The Secretary of the Treasury shall have full power to determine who is or shall be deesed to be a *actional* within the meaning of this definition. Without limitation of the foregoing, the term First nal shall also include any other person who is determined by the Secretary of the Treasury to be, or to have been, since such effective date, acting or perforking to art directly or indirectly under the direction of a designated foreign country or national thereof, as herein defined. The term *direction", as used herein, shall include any power to guide, shape, determine or appertain the activities or policies of any person, because of any relationship is fast, be class of any contract, patest pool, understanding, agreement, including any licensing, marketing, or regulty agreement, any agreement to exchange inform tion, or any other agreement, whether or act legally enforceable. D. The term "beaking institution as used in section 9 shall include any person engaged primarily or incidentally is the business of banking, of and ing or triasferring credits, or of purchasing or selling foreign exchange of procuring purchasers and sellers thereof, as principal or agent, or any porsia holding credits for others se a direct or indidental part of 229 -10- his business, or brokers; and, each principal, agent, home office, brench or correspondent of any person so engaged shall be regarded as a separate "banking in- stitution". E. The torn "this Order", as used in this Title, shall neen Executive Order No. 6560 of January 15, 1934, as amended. Section 14. The Regulations of November 12, 1934, are hereby modified in so far as they are inconsistent with the provisions of sections 9 to 14, inclusive, of this Order, and except 3.5 so sodified are hereby continued in full force and effect. TITLE III Section 1. Coordination of Foreim Buying, Subject to the policies formulated by the Committee, the Secretary of the Treasury shall coordinate the buying, or other accur- sition, including negotiations therefor, by or on behalf of any foreign country or national thereof, of all defense articles, including all military equipment and munitions, component parts thereof, and cachinery, tools, and material and supplies necessary for the manufacture, servicing or operation of defense articles, in such a unner as will most effectively further the interests of national defense. For such purpose the Secretary of the Treasury shall serve as the limison officer between this Government and foreign countries and nationals thereof. The Secretary of the Treasury shall keep the Committee currently and fully in- formed of his activities in connection herewith. 230 -11- Section 2. heart Internet The Preclautions, Orders and Regulations heretafore issued water section 6 of the let of July 2, 1940 (54 Stat. 724) shall, - as herein or otherwise assested, remain in full fores and effect and the functions of the Maintstrator of Export Central and his staff shall be subject to the supervision and central of the Secretary of the Treasury asking subject to the policies formulated by the Committee and the licensing presentere in effect as of the date of this Order shall remain in of feet util notified, amended or revolved by regulations hereafter issued by the Secretary of the Treasury. Section 3. Percisitioning of Materials Design Breads The Executive Order and Regulations heretefore issued water the Ast of October 10, 1940 (54 Stat. 1090) shall, except as herein or otherwise assessed, remain is full force and effect, assept that the powers therein vested in the Sourstary of Nar and the Secretary of the Nevy, acting jointly through the Away - Hevy Monitions Board, are hereby transferred to the Committee, asking with the approval of the Away and Havy Institute Board, and the frustions of the of Report Central and his staff shall be jest to the supervision and central of the Secretary of the Treasury subject to the policies formisted by the Committee. Seekies 40 Sential of Sale The Proclemetion and the regulations issued under section 1 of Title II of the Ast of Jaso 15, 1917 (w Set. 220) shall remain in full force and effect, and the administration thereof by the Secretary of the Treasury shall be subject to the 231 12 - policies formulated by the Committee. TITLE IV Section 1. Protestion of Defense Production from Restructs and Foreign Control. With such advice and assistance as he may require from the several departments and agencies of the Federal Government, the Attorney General shall, acting in accordance with the policies formulated by the Committee and pursuant to the authority hereinbefore re- ferred to, or pursuant to any other authoritys (a) Conduct investigations, bring ground jury proceedings, recommend legislative or other programs, and take such other action as may be appropriate for the purpose of deeling with restrictions, hindrances or conduct detrimental to national defense or security, and affecting production, trade and other overations incidental thereto, by reason of or imposed bys (1) any foreign central or influence over or interest in, directly or indirectly, any business or industrial establishment, enterprise, activity; (11) any agreements, licenses, patent arrangements, conspirucies or other practices or doviees) (111) industrial espionage or sabotage or the obtaining of information by any foreign interest. (b) In aid of national defense and security, furnish information and reader such assistance as the Attorney General may dees appropriate, with regard to 232 - 13 - the foregoing Betters upon request of the Office of Production Management or any other interested agency of the Government. (a) Perform such other related functions as the Committee, with the approval of the Attorney General, may from time to time assign or delegate to him. TITLE v Section 1. Recommendations by the Consittee. The Committee shall engage in such studies end shall make such recommendations to the President, to the Congress and to the appropriate departments and agencies of the Government as the Committee doess in the interests of the economic defense of the United States. Section 2. Continued Validity of Prior Actions and Saving Class Except as otherwise provided, this Order shall not be deemed to revoke any regulation, license, ruling, instruction or other action issued or taken pursuant to any law, proolamation, order or regulation heretofore referred to which is in effect as of the date of this Order) provided, however, that all such regulations, licenses, rulings, instructions, or other actions shall be subject to the provisions of this Order and the regulations, licenses, rulings, instructions or other actions issued or takes thereunder. Any amendment, modification or revocation by or pursuant to the provisions of this Order of any orders, proclamations, regulations, rulings, instructions or licenses shall not effect any not done or 233 - 14 - any suit or proceeding and or contented in any civil or criminal case prior to such assember modification or revocation, and all penalties, forfeitures and liabilities under any such orders, proolamations, regulations, rulings, instructions or licenses shall continue and my be enforced as if such amendment, modification or revocation bed not been made. Section 3. Regulations. Except with respect to Title IV, the Secretary of the Treasury is authorized and emporer- ed to prescribe from time to time regulations, rulings, and instructions to CAPTY out the purposes of this Order and the proclamations and orders herein referred to, and to provide therein or otherwise the conditions under which licenses may be granted by or through such officers or agencies as the Secretary of the Treesury may designate, and the decision of the Secretary with respect to the granting, denial or other disposition of a license shall be final. Section 4. It shall be conclusively presumed that any regulation, license, ruling, instruction or other action by the Secretary of the Treasury or the Attorney General under the Order has been issued or taken in accordance with and subject to the policies formulated by the Committee with the essent of the Secretary of State. Section 5. Revocation. This Executive Order and any regulations, rulings, licenses or instructions issued 234 - 15 - herounder may be amended, modified or revoked at any time. THE WHITE MOUSE, . 1941. 235 January 23, 1941 My dear Mr. Schenker: Thank you for your memorandum of Janu- ary 22nd advising me of recent developments in connection with the disposition by the British of their direct investments in this country. Yours sincerely, (Signed) H. Morgenthau, Jr. Mr. David Schenker, Director Investment Company Division, Securities and Exchange Commission, Washington, D. C. 236 January 23, 1941 My dear Mr. Schenker: Thank you for your memorandum of Janu- ary 22nd advising me of recent developments in connection with the disposition by the British of their direct investments in this country. Yours sincerely, Mr. David Schenker, Director Investment Company Division, Securities and Exchange Commission, Washington, D. C. 237 January 23, 1941 My dear Mr. Schenkers Thank you for your memorandus of Jamu- any 22nd advising me of recent developments in connection with the disposition by the British of their direct investments in this country. Yours sincerely, (Signed) E Morganthau, Jr. Mr. David Scheaker, Director Investment Company Division, Securities and Exchange Commission, Washington, D. C. 238 MR. MORGENTHAU'S OFFICE TOwr. Bell Mr. Thompson Mr. Gaston Mr. Foley Mr. Sullivan Mr. Graves ###### Mr. Alexander Mr. Haas Mr. Allen Mr. Bartelt Mr. Hall Mr. Berkshire Mr. Harris Mr. Helvering Mr. Irey Mr. Julian Mr. Kilby Mr. C. S. Bell Mr. Bernard Mrs. Bette Mr. Birgfeld Mr. Blough Mr. Broughton Mr. Bryan Mr. Coohran Mr. Hanna Mr. Harper Mr. Mulvihill Mr. Rose Mrs. Ross Mr. Collie Capt. Collins Mr. Schwars Mr. Sloan Mr. Spangler Miss Diamond Mr. Tarleau Mr. Dietrich Mr. Uphan Mr. Delano Miss Flanagen Mr. White Mr. Wilson Mr. Cochran: The Secretary would like to have you show the attached memorandum will to Mr. Phillips. you then pleaseHsklotz(c) return MEMORANDUM 17 a DATE January 22, 1941 TO FROM: The Honorable Henry Morgenthau, Jr., phillips The Secretary of the Treasury David Schenker, Director, Investment Company Division, Securities and Exchange Commission SUBJECT British investments in America I am sending you this brief memorandum to keep you informed of developments since our last conference with respect to the disposi- tion by the British of their direct investments in this country. (a) The investment companies have been constantly trying to ascertain when they can meet with the representatives of the British Government to discuss the subject of the sale of these direct investments to them. (b) Various parties, who are highly recommended, have made inquiries with respect to specific direct investments with a view of a3certaining whether these investments are for sale, including: (1) One representative who manifested an interest in the Viscous Corporation, represents a private group presently engaged in the rayon business, who would be interested in bidding for Viscous. He informed me his group was prepared to pay cash and he assumed that the price would range from $60,000,000 to $100,000,000. (2) One investment company, which has about $20,000,000 in cash, stated they were interested not only in becomming one of a group, but in addition, were interested in buying the British-owned drug and chemical company in this country. (3) Another individual stated he was prepared to pay about $4,000,000 for a minority interest which the British hold in a finance company in this country. (4) A representative of the Freeport Sulphur Company stated that that company would be interested in bidding for any chemical or mining properties of the British. (5) In addition, various other representatives of brokerage firms have stated that they are prepared to bid for the direct investments of the British. 239 MEMORANDUM DATE 240 January 22, 1941 The Honorable Henry Morgenthau, Jr., The Secretary of the Treasury David Schenker, Director, Investment Company Division, TO: FROM: Securities and Exchange Commission SUBJECT: British investments in America Since my memorandum to you of yesterday, relating to the British direct investments, I wish to add the following further inquiries: (1) Barret, Herrick & Co., 60 William Street, New York, New York, of which Mr. Waddell, a son-in-law of Chief Justice Hughes, is a partner, informed me that they were interested in bidding for the British real estate and dock properties in the City of New York. (2) Frank H. Barnett, representing Henderson & Co., 340 Pine Street, San Francisco, informed me that that company would be interested in bidding for a firm known as Theodore H. Davies, located in Honolulu (a merchandising and sugar factor company), owned by the British and in any Pacific Coast situations which the British may own. (3) Benjamin Becker of Chicago informed me that some of his clients might be interested in, bidding on Kki weffern British-owned direct investiments. her 241 TO KEEP YOU POSTED CONFIDENTIAL January 23, 1941 To: The Secretary From: Mr. Young Re: Foreign Press Reports Attached herewith is a copy of the press reports of English papers upon the lease-lend bill, which I have just received from Mr. Ballantyne. The press reports upon the testimony by witnesses are not yet available. As 242 Received from London January 15. In reply to your EMPAX 43 the Times says "The unparalleled Bill will translate into action the determination of the American people to help the countries engaged in defending the liberty of the world. In a country so wedded to a system of Constitutional checks and balances, a proposal to hand over such far-reaching authority to an executive head already accused of dictatorial leanings is bound to give a fresh opening to his critics. There seems, however, to be no other way. If delays in authorization caused by limitations in the power of the President are added to delays which are inevitable, then the help which America is anxious to give might well be too late," The Times points out that Congress still retains control anyhow, by retaining the power of the purse. The Daily Telegraph "Happily there can be no doubt, thanks to the vigorous leadership of Roosevelt, about America's resolve to play her part in real earnest as the Arsenal of the Democracies. Stressing the President's insistence in stepping up industrial capacity, the Telegraph points out "Time is the essence of this gigantic undertaking, which no other nation in the world would be capable of carrying through. The unmatched industrial potential of the United States may well prove the deciding factor in the conflict between Hitlerism and Free Demo- cracy. It's not big battalions, but humming factories and workshops that are the ultimate instruments of victory in warfare today. America has opportunity to prove that machine tools may be more potent than bombs." The Daily Express describes the Bill as "Grand practical evidence 243 -2- of Roosevelt's determination to support our common Democratic cause with deeds." The Daily Herald declares Roosevelt asked his countrymen for a blank check to hurry assistance to Britain. Minority American opinion thinks that the President overestimates the extent and urgency of the aid which should be given to Britain. Yet even that minority recognises that our cause is a common cause. America and Britain are one." Sunday Times dwells on urgency of aid "Help within the next few months will be of incalculably greater value than help by the Autumn and help even by Autumn will be far more precious than in 1942. It may be difficult for Americans to realize how immensely urgent the case is. If they could see with their own eyes the ravages of London, or make a swift tour of survey through Birmingham, Coventry etc. and note in each ruin, the civil and cultural monuments, then they might know how things stand. This British Nation will live and not die, but it is paying a terrible price, and those for whose freedom it fights besides its own should make all the haste they can to lessen it." The Scotsman declares "The Bill suggests that the enemy, having broken all the rules of International Law, the President is not inclined to stand upon a narrow interpretation of neutrality. It is an entirely unprecedented step that the President is taking in asking for these powers, and if, as expected, Congress should concede them, the President and Congress, will have shown the world how unselfishly, resolutely and nobly America can act in defence of National Freedom and of Individual Human Rights. For the Totalitarian Powers, the Bill may well be the writing on the wall." 244 -3- The Manchester Guardian says the Bill goes beyond what most of us had hoped would be possible. Citing the provision enabling us to repair the products of the countries whose defence it is assisting, The Guardian declares, This is a truly great concession, whose implications might be enormous. It adds, The Bill will put a strain on a section of Congress, but that the President's plea of urgency should carry. The Western Mail commenting on the same provision, declares this is a tremendous decision for a Neutral to make. "But Roosevelt has torn up neutrality. With the mass of people behind him he has ranged his country on our side, and he is too honest a man to maintain a specious neutrality by giving with one hand and taking away with another." Jan. 15/41 8.36 PM FL 245 Jan.22.1941 Further editorial comments on the Lease-Lend Bill- Daily Telegraph. "What Congress really has decided is not whether the United States should help Britain but whether she should defend herself. What form their action will take is now for Congress to determine The need now is America's as much as ours, and the Arsenal of Democ- racy must devise its own measures of operation." Daily Mirror. "The Bill will almost certainly pass Congress, after which Roosevelt will be wise enough to conciliate the defeated opposition. He will remember the mistake of President Wilson who helped to muddle the Peace because he invited repudiation by his political enemies. For the next and lasting Peace we desire the assent and collaboration of the vast majority of the American people." Sunday Times. "Sometimes it is wise to learn from the enemy. What is German propaganda reiterating." That American aid will be too late, that Britain will be crushed before it arrives. The ultimate volume of output attainable by American war industry is vast, but if it were not attained until those who could use it had gone under, where would America be,' It would be impossible for her to build up single-handed a defence of her own in time which, wisely used, would have been sufficient to save the British Commonwealth. The Birmingham Post says that as the Bill goes through Congress the wishful thinker here must be prepared for delays and disappointments, and Roosevelt may have to accept amendments that seem to him, and still more to us, unnecessary and unfortunate. It argues that Britain is a worthy first line of defence for United States Democracy, and concludes "Defence, unlike Charity, begins abroad." Ends Jan. 22/41 5.04 PM 246 January 23, 1941. STRICTLY CONFIDENTIAL MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston I am attaching a memorandum from Admiral Johnson showing the status both of degaussing and of armament on the cutters. You will notice that the CAMPBELL is the only one of the large cutters degaussed, but degaussing has been done on five of the fourteen electric drive cutters. These are of the 250 ft. class and these are the cutters of which the Navy has asked that four be turned over in the very near future. The Coast Guard has kept all the work up to date so far as possible, using Navy Yards, private yards and Curtis Bay, depending upon availability. The delaying factor is the receipt of material. In my opinion it would be very unwise for the Navy to take over the Coast Guard at this time. I think it would be unnecessarily alarm- ing to the public and I don't see any practical gain. The status of the cooperation with the Navy is excellent and we have always stood ready to turn over any equipment that could possibly be spared for Navy operation, considering defense needs as paramount. I believe the Coast Guard could operate most satisfactorily, even in war time, through a liaison arrangement rather than through absorption by the Navy. The necessary work of the Coast Guard will have to be done in any event no matter under whose command and I believe their safety operations generally, law enforcement, policing of shipping, Arctic patrols and other civil activities, including the surf stations, the lighthouse branch and Merchant Ship Control would suffer if the transfer is made. We are now engaged in discussions with the State Department regarding this summer's work in the Greenland area and the situation there is such that I believe the State Department might have strong objections to making this a Navy operation. If the Navy merely wishes to have the cutters adequately prepared for war duty and to train them for operations with the fleet, that can very easily be arranged and is in fact being handled under the present set-up. If on the contrary what they desire is complete control over merchant shipping, I think it is bad organization to give it to them in view of the inevitably close tie-up with Customs. NBS 247 January 23, 1941. STRICTLY CONFIDENTIAL MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston I - attaching a memorandum from Admiral Johnson showing the status both of degaussing and of armament on the cutters. You will notice that the CAMPBELL is the only one of the large cutters degaussed, but degaussing has been done on five of the fourteen electric drive cutters. These are of the 250 ft. class and these are the cutters of which the Navy has asked that four be turned over in the very near future. The Coast Guard has kept all the work up to date so far as possible, using Navy Yards, private yards and Curtis Bay, depending upon availability. The delaying factor is the receipt of material. In my opinion it would be very unwise for the Navy to take over the Coast Guard at this time. I think it would be unnecessarily alarming to the public and I don't see any practical gain. The status of the cooperation with the Navy is excellent and we have always stood ready to turn over any equipment that could possibly be spared for Navy operation, considering defense needs as paramount. I believe the Coast Guard could operate most satisfactorily, even in war time, through a lisison arrangement rather than through absorption by the Navy. The necessary work of the Coast Guard will have to be done in any event no matter under whose command and I believe their safety operations generally, law enforcement, policing of shipping, Arctic patrols and other civil activities, including the surf stations, the lighthouse branch and Merchant Ship Control would suffer if the transfer is made. We are now engaged in discussions with the State Department regarding this summer's work in the Greenland area and the situation there is such that I believe the State Department might have strong objections to making this a Navy operation. If the Navy merely wishes to have the cutters adequately prepared war duty and to train them for operations with the fleet, that can very easily be arranged and is in fact being handled under the present set-up. If on the contrary what they desire is complete control over for merchant shipping, I think it is bad organisation to give it to them in view of the inevitably close tie-up with Customs. 248 STATUS OF DEGAUSSING January 23, 1941 Completed Vessels 7 - 327-ft. cutters In Yard 4 - arrangements made and 2 1 will go in yard in the immediate future. 14 - Electric drive 9 - arrangements made, - 5 dates of arrival at yards cutters 6 - !!iscellaneous cutters various 5 - arrangements not yet - 1 made due to unavailability of yards 6 - 165-ft. cutters 17 - 165-ft. patrol boats 32 - 125-ft. patrol boats 36 tenders 5 - dates set up for those - 1 now included in program 13 - date set up for yard, 4 beginning in February. About 3 weeks to complete. 20 - All authorized. Material 6 6 on hand. Will be completed about April 15. - 7 9 additional tenders authorized. Remainder under study. 118 vessels The present degaussing is of a temporary nature. It is proposed when funds become available permanently to degauss 59 vessels. 249 STATUS OF DEGAUSSING January 23, 1941 Vessels Completed In Yard 1 2 7 - 327-ft. cutters 4 - arrangements made and will go in yard in the immediate future. 14 - Electric drive - 9 - arrangements made, 5 dates of arrival at yards cutters 6 - Miscellaneous cutters various 5 - arrangements not yet made due to unavailability - 1 of yards 1 17 - 165-ft. patrol boats 4 32 - 125-ft. patrol boats 36 - tenders 5 - dates set up for those - 6 - 165-ft. cutters now included in program - 13 - date set up for yard, beginning in February. About 3 weeks to complete. 6 6 20 - All authorised. Material on hand. will be completed about April 15. 7 9 additional tenders authorised. Remainder under study. 118 vessels The present deganasing is of a temporary nature. It is proposed when funds become available permanently to degause 59 vessels. 250 Status of Guns January 23, 1941. Depth 3"-50 Cal.-3 7 - 327 Footers Completed 3 5"-51 Completed Charge 6 50 Cal. Y Guns 1-4 6-2 Racks 6 Sound equipment ordered. Some delivered and inboard work generally completed. Searchlights awaiting delivery. 14 Electric Drive Cutters 3 ITASCA 2 HAIDA 2 5" Completed None 11 with 3 without 5 completed No guns for two vessels 6 - ,isc. Cutters 1 - 2 - 3" - 50 4 50 Cal. 2 4 - 2 - 3" 23 Other guns not available 6 165 Foot Cutters 1 2 -3" - 50 Cal 5 3" 23 4 Larger guns not available 17 165 Foot Patrol Boats 3" 23 Cal. All completed None 10 Com- pleted. Others set up 32 125 Foot Patrol Boats 1 - 3" 23 Cal. 36 Tenders None so far authorized. Funds requested for 22 ships to All on board install 2 - 50 Cal. guns All vessels except 2 miscellaneous cutters and tenders are authorized beginning to carry Depth Bomb Racks. This material is under order and delivery expected material. January 20, 1941. Completion date is dependent upon delivery of Very short job to install. Preliminary work done. 251 Status of Guns January 23. 1941. 3"-50 Cal.-3 7 - 327 Footers Completed 3 - 5t-51 6-50 Cal. Completed I One 1-4 6-2 Depth Charge Racks 6 Sound equipment ordered. Some delivered and inboard work 14 - Electric Drive Cutters generally completed. Searchlights awaiting delivery. 3 ITASCA 2 5" 11 with 2 HAIDA None Completed 3 without 5 - completed No guns for two vessels 6 - Misc. Cutters 1- 2 - 3" - 50 4 - 50 Cal. 2 4 - 2 - 3" - 23 Other guns not available 6 165 Foot Cutters 1-2-3" - 50 Cal 5-3"- 23 4 Larger guns not available 17 - 165 Foot Patrol Boats 3" 23 Cal. All completed None 10 Com- pleted. Others set up 32 - 125 Foot Patrol Boats 1 - 3" - 23 Cal. 36 Tenders None so far authorised. Funds requested for 22 ships to 18 All on board install 2 - 50 Cal. guns All vessels except 2 miscellaneous cutters and tenders are authorised to carry Depth Bomb Racks. This material is under order and delivery expected beginning January 20, 1941. Completion date is dependent upon delivery of material. Very short job to install. Preliminary work done. 252 BRITISH EMBASSY, WASHINGTON, D.C. PERSONAL AND SECRET. 23rd January, 1941. 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, Awk Bother The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. 253 Telegram from London of January 23rd 1941. Naval. 1. During air raids on Malta on January 19th v/T ship Essex received extensive damage to super structure and engine room. Casualties 15 killed 23 wounded. A damaged Italian U boat reported arrived Las Palmas. Canary Islands. 3. - 2. "Vichy" 1 rench merchant vessel with cargo of petrol seized being sent to Cape Town under armed uard. 4. Convoy of 24 ships arrived in home waters from anada including five tankers and eight cargoss of steel and DIE iron. Military. 5. Sudan. Our leading troops are now 20 miles across the frontier of Erythrea. Royal Air Force. D. 21st and 21st/22nd. All operations cancelled owing to weather. 7. Libya. on the night of the 19th/20th our air- craft dropped over 6 tons of bombs on military targets in Tobruk. 8. Sicily. n the SAMO night over 10 tons of H.E. and 2,000 incendiaries were dropped on aerodrome of Catania where 7 =rounded aircraft were seen to catch fire. One heavy bomber also attacked Brindisi railway station. / 9. 254 -2 9. German Air Force. January 21st. slight enomy activity took place. Bad weather prevented interceptions by our fighters. The night of the 21st/22nd. No enemy activity reported. 10. Malta. January 21st. Several single enemy aircraft dropped bombs which caused damage to private property but none of military importance. on January 20th 9 enemy aircraft attacked the 11. Pireaus damaging cargo vessel. One aircraft was shot down by our fighters. 255 RESTRICTED M.I.D., W.D. January 23, 1941 G-2/2657-220 No. 299 12:00 M. SITUATION REPORT I. Western Theater of War. 1. Air. Bad weather prevailed. German. Minor offensive activity last night. British. During the night of the 22d-23d, Dusseldorf was raided in moderate force. Two airdromes in occupied France were also bombed. II. Greek Theater of War. 1. Ground. Some Greek progress in the center along the axis Klisura-Berat. 2. Air. Local attacks by both sides against ground objectives in the combat zone. III. African and Mediterranean Theaters of War. 1. Ground: Libya. Tobruk fell to the British on January 22. British advance forces are already reported at the important road junction of Mekili (el-Mechili), about fifty miles southwest of Derna and a hundred miles west of Tobruk. The Italian cruiser San Giorgio has been blown up in Tobruk harbor. Captures are tentatively set at 14,000, including an admiral, a corps commander, and two other generals. East Africa. British advances from the Sudan into Eritrea and from Kenya into Ethiopia and Italian Somaliland continue. 2. Air: The R.A.F. again raided Catania, Sicily, on the night of the 22d-23d. Note: 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. RESTRICTED CONFIDENTIAL 256 Paraphrase of Code Cablegram Received at the War Department at 9:10, January 23, 1941 London, filed 14:05, January 23, 1941. 1. On Wednesday, January 22, German marchant vessels in a harbor in Norway were bombed successfully by planes of the British Coastal Command. On the same day two antiaircraft ships and an oil installation in Holland were attacked by three planes of the British Bomber Command. 2. On January 22 the Germans engaged in only minor air opens- tions with a few planes over coasts of Lincolnshire, Norfelk and Suffelk. The British shot down two of the German attachers and damaged three others. That night only a few German planes were active over England and their activities were centered in the area between Yarmouth and The Wash. 3. The capture of Tobrak is now complete. All British planes in Egypt were used in cooperation with the Army in the attacks on January 20 and 21 in this area. 4. Airplanes from South Africa completely destroyed gasoline storage and motor transport concentrations at Neghelli (?) in the Kenya theater. German Junkers dive bombers were used by the South African Air Force in this raid. The railroad and buildings being used for military purposes in Elbasan, Albania, were successfully attacked by British planes based in Greece. In Eritres the most advanced elements of the British forces had penetrated 20 miles beyond the border by January 22 and were still going forward. British aircraft from the Anglo-Egyptian Sudan attacked Riscia and CONFIDENTIAL CONFIDENTIAL 257 Massaus, Eritree, and Buree in British Senaliland. One German fighter plane was destroyed. British planos from the Aden area successfully attached the Assab supply base and also a supply depot at Adad, Ethiopia, so miles southwest of Djibuti. 5. No information has been received concerning the opera- tions of German aircraft in Middle Eastern theaters. 6. It is reported that an Italian submarine which had been severely damaged has arrived in Canary Islands. The British have seised a French eargo boat loaded with wine. It is now known that during the German attack on Malta on January 19 severe damage was inflicted on the ESSEX (probably a merchant vessel - 0-2). 7. An official of the city of Southampton reports that the following damage to properties in that city has resulted from the operations of the German Air Force since the beginning of the war. A total of 1,600 buildings are total lesses, 1,450 have been damaged se severely that it is probable that they will have to be demolished, and 14,500 have been more or less badly damaged. 8. A report from France tells of the complete demoralization of all the German personnel assigned to a certain airfield which was raided by the British during a recent and very cold night. It was stated that the Germans with their night shirts flapping took to the woods. SCANLON Distribution: Secretary of War State Department Secretary of Treasury Asst. Secretary of War Chief of Staff CONFIDENTIAL War Plans Division Office of Naval Intelligence Air Corps - 2 G-3 -2- 258 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 24, 1941 Secretary Morgenthau FROM E. H. Foley, Jr. For your information There was a meeting at Berle's office yesterday to discuss the Economic Defense Problem. Present at the meeting were: Adolf A. Berle, Jr. for the State Deparment, Francis Shea and L.M.C. Smith for the Department of Justice, C. David Ginsburg, attorney for Leon Henderson and Bernard Bernstein for the Treasury Department. Berle made it perfectly clear that the State Department was opposed to the export control being administered by the Treasury. Berle stated that there was no precedent for putting the export control in the Treasury Department, and to do so would vest too great a power in one single department; that the export control was minutely related to diplomatic problems and the trade problems which have heretofore been handled by the State Department and that it would be better to put the administration of the export control under the State Department. Berle also said that he thought that, at the present time, Secretary Hull was inclined to be willing to recommend extension of the freeze control to Continental 259 -2Europe, excluding Great Britain, Greece, Turkey and Russia, but only after it had been pointed out clearly to the President all the risks and implications of such extension of the freeze control. Berle also indicated that there was considerable difference of opinion in the State Department on the matter of extension of freeze control, and that Secretary Hull apparently didn't strongly feel the desirability of extending such control. Alternative methods of dealing with different points of view were considered, including the possibility of drafting half a dozen different executive orders. It was concluded that the preferable way of dealing with the problem was for the Attorney General to prepare a memorandum to the President which would indicate the various points on which there was agreement among the three agencies, the points on which there was no agreement, and indicate the considerations involved. Such a memorandum will be circulated both to the State Department and the Treasury Department. It may be that the Attorney General will also make some recommendations to the President and suggest that there be a conference of the two Secretaries and the Attorney General with the President on this matter. 260 January 24, 1941 9:55 a.m. H.M.Jr: Hello. Operator: The Attorney General. H.M.Jr: Hello. Bob Jackson: This 18 Bob Jackson, Henry. H.M.Jr: This is Henry Morgenthau. J: How are you this morning? H.M.Jr: Well, after that scintilating, sparkling affair H.M.Jr: last night I had a wonderful night's sleep. Well (laughter) good. And no dissipation. And no dissipation. Right. J: Henry, on this matter that we mentioned last H.M.Jr: Yeh. J: I wonder if the best way to expedite that isn't for you and Secretary of State and perhaps myself to sit down and talk about that a few minutes. H.M.Jr: Well. J: Would it get anywhere? H.M.Jr: I don't know. You see the last time I talked it J: night - that order. was a couple of weeks ago and he just wanted over a weekend. The President said he would have signed it on Thursday morning and in a soft headed, soft hearted moment I said I'd give the Secretary of State from Thursday until Monday to read it. It was stupid on my part. Now I understand A. A. Berle wants the thing administered in the State Department. J: H.M.Jr: No, I didn't understand that. Well, they had a meeting yesterday and Ed Foley gave me a memorandum on it and he said the export control part. But - J: I didn't understand that they wanted to administer it, in fact, at the early meeting he said definitely that they did not. H.M.Jr: Yeh. 261 2J: What did want was that it be subject to the foreignhepolicy considerations. H.M.Jr: Well, now I gather yesterday that Berle turned a somersault. J: Uh, huh. H.M.Jr: Completely. J: Well, I haven't had a report on that. H.M.Jr: J: H.M.Jr: J: Well I just got it a few minutes ago, but as they say, he completely turned a somersault. But, as to your suggestion that Hull, you and I get together, of course. I think it's good. I think that's the only way that we'll get this thing worked out because it's hard to tell, in fact Berle himself saye it's hard to know just how far he's authorized to go; it's hard to know just when he's speaking for the Secretary and when he's giving his own views; it's hard also to tell just what basis of information is laid before the Secretary. H.M.Jr: Right. J: And, it seems to me that if we could devote a little time to discussing it among the three of us, that we could then - there probably would remain some questions, or may remain some questions H.M.Jr: to put up to the President. Well I'm all for it, Bob, and inasmuch as he sort of designated you, if you' call the meeting I'11 come to any time or place that you designate. J: Well, are you going to be in town over the weekend? H.M.Jr: I'll be, yes. J: Well, I'11 get ahold of the Secretary and see if we can get together on it. H.M.Jr: Now, just this, we're holding Sunday morning for Speaker Rayburn who is going to have a meeting on this lend-lease bill. J: Uh, huh. -3 J: H.M.Jr: Well, my religious duties would conflict with that anyway. (Laughter) I see. Well J: I H.M.Jr: J: Well, I'll wait until I hear from you. All right, Henry. H.M.Jr: Thank you. have to see that my wife gets up and goes to church. 262 263 January 24, 1941 11:00 a.m. RE BRITISH PURCHASING PROGRAM Present: Mr. Bell Mr. White Mr. Purcell Mr. Foley Mr. Schenker Mr. Louchheim Mr. Phillips Mr. Gifford Mr. Pinsent Mr. Cochran H.M.Jr: Mr. Gifford, I haven't had a chance, because it has been a little more hectic than usual, to tell the SEC about your message to me of night before last, you see, and I wanted to take this chance to tell them my reaction and then discuss it in their presence. Mr. Gifford sent me word, night before last, that he had the feeling that possibly he had been - shall I use the word "crowd- Gifford: H.M.Jr: ing"the market a little bit? That if I went on, I would be crowding it. And how did I feel if he eased up on his sales, and I said, going back to him yesterday morning before the market opened, that I sensed the same thing and suggested that he try out not to sell anything, say for the balance of this week, just to see what effect it would have, because this pressure has been pretty constant. Schenker: And complicated by that sale of the 500 thousand Standard Oil. 264 -2H.M.Jr: That is right, and then he also - but he said he had a deal on with Boston which I take it was what, United Fruit? Gifford: That is right. H.M.Jr: Which you consummated yesterday? Gifford: That is right. H.M.Jr: But that was the whole story, but I thought it was important enough that I asked him to come down and see how you gentlemen felt. Is that about the story? Gifford: Might I elaborate a little, sir? H.M.Jr: If you please. Gifford: We had been putting out distribution transactions very nearly, not quite, but very nearly one a day until the big Standard Oil thing came along, which was being done by the people who had done one of our transactions, and we thought it right to keep off the market the day before in order to facilitate their operation, and then, of course, they definitely, on the date they were doing it, There was a good deal of anxiety. (Mr. Bell entered the conference.) Gifford: Since then we proceeded with other transactions that we had had on the stocks. (Mr. White entered the conference.) Gifford: And then we came to the conclusion-- H.M.Jr: Do you mind repeating just what you have been saying for these two gentlemen? 265 -3Gifford: Where had I got to now? The Secretary had explained that I had telephoned to Mr. Cochran two days ago suggesting that in view of the rate at which we had been releasing and the number of distribution operations that we had done, it +might be as well to go a little slow for the next few days. Mr. Cochran reported that and told me that Mr. Morgenthau was not only agreeable but inclined to think that we ought to keep off - well, definitely until the end of this week. I was just elaborating a little, that we had been doing a good many distribution sales and had thought it necessary to keep off the market the day before the big Standard Oil sale from the Harkness estate took place and very definitely on the day on which it was taking place because there was a lot of anxiety and a good deal of differing views in New York as to how it was going to go. In the end it was a great success. Yesterday, I had so far arranged - it would have been awkward, I think, to stop it, and we went on with it, the United Fruit situation. I think that went off very satisfactorily again. But while I don't want to convey the impression that we can't go on doing this, I think we can, the distribution firms are keen on doing the work if we allow them to, but our feeling has been that it would be wiser to give the market a rest for a day or two. The dealers all over the country begin to get - their clients begin to get a little too accustomed to the excitement of a new stock being offered in volume, and it doesn't do to give them one every day. That was the - my reason for ringing up Mr. Cochran was that I didn't want to give a startling impres- sion of not being able to go on by reducing my sales without advising beforehand that it would be intentional, not from definite inability and because the averages, of course, have been 266 4- dropping quite a bit in the last week, and one would like to just give the market a little bit of a rest to see if it needs it. Schenker: H.M.Jr: May I make one observation, Mr. Secretary? That is the purpose of asking you over here. I would have called you but I didn't get this thing until late that night but-- Schenker: This whole problem-- H.M.Jr: You are just one day behind, that is all. It is just awfully difficult. Schenker: This problem, of course, is Ganson's bailiwick, except that people have come to me, Mr. Secre- tary, and I spoke up in New York the other night and there were quite a few brokers who asked questions with respect to this liquidation, and I don't know if it has any significance or not, but what I think is developing is a trifle well, not bad feeling but lack of good will - among the smaller houses who haven't been able to participate in that and, as a matter of public relations, I think if some method could be devised to give the smaller firms a little chance to get in on that, I think it would be helpful. I don't know enough about it, but that is my naive reaction on it. Gifford: I am aware of that. That isn't really a matter that has much to do with me. It is more a matter of the members of the stock exchange. You see, as the press has indicated - there are two sides on the stock exchange. There are the big people who do the distribution thing and the little people, and particularly the specialists on the floor of the exchange. I had a call yesterday afternoon from a governor of this exchange who is especially urging the use of the specialists just because of the smaller people, and we have 267 -5been well aware of that problem. I caused a call to be made on one of the officials of the stock exchange about three days ago be- cause we realized that this was there and to ask if they had any criticism of what we were doing or any suggestion to make, and they said, "No, we realize you have got your job to do and that if you want money in large amounts, that is the only way in which it can be done, but we also know, of course, that we are being subjected to criticism from the smaller people and from the specialists." I really think it is a matter of the internal working of the stock exchange as between one group and another rather than ourselves, but I definitely have it in view if I can feed the specialists in some way - the trouble with that is that you just don't know whether you are going to get the stuff sold or not. You may remember the meeting I attended - how long ago is it now, five weeks ago - up to then, I had been doing very little distribution. I had been doing it almost entirely through the specialists and, of course, they were perfectly happy then. The distribution people weren't so happy. Now the foot is on the other leg, but we are getting more money. Schenker: The firms that spoke to me, for instance, is E. A. Pierce. They are one of the biggest houses. Gifford: They have no ground to complain because we have been using them. Schenker: And a company like Victor Emanuel, and there have been other companies and they said, "We don't seem to have any access to the British. We are prepared to buy these blocks and dis- tribute it and it seems unless you have an 'in' you don't get anywhere. 268 -6Gifford: I am just inundated, of course, by people who want to do the distribution. I can only hire one firm at a time and, for instance, I admit that I have employed Smith Barney twice and possibly thrice and with the intention of employing them again. One reason being, of course, that if you find a firm does a really satisfactory job and the stock remains firm after it, it gives you con- fidence. Now I have employed another firm which shall be nameless. We got their check all right and the stuff was distributed but it dropped right in half the day after. Well, that is not so attractive. I am a little disinclined to go back to that firm, you see. Purcell: And I think your difficulties - you may find that same type of difficulty if you go to the smaller firms that haven't got the clean towel dealer distribution groups that some of the larger firms have. Gifford: One thing I just cannot - I am bound to be criticized by somebody. If I employ six firms and there are six left out, there will be some criticizing people among the six left out. Purcell: And just as you point out, Mr. Gifford, as soon as you take operations off the exchange you are going to earn the illwill of the exchange people and the specialists. Gifford: There you are. As long as I was going along selling simply on the board, the criticism was from the big people who say, "You will never sell the stuff satisfactorily that way. Now that I employing them and selling the stuff in big am wads, then the little people don't like it, but I can hardly compete with that. Purcell: No, that is fundamental in our system. 269 -7H.M.Jr: What has it been running a week? Gifford: About 10 or 11 million dollars a week, sir. H.M.Jr: That is pretty good. Well, as far as I am concerned, I wouldn't get the firms who are either pleased or disgruntled. Naturally the SEC would get them, but I don't get them. The only thing that bothers me a little bit is that you read in the paper a sort of veiled reference to this transaction and that this firm did it and I suppose the people in it know it. Gifford: Oh, you can't keep it. H.M.Jr: I mean, but they know it, but the fellow out in the field doesn't and, of course, he is at that kind of a disadvantage. Gifford: Yes, exactly. Especially when it is in preparation, they don't know it. H.M.Jr: But even after it is over. Gifford: Oh, it gets out pretty well in the course of a day or two. H.M.Jr: If I lived in Des Moines, Iowa, would I know that-- Gifford: Now you are taking me out of my department. I can't answer that. H.M.Jr: Well, if I lived in New Orleans or Savannah, would I know it? Purcell: Probably on the news ticker. If you lived in a small city in Iowa, you would have to depend on Associated Press items carrying it. H.M.Jr: Would I know it? 270 -8Louchheim: Yes. H.M.Jr: Well, I didn't know that. I wonder if these gentlemen agree that - or whether they don't, that it is just as well to ease up a couple of days. I would like to hear the SEC on that. Purcell: Well, it is difficult to - it seems to me, to judge just what effect the selling may have had on the market. During a good deal of the time that your liquidation was stepped up, so to speak, the market was strong and rose. During the past - what is it, a week or so? Louchheim: Yes, sir. Purcell: Have you been doing any selling? Gifford: Oh, yes. Purcell: Well, the only way you can judge whether it one way you can judge whether it has a depress- ing effect on the market would be the increase of volume on the exchange in the stocks which you had distributed over the counter. There don't appear to have been any increases in the volume on the exchange, but rather a decrease. Gifford: It may be a little more fundamental than that, that buying power, of course, may be somewhat taken up by the distribution of our stocks and the power that would reach into the market generally. Purcell: That might be, Mr. Gifford, although-- Gifford: Who can say? Purcell: Who can say, except what we have heard, generally speaking, is that buyers, individuals and institutions are just hungry for these issues of this 271 -9 high-grade type. Now, maybe their hunger was satiated for a few days. Gifford: Oh, I am not in the least - it wasn't in my mind at all not to begin again after a day or two, it was simply that - the remark was made very much after the success of the big Standard oil thing - I had a fellow that I happened to be speaking on the telephone to down in Atlanta, Georgia, and after he finished what he was talking about, he referred to this and he said it is extraordinary, the people coming in wanting to buy this because they hear it is on, you know, and that, I think, is just a little bit of mob psychology, a little excitement, but if you have it every four or five days in the week, the effect of it is apt to weaken. Purcell: Sure. Mr. Lochheim reminds me that we know from our general reports that as far as the exchange is concerned some rather unusual blocks have come in on the exchange in the past few days which have probably contributed to the depreciation from other sources entirely. H.M.Jr: There have been? Purcell: Yes. Some foreign sources. H.M.Jr: Oh, really? Anything to do with these rumors of freezing? Purcell: I think it might, yes. White: Yes. Purcell: I think it might well. H.M.Jr: You think so? Well, of course, our situation yesterday in our Government financing is we only got about half as many subscriptions as 272 - 10 we had a month ago. I mean, it was four times over subscribed instead of eight times, so there is a little wavering. Louchheim: The markets are all nervous. H.M.Jr: They seemed to be a little, which I sensed. When you got word to me, I was just doing my checking on the Government bond market, just the way I sensed originally that I was quite sure that the investing public was there and could take it and was quite, you remember, moderately emphatic about it, but when you got me this word, being in the process of my nerves being exposed to the investing on govern- ments, I sensed a little reluctance there, so there seems to be a little slowing up. There may be something somewhere. What? Louchheim: Yes. The New York banks, some of them at least, are, I understand, advising trust funds to be very liquid in cash. H.M.Jr: There is a little something going on somewhere. Gifford: May I say this, that both before and after I spoke to Mr. Cochran, I had some hesitation as to whether I really ought to have done so, because I didn't want in any way to appear to be putting on to the shoulders of the Treasury here the handling of a problem which is ob- viously essentially mine, to judge the feel of the market. It was more really, sir, as a matter of courtsey and to prevent you, if you happened to see the figures, or the members of the Treasury, being taken aback at seeing me suddenly drop down from a million or two to a small figure. H.M.Jr: I was very glad you sent the message. I don't 273 - 11 - want to advise you day to day. I am certainly not going to advise you who you should do business through, and I appreciate that if you had slowed up without saying I ho, British cold and that. So it was all to the good. But I wanted the SEC to know about it, too, and I wanted to get the benefit of their feet?" have what got Or hold is something this? of Sir Are like Frederick the anything, getting said, might "What advice. Now, there are a number of people who are coming to see the SEC with their tongues hanging out and their chops watering wanting to get a chance at some of these English invest- ments, and I wondered when the English Govern- ment is going to be ready to talk on that. Gifford: I think you are aware, sir, that Sir Edward Peacock is on his way as fastas the clipper can bring him. H.M.Jr: Yes. Gifford: I mean he is stuck at the moment just as Mr. Willkie is stuck going the other way; and he is, I presume, bringing both authority and information, information that I certainly don't possess, you see. H.M.Jr: Well, I wanted to get that to the SEC, that really until he arrives-- Gifford: It is quite impractical to do anything as far as I am concerned until he arrives. I haven't got the data. I just haven't got the straw to make bricks. Schenker: I want to be in a position to tell these people what the situation is. Gifford: I am having the same calls, you see, in New 274 - 12 York from dozens of people, and what I am doing is, I am making up a file, noting who is interested and what, and I have seen the note that I think reached Mr. Pinsent O. Sir Frederick of the similar calls that you have had. H.M.Jr: You see, I passed it around. Schenker: Then hereafter, I will send you more than one copy, Mr. Secretary, so you can make it avail- able to them. N.M.Jr: Well, I will tell you what you will do, and it would save me one motion, if you would send it to Merle Cochran direct, then he could get it right to Pinsent, you see. Schenker: There was an inquiry about the real estate in New York yesterday from a very substantial firm. Gifford: I know nothing about the real estate. Schenker: And some of the Honolulu properties, railroads. I may be able to get you a customer for the Manila railway bonds you were talking about. Gifford: My difficulty is not going to be lack of buyers, as I can sec. Schenker: I can tell these people we may have some information in a few days. H.M.Jr: Didn't you announce in the papers that he left? Phillips: We were going to, but you know he has been held back four or five days now. He was due to leave today. H.M.Jr: Has he left Lisbon. 275 - 13 Phillips: I haven't heard. He was due to leave today and my belief is as soon as he does leave, it also will be published. H.M.Jr: They were going to announce it once he left Lisbon, but they were holding it up. Gifford: From what I heard from Pan-American Airways yesterday, I don't think the plane had left Lisbon. H.M.Jr: But he was supposed to be on that plane that was supposed to have left the 19th. Gifford: When that plane will come depends on the weather. H.M.Jr: Dan, do you want to raise anything? Bell: No. I am getting a number of inquiries, too, about the direct investments, where they should make their contacts and so forth, and I have told most of them that there will be a gentleman here to deal with that in the course of the next week or 10 days. H.M.Jr: Harry? White: Nothing. H.M.Jr: Ed: Gifford: I am quite willing to see them. Bell: I told them that they could see you in the meantime. H.M.Jr: Schenker? Anything? Schenker: Nothing. Gifford: I have seen a large number of them. 276 - 14 Bell: I'll bet you have. H.M.Jr: I thought it was worth while to come down just to spend a half hour together and, as I say, I wanted to be sure that I was together with the SEC, that is what I wanted to make sure. See, it is kind of hard to keep everybody posted not only in the Treasury but all over the Government what we do every day, because things are happening so fast. Well, thank you very much. 277 January 24, 1941 This was handed to the Secretary today by Mr. Gifford. 278 7th December 1939. No.28 Please transmit to Sir R.Hopkins as too late to send by Consul's code. 1. Saw Kennedy late today who confirms our view of immediate Vesting but advised strongly much smaller amounts. Th: differs from our view confirmed by J.P.Morgan & Co. who thought our list a very good selection with good spread No opportunity to discuss with them again tonight, will discuss tomorrow morning. 2. Referring to our 812 paragraph 2 reduced list numbered 60 securities value about $120 million less private sales. WHIGHAM. No.30 Referring to our 28 for Treasury. This morning's discussion with J.P.Morgan & Co. confirms our view. WHIGHAM. 279 January 24, 1941 2:50 p.m. James Forrestal: Henry. H.M.Jr: Hello, Jim. F: I had a communication from the O.P.M. this morning which concerned itself with priorities on foreign contracts and I didn't know whether it had been cleared with you or not. I thought I'd send a copy of it over. H.M.Jr: Would you mind addressing it to Philip Young? F: Yes, I'll do that. H.M.Jr: Because he handles all of that. F: O. K. I will. H.M.Jr: He lives with that. F: Right. H.M.Jr: Thank you. 280 January 24, 1941 2:55 p.m. H.M.Jr: Hello. Speaker Sam Rayburn: Yes. H.M.Jr: Sam, Ed was telling me that you called him about 11:00 I wondered if you got through with the and President. R: No. I didn't try. H.M.Jr: Oh. R: I just - I haven't yet. I assume he'11 go away this evening. H.M.Jr: R; He's away now. Oh, he's away now. No, I didn't get through, but I m going by and see Cordell in the morning anyhow and see if - and, Henry, I'll let you know exactly - truth of the business is, Luther Johnson was talking to me about this the other day and I haven't cleared the thing with Bloom yet but that'11 be all right. I will. H.M.Jr: R: H.M.Jr: R: H.M.Jr: R: I see. But I've got to consult him of course and I was just telling Ed that Mr. Beaman was in here this morning and this limitation and things like that is going to be a headache. Yeah. We re trying to draw the thing and I wish if you could spare Ed in the morning, he and Beaman would work on some of those things a little for us before we meet Sunday morning. He's yours. Well, that'11 be fine. I got here and I was so busy all morning, Henry, that I just didn't try. 281 -2H.M.Jr: Well, he's yours. R: And I don't know whether it would have done H.M.Jr: R: H.M.Jr: any good in a little telephone conversation anyhow. Right. But if we can work out something Sunday, why if he wants us to we can submit it to him Monday and let it go at that. Well, you can have anybody we've got down here. R: All right, fine, Henry. Thank you. H.M.Jr: Right. January 24, 1941. 3:42 p.m. H.M.Jr: Philip Phil. Young: Yes sir. H.M.Jr: I just talked to Mr. Stimson. Y: Yes sir. H.M.Jr: And he wanted to know how much the English wanted Y: How much? H.M.Jr: to buy for the calendar year 41 and 42. I told him I thought the total was eight billion; now you might be talking to him, he should have something for me for Sunday afternoon or earlier. Just a second Y: Yes sir. H.M.Jr: Hello. Y: Yes sir. H.M.Jr: Isn't that about right? Eight billion? Y: H.M.Jr: Yeh, that was the original figure. Now you know we have that new deficiency list. Well, tell them that between now and noon tomorrow I would like to know how much they want to buy in this calendar year 41 and how much they want to buy in 42. Y: In dollars? H.M.Jr: Dollars. Y: Oh I don't know, I think it's anybody's guess because I don't think you can translate it into dollar value. H.M.Jr: Well just get - Y: The quantities are 80 large. H.M.Jr: Well anyway, get me something, Phil. Yes sir. Y: H.M.Jr: 41 and 42. 282 -2Y: H.M.Jr: Yeh. I said five billion for 41 and three billion more for 42. Y: Well, that's a good guess anyhow. H.M.Jr: Well, I'll be talking to you again about it by Y: Right. Any objection to $400,000 worth of forgings to clear? (Laughter) H.M.Jr: noon tomorrow. (Laughter) O.K. When are we going to put them on an allowance? Y: I don't know. We had better do it soon. H.M.Jr: Better do it damn soon. Y: (Laughter) Yes. Y: Any ideas as to an amount on the loan? H.M.Jr: I'd like Sir Frederick Phillips to set that. Y: H.M.Jr: Y: Yeh, that's good. Let him set the amount. All right. 283 284 JAN 24 1941 Your Excellency: I am taking advantage of this opportunity to send you my personal greetings through Dr. B. Currie. The recent stops taken by the United States Government with respect to China were, as you must have realised, a source of great satisfaction to no. I hope you will agree with - that the proposed - Chinese Stabilisation Committee will play a signifieant role is strengthening China's mentary system and in aiding her struggle for independence. It could and should serve as a most important link between our two economics and should provide a further basis for fruitful monetary cooperation in the critical days that lie ahead. I regard the chairmanship of this proposed sittee to be a position of great importance. In my opinion, the Chairmen should not only be - experienced banker and patriot, but should also have - understanding of the United States. I - therefore taking the liberty of suggesting the - of Mr. K. P. Chem for this place. If I did not know that you shared my high opinion of him, I should not presence is this my, but I think you should know that such - appointment would please the Treasury very such. FILE COPY 285 -2I - following China's efforte with been syapsday and admiration, and hope that the pplanded unity the Chinese people have achieved under the most die- will, I Healt feel sure, circumstances succincially will maintain be preserved. its coarageous China al united struggle for independence against agreegive. with my most cordial and best wishes for year continued success. Yours sincerely, (Signed) H. Morgonthau, Jr. Excellency, .I.R. Kung, Mee President and Minister of Finance, Executive Yuan, singling, China. This ltr. sent to Dr. Lauchlin Currie, White House, for transmittal to Dr. Kung. (by hand 10:40) is to Mr. Thompson FILE COPY 286 MEMORANDUM January 24, 1941. TO: Secretary Morgenthau FROM: Mr. Sullivan Attached hereto is a suggested plan for amending Section 722 of the Second Revenue Act of 1940, and a copy of the Act itself. During the conference it became evident that passage of the Act could be obtained only by accepting the amendment introduced on the floor of the Senate by Senator George which provided for general relief. It was understood by all conferees that the George amendment was inadequate and would be superseded by an amendment to be introduced at this session and to apply to 1940 income. JLS 287 MEMORANDUM To: Mr. Sullivan January 22, 1941 From: Mr. Tarleau Re: Suggested plan for granting relief under the Excess-Profits Tax Act of 1940 The proposals outlined below are suggested as a method of pro- viding relief in cases where the present provisions of the excessprofits tax operate inequitably. The proposals are to be inserted in lieu of Section 722 of the present law. I. Specific Relief 1. New corporations and corporations with fluctuating earnings To provide relief for corporations with fluctuating earnings and for newly or recently organized corporations, taxpayers should be pernitted to carry forward for two years the unused excess-profits credit of any excess profits taxable year. 2. Growing corporations To provide a more equitable average earnings credit in the case of growing corporations, the following alternative method of computing base period earnings should be permitted in addition to the present averaging method: Ascertain the average of 1936 and 1937 earnings, and the average of 1938 and 1939 earnings; subtract the first average from the second, divide the difference by two and add the result to the average of 1938 and 1939 earnings. The resulting sum shall constitute the base period earnings, except that a figure in excess of the largest income of any year during the base period may not be used. 3. Abnormal deductions in base period To aid those corporations which have reduced earnings in the base period because of unusual deduction items not eliminated under present provisions, it is suggested that abnormal deductions in the base periodeither those abnormal in kind or abnormal in amount (by reference to the average of the corresponding item in the four previous years)-should be eliminated in the computation of base period earnings. 288 -24. Incorporation of partnership or sole proprietorship To permit the average earnings credit of a corporation formed during the base period as a result of the incorporation of a partnership or sole proprietorship to reflect the earnings of such predecessor, the base period earnings of the corporation should be computed by reference to the earnings of the partnership or proprietorship instead of the present hypothetical 8 percent of invested capital provided in the present law. This provision should be limited to cases in which there is no change of identity as a result of the incorporation and such incorporation occurs in a tax-free exchange. 5. Capitalization of items previously deducted as expenses To prevent the hardships that may occur by reason of the deduction in prior years for income tax purposes of certain expenditures whose capitalization would have benefited the taxpayer under the excess-profits tax, the taxpayer should be permitted to re-examine prior years and make the desired changes. Thus, if the taxpayer had erroneously deducted an expenditure which should have been capitalized, or having an option to deduct or capitalize the expenditure, had chosen to deduct it, it should be permitted to revise the earlier income tax treatment and capitalize the expenditure if so desired. Any additional income tax due as a result of such change, plus interest thereon, would have to be paid. In the case of expenditures for advertising and good will, the capitalisation of the portion properly attributable to capital should be limited to expenditures made in the base period in view of the short life of the benefit of such expenditures. 6. Correction of erroneous results previously reached under the income tax To prevent the hardships that may occur by reason of erroneous treatment of items with respect to the income tax in prior years in cases where such items have a bearing upon the excess-profits tax, it is suggested that taxpayers be permitted to re-examine the results reached under the income tax in prior years and to take positions with respect to the excess-profits tax inconsistent with those results if the earlier treatment was erroneous. In such cases, however, the additional income tax which would have been due if the treatment in the prior income tax year were likewise altered must be paid, together with interest thereon. Correspondingly, if the inconsistent position is taken by the Government any refund owing to the taxpayer, plus interest, must be paid. 7. Abnormal income in taxable year To prevent the undue tax that would result from the receipt in one taxable year of an abnormal item of income attributable in whole or in part to other years, it is suggested that such abnormal items- 289 -3either in kind or amount (by reference to the average of the corresponding item in the prior four years)-be spread over the years to which they are attributable and taxed according to the method now utilized in similar cases in Section 721. 8. Affiliated corporations The present restrictions affecting inclusion of insurance companies in consolidated returns should be re-examined to ascertain if casualty insurance companies may be permitted to file consolidated returns with non-insurance companies. 9. Gain on involuntary conversion of property As capital gains are eliminated from excess profits income, and as gain on the involuntary conversion of property (such as insurance paid on the loss of a ship in excess of the tax basis of the ship) is similar to capital gain, such gain (if it is ruled not to be capital gain) likewise should be excluded from excess profits income. II. General Relief To provide relief in unanticipated cases not covered by the above specific relief provisions, a general relief provision should be inserted along the following lines: If the taxpayer shows by the clear preponderance of the evidence that the base period earnings as computed under present provisions are less than the earnings which would normally have been experienced by the taxpayer during the base period, considering its status as to type of business as of the beginning of its first excess-profits taxable year, and also shows the adjustments necessary, such adjustments should then be made, provided they do not conflict with any principle respecting the computation of the average earnings credit contained in existing provisions. The following limitations should be made applicable to the general relief provision: (a) No relief should be granted (A) for low base period income due to (1) high prices of materials, labor, capital and other agents of production, (2) low selling price of the product, or (3) low physical volume of sales owing to low demand by the buyers of the product for the output of the taxpayer: (B) for capital investments made at rela- tively low price levels or at bargain prices; (c) for the development of intangibles by the taxpayer which other taxpayers may have secured through purchase; (D) for income derived in large part from personal services; (E) for borrowed capital; (F) for the time and manner of or ganisation; (G) for any factor already covered by a specific relief provision. 290 4 - (b) No relief should be granted unless the corporation is paying excess-profits tax equal to at least 6 percent of its normal tax net income and unless the relief granted would result in a diminution of excess-profits tax by at least 10 percent. The relief granted an should not reduce the excess-profits tax below such 6 percent figure, and the reduction allowed by reason of such relief should be reduced by 10 percent of the tax computed without such reduction. (c) A taxpayer must compute his tax without the benefit of the general relief provision and must petition the Commissioner for such relief by way of a claim for refund. (d) A taxpayer may appeal from the Commissioner's decision re- specting the general relief provision only to the Board of Tax Appeals. A special division of three members should be established in the Board of Tax Appeals to hear such appeals and its decision should be final. Procedural steps should be adopted to coordinate the consideration of the relief and non-relief phases of the excess-profits tax, and the consideration of the income tax and the excess-profits tax. Limitations (b) and (c) should also be applicable to the specific relief provisions regarding the capitalization of advertising and good will expenditures. Limitation (d) should also be applicable to that specific relief provision, to the present Section 721 provisions, and to the specific relief provisions respecting abnormal deductions and abnormal income. SSS:mrm 1/22/41 291 [PUBLIC-No. 801-76TH CONGRESS] [CHAPTER 757-3D SESSION] [H. R. 10413] AN ACT To provide revenue, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may cited as the "Second Revenue Act of 1940". TITLE I-CORPORATION INCOME TAX SEC. 101. CORPORATION INCOME TAX. (a) TAX ON CORPORATIONS IN GENERAL-Section 13 (b) of the Internal Revenue Code, as amended by section 3 of the Revenue Act of 1940. is amended to read as follows: "(b) IMPOSITION OF TAX-There shall be levied, collected, and paid for each taxable year upon the normal-tax net income of every corporation the normal-tax net income of which is more than $25,000 (except a corporation subject to the tax imposed by section 14, section 931 (a), Supplement G, or Supplement Q) whichever of the following taxes is the lesser: "(1) GENERAL RULE.-A tax of 221/10 per centum of the normaltax net income; or "(2) ALTERNATIVE TAX CORPORATIONS WITH NORMAL-TAX NET INCOME SLIGHTLY MORE THAN $25,000).-A tax of $3,775, plus 35 per centum of the amount of the normal-tax net income in excess of $25,000." (b) TAX ON FOREIGN CORPORATIONS-Section 14 (c) (1) of the Internal Revenue Code, as amended by section 3 of the Revenue Act of 1940, is amended to read as follows: "(e) FOREIGN CORPORATIONS.- "(1) In the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, the tax shall be an amount equal to 221/8 per centum of the normal-tax net income, regardless of the amount thereof." (e) TAX ON MUTUAL INVESTMENT COMPANIES.-Section 362 (b) of the Internal Revenue Code, as amended by section 3 of the Revenue Act of 1940, is amended to read as follows: "(b) IMPOSITION OF TAX-There shall be levied, collected, and paid for each taxable year upon the Supplement Q net income of every mutual investment company a tax equal to 221/10 per centum of the amount thereof." (d) DEFENSE TAX FOR FIVE YEARS.-The first sentence of section 15 of the Internal Revenue Code, added to such Code by section 201 of the Revenue Act of 1940, is amended to read as follows: "In the case 2 (Pvs.801.) 3 of any taxpayer, the amount of tax under this chapter for able year beginning after December 31, 1939, and before January any tax. 1945, shall be the tax computed without regard to this 1, increased by 10 per centum except that in the case of a corporation section, the increase shall be limited to 10 per centum of the tax computed without to theRevenue amendments and (c) ofregard the Second Act of made 1940." by section 101 (a), (b), (e) TAXABLE YEARS TO WHICH APPLICABLE.-Amendments made this section shall be applicable only with respect to taxable years by beginning after December 31, 1939. this subsection to such taxpayer, in lieu of each amount, other than the percentages, specified in such paragraph, there shall be substituted an amount which bears the same ratio to the $500,000. so specified as the highest bracket amount so computed bears amount to "(b) DEFINITION OF ADJUSTED EXCESS PROFITS NET INCOME.- used in this section, the term 'adjusted excess profits net income in the caseinofsection any taxable year means theofexcess profits net income (as defined 711) minus the sum "(1) SPECIFIC EXEMPTION.-A specific exemption of $5,000; "(2) EXCESS PROFITS CREDIT.-The credit allowed under section 712; and amount of the excess profits TITLE II-EXCESS PROFITS TAX SEC. 201. EXCESS PROFITS TAX OF 1940. "(3) UNUSED EXCESS PROFITS CREDIT.-In the case of a taxpayer The Internal Revenue Code is amended by inserting after section 706 theTax following subchapter which may be cited as the "Excess Profits Act ofnew 1940": "SUBCHAPTER E-EXCESS PROFITS TAX the normal-tax net income of which for the taxable year is not more than $25,000, the amount by which the excess profits credit for the preceding taxable year (if beginning after December 31, taxable year. 1939) exceeds the excess profits net income for such preceding "SEC. 711. EXCESS PROFITS NET INCOME. "Part I "SEC. 710. IMPOSITION OF TAX. "(a) IMPOSITION.-There shall be levied, collected, and paid, for each taxable year beginning after December 31, 1939, on the adjusted excess profits net income, as defined in subsection (b), of every corporation follows: (except a corporation exempt under section 727) a tax as "(1) Upon adjusted excess profits net incomes of less than $20,000, 25 per centum of the adjusted excess profits net income. "$5,000 upon adjusted excess profits net incomes of $20,000; and upon adjusted excess profits net incomes in excess of $20,000, and not in excess of $50,000, 30 per centum in addition of such excess. "$14,000 upon adjusted excess profits net incomes of $50,000; and upon adjusted excess profits net incomes in excess of $50,000. and not in excess of $100,000, 35 per centum in addition of such excess. "$31,500 upon adjusted excess profits net incomes of $100,000: and upon adjusted excess profits net incomes in excess of $100,000. and not in excess of $250,000, 40 per centum in addition of such excess. "$91,500 upon adjusted excess profits net incomes of $250,000: and upon adjusted excess profits net incomes in excess of $250,000. and not in excess of $500,000, 45 per centum in addition of such excess. "$204,000 upon adjusted excess profits net incomes of $500,000: and upon adjusted excess profits net incomes in excess of $500,000. 50 per centum in addition of such excess. "(2) APPLICATION OF RATES IN CASE OF CERTAIN EXCHANGES.- If the taxpayer's highest bracket amount for the taxable year computed under section 752 (relating to certain exchanges) is less than $500,000, then in the application of paragraph (1) of "(a) TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1939.-The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section be 13made: (a) (2), for such year except that the following adjustments shall "(1) EXCESS PROFITS CREDIT COMPUTED UNDER INCOME CREDIT.- If the excess profits credit is computed under section 713, the adjustments shall be as follows: "(A) Income Taxes.-The deduction for taxes shall be increased by an amount equal to the tax (not including the tax year;under section 102) under Chapter 1 for such taxable "(B) Long-term Gains and Losses.-There shall be excluded long-term capital gains and losses, There shall be excluded the excess of gains from the sale or exchange of property held for more than eighteen months which is of a character which is subject to the allowance for depreciation provided in section 23 (1) over the losses from the sale or exchange of such property; "(C) Income From Retirement or Discharge of Bonds, and So Forth.-There shall be excluded, in the case of any taxpayer, income derived from the retirement or discharge by the taxpayer of any bond, debenture, note, or certificate or other evidence of indebtedness, if the obligation of the taxpayer has been outstanding for more than eighteen months, including, in case the issuance was at a premium, the amount includible in income for such year solely because of such retirement or discharge; "(D) Refunds and Interest on Agricultural Adjustment Act Taxes.-There shall be excluded income attributable to refund of tax paid under the Agricultural Adjustment Act of 1933, as amended, and interest upon any such refund; 4 [PUB.BOL] "(E) Recoveries of Bad Debts.-There shall be excluded income attributable to the recovery of a bad debt if a dedue. for any taxable year beginning prior to January gross 1, "(F) Dividends Received.-The credit for dividends received shall apply, without limitation, to dividends on stock of domestic corporations. "(2) EXCESS PROFITS CREDIT COMPUTED UNDER INVESTED CAPITAL CREDIT.-If the excess profits is computed under section 714, the adjustments shall be ascredit follows: "(A) Dividends Received.-The credit for dividends received shall apply, without limitation, to all dividends on stock of all corporations, except dividends (actual or constructive) on stock of foreign personal-holding companies: "(B) Interest.-The deduction for interest shall be reduced by an amount equal to 50 per centum of so much of such interest as represents interest on the indebtedness included in the daily amounts of borrowed capital (determined under section 719 (a)) "(C) Income Taxes.-The deduction for taxes shall be increased by an amount equal to the tax (not including the tax under section 102) under Chapter 1 for such taxable "(F) Refunds and Interest on Agricultural Adjustment Act Taxes.-There shall be excluded income attributable to refund of tax paid under the Agricultural Adjustment Act of 1933, as amended, and interest upon any such refund; "(G) Interest on Certain Government Obligations.-The normal-tax net income shall be increased by an amount equal to the amount of the interest on obligations held during the taxable year which are described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income, if taxpayer has so elected under section 720 (d) and (H) Recoveries of Bad Debts.-There shall be excluded the income attributable to the recovery of a bad debt if a deduc- of the tax computed on such annual basis as the number of days in the taxable year is of the number of days in the twelve months ending with the close of the taxable year. "(b) TAXABLE YEARS IN BASE PERIOD.- "(1) GENERAL RULE AND ADJUSTMENTS-The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January i, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustments shall be made (for additional adjustments in case of certain increased by an amount equal to the tax (not including the tax under section 102) for such taxable year under Title I or Chapter 1, as the case may be, of the revenue law applicable to such year; a the amount includible in income for such year solely because of such retirement or discharge; income shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the taxable year and dividing by the number of days in the taxable year. The tax shall be such part "(A) Income Taxes.-The deduction for taxes shall be "(D) Long-term Gains and Losses.-There shall be "(E) Income From Retirement or Discharge of Bonds, and So Forth.-There shall be excluded, in the case of any taxpayer, income derived from the retirement or discharge by the taxpayer of any bond, debenture, note, or certificate or other evidence of indebtedness, if the obligation of the taxpayer has been outstanding for more than eighteen months, including, in case the issuance was at a premium, "(3) TAXABLE YEAR LESS THAN TWELVE MONTHS.-If the taxable year is a period of less than twelve months the excess profits net reorganizations, see section 742 (e)) year; excluded long-term capital gains and losses. There shall be excluded the excess of gains from the sale or exchange of property held for more than eighteen months which is of character which is subject to the allowance for depreciation provided in section 23 (1) over the losses from the sale or exchange of such property; 5 tion with reference to such debt was allowable from gross 1940. income for any taxable year beginning prior to January 1, tion with reference to such debt was allowable from 1940: income [PUB. 801.) "(B) Long-Term Gains and Losses.-There shall be excluded long-term capital gains and losses. There shall be excluded the excess of gains from the sale or exchange of property held for more than eighteen months which is of a character which is subject to the allowance for depreciation provided in section 23 (1) over the losses from the sale or exchange of such property "(C) Income From Retirement or Discharge of Bonds, and So Forth.-There shall be excluded, in the case of any taxpayer, income derived from the retirement or discharge by the taxpayer of any bond, debenture, note, or certificate or other evidence of indebtedness, if the obligation of the taxpayer has been outstanding for more than eighteen months, including, in case the issuance was at a premium, the amount includible in income for such year solely because of such retirement or discharge; "(D) Deductions on Account of Retirement or Discharge of Bonds, and So Forth.-If during the taxable year the taxpayer retires or discharges any bond, debenture, note, or certificate or other evidence of indebtedness, if the obligation of the taxpayer has been outstanding for more than eighteen months, the following deductions for such taxable year shall not be allowed "(i) The deduction allowable under section 23 (a) for expenses paid or incurred in connection with such retirement or discharge; 6 [Pca.801.] "(ii)retirement The deduction for losses such or discharge; andallowable by reason of "(iii) In case the issuance was at a discount, the amount deductible for such year solely because of such retirement or discharge; "(E) Casualty, Demolition, and Similar Losses.-Deduc tions under section 23 (f) for losses arising from fires, storms, shipwreck, or other casualty, or from theft, or arising from the demolition, abandonment, or loss of useful value of property, notallowed: compensated for by insurance or otherwise, shall not be "(F) Repayment of Processing Tax to Vendees.-The deduction under section 23 (a), for any taxable year, for expenses shall be decreased by an amount which bears the same ratio to the amount deductible on account of any repayment or credit by the corporation to its vendee of any amount attributable to any tax under the Agricultural Adjustment Act of 1933, as amended, as the excess of the aggregate of the amounts so deductible in the base period over the aggregate of the amounts attributable to taxes under such Act collected from its vendees which were includible in the corporation's gross income in the base period and which were not paid, bears to the aggregate of the amounts so deductible in the base period; '(G) Payment of Judgments, and So Forth.-Deductions attributable to any claim, award, judgment, or decree against the taxpayer, or interest on any of the foregoing, shall not be allowed if in the light of the taxpayer's business it was abnormal for the taxpayer to incur a liability of such character or, if the taxpayer normally incurred such liability, the amount of such liability in the taxable year was grossly disproportionate to the amount of such liability in the four previous taxable years; ((H) All expenditures for intangible drilling and development costs paid or incurred in or for the drilling of wells or the preparation of wells for the production of oil or gas, or expenditures for development costs in the case of mines, which the taxpayer has deducted from gross income as an expense, shall not be allowed to the extent that in the light of the taxpayer's business it was abnormal for the taxpayer to incurr a liability of such character or, if the taxpayer normally incurred such liability, to the extent that the amount of such liability in the taxable year was grossly dis- proportionate to the amount of such liability in the four previous taxable years; and (1) Dividends Received.-The credit for dividends received shall apply, without limitation, to dividends on stock of domestic corporations. "(2) CAPITAL GAINS AND LOSSES.-For the purposes of this subsection the normal-tax net income and the special-class net income referred to in paragraph (1) shall be computed as if section 23 (g) (2), section 23 (k) (2), and section 117 were part of the revenue law applicable to the taxable year the excess profits net 7 income of which is being computed, with the exception that the net short-term capital loss carry-over provided in subsection (e) of section 117 shall be applicable to net short-term capital losses for taxable years beginning after December 31, 1934. Such exception shall not apply for the purposes of computing the tax under subchapter for any taxable year beginning before Januarythis 1, 1941. "SEC. 712. EXCESS PROFITS CREDIT-ALLOWANCE (a) DOMESTIC CORPORATIONS-In the case of a domestic corporation which was in existence before January 1, 1940, the excess profits credit for any taxable year shall. at the election of the taxpayer made in its return for such taxable year, be an amount computed under section 713 or section 714. (For election in case of certain reorganizations of corporations not qualified under the preceding sentence, see section 741.) In the case of all other domestic corporations the excess profits credit for any taxable year shall be an amount computed under section 714. In the case of a domestic corporation which for any taxable year does not file a return before the expiration of the time prescribed by law for filing such return, the excess profits credit for such taxable year shall be an amount computed under section 714. (b) FOREIGN CORPORATIONS-In the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, the first taxable year of which under this subchapter begins on any date in 1940, which was in existence on the day forty-eight months prior to such date and which at any time during each of the taxable years in such forty-eight months was engaged in trade or business within the United States or had an office or place of business therein, the excess profits credit for any taxable year shall, at the election of the taxpayer in its return for such taxable year, be an amount computed under section 713 or section 714. In the case of all other such foreign corporations the excess profits credit for any taxable year shall be an amount computed under section 714. In the case of a foreign corporation which for any taxable year does not file a return before the expiration of the time prescribed by law for filing such return, the excess profits credit714. for such taxable year shall be an amount computed under section "SEC. 713. EXCESS PROFITS CREDIT-BASED ON INCOME. "(a) AMOUNT OF EXCESS PROFITS CREDIT.-The excess profits credit for any taxable year, computed under this section, shall be- (1) DOMESTIC CORPORATIONS.-In the case of a domestic cor- poration- "(A) 95 per centum of the average base period net income, as defined in subsection (b), "(B) Plus 8 per centum of the net capital addition as defined in subsection (c), or "(C) Minus 6 per centum of the net capital reduction as defined in subsection (c). "(2) FOREIGN CORPORATIONS.-In the case of a foreign corporation, 95 per centum of the average base period net income. 8 (Pra. NO.) "(b) AVERAGE BASE PERIOD NET INCOME-For the purposes of this section the as average base period net income of the taxpayer shall be determined follows: '(1) By computing the aggregate of the excess profits income for each of the taxable years of the taxpayer beginning net after December 31, 1935, and before January 1, 1940, reduced, in the case of each such taxable year in which the deductions plus the credit for dividends received exceeded the gross income. by the amount attributable to such excess under paragraph (4) "(2) By dividing the amount ascertained under paragraph (1) by the total number of months in all such taxable years; and "(3) By multiplying the amount ascertained under paragraph (2) by twelve. (4) For the purposes of paragraph (1)"(A) In determining whether, for any taxable year, the deductions plus the credit for dividends received exceeded the gross income, and in determining the amount of such excess, the adjustments provided in section 711 (b) (1) shall be made: and "(B) The amount attributable to any taxable year in which there is such an excess shall be the amount of such excess, except that such amount shall be zero if there is only one such year, or, if more than one, shall be zero for the year in which such excess is the greatest. "(5) For the purposes of paragraph (1), if the taxpayer was in existence during only part of the 48 months preceding the beginning of its first taxable year under this subchapter (hereinafter in this paragraph called 'base period'), its excess profits net income"(A) for each taxable year of twelve months (beginning with the beginning of such base period) during which it was not in existence, shall be an amount equal to 8 per centum of the excess of(i) the daily invested capital for the first day of the taxpayer's first taxable year beginning after December 31, 1939, over "(ii) an amount equal to the same percentage of such daily invested capital as is applicable under section 720 in reduction of the average invested capital of the preceding taxable year; "(B) for the taxable year of less than twelve months consisting of that part of the remainder of the base period during which it was not in existence, shall be the amount ascer- tained for a full year under subparagraph (A). multiplied by the number of days in such taxable year of less than twelve months and divided by the number of days in the twelve months ending with the close of such taxable year. "(6) In no case shall the average base period net income be less than zero. '(7) For computation of average base period net income in case of certain reorganizations, see section 742. 9 ((c) ADJUSTMENTS IN EXCESS PROFITS CREDIT ON ACCOUNT OF CAPITAL CHANGES.-For the purposes of this section- "(1) The net capital addition for the taxable year shall be the excess, divided by the number of days in the taxable year. of the aggregate of the daily capital addition for each day of the taxable the aggregate each year day ofover the taxable year. of the daily capital reduction for "(2) The net capital reduction for the taxable year shall be the excess, divided by the number of days in the taxable year, of the aggregate of the daily capital reduction for each day of the taxable the year. aggregate of the daily capital addition for each day ofyear the over taxable "(3) The daily capital addition for any day of the taxable year shall be the aggregate of the amounts of money and property paid in for stock, or as paid-in surplus, or as a contribution to capital, after the beginning of the taxpayer's first taxable year under this subchapter and prior to such day. In determining the amount of any property paid in, such property shall be included in an amount determined in the manner provided in section 718 (a) (2). A distribution by the taxpayer to its shareholders in its stock or rights to acquire its stock shall not be regarded as money or property paid in for stock, or as paid-in surplus, or as a contribution to capital. The amount ascertained under this paragraph shall be reduced by the excess, if any, of the excluded capital for such day over the excluded capital for the first day of the taxpayer's first taxable year under this subchapter. For the purposes of this paragraph the excluded capital for any day shall be an amount equal to the sum of the following: "(A) The aggregate of the adjusted basis (for determining loss upon sale or exchange) as of the beginning of such day, of obligations held by the taxpayer at the beginning of such day, which are described in section 22 (b) (4) (A), (B), or (C) any part of the interest from which is excludible from and gross income or allowable as a credit against net income; "(B) The aggregate of the adjusted basis (for determining loss upon sale or exchange) as of the beginning of such day. of stock of domestic corporations held by the taxpayer at the beginning of such day. The daily capital addition shall in no case be less than zero. For daily capital additions and reductions in case of certain reorganizations, see section 743.) (4) The daily capital reduction for any day of the taxable year shall be the aggregate of the amounts of distributions to shareholders, not out of earnings and profits, after the beginning of the taxpayer's first taxable year under this subchapter and prior to such day. "SEC. 714. EXCESS PROFITS CREDIT-BASED ON INVESTED CAPITAL. "The excess profits credit, for any taxable year, computed under this section, shall be an amount equal to 8 per centum of the taxpayer's invested capital for the taxable year, determined under section 715. PER No. 10 11 [Pva 801.) "SEC. 715. DEFINITION OF INVESTED CAPITAL. "For the purposes of this subchapter the invested capital for taxable year shall be the average invested capital for such year. any determined under section 716, reduced by an amount computed under section 720 (relating to inadmissible assets). If the Commissioner finds that in any case the determination of invested capital, on a basis other than a daily basis, will produce an invested capital differing by not more than $1,000 from an invested capital determined on a daily basis, he may, under regulations prescribed by him with the approval of the Secretary, provide for such determination on such other basis, (For computation of invested capital in case of foreign corporations and corporations entitled to the benefits of section 251, see section 724.) "SEC. 716. AVERAGE INVESTED CAPITAL. "The average invested capital for any taxable year shall be the aggregate of the daily invested capital for each day of such taxable year, divided by the number of days in such taxable year. "SEC. 717. DAILY INVESTED CAPITAL. "The daily invested capital for any day of the taxable year shall be the sum of the equity invested capital for such day plus the borrowed invested capital for such day determined under section 719. "SEC. 718. EQUITY INVESTED CAPITAL. "(a) DEFINITION.-The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b)"(1) MONEY PAID IN.-Money previously paid in for stock, or as paid-in surplus, or contribution to capital; "(2) PROPERTY PAID IN.-Property (other than money) previ- ously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. If the property was disposed of before such taxable year, such basis shall be determined in the same manner as if the property were still held at the beginning of such taxable year. If such unadjusted basis is a substituted basis it shall be adjusted, with respect to the period before the property was paid in, in the manner provided in section 113 (b) (2) "(3) DISTRIBUTIONS IN STOCK.-Distributions in stock- '(A) Made prior to such taxable year to the extent to which they are considered distributions of earnings and profits; and "(B) Previously made during such taxable year to the extent to which they are considered distributions of earnings and profits other than earnings and profits of such taxable year; "(4) EARNINGS AND PROFITS AT BEGINNING OF YEAR.-The accu- mulated year; and earnings and profits as of the beginning of such taxable "(5) INCREASE ON ACCOUNT OF GAIN ON TAX-FREE LIQUIDATION.- In the case of the previous receipt of property (other than property described in the last sentence of section 113 (a) (15)) by the taxpayer in complete liquidation of another corporation under section 112 (b) (6), or the corresponding provision of a prior revenue law, an amount, with respect to each such liquidation, equal to the amount by which the aggregate of the amount of the money so received and of the adjusted basis, at the time of receipt, of all sum of property (other than money) so received, exceeds the "(A) The aggregate of the adjusted basis of each share of stock with respect to which such property was received: such adjusted basis of each share to be determined immediately prior totothe receipt any property in such liquidation with respect such share,ofand "(B) The aggregate of the liabilities of such other corporation assumed by the taxpayer in connection with the receipt of such property, of the liabilities (not assumed by the taxpayer) to which such property so received was subject, and of any other consideration (other than the stock with respect to such property was received) given by the taxpayer forwhich such property so received. "(b) REDUCTION IN EQUITY INVESTED CAPITAL-The amount by which the equity invested capital for any day shall be reduced as provided in subsection (a) shall be the sum of the following amounts"(1) DISTRIBUTIONS IN PREVIOUS YEARS.-Distributions made prior to such taxable year which were not out of accumulated earnings and profits; "(2) DISTRIBUTIONS DURING THE YEAR-Distributions previously made during such taxable year which are not out of the earnings and profits of such taxable year; "(3) EARNINGS AND PROFITS OF ANOTHER CORPORATION-The earnings and profits of another corporation which previously at any time were included in accumulated earnings and profits by reason of a transaction described in section 112 (b) to (e), both inclusive, or in the corresponding provision of a prior revenue law, or by reason of the transfer by such other corporation to the taxpayer of property the basis of which in the hands of the taxpayer is or was determined with reference to its basis in the hands of such other corporation, or would have been so determined if the property had been other than money; and "(4) REDUCTION ON ACCOUNT OF LOSS ON TAX-FREE LIQUIDA- TION.In the case of the previous receipt of property (other than property described in the last sentence of section 113 (a) (15)) by the taxpayer in complete liquidation of another corporation under section 112 (b) (6), or the corresponding provision of a prior revenue law, an amount, with respect to each such liquidation, equal to the amount by which the sum of- 12 13 (Pcs.sot.) "(A) The aggregate of the adjusted basis of each share of stock with respect to which such property was received: such adjusted basis of each share to be determined immediatelyrespect prior totothe receipt any property in such liquidation with such share,ofand "(B) The aggregate of the liabilities of such other corporation assumed by the taxpayer in connection with the receipt of such property, of the liabilities (not assumed by the taxpayer) to which such property so received was subject. and of any other consideration (other than the stock with respect to which such property was received) given by the taxpayer for such property so received, exceeds the aggregate of the amount of the money so received and of the adjusted basis, at the time of receipt, of all property (other than money) so received. The amount of the reduction under this paragraph shall not exceed the accumulated earnings and profits as of the beginning of such taxable year. "(e) RULES FOR APPLICATION OF SUBSECTIONS (A) AND (B).-For the purposes of subsections (a) and (b)- F(1) DISTRIBUTIONS TO SHAREHOLDERS.-The term "distribution" means a distribution by a corporation to its shareholders, and the term 'distribution in stock means a distribution by a cor- poration in its stock or rights to acquire its stock. To the extent that a distribution in stock is not considered a distribution of earnings and profits it shall not be considered a distribution. A distribution in stock shall not be regarded as money or propertyto paid in for stock, or as paid-in surplus, or as a contribution capital. "(2) DISTRIBUTIONS IN FIRST SIXTY DAYS OF TAXABLE YEAR-In the application of such subsections to any taxable year beginning after December 31, 1940, so much of the distributions (taken in the order of time) made during the first sixty days thereof as does not exceed the accumulated earnings and profits as of the beginning thereof (computed without regard to this paragraph) shall be considered to have been made on the last day of the then such stock shall not be considered as property paid in for stock of, or as paid-in surplus of, or as a contribution to capital of. the corporation subparagraph (A) resulting or (B). from the transaction referred to in "(d) For special rules affecting computation of property paid in for stock connection with certain exchanges and liquidations, see section 751in(a). For723. determination see"(e) section of equity invested capital in special cases, "SEC. 719. BORROWED INVESTED CAPITAL. "(a) BORROWED CAPITAL-The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following: "(1) The amount of the outstanding indebtedness (not including interest, and not including indebtedness described in section 751 (b) relating to certain exchanges) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, plus, "(2) In the case of a taxpayer having a contract (made before the expiration of 30 days after the date of the enactment of the Second Revenue Act of 1940) with a foreign government to furnish articles, materials, or supplies to such foreign government. if such contract provides for advance payment and for repayment by the vendor of any part of such advance payment upon cancellation of the contract by such foreign government, the amount which would be required to be so repaid if cancellation occurred at the beginning of such day, but no amount -hall be considered as borrowed capital under this paragraph which has been includible in gross income. "(b) BORROWED INVESTED CAPITAL-The borrowed invested capital for any day of any taxable year shall be determined as of the begin- ning of such day and shall be an amount equal to 50 per centum of the borrowed capital for such day. preceding taxable year. (3) COMPUTATION OF EARNINGS AND PROFITS OF TAXABLE TEAR- For the purposes of subsections (a) (3) (B) and (b) (2) in determining whether a distribution is out of the earnings and profits of any taxable year, such earnings and profits shall be computed as of the close of such taxable year without diminution by reason of any distribution made during such taxable year or by reason of the tax under this subchapter for such year and the determination shall be made without regard to the amount of earnings and profits at the time the distribution was made. "(4) STOCK IN CASE OF MERGER OR CONSOLIDATION.-If a corpo- ration owns stock in another corporation, and"(A) such corporations are merged or consolidated in 3 statutory merger or consolidation, or "(B) such corporations are parties to a transaction similar which results in the elimination of such stock in a manner to that resulting from a statutory merger or consolidation. "SEC. 720. ADMISSIBLE AND INADMISSIBLE ASSETS "(a) DEFINITIONS.-For the purposes of this subchapter"(1) The term 'inadmissible assets' means- "(A) Stock in corporations except stock in a foreign personal-holding company: and "(B) Except as provided in subsection (d). obligations described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income. "(2) The term 'admissible assets means all assets other than inadmissible assets, "(b) RATIO OF INADMISSIBLES TO TOTAL ASSETS-The amount by which the average invested capital for any taxable year shall be reduced as provided in section 715 shall be an amount which is the same percentage of such average invested capital as the percentage which the total of the inadmissible assets is of the total of admissible and inadmissible assets. For such purposes, the amount attributable 14 (PTZ-BIL) to each asset held at any time during such taxable year shall be deter. mined by ascertaining the adjusted basis thereof (or, in the case money, the amount thereof) for each day of such taxable year so of and adding such daily amounts. The determination of such daily held amounts shall be made under regulations prescribed by the Commis sioner with the approval of the Secretary. The adjusted basis shall be the adjusted for 113. determining loss upon sale or exchange as determined underbasis section (c) COMPUTATION IF SHORT-TERM CAPITAL GAIN.-If during the taxable year there has been a short-term capital gain with respect to an inadmissible asset, then so much of the amount attributable to such inadmissible asset under subsection (b) as bears the same ratio thereto as such gain bears to the sum of such gain plus the dividends and interest on such asset for such year, shall, for the purpose of determining the ratio of inadmissible assets to the total of admissible and inadmissible assets, be added to the total of admissible assets and subtracted from the total of inadmissible assets. "(d) TREATMENT OF GOVERNMENT OBLIGATIONS AS ADMISSIBLE ASSETS.-If the excess profits credit for any taxable year is computed under section 714, the taxpayer may in its return for such year elect to increase its normal-tax net income for such taxable year by an amount equal to the amount of the interest on all obligations held during the taxable year which are described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income. In such case, for the purposes of this section, the term 'admissible assets' includes such obligations, and the term 'inadmissible assets does not include such obligations. "SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. "If there is includible in the gross income of the taxpayer for any taxable year an item of income of any one or more of the following classes: "(a) Arising out of a claim, award, judgment, or decree, or interest on any of the foregoing; or "(b) Constituting an amount payable under a contract the performance of which required more than 12 months: or "(c) Resulting from exploration, discovery, prospecting. research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months: or "(d) Includible in gross income for the taxable year rather than for a different taxable year by reason of a change in the taxpayer's accounting period or method of accounting; or "(e) In the case of a lessor of real property, amounts included in gross income for the taxable year by reason of the termination of the lease: or "(f) Dividends on stock of foreign corporations, except foreign personal holding companies: and, in the light of the taxpayer's business, it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class, the item includible in the gross income of the taxable year is grossly disproportionate to the gross income of 15 the same class in the four previous taxable years, then: (1) the amount of such item attributable to any previous taxable year or shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary: (2) the amount of such item attributable to any future taxable year or years shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary and shall, for the purposes of this subchapter, be included in the gross income for the future year or years to which attributable; and (3) the tax under this subchapter for the taxable year (in which the whole of such item would, without regard to this section, be includible) shall not exceed the sum of "(A) The tax under this subchapter for such taxable year computed without the inclusion in gross income of the portion of such item which is attributable to any other taxable year, and "(B) The aggregate of the increase in the tax under this subchapter which would have resulted for each previous taxable year to which any portion of such item is attributable, computed as if an amount equal to such portion had been included in gross income for such previous taxable year. "SEC. 722. ADJUSTMENT OF ABNORMALITIES IN INCOME AND CAP. ITAL BY THE COMMISSIONER. "For the purposes of this subchapter, the Commissioner shall also have authority to make such adjustments as may be necessary to adjust abnormalities affecting income or capital, and his decision shall be subject to review by the United States Board of Tax Appeals. "SEC. 723. EQUITY INVESTED CAPITAL IN SPECIAL CASES. "Where the Commissioner determines that the equity invested capital as of the beginning of the taxpayer's first taxable year under this subchapter cannot be determined in accordance with section 718, the equity invested capital as of the beginning of such year shall be an amount equal to the sum of (a) the money plus (b) the aggregate of the adjusted basis of the assets of the taxpayer held by the taxpayer at such time, such sum being reduced by the indebtedness outstanding at such time. The amount of the money, assets, and indebtedness at such time shall be determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary. In such case, the equity invested capital for each day after the beginning of the taxpayer's first taxable year under this subchapter shall be determined, in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary, using as the basic figure the equity invested capital as so determined. "SEC. 724. FOREIGN CORPORATIONS AND CORPORATIONS ENTITLED TO BENEFITS OF SECTION 251-INVESTED CAPITAL. "Notwithstanding section 715, in the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, and in the case of a corporation entitled to the benefits of section 251. the invested capital for any 16 17 (Pra.801.) taxable year shall be determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary. under which- subsection (b) of this section, if, and only if, the tax computed under subsection (b) is less than the tax computed under section 710. "(a) GENERAL RULE-The daily invested capital for any day of of- the taxable year shall be the aggregate of the adjusted basis of each United States asset held by the taxpayer on the beginning of such "(1) A tentative tax computed under section 710 with the normal-tax net income increased by the amount of any payments made, or to be made, to the United States Maritime Commission with respect to such contracts or subcontracts: over "(2) The amount of such payments. day. In the application of section 720 in reduction of the average invested capital (determined on the basis of such daily invested capital), the terms 'admissible assets' and 'inadmissible assets' shall include only United States assets; or "(b) EXCEPTION.-If the Commissioner determines that the United "SEC. 727. EXEMPT CORPORATIONS. States assets of the taxpayer cannot satisfactorily be segregated from its other assets, the invested capital for the taxable year shall following corporations shall be exempt from the tax imposed by"The this subchapter: be an amount which is the same percentage of the aggregate of the adjusted basis of all assets held by the taxpayer as of the end of the last day of the taxable year which the net income for the taxable year from sources within the United States is of the total net Corporations exempt under section 101 from the tax imposed by "(a) Chapter 1. "(b) Foreign personal-holding companies, as defined in section 331. "(e) Mutual investment companies, as defined in section 361. "(d) Investment companies which under the Investment Company Act of 1940 are registered as diversified companies at all times during the taxable year. For the purposes of this subsection, if a company is so registered before July 1, 1941, it shall be considered as so registered at all times prior to the date of such registration. "(e) Personal-holding companies, as defined in section 501. "(f) Foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein, "(g) Domestic corporations satisfying the following conditions: income of the taxpayer for such year. "(c) DEFINITION OF UNITED STATES ASSET.-As used in this subsection, the term United States asset' means an asset held by the taxpayer in the United States, determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary. "SEC. 725. PERSONAL SERVICE CORPORATIONS. "(a) DEFINITION.-As used in this subchapter, the term personal service corporation' means a corporation whose income is to be ascribed primarily to the activities of shareholders who are regularly engaged in the active conduct of the affairs of the corporation and are the owners at all times during the taxable year of at least 70 per centum in value of each class of stock of the corporation. and in which capital is not a material income-producing factor: but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists of gains, profits, or income derived from trading as a principal. For the purposes of this subsection, an individual shall be considered as owning, at any time, the stock owned at such time by his spouse or minor child or by any guardian or trustee representing them. (b) ELECTION AS TO TAXABILITY.-If a personal service corporation signifies, in its return under Chapter 1 for any taxable year. its desire not to be subject to the tax imposed under this subchapter for such taxable year, it shall be exempt from such tax for such year. and the provisions of Supplement S of Chapter 1 shall apply to the shareholders in such corporation who were such shareholders on the last day of such taxable year of the corporation. "SEC. 726. CORPORATIONS COMPLETING CONTRACTS UNDER MERCHANT MARINE ACT, 1936. "(a) If the United States Maritime Commission certifies to the Commissioner that the taxpayer has completed within the taxable year of any contracts or subcontracts which are subject to the provisions section 505 (b) of the Merchant Marine Act of 1936, as amended. shall then the tax imposed by this subchapter for such taxable year under be, in lieu of a tax computed under section 710. a tax computed "(b) The tax computed under this subsection shall be the excess "(1) If 95 per centum or more of the gross income of such domestic corporation for the three-year period immediately preceding the close of the taxable year (or for such part of such , period during which the corporation was in existence) was derived from sources other than sources within the United States: and "(2) If 50 per centum or more of its gross income for such period or such part thereof was derived from the active conduct of a trade or business. "(h) Any corporation subject to the provisions of Title IV of the Civil Aeronautics Act of 1938, in the gross income of which for any taxable year beginning after December 31. 1939. there is includible compensation received from the United States for the transportation of mail by aircraft if, after excluding from its gross income such compensation. its adjusted excess profits net income for such year is zero or less. "SEC. 728. MEANING OF TERMS USED. "The terms used in this subchapter shall have the same meaning as when used in Chapter 1. "SEC. 729. LAWS APPLICABLE "(a) GENERAL RULE-All provisions of law (including penalties) applicable in respect of the taxes imposed by Chapter 1, shall. insofar as not inconsistent with this subchapter, be applicable in respect of the tax imposed by this subchapter. PUB. No. 801- 18 (Pra. 801.1 (Pcm.801.) 19 "(b) RETURNS.-Notwithstanding subsection (a), no return section 52 (a) shall be required to be filed by any taxpayer under under this subchapter for any taxable year for which its excess profits net income, computed with the adjustments provided in section 711 (a) (2) placed than on an$5,000. annual basis as provided in section 711 (a) (3), is and not greater (c) FOREIGN TAXES PAID.-In the application of section 131 for the purposes of this subchapter the tax paid or accrued to any country shall be deemed to be the amount of such tax reduced by the amount of the credit1.allowed with respect to such tax against the tax imposed by Chapter '(d) LIMITATIONS ON AMOUNT OF FOREIGN TAX CREDIT-The amount of the credit taken under this section shall be subject to each of the following limitations: "(1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's excess profits net income from sources within such country bears to its entire excess profits net income for the same taxable year: and "(2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's excess profits net income from sources without the United States bears to its entire excess profits net income for the same taxable year. "SEC. 730. CONSOLIDATED RETURNS. "(a) PRIVILEGE TO FILE CONSOLIDATED RETURNS-An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) prescribed prior to the last day prescribed by law for the filing of such return: and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group. '(b) REGULATIONS-The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem neces- sary in order that the tax liability of any affiliated group of cor- porations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the excess profits tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. "(c) COMPUTATION AND PAYMENT OF TAX-In any case in which a consolidated return is made the tax shall be determined, computed. assessed, collected, and adjusted in accordance with the regulations under subsection (b) prescribed prior to the last day prescribed by law for the filing of such return. Only one specific exemption of $5,000 section 710 (b) (1) shall be allowed for the entire affiliatedprovided group ofincorporations, "(d) DEFINITION OF "AFFILIATED GROUP'--A used in this section, an 'affiliated group' means one or more chains of includible corporations connected through stock ownership with a common parent cor- poration which is an includible corporation if- "(1) At least 95 per centum of each class of the stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includi- ble corporations; and "(2) The common parent corporation owns directly at least 95 per centum of each class of the stock of at least one of the other includible corporations. As used in this subsection, the term 'stock' does not include nonvoting stock which is limited and preferred as to dividends "(e) DEFINITION OF INCLUDIBLE CORPORATION'--As used in this section, except- the term includible corporation means any corporation "(1) Corporations subchapter. exempt from the tax imposed by this "(2) Foreign corporations. "(3) Corporations organized under the China Trade Act, 1922 "(4) Corporations entitled to the benefits of section 251, by reason ofofreceiving a large percentage of their income from possessions the United States, "(5) Personal service corporations. "(6) Insurance companies subject to taxation under section 201, ,204, or 207. "(f) INCLUDIBLE INSURANCE COMPANIES.-Despi the provisions of paragraph (6) of subsection (e), two or more domestic insurance companies each of which is subject to taxation under the same section of Chapter 1 shall be considered as includible corporations for the purpose of the application of subsection (d) to such insurance com- panies alone. "(g) SUBSIDIARY FORMED TO COMPLY WITH FOREIGN Law.-In the case of a domestic corporation owning or controlling, directly or indirectly, 100 per centum of the capital stock (exclusive of directors' qualifying shares) of a corporation organized under the laws of a contiguous foreign country and maintained solely for the purpose of complying with the laws of such country as to title and operation of property, such foreign corporation may, at the option of the domestic corporation, be treated for the purpose of this subchapter as a domestic corporation. "(h) SUSPENSION OF RUNNING OF STATUTE OF LIMITATIONS.-If a notice under section 272 (a) in respect of a deficiency for any taxable year is mailed to a corporation, the suspension of the running of the statute of limitations, provided in section 277, shall apply in the case of corporations with which such corporation made a consolidated return for such taxable year. 20 (PUB.RUL) (Pcs.801) 21 "SEC. 731. CORPORATIONS ENGAGED IN MINING OF STRATEGIC METALS. "(b) COMPONENT CORPORATION.-The term 'component corporation means- "In the case of any domestic corporation engaged in the mining of tungsten, quicksilver, manganese, platinum, antimony, chromite, tin, the portion of the adjusted excess profits net income attributable or to such mining in the United States shall be exempt from the tax imposed by this subchapter. The tax on the remaining portion of such adjusted excess profits net income shall be an amount which bears the same ratio to the tax computed without regard to this sec. tion as such remaining portion bears to the entire adjusted excess profits net income, "Part II-Rules in Connection With Certain Exchanges "Supplement A-Excess Profits Credit Based on Income "SEC. 740. DEFINITIONS. "For the purposes of this Supplement"(a) ACQUIRING CORPORATION-The term 'acquiring corporation' means- "(1) A corporation which has acquired'(A) substantially all the properties of another corporation and the whole or a part of the consideration for the transfer of such properties is the transfer to such other corporation of all the stock of all classes (except qualifying shares) of the corporation which has acquired such proper- ties, or "(B) substantially all the properties of another corporation and the sole consideration for the transfer of such properties is the transfer to such other corporation of voting stock of the corporation which has acquired such properties, or "(C) before October 1, 1940, properties of another corporation solely as paid-in surplus or a contribution to capital in respect of voting stock owned by such other corporation. For the purposes of subparagraphs (B) and (C) in determining whether such voting stock or such paid-in surplus or contribution to capital is the sole consideration, the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disre- garded. Subparagraph (B) or (C) shall apply only if the corporation such properties is forthwith liquidatedtransferring in pursuance of the plan under acquisition which thecompletely is made, and the transaction of which the acquisition is a part has the effect of a statutory merger or consolidation. (2) A corporation which has acquired property from another corporation in a transaction with respect to which gain or loss was not recognized under section 112 (b) (6) of Chapter 1 or a corresponding provision of a prior revenue law: (3) A corporation the result of a statutory merger of two or more corporations; or "(4) A corporation the result of a statutory consolidation of two or more corporations. "(1) In the case of a transaction described in subsection (a) (1), the corporation which transferred the assets; (2) In the case of a transaction described in subsection (a) (2), the corporation the property of which was acquired "(3) In the case of a statutory merger, all corporations merged, except the corporation resulting from the merger; or (4) In the case of a statutory consolidation, all corporations consolidated, except the corporation resulting from the consolidation. "(c) QUALIFIED COMPONENT CORPORATION.-The term "qualified component corporation' means a component corporation which was in existence on the date of the beginning of the taxpayer's base period. "(d) BASEthe PERIOD.-In case corporation base periodthe shall be:of a taxpayer which is an acquiring "(1) If the tax is being computed for any taxable year beginning 1940,year; the forty-eight months preceding the beginning of such in taxable or "(2) If the tax is being computed for any taxable year beginning after December 31, 1940, the forty-eight months preceding what would have been its first taxable year beginning in 1940 if it had had a taxable year beginning in 1940 on the date on which the taxable year for which the tax is being computed began. "(e) BASE PERIOD YEARS.-In the case of a taxpayer which is an acquiring corporation its base period years shall be the four successive twelve-month periods beginning on the same date as the beginning of its base period. (f) EXISTENCE OF ACQUIRING CORPORATION.-For the purposes of subsection (c) and section 741, if any component corporation was in existence on the date of the beginning of the taxpayer's base period (either actually or by reason of this subsection), its acquiring corporation shall be considered to have been in existence on such date. '(g) COMPONENT CORPORATIONS OF COMPONENT CORPORATIONS.-If a corporation is a component corporation of an acquiring corporation. under subsection (b) or under this subsection, it shall (except for the purposes of section 742 (d) (1) and (2) and section 743 (a)) also be a component corporation of the corporation of which such acquiring corporation is a component corporation. "SEC. 741. ELECTION OF INCOME CREDIT. "In addition to the corporations which under section 712 (a) may elect the excess profits credit computed under section 713 or the excess profits credit computed under section 714, a taxpayer which is an acquiring corporation which was in existence on the date of the beginning of its base period shall have such election. "SEC. 742. AVERAGE BASE PERIOD NET INCOME. "In the case of a taxpayer which is an acquiring corporation which was actually in existence on the date of the beginning of its base 22 (PUB. SOL) period, or which is entitled under section 741 to elect the excess profits credit computed under section 713, its average base period net income (for the purpose of the credit computed under section 713) shall be computed as follows, in lieu of the method provided in section 713: "(a) By ascertaining with respect to each of its base period years"(1) The amount of its excess profits net income for each of its taxable years beginning after December 31, 1935, and ending with or within such base period year; or, in the case of each such taxable year in which the deductions plus the credit for dividends received exceeded the gross income, the amount of such excess; "(2) With respect to each of its qualified component corporations, the amount of its excess profits net income for each of its taxable years beginning after December 31, 1935, and ending with or within such base period year of the taxpayer; or, in the case of each such taxable year in which the deductions plus the credit for dividends received exceeded the gross income, the amount of such excess: "(3) (A) The aggregate of the amounts of excess profits net income ascertained under paragraphs (1) and (2) (B) the aggregate of the excesses ascertained under paragraphs (1) and (2) and (C) the difference between the aggregates found under clause (A) and clause (B). If the aggregate ascertained under clause (A) is greater than the aggregate found under clause (B), the difference shall for the purposes of subsection (b) be designated a 'plus amount', and if the aggregate ascer- tained under clause (B) is greater than the aggregate found under clause (A), the difference shall for the purposes of subsection (b) be designated a 'minus amount'. '(b) By adding the plus amounts ascertained under subsection (a) (3) for each year of the base period; and by subtracting from such sum, if for two or more years of the base period there was a minus amount, the sum of such minus amounts, excluding the greatest. (c) By dividing the amount ascertained under subsection (b) by four. "(d) In no case shall the average base period net income be less than zero. In the case of a taxpayer which becomes an acquiring corporation in any taxable year beginning after December 31, 1939. if, on September 11, 1940, and at all times until the taxpayer became an acquiring corporation'(1) the taxpayer owned not less than 75 per centum of each class of stock of each of the qualified component corporations involved in the transaction in which the taxpayer became an acquiring corporation: or "(2) one of the qualified component corporations involved in the transaction owned not less than 75 per centum of each class of stock of the taxpayer, and of each of the other qualified component corporations involved in the transaction, the average base period net income of the taxpayer shall not be less than (A) the average base period net income of that one of the its qualified component corporations involved in the transaction the average base period net income of which is greatest, or (B) average base period net income of the taxpayer computed without 23 (Pva. 801.) regard to the base period net income of any of its qualified com- ponent corporations involved in the transaction. (e) For section- the purposes of subsection (a) (1) and (2) of this "(1) There shall be excluded, in the various computations, any dividends paid by the taxpayer or any of its qualified com- ponent corporations during any of the taxable years of the payor which are included in the computation of the taxpayer's average base period net income. If the payor corporation is a corporation described in subsection (f) (1) or (2) of this section, the dividends to be excluded under this paragraph shall be only such as are paid after such payor corporation first became an acquiring corporation; and "(2) In determining whether, for any taxable year, the deductions plus the credit for dividends received exceeded the gross income, and in determining the amount of such excess, the adjustments provided in section 711 (b) (1) shall be made. "(f) (1) In the case of a taxpayer which is an acquiring corporation and which was not actually in existence on the date of the beginning of its base period, there shall be excluded from the various computations under subsection (a) (1) of this section the portion of its excess profits net income, or of the excess over gross income therein referred to, which is attributable to any period before it first became an acquiring corporation. "(2) In the case of a component corporation which became a qualified component corporation only by reason of section 740 (f), there shall be excluded from the various computations under subsection (a) (2) of this section the portion of its excess profits net income, or of the excess over gross income therein referred to, which is attributable corporation. to any period before it first became an acquiring "(3) In the case of a qualified component corporation which was actually in existence on the date of the beginning of the taxpayer's base period, there shall be excluded from the various computations under subsection (a) (2) of this section the portion of its excess profits net income, or of the excess over gross income therein referred to, which is attributable to the period before such date. '(4) If during the taxable year for which tax is computed under this subchapter the taxpayer acquires assets in a transaction which constitutes it an acquiring corporation, the amount includible under subsection (a) (2), attributable to such transaction. shall be limited to an amount which bears the same ratio to the amount computed without regard to this paragraph as the number of days in the taxable year after such transaction bears to the total number of days in such taxable year. "SEC. 743. NET CAPITAL CHANGES. (a) For the purposes of section 713 (c), upon the date of the transaction which constitutes a corporation an acquiring corporation, there shall be added to its daily capital addition or reduction for such day, the net capital addition or reduction, as the case may be, of each of the component corporations involved in such transaction, 24 [PUB-BILL but no been othermade capital addition reduction shall be considered having by reason of or such transaction. "(b) For the purposes of this section(1) In computing the net capital addition of each such ponent corporation there shall be disregarded property paid comto such corporation by the taxpayer or by any of its component in corporations. "(2) In computing the net capital reduction of each such ponent corporation there shall be disregarded distributions made com- to the taxpayer or to any of such component corporations. "SEC. 744. FOREIGN CORPORATIONS as 25 (Pen. 801.) "SEC. 751. DETERMINATION OF PROPERTY PAID IN FOR STOCK AND OF BORROWED CAPITAL IN CONNECTION WITH CER. TAIN EXCHANGES "(a) PROPERTY PAID IN FOR STOCK.-In the application of section 718 (a) to a transferee upon an exchange in determining the amount paid in for stock of the transferee, or as paid-in surplus or as a contribution to capital of the transferee, in connection with such exchange, only an amount shall be deemed to have been so paid in equal to the excess of the basis in the hands of the transferee of the property of the transferor received by the transferee upon the exchange over the sum of- "(1) Any liability of the transferor assumed upon such "The term 'corporation' as used in this Supplement does not include a foreign corporation. exchange and any liability subject to which the property was received upon such exchange. plus "(2) The aggregate of the amount of money and the fair "Supplement B-Highest Bracket Amount and Invested Capital "SEC. 750. DEFINITIONS "As used in this Supplement"(a) EXCHANGE-The term 'exchange' means an exchange, to which section 112 (b) (4) or (5) or so much of section 112 (c), (d), or (e) as refers to section 112 (b) (4) or (5), or to which a corresponding provision of a prior revenue law, is or was applicable, by one corporation of its property wholly or in part for stock or securities of another corporation, or a transfer of property by one corporation to another corporation after December 31, 1917, the basis of which in the hands of such other corporation is or was determined under section 113 (a) (8) (B), or would have been so determined had such section been in effect. "(b) TRANSFEROR UPON AN EXCHANGE.-The term transferor upon an exchange means a corporation which upon an exchange transfers property to another corporation in exchange, wholly or in part, for stock or securities of such other corporation, or transfers property to another corporation after December 31, 1917, the basis of which in the hands of such other corporation is or was determined under section 113 (a) (8) (B), or would have been so determined had such section been in effect. "(c) TRANSFEREE UPON AN EXCHANGE-The term 'transferee upon an exchange means a corporation which upon an exchange acquires property from another corporation in exchange, wholly or in part. for its stock or securities, or which acquires property from another corporation after December 31, 1917, the basis of which in its hands is or was determined under section 113 (a) (8) (B), or would have been so determined had such section been in effect. "(d) CONTROL-The term 'control' means the ownership of stock possessing at least 90 per centum of the total combined voting power of all classes of stock entitled to vote and at least 90 per centum of the total value of shares of all classes of stock of the corporation. "(e) HIGHEST BRACKET AMOUNT.-The term 'highest bracket amount' means $500,000 or the highest bracket amount computed under section 752, whichever is the smaller. market value of any other property transferred to the transferor not permitted to be received by such transferor without the recognition of gain. (b) BORROWED CAPITAL-In the application of section 719 (a) to a transferee upon an exchange, the term 'borrowed capital' shall not include indebtedness originally evidenced by securities issued by the transferee upon such exchange as consideration for the property of the transferor received by the transferee upon such exchange if (1) such securities were property permitted to be received by the person to whom such securities were issued without the recognition of gain and (2) the indebtedness originally evidenced by such securities did not arise out of indebtedness of the transferor (other than indebtedness which in the transferor's hands was subject to the limitations of this subsection) assumed by the transferee in connection with such exchange. "SEC. 752. COMPUTATION OF HIGHEST BRACKET AMOUNT IN CON. NECTION WITH EXCHANGES "(a) SPECIAL APPLICATION OF DAILY INVESTED CAPITAL OF TRANS- FEROR UPON EXCHANGE-For the purposes of this section, the daily invested capital of a transferor upon an exchange for the day after the exchange shall be the daily invested capital determined under section 717 reduced by an amount equal to the amount by which the equity invested capital of the transferee upon such exchange was increased by reason of the receipt of property from such transferor upon such exchange. '(b) HIGHEST BRACKET AMOUNT OF TRANSFEROR.'(1) TAXABLE YEAR OF EXCHANGE-In the case of a transferor upon an exchange after the beginning of its first taxable year under this subchapter, its highest bracket amount for the taxable year in which the exchange takes place shall be the sum of- (A) Its highest bracket amount immediately preceding the exchange multiplied by the number of days in the taxable year up to and including the day of the exchange, plus "(B) Its highest bracket amount for the taxable year after the exchange, multiplied by the number of days in the taxable year remaining after the day of the exchange, divided by the number of days in the taxable year. PCR No. 26 [PUB,BOL] (Pca.801.) 27 "(2) TAXABLE YEARS AFTER EXCHANGE INVOLVING CONTROL-In the case of a transferor upon an exchange after the beginning of its first taxable year under this subchapter, if immediately after the exchange the transferor or its shareholders, or both, are in control of the transferee, the transferor's highest bracket amount for any taxable year after the taxable year in which the exchange takes place shall be an amount which is a percentage of its highest bracket amount immediately preceding the exchange equal to the percentage which its daily invested capital for the day after the exchange is of its daily invested capital for the day of the exchange. In the case of a transferor upon an exchange (other than a trans- feror described in paragraph (4) of this subsection) after the beginning of its first taxable year under this subchapter, if immediately after the exchange no transferor or its shareholders, both, upon the exchange are in control of the transferee, and if the shareholders of the transferee immediately preceding the exchange are not in control of the transferee immediately after the exchange, the transferor's highest bracket amount for any taxable year after the exchange shall be the excess, if any, of the sum of the transferor's highest bracket amount immediately preceding the exchange and the transferee's highest bracket amount immediately preceding the exchange, over $500,000. or '(4) TAXABLE YEARS AFTER CERTAIN EXCHANGES UNDER SECTION the first taxable year under this subchapter of any transferor or transferee upon such exchange, involving two or more transferors, or one or more transferors and one or more other persons, if immediately after the exchange no one of such transferors, or its shareholders, or both. and no one or more of such other persons are in control of the transferee and if such exchange is an exchange described in section 112 (b) (5) or so much of section 112 (c) or 112 (e) as refers to section 112 (b) (5), the highest bracket amount of any such transferor for any taxable year after the exchange shall be an amount equal to its highest bracket amount immediately preceding the exchange'(A) Minus an amount which bears the same ratio to its highest bracket amount immediately preceding the exchange as the excess of its daily invested capital for the day of the exchange over its daily invested capital for the day after the exchange bears to its daily invested capital for the day of the exchange, and "(B) Plus an amount which bears the same ratio to the excess over $500,000 of the sum of the amounts computed under subparagraph (A) with respect to each transferor, as the amount computed under subparagraph (A) with respect to such transferor bears to the sum of the amounts computed under such subparagraph with respect to each transferor. '(c) HIGHEST BRACKET AMOUNT OF TRANSFERER."(1) TAXABLE YEAR OF EXCHANGE INVOLVING CONTROL.I the case of a transferee upon an exchange after the beginning of the "(A) Its highest bracket amount immediately preceding the exchange multiplied by the number of days in the taxable year up to and including the day of the exchange, plus (B) Its highest bracket amount for the taxable year after the exchange multiplied by the number of days in the taxable year remaining after the day of the exchange, divided by the number of days in the taxable For the (3) TAXABLE YEARS AFTER EXCHANGE NOT INVOLVING CONTROL.- 112 (b) -In the case of an exchange after the beginning of first taxable year under this subchapter of a transferor upon such exchange the transferee's highest bracket amount for the taxable sum of- year in which the exchange takes place shall be the purposes of this paragraph and subsection (d) year. of this section exchange includes a liquidation described in paragraph (5) of this subsection, and such exchange shall be deemed to have taken place on the day such liquidation was completed. '(2) TAXABLE YEARS AFTER EXCHANGE INVOLVING CONTROL-In the case of a transferee upon an exchange after the beginning of the first taxable year under this subchapter of a transferor upon such exchange, if immediately after the exchange any transferor upon such exchange or its shareholders, or both, are in control of the transferee, the transferee's highest bracket amount for any taxable year after the exchange shall be an amount which is a percentage of such transferor's highest bracket amount immediately preceding the exchange equal to the percentage which the excess of the transferee's daily invested capital for the day after the exchange over its daily invested capital for the day of the exchange is of such transferor's daily invested capital for the day of the exchange. "(3) TAXABLE YEARS AFTER EXCHANGE NOT INVOLVING CONTROL.- In the case of a transferee upon an exchange (other than a trans- feree described in paragraph (4) of this subsection) after the beginning of the first taxable year under this subchapter of a transferor upon such exchange, if immediately after the exchange no transferor or its shareholders, or both, are in control of the transferee, and if the shareholders of the transferee immediately preceding the exchange are not in control of the transferee immediately after the exchange, the transferee's highest bracket amount for any taxable year after the exchange shall be an amount equal to (A) the sum of the transferor's highest bracket amount immediately preceding the exchange and the transferee's highest bracket amount immediately preceding the exchange, or (B) $500,000. whichever is the smaller. '(4) TAXABLE YEARS AFTER CERTAIN EXCHANGES UNDER SECTION 112 (b) (5).-In the case of an exchange described in subsection (b) (4) of this section, the highest bracket amount of the trans. feree upon such exchange for any taxable year after the exchange shall be an amount equal (A) to the sum of the amounts computed under subparagraph (A) of such subsection with respect to each transferor or (B) $500,000. whichever is the smaller. "(5) TAXABLE YEARS AFTER LIQUIDATION IN CASE OF CORPORATION RECEIVING PROPERTY UNDER SECTION 112 (b) (6).-Upon the receipt by a corporation during any taxable year under this subchapter of property in complete liquidation of another corporation, gain 28 [Pts.BIL] or loss upon which is not recognized by reason of section 112 (6), the highest bracket amount of the corporation receiving (b) property for any taxable year after the liquidation is completed shall be an amount equal to its highest bracket amount imme- diately preceding the completion of the liquidation increased, but in no case to an amount above $500,000, by an amount equal to the highest bracket amount of such other corporation imme- diately preceding the completion of such liquidation, if previously and after the beginning of the first taxable year under this subchapter of the corporation receiving such property such corporation was a transferor upon an exchange with respect to which such other corporation was a transferee. (d) HIGHEST BRACKET AMOUNT IN CASE OF Two OR MORE EXCHANGES IN SAME TAXABLE YEAR.- "(1) If a transferor upon an exchange is in the same taxable year involved in more than one exchange (either as transferor or transferee), its highest bracket amount for such taxable year shall be the amount determined under subsection (b) (1) with respect to the last exchange in such taxable year. Its highest bracket amount immediately preceding any exchange in such taxable year subsequent to the first exchange therein shall be the amount computed under subsection (b) (1) with respect to the immediately preceding exchange as if the taxable year closed on the day of such subsequent exchange. "(2) If a transferee upon an exchange is in the same taxable year involved in more than one exchange (either as transferee or transferor), its highest bracket amount for such taxable year shall be the amount determined under subsection (c) (1) with respect to the last exchange in such taxable year. Its highest bracket amount immediately preceding any exchange in such taxable year subsequent to the first exchange therein shall be the amount computed under subsection (c) (1) with respect to the immediately preceding exchange as if the taxable year closed on the day of such subsequent exchange. "(3) If a transferor or transferee upon an exchange is in the same taxable year involved in more than one exchange (either as transferor or transferee), its highest bracket amount for any taxable year after the taxable year in which such exchanges took place shall be the amount computed under subsection (b) (2), (3), or (4), or (c) (2), (3), (4), or (5), as the case may be, with respect to the last such exchange." TITLE III-AMORTIZATION DEDUCTION SEC. 301. ALLOWANCE OF AMORTIZATION DEDUCTION. Section 23 of the Internal Revenue Code is amended by inserting at the end thereof the following new subsection: "(t) AMORTIZATION DEDUCTION.-The deduction for amortization provided in section 124." SEC. 302. COMPUTATION OF AMORTIZATION DEDUCTION. The Internal Revenue Code is amended by inserting after section 123 the following new section: (Pvs. 801.) 29 "SEC. 124. AMORTIZATION DEDUCTION. "(a) GENERAL RULE-Every corporation, at its election, shall be entitled to a deduction with respect to the amortization of the adjusted basis of any emergency facility (as defined in subsection (e)), based on a period of sixty months. Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the adjusted basis of the facility at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such adjusted basis at the end of the month shall be computed without regard to the amortization deduction for such month. The amortization deduction above provided with respect to any month shall, except to the extent provided in subsection (g) of this section, be in lieu of the deduction with respect to such facility for such month provided by section 23 (1), relating to exhaustion, wear and tear, and obsolescence. The sixty-month period shall begin as to any emergency facility, at the election of the taxpayer, with the month following the month in which the facility was completed or acquired, or with the succeeding taxable year. "(b) ELECTION OF AMORTIZATION.-The election of the taxpayer to take the amortization deduction and to begin the sixty-month period with the month following the month in which the facility was completed or acquired shall (except as provided in subsection (d) (3)) be made only by a statement to that effect in its return for the taxable year in which the facility was completed or acquired. Its election to take the amortization deduction and to begin such period with the taxable year succeeding such year shall be made only by a statement to that effect in its return for such succeeding taxable year. "(c) TERMINATION OF AMORTIZATION DEDUCTION.-A taxpayer which has elected under subsection (b) to take the amortization deduction provided in subsection (a) may, at any time after making such election, discontinue the amortization deductions with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month specified by the taxpayer in a notice in writing filed with the Commissioner before the beginning of such month. The deduction provided under section 23 (1) shall be allowed, beginning with the first month as to which the amortization deduction is not applicable, and the taxpayer shall not (except as provided in subsection (d)) be entitled to any further amortization deductions with respect to such emergency facility. (d) TERMINATION OF AMORTIZATION PERIOD.- "(1) If the President has proclaimed the ending of the emergency period (as defined in subsection (e)), or if the Secretary of War or the Secretary of the Navy has, in accordance with regulations prescribed by the President, certified to the Commissioner that an emergency facility ceased, on the date specified in the certificate, to be necessary in the interest of national defense during the emergency period, and if the date of such. proclamation or the date specified in such certificate occurs within sixty months from the beginning of the amortization period with respect to such emergency facility, then the taxpayer may elect (in accordance with paragraph (4) of this subsection) to terminate the amortization period with respect to such emergency 30 [PUB,8013 facility as of the end of the month in which such proclamation was issued or in which occurred the date specified in certificate, whichever is the earlier. In such case the such tion period with respect to such facility shall end with amortiza- the end of such month in lieu of the end of the sixty-month period. "(2) If the date of the proclamation or the date specified the certificate referred to in paragraph (1) of this subsection in occurs within sixty months from the beginning of the amortiza. tion period with respect to such emergency facility and after the beginning of the month which the taxpayer has previously fixed under subsection (c) for the taking, in lieu of the amortization deduction provided in this section, of the deduction allowed by section 23 (1), the taxpayer may elect (in accordance with graph (4) of this subsection) to terminate the amortization paraperiod with respect to such emergency facility as of the end of the month in which such proclamation was issued or in which occurred the date specified in such certificate, whichever is the earlier. In such case the amortization period with respect to such facility shall end with the end of such month in lieu of the end of the sixty-month period, and the termination of the amortization deduction under subsection (c) shall be disregarded. "(3) In the case of a taxpayer which has not in either of its returns specified in subsection (b) elected to take an amortization deduction with respect to an emergency facility, if the date of the proclamation or the date specified in the certificate, referred to in paragraph (1) of this subsection, whichever is earlier, is before the expiration of sixty months from the last day of the month in which such emergency facility was completed or acquired, then the taxpayer may elect (in accordance with para- graph (4) of this subsection) the amortization deduction provided in subsection (a), using an amortization period beginning with the month following the month in which the emergency facility was completed or acquired and ending as of the end of the month within which such proclamation was issued or within which occurred the date specified in such certificate, whichever is the earlier. "(4) The election provided in paragraph (1), (2), or (3) shall be made by filing with the Commissioner, in such manner, in such form, and within such time, as the Commissioner with the approval of the Secretary may by regulations prescribe, a statement of such election. When such election has been so made, then, under regulations prescribed by the Commissioner with the approval of the Secretary, the taxes for all taxable years, beginning with the taxable year in which the amortization period began, shall be computed in accordance with an amortization deduction computed in accordance with the method provided in subsection (a), but using (in lieu of the sixty-month period provided in such subsection) the amortization period specified in paragraph (1), (2), or (3), as the case may be. "(5) RECOMPUTATION OF TAX IN CASE OF ELECTION UNDER THIS SUBSECTION.-If the adjustment of the income or excess-profits (Pvs.801.) 31 tax liability for any taxable year necessary to give effect to graph (4) of this subsection is prevented (A) on the date parathe certificate of the Secretary of War or the Secretary of the of Navy or on the date of the President's proclamation, whichever is the basis of the taxpayer's election under this subsection, or (B) within one year from such date, by any provision of law (other than this paragraph and other than section 3761, relating to compromises), an adjustment of the tax liability shall neverthe- less be made if in respect of such taxable year a notice of deficiency is mailed or a claim for refund is filed, as the may be, within one year after the date of such certificate or such case proclamation, whichever is the basis of the taxpayer's election under this subsection. If at the time of the mailing of such notice of deficiency or the filing of such claim for refund, the adjustment is so prevented, then the amount of the adjustment authorized in this paragraph shall be limited to the increase decrease in the tax previously determined for such taxable or which results solely from the effect of paragraph (4) of year this subsection, and such amount shall be assessed and collected, or credited or refunded, in the same manner as if it were a deficiency or an overpayment, as the case may be, for such taxable and as if on the date of such certificate or such proclamation, year whichever is the basis of the taxpayer's election under this subsection, one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund for the taxable year. The tax previously determined shall be ascertained in accordance with section 3801 (d). The amount to be assessed and collected under this paragraph in the same manner as if it were a deficiency, or to be refunded or credited in the same manner as if it were an overpayment. shall not be diminished by any credit or set-off based upon any item, inclusion, deduction, credit, exemption, gain, or loss, other than one resulting from the effect of paragraph (4) of this subsection. Such amount, if paid, shall not be recovered by a claim or suit for refund or suit for erroneous refund based upon any item, inclusion, deduction, credit, exemption, gain, or loss, other than one resulting from the effect of paragraph (4) of this subsection. "(e) DEFINITIONS.- (1) EMERGENCY FACILITY.-As used in this section, the term "emergency facility means any facility, land, building, machinery, or. equipment, or part thereof, the construction, reconstruetion, erection, or installation of which was completed after June 10, 1940, or which was acquired after such date, and with respect to which a certificate under subsection (f) has been made. "(2) EMERGENCY PERIOD.-As used in this section, the term 'emergency period' means the period beginning June 10, 1940, and ending on the date on which the President proclaims that the utilization of a substantial portion of the emergency facilities with respect to which certifications under subsection (f) have defense. been made, is no longer required in the interest of national 32 [Pen.801.] 33 (PCB. 801.) "(f) DETERMINATION OF ADJUSTED BASIS OF EMERGENCY FACILITY,- "(A) A contract with the United States involving the use In determining, for the purposes of subsection the adjusted basis of an emergency facility- (a) or subsection (h), of the facility cancellation, or "(1) There shall be included only so much of the amount "(B) the taxpayer had reasonable grounds (either from provisions of a contract with the United States involving the use of the facility, or from written or oral representations made under authority of the United States) for anticipating otherwise constituting such adjusted basis as is properly attributable to such construction, reconstruction, erection, installation, acquisition after June 10, 1940, as the Advisory Commission or the Council of National Defense and either the Secretary of War to or the Secretary of the Navy have certified, within the time specified in paragraph (3) of this subsection, and under such futurecontracts contracts involving use of the facility, which future have not beenthe made. "(2) In case the taxpayer is not entitled to any amortization deduction with respect to the emergency facility the deduction allowable under section 23 (1) on account of the month in which such amount is so includible shall be increased by such amount, but such deduction on account of such month shall not be in excess of the adjusted basis of the emergency facility as of the end of such month (computed without regard to any amount allowable, on account of such month, under section 23 (1) or this paragraph). regulations as the President may prescribe, as necessary in the interest of national defense during the emergency period; "(2) After the completion or acquisition of any emergency facility with respect to which a certificate under paragraph (1) has been made, any expenditure (attributable to such facility and to the period after such completion or acquisition) which does not represent construction, reconstruction, erection, installation. or acquisition included in such certificate, but with respect to which a separate certificate is made under paragraph (1), shall not be applied in adjustment of the basis of such facility and shall be considered as an expenditure with respect to a new emergency facility; and "(3) The certificate provided for in paragraph (1) shall have no effect unless made before whichever of the following dates is the later: (A) The beginning of such construction, reconstruetion, erection, or installation, or the date of such acquisition, or (B) the one hundred and twentieth day after the date of the enactment of the Second Revenue Act of 1940. "(i) PROTECTION OF THE UNITED STATES.-If the taxpayer has been or will be reimbursed by the United States for all or a part of the cost of States, any emergency United either- facility pursuant to any contract with the "(1) directly, by aorprovision therein dealing expressly with such reimbursement, "(2) indirectly, because the price paid by the United States (insofar as return of cost of the facility is used as a factor in the fixing of such price) is recognized by the contract as including a return of cost greater than the normal exhaustion, wear and tear, "(g) DEPRECIATION DEDUCTION.-If the adjusted basis of the emer- gency facility computed without regard to subsection (f) of this section is in excess of the adjusted basis computed under such subsection, the deduction provided by section 23 (1) shall, despite the provisions of subsection (a) of this section, be allowed with respect to such emergency facility as if its adjusted basis were an amount equal to the amount of such excess. "(h) PAYMENT BY UNITED STATES OF UNAMORTIZED COST OF FACILITY.-If an amount is properly includible in the gross income of the taxpayer on account of a payment with respect to an emergency facility and such payment is certified as provided in this paragraph, then, at the election of the taxpayer in its return for the taxable year in which such amount is so includible"(1) The amortization deduction for the month in which such amount is so includible shall (in lieu of the amount of the deduc- tion for such month computed under subsection (a)) be the amount so includible, but such deduction shall not be in excess of the adjusted basis of the emergency facility as of the end of such month (computed without regard to any amortization deduction for such month). Payments referred to in this paragraph shall be payments the amounts of which are certified. under such regulations as the President may prescribe, by either the Secretary of War or the Secretary of the Navy as compensation to the taxpayer for the unamortized cost of the emergency facility made because- has been terminated by its terms or by ( no amortization deduction with respect to such emergency facility shall be allowed for any month after the end of the month in which such contract is made, unless, before the expiration of ninety days after the making of such contract or one hundred and twenty days after the date of the enactment of the Second Revenue Act of 1940, whichever of such periods expires the later, the Advisory Commission to the Council of National Defense, and either the Secretary of War or the Secretary of the Navy certify to the Commissioner that such contract adequately protects the United States with reference to the future use and disposition of such emergency facility. A cer- tificate by the Advisory Commission to the Council of National Defense and either the Secretary of War or the Secretary of the Navy, made to the Commissioner before the expiration of ninety days after the making of a contract or one hundred and twenty days after the date of the enactment of the Second Revenue Act of 1940. whichever of such periods expires the later, to the effect that, under such contract. reimbursement for all or a part of the cost of any emergency facility is not provided for within the meaning of clause (1) or clause subsection (2), shall be conclusive for the purposes of this "The terms and conditions of contracts with reference to reimburse- ment of the cost of emergency facilities and the protecting of the United States with reference to the future use and disposition of -uch emergency facilities shall be made available to the public." 34 (Pra.801.) TITLE IV-SUSPENSION OF PROFIT-LIMITING 35 TITLE V-AMENDMENTS TO INTERNAL PROVISIONS OF THE VINSON ACT AND REVENUE CODE CERTAIN PROVISIONS OF THE MERCHANT MARINE ACT, 1936 SEC. 501. EARNINGS AND PROFITS OF CORPORATIONS SEC. 401. SUSPENSION VINSON ACT.OF PROFIT-LIMITING PROVISIONS OF THE (a) UNDER INTERNAL REVENUE CODE.-Section 115 of the Internal new Revenue subsections: Code is amended by inserting at the end thereof the following The provisions of section 3 of the Act of March 27, 1934 (48 505: 34 U. S. C., sec. 496), as amended, beginning with the Stat. first proviso thereof, and section 2 (b) of the Act of June 28, (Public, Numbered 671, Seventy-sixth Congress, third session), shall 1940 not apply to contracts or subcontracts for the construction or manyfacture of any complete naval vessel or any Army or Navy aircraft, or any portion thereof. which are entered into in any taxable to which the excess profits tax provided in subchapter E of Chapter year 2 of the Internal Revenue Code is applicable or would be applicable if the contractor or subcontractor, as the case may be, were a corporation, and any agreement to pay into the Treasury profit in excess of 10 per centum, 12 per centum, or 8 per centum, as the case may be, of the contract prices of any such contracts or subcontracts shall be without effect. This section shall also apply to such contracts or subcontracts which were entered into before the date of the beginning of the contractor's or subcontractor's first taxable year which begins in 1940 and which are not completed before such date. SEC. 402. SUSPENSION OF PROFIT-LIMITING PROVISIONS OF THE MERCHANT MARINE ACT, 1936, AS TO CERTAIN SUBCONTRACTS. (a) The provisions of section 505 (b) of the Merchant Marine Act of 1936, as amended, shall not apply to any subcontract which would otherwise be within such provisions if such subcontract is entered into in any taxable year of the subcontractor to which Subchapter E of Chapter 2 of the Internal Revenue Code is applicable and if the principal contractor and the subcontractor between which such subcontract is entered into are not affiliated within the meaning of subsection (b) of this section at the time such subcontract is entered into or at any time thereafter up to and including the date of its comple- tion: and any agreement, pursuant to which the subcontractor is required to pay to the United States Maritime Commission profit in excess of 10 per centum of the contract price of any such subcontract or pursuant to which such an agreement is required to be obtained from such subcontractor relative to such subcontract, shall be without effect. This subsection shall apply only if both the principal contractor and the subcontractor are corporations. (b) For the purposes of this section, two or more corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests, As used in this subsection, the term "stock" does not include nonvoting stock which is limited and preferred as to dividends. "(I) EFFECT ON EARNINGS AND PROFITS OF GAIN OR Loss AND RECEIPT OF TAX-FREE DISTRIBUTIONS.-The gain or loss realized from OF athe corporationsale or other disposition (after February 1913) of property by "(1) for the purpose of the computation of earnings and profits of the corporation, shall be determined, except as provided in paragraph (2), by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard but shall be had to the value of the property as of March 1, 1913: "(2) for the purpose of the computation of earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain. Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing net income under the law applicable to the year in which such sale or disposition was made. Where in determining the adjusted basis used in computing such realized gain or loss the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings CT profits, then the latter adjustment shall be used in determining the increase or decrease above provided. Where a corporation receives (after February 28. 1913) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases: "(1) No such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of made. the basis of the stock in respect of which the distribution was "(2) No such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received. "(m) EARNINGS AND PROFTTS-INCREASE IN VALUE ACCRUED BEFORE MARCH 1, 1913.- "(1) If any increase or decrease in the earnings or profits for any period beginning after February 28, 1913. with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1. 1913, value, then. except as provided in paragraph (2). an 36 (PUB.BOL) increase (properly reflecting such difference) shall be made that of the earnings and profits valuepart of property accrued before Marchconsisting 1, 1913. of increase in "(2) If the application of subsection (1) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (1) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss, exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913. (b) EFFECTIVE DATE OF AMENDMENT-The amendment made by subsection (a) shall be applicable to taxable years beginning after December 31, 1938. (c) UNDER PRIOR Acts.-For the purposes of the Revenue Act of 1938 or any prior Revenue Act the amendments made to the Internal Revenue Code by subsection (a) of this section shall be effective as in (Pen.801.) 37 "SEC. 393. SUPPLEMENT S NET INCOME "For the purposes of this chapter 'Supplement S net income' means the net income, except that there shall be allowed as additional deductions"(a) The income tax payable under this chapter for the taxable year;Federal and "(b) In lieu of the deduction allowed by section 23 (q), contributions or gifts, payment of which is made within the taxable year, to or for the use of donees described in section 23 (q) for the purposes therein specified, to an amount which does not exceed 15 per centum of the corporation's net income, computed without the benefit of this subsection and section 23 (q). "SEC. 394. CORPORATION INCOME TAXED TO SHAREHOLDERS "(a) GENERAL RULE-The undistributed Supplement S net income of a personal service corporation shall be included in the gross income of the shareholders in the manner and to the extent set forth in this Supplement. '(b) AMOUNT INCLUDED IN GROSS INCOME-Eac shareholder who, if they were a part of each such Revenue Act on the date of its enactment. Nothing in this subsection shall affect the tax liability of any taxpayer for any year which, on September 20, 1940, was pending before, or was theretofore determined by, the Board of Tax on the last day of the taxable year of the corporation, was a shareholder in such corporation shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the corporation ends, the amount he would have received as a dividend if on such last day there had been distributed by the corpo- SEC. 502. TAX OF SHAREHOLDERS OF PERSONAL SERVICE CORPO- tributed Supplement S net income of the corporation for its taxable year. The Internal Revenue Code is amended by inserting after section 373 the following new Supplement: MENTALITIES.-Each such shareholder shall be allowed a credit against net income, for the purposes of the tax imposed by section 11, 13, 14. 201, 204. 207, or 362, of his proportionate share of the interest specified Appeals, or any court of the United States. RATIONS. ration, and received by the shareholders, an amount equal to the undis"(e) CREDIT OBLIGATIONS OF THE UNITED STATES AND ITS INSTRU- "Supplement S-Tax of Shareholders of Personal Service Corporations "SEC. 391. APPLICABILITY OF SUPPLEMENT. "If a personal service corporation (as defined in section 725) is exempt under such section for any taxable year from the excess profits tax imposed by such subehapter, the provisions of this Supplement shall be applicable with respect to each shareholder of such corporation who was a shareholder in such corporation on the last day of such taxable year of the corporation. "SEC. 392. UNDISTRIBUTED SUPPLEMENT S NET INCOME. "For the purposes of this chapter, the term 'undistributed Supplement S net income' means the Supplement S net income (as defined in section 393) minus the amount of the dividends paid during the taxable year. For the purposes of this section the amount of dividends paid shall be computed in the same manner as provided in subsections (d), (e), (f), (g), (h), and (i) of section 27 for the purpose of the basic surtax credit provided in section 27. in section 25 (a) (1) or (2) which is included in the gross income of the corporation. "(d) EFFECT ON CAPITAL ACCOUNT OF PERSONAL SERVICE CORPORA- TION.-An amount equal to the undistributed Supplement S net income of the personal service corporation for its taxable year shall be considered as paid in as of the close of such taxable year as paid-in surplus or as a contribution to capital, and the accumulated earnings and profits as of the close of such taxable year shall be correspondingly reduced, if such amount or any portion thereof is required to be included as a dividend in the gross income of the shareholders "(e) BASIS OF STOCK IN HANDS OF SHAREHOLDERS.-The amount required to be included in the gross income of the shareholder under subsection (b) shall, for the purpose of adjusting the basis of his stock with respect to which the distribution would have been made (if it had been made), be treated as having been reinvested by the shareholder as a contribution to the capital of the corporation; but only to the extent to which such amount is included in his gross income in his return, increased or decreased by any adjustment of such amount in the last determination of the shareholder's tax liability, made before the expiration of seven years after the date prescribed by law for filing the return, 38 39 (Pra. 801.) '(f) PERIOD OF LIMITATION ON ASSESSMENT AND COLLECTION.-For period of limitation on assessment and collection without alien individual shall be allowed as a credit against his tax the in the case of failure to include in gross income the amount assessment. properly amount required by section 396 to be paid by the personal service corporation of which he is a shareholder with respect to his tax liability under Supplement S.". includible therein under subsection (b), see section 275 (d). "SEC. 395. NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN COR. PORATIONS. "In the case of a shareholder taxable under section 211 (a) or 231 (a), his distributive share of the undistributed Supplement S net income of the corporation required to be included in the incomethe shallUnited be considered within States. as a dividend received by him from sources gross "SEC. 396. SHAREHOLDER'S TAX PAID BY CORPORATION. "If a personal service corporation is exempt for any taxable year under section 725 from excess profits tax, it shall, at the time of filing its return, pay to the collector an amount equal to the amount that would be required by section 143 (b) or section 144 to be deducted and withheld by the corporation if any amount required by this Supplement to be included in the gross income of the shareholder had been, on the last day of the taxable year of the corporation, paid to the shareholder in cash as a dividend. Such amount shall be collected and paid in the same manner as the amount of tax due in excess of that shown by the taxpayer upon a return in the case of a mathematical error appearing on the face of the return." SEC. 503. STATUTE OF LIMITATIONS IN CASE OF CONSTRUCTIVE DIVIDENDS. Section 275 (d) of the Internal Revenue Code (relating to statute of limitations) is amended to read as follows: "(d) CONSTRUCTIVE DIVIDENDS.-If the taxpayer omits from gross income an amount properly includible therein'(1) FOREIGN PERSONAL-HOLDING COMPANIES-Under section 337 (b) (relating to the inclusion in the gross income of United States shareholders of their distributive shares of the undistributed Supplement P net income of a foreign personal-holding company) or "(2) PERSONAL SERVICE CORPORATIONS.-Under section 394 (b) (relating to the inclusion in the gross income of shareholders of their distributive shares of undistributed Supplement S net income of a personal service corporation) the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within seven years after the return was filed." SEC. 504. CREDIT OF NONRESIDENT ALIEN OF TAX AS SHAREHOLDER IN PERSONAL SERVICE CORPORATION. Section 216 of the Internal Revenue Code (relating to credit against tax of a nonresident alien individual) is amended by adding at the end thereof a new sentence to read as follows: "A nonresident SEC. 505. CREDIT OF FOREIGN CORPORATION OF TAX AS SHARE. HOLDER IN PERSONAL SERVICE CORPORATION. Section 234 of the Internal Revenue Code (relating to credits against tax of foreign corporations) is amended by adding at the end thereof a new sentence to read as follows: "A foreign corporation shall be allowed as a credit against its tax the amount required by section 396 to be paid by the personal service corporation of which it is a shareholder with respect to its tax liability under Supplement S.". SEC. 506. CHANGE OF NAME OF EXISTING EXCESS-PROFITS TAX. (a) Subchapter B of Chapter 2 of the Internal Revenue Code is amended, effective February 10, 1939, by striking out, in the head- ing of such subchapter, "EXCESS-PROFITS TAX" and inserting in lieu thereof "DECLARED VALUE EXCESS-PROFITS TAX", and by striking out, in the first paragraph of section 600 of such subchapter, "excess-profits tax" and inserting in lieu thereof "declared value excess-profits tax" (b) Section 23 (c) (1) of the Internal Revenue Code (relating to taxes not deductible in computing net income) is amended, effective February 10, 1939, to read as follows: "(1) Federal income, war-profits, and excess-profits taxes (other than the excess-profits tax imposed by section 106 of the Revenue Act of 1935 (49 Stat. 1019), or by section 602 of the Revenue Act of 1938 (52 Stat. 567), and other than the declared value excess-profits tax imposed by section 600) SEC. 507. PUBLICITY OF RETURNS OF SUBCHAPTER E EXCESS PROFITS TAX. Section 55 (a) (2) of the Internal Revenue Code is amended by striking out "Subchapters A, B, and D of Chapter 2" and inserting in lieu thereof "Subchapters A, B, D, and E of Chapter 2". SEC. 508. TECHNICAL AMENDMENTS (a) LIMITATION ON ASSESSMENT AND COLLECTION.-Section 3312 of the Internal Revenue Code (relating to period of limitation on assessment and collection of taxes) is amended by striking out "Except in the case of income, estate, and gift taxes" and inserting in lieu thereof "Except in the case of income, war-profits, excess-profits, estate, and gift taxes" (b) ABATEMENT, CREDIT, AND REFUND OF TAXES-Section 3770 (a) (1) of the Internal Revenue Code (relating to authority to abate, credit, or refund tax) is amended by striking out "Except as otherwise provided by law in the case of income, estate, and gift taxes" and inserting in lieu thereof "Except as otherwise provided by law in the case of income, war-profits, excess-profits, estate, and gift taxes". 40 [Pca,801.] TITLE VI-NATIONAL SERVICE LIFE INSUR. ANCE ANDRETIREMENT PROVISIONS AFFECTING THE RAILROAD BOARD Part I-National Service Life Insurance SEC. 601. When used in this part- (a) The term "person" means (1) a commissioned officer; (2) warrant officer; (3) enlisted personnel (including persons selected a for training and service under the Selective Training and Service 41 (d) Any person who has been commissioned, or examined, accepted, and enrolled, in the active service and is in such active service on the date of enactment of this Act shall be granted such insurance application therefor in writing (made within one hundred and twenty upon days after the date of enactment of this Act and before discharge resignation from such active service), and upon payment of premiums or and evidence satisfactory to the Administrator showing such person to be in good health at the time of such application. (e) The premium rates for such insurance shall be the net rates based upon the American Experience Table of Mortality and interest Act of 1940) (4) a member of the Army Nurse Corps (female): at the rate of 3 per centum per annum. All cash, loan, paid and (b) Affairs; The term "Administrator" means the Administrator of Vet. erans extended values, and all other calculations in connection with up, such and (5) a member of the Navy Nurse Corps (female) (c) The term "active service" means active service in the land or naval forces (including the Coast Guard) of the United States and service in the land or naval forces of the United States under the Selective Training and Service Act of 1940, but the service of any person ordered to active duty in any such force for a period of thirty days or less, shall not be deemed to be active service in such force during such period; (d) The term "insurance" means National Service Life Insurance: (e) The term "child" includes an adopted child. SEC. 602. (a) Every person who is commissioned and hereafter ordered into, or who is hereafter examined, accepted, and enrolled in, the active service and while in such active service shall, upon application in writing (made within one hundred and twenty days after entrance into such active service) and payment of premiums as hereinafter provided and without further medical examination, be granted insurance on the five-year level premium term plan by the United States against the death of such person occurring while such insurance is in force. (b) Any person who is released from active service within one hundred and twenty days after such enrollment shall be granted such insurance upon application therefor in writing (made within one hundred and twenty days after a subsequent enrollment or entrance into active service and before discharge or resignation therefrom), and upon payment of premiums and evidence satisfactory to the Administrator showing such person to be in good health at the time of such application. (c) Any person upon reenlistment or reentrance into or reemployment in active service and before discharge or resignation therefrom and any person in the active service upon discharge to accept a com- mission and before resignation therefrom, shall be granted such insurance upon application therefor in writing (made within one hundred and twenty days following such reenlistment, reentrance, reemployment, or discharge to accept a commission), and upon pay- ment of premiums and evidence satisfactory to the Administrator showing such person to be in good health at the time of such application. insurance, shall be based upon said American Experience Table of Mortality and interest at the rate of 3 per centum per annum. (f) Such insurance shall be issued upon the five year level premium term plan, with the privilege of conversion as of the date when any premium becomes or has become due, or exchange as of the date of the original policy, upon payment of the difference in reserve, at time after such policy has been in effect for one year and within any the five year term period, to policies of insurance upon the following plans: Ordinary life, twenty payment life, thirty payment life. All five year level premium term policies shall cease and terminate at the expiration of the five year term period. Provisions for cash, loan, paid up, and extended values, dividends from gains and savings, refund of unearned premiums, and such other provisions as may be found to be reasonable and practicable, may be provided for in the policy insurance or from time to time by regulations promulgated by the of Administrator. (g) The insurance shall be payable only to a widow, widower, child (including a stepchild or an illegitimate child if designated as benefi- ciary by the insured), parent (including person in loco parentis if designated as beneficiary by the insured), brother or sister of the insured. The insured shall have the right to designate the beneficiary or beneficiaries of the insurance, but only within the classes herein provided, and shall, subject to regulations, at all times have the right to change the beneficiary or beneficiaries of such insurance without the consent of such beneficiary or beneficiaries but only within the classes herein provided. (h) Such insurance shall be payable in the following manner: (1) If the beneficiary to whom payment is first made is under thirty years of age at the time of maturity, in two hundred and forty equal monthly installments, (2) If the beneficiary to whom payment is first made is thirty or more years of age at the time of maturity, in equal monthly installments for one hundred and twenty months certain, with such payments continuing during the remaining lifetime of such beneficiary. (3) Any installments certain of insurance remaining unpaid at the death of any beneficiary shall be paid in equal monthly installments in an amount equal to the monthly installments paid to the first beneficiary, to the person or persons then in being 42 [PUB.801.] within classes hereinafter specified in theorderorder named. unlessthe designated by the insured in a and different (A) to the widow or widower of the insured, if if no widow or in widower, to the child or children living: of the(B) insured, if living, equal shares; (C) if no widow, widower, or child, to the parent or parents of the insured, if living, in equal shares; (D) if no widow, widower, child, or parent, to the brothers and sisters of the insured, if living, in equal shares. (i) If no beneficiary is designated by the insured or if the desig. nated beneficiary does not survive the insured, the beneficiary shall be determined in accordance with the order specified in subsection (h) (3) of this section and the insurance shall be payable in equal monthly installments in accordance with subsection (h) (1) or (2), as the case may be. The right of any beneficiary to payment of any installments shall be conditioned upon his or her being alive to receive such payments. No person shall have a vested right to any installment or installments of any such insurance and any install. ments not paid to a beneficiary during such beneficiary's lifetime shall be paid to the beneficiary or beneficiaries within the permitted class next entitled to priority, as provided in subsection (h). (j) No installments of such insurance shall be paid to the heirs or legal representatives as such of the insured or of any beneficiary, and in the event that no person within the permitted class survives to receive the insurance or any part thereof no payment of the unpaid installments shall be made. (k) When the amount of an individual monthly payment is less than $5. such amount may, in the discretion of the Administrator. be allowed to accumulate without interest and be disbursed annually. (1) Any payments of insurance made to a person represented by the insured to be within the permitted class of beneficiaries shall be deemed to have been properly made and to satisfy fully the obligation of the United States under such insurance policy to the extent of 43 become effective prior to the date of application therefor: except that, in the discretion of the Administrator, it may be made effective at any time within a period of not more than six months prior to such date but in no event prior to the first day of the seventh month of such continuous disability. Any premiums tendered to cover a period during which such waiver is effective shall be refunded. The Administrator shall provide by regulations for reexaminations of beneficiaries under this subsection and, in the event that it is found that an insured is no longer totally disabled, the waiver of premiums shall cease as of the date of such finding and the policy of insurance may be continued by payment of premiums as provided in said policy. Premium rates shall be calculated without charge for the cost of the waiver of premiums herein provided and deduction thereof. from benefits otherwise payable shall be made on account no (o) The Administrator shall promptly determine and publish the terms and conditions of such insurance. Pending the promulgation of the terms and conditions of the five year level premium term policy and the printing of such policy, the Administrator may issue a certificate in lieu thereof as evidence that insurance has been granted and the rights and liabilities of the applicant and of the United States shall be those specified by the terms and conditions of the policy when published. (p) Such insurance may be made effective, as specified in the appli- cation, not later than the first day of the calendar month following the date of application therefor, but the United States shall not be liable thereunder for death occurring prior to such effective date. (q) Such insurance shall be issued in any multiple of $500 and the amount of such insurance with respect to any one person shall be not less than $1,000 or more than $10,000. SEC. 603. No person may carry a combined amount of National Service Life Insurance and United States Government life insurance such payments. in excess of $10,000 at any one time. (m) The Administrator shall, by regulations, prescribe the time and method of payment of the premiums on such insurance, but payments of premiums in advance shall not be required for periods SEC. 604. There is hereby authorized to be appropriated, out of any money in the Treasury not otherwise appropriated, such sums as may be necessary to carry out the provisions of this part, to be known as the National Service Life Insurance appropriation, for the payment of of more than one month each, and may at the election of the insured be deducted from his active service pay or be otherwise made. (n) Upon application by the insured and under such regulations as the Administrator may promulgate, payment of premiums on such insurance may be waived during continuous total disability of the insured which commenced subsequent to the effective date of such insurance and which has existed for six consecutive months or more prior to the attainment by the insured of the age of sixty years, effective as of the due date of the monthly premium becoming pay- of able on or after the first day of the seventh consecutive month such disability: Provided, That application for waiver is made while the insurance is currently kept in force by the payment of premiums, and the insured furnishes proof satisfactory to the Administrator for showing that he is and has been continuously totally disabled Any six or more months prior to attaining sixty years of age. waiver granted by the Administrator under this subsection shall not liabilities under National Service Life Insurance. Payments from thisthe appropriation shall be made upon and in accordance with awards by Administrator. SEC. 605. (a) There is hereby created in the Treasury a permanent trust fund to be known as the National Service Life Insurance Fund. All premiums paid on account of National Service Life Insurance shall be deposited and covered into the Treasury to the credit of such fund, which, together with interest earned thereon, shall be available of for the payment of liabilities under such insurance, including payment dividends and refunds of unearned premiums. Payments from Administrator. this fund shall be made upon and in accordance with awards by the (b) The Administrator is authorized to set aside out of such fund such reserve amounts as may be required under accepted actuarial principles, to meet all liabilities under such insurance; and the Secretary of the Treasury is hereby authorized to invest and reinvest such 44 (Pes.801.) fund, or any part thereof, in interest-bearing obligations of the United States or in obligations guaranteed as to principal and interest the United such fund. States, and to sell such obligations for the purposes by of SEC. 606. The United States shall bear the cost of administration in connection with this part, including expenses for medical examina. tions, printing and binding, and for such other expenditures as are necessary in the discretion of the Administrator. The appropriations made for the Veterans' Administration for the fiscal year 1941 for administrative expenses shall be available for the payment of such costs of administration under this part. SEC. 607. (a) The United States shall bear the excess mortality cost and the cost of waiver of premiums on account of total disability traceable to the extra hazard of military or naval service, as such hazard may be determined by the Administrator. (b) Whenever benefits under such insurance become payable because of the death of the insured as the result of disease or injury traceable to the extra hazard of military or naval service, as such hazard may be determined by the Administrator, the liability for payment of such benefits shall be borne by the United States in an amount which, when added to the reserve of the policy at the time of death of the insured, will equal the then value of such benefits under such policy. The Administrator is authorized and directed to transfer from time to time from the National Service Life Insurance appropriation to the National Service Life Insurance Fund such sums as may be necessary to carry out the provisions of this section. (c) Whenever the premiums under such insurance are waived as provided in section 602 (n) because of the total disability of the insured as the result of disease or injury traceable to the extra hazard of military or naval service, as such hazard may be determined by the Administrator, the premiums so waived shall be paid by the United States and the Administrator is authorized and directed to transfer from time to time an amount equal to the amount of such premiums from the National Service Life Insurance appropriation to the National Service Life Insurance Fund. SEC. 608. The Administrator, subject to the general direction of the President, shall administer, execute and enforce the provisions of this part, shall have power to make such rules and regulations, not inconsistent with the provisions of this part, as are necessary or appropriate to carry out its purposes, and shall decide all questions arising hereunder. All officers and employees of the Veterans Administration shall perform such duties in connection with the administration of this part as may be assigned to them by the Administrator. All official acts performed by such officers or employees designated therefor by the Administrator shall have the same force and effect as though performed by the Administrator in person. Except in the event of suit as provided in section 617 hereof, all decisions rendered by the Administrator under the provisions of this part, or regulations issued pursuant thereto, shall be final and conclusive on all questions of law and fact, and no other official or court of the United States shall have jurisdiction to review by motion or otherwise any such decision. SEC. 609. (a) There shall be no recovery of payments made under this part from any person who, in the judgment of the Administrator, 45 C is without fault on his part and where, in the judgment of the said Administrator, such recovery would defeat the purpose of benefits otherwise authorized herein or would be against equity and good conscience. No disbursing officer or certifying officer shall be held liable forisany amount paid to section. any person where the recovery of such amount waived under this (b) Where, under the provisions of this section. the recovery of a payment made from the National Service Life Insurance Fund is waived, the National Service Life Insurance Fund shall be reimbursed for the amount ofLife suchInsurance. payment from the current appropriation for National Service SEC. 610. No State law providing for presumption of death shall be applicable to claims for National Service Life Insurance If evidence satisfactory to the Administrator is produced establishing the fact of the continued and unexplained absence of any individual from his home and family for a period of seven years, during which period no evidence of his existence has been received, the death of such indi- vidual as of the date of the expiration of such period may, for the purposes of this part, be considered as sufficiently proved. SEC. 611. No United States Government life insurance shall be granted hereafter to any person under the provisions of section 300 of the World War Veterans' Act, 1924, as amended: Provided, That this section shall not be construed to prohibit the issue of United States Government life insurance policies in cases in which acceptable applications accompanied by proper and valid remittances or author- izations for the payment of premiums have, prior to the date of enactment of this Act, been received by the Veterans' Administration or which have, prior to said date, been placed in the mails properly directed to said Veterans' Administration, or been delivered to an authorized representative of the War Department, the Navy Department, or the Coast Guard, and which are forwarded to the Veterans' Administration not later than one hundred and twenty days subsequent to said date. SEC. 612. Any person guilty of mutiny, treason, spying, or desertion, or who, because of conscientious objections, refuses to perform service in the land or naval forces of the United States or refuses to wear the uniform of such force, shall forfeit all rights to insurance under this part. No insurance shall be payable for death inflicted as a lawful punishment for crime or for military or naval offense, except when inflicted by an enemy of the United States: but the cash surrender value, if any, of such insurance on the date of such death shall be paid to the designated beneficiary, if living, or otherwise to the beneficiary or beneficiaries within the permitted class in accordance with the order specified in section 602 (h) (3). SEC. 613. Whoever in any claim for insurance issued under the provisions of this part makes any sworn statement of a material fact knowing it to be false, shall be guilty of perjury and shall, upon conviction thereof, be punished by a fine of not more than $5,000, or by imprisonment and imprisonment. for not more than two years, or by both such fine SEC. 614. Whoever, with intent to defraud the United States or any beneficiary of such insurance, shall obtain or receive any money or check for National Service Life Insurance without being entitled to 46 (Pus.801.) the same, shall, upon conviction thereof, be punished by a fine of more than $2,000, or by imprisonment for not more than one year, not by both such fine and imprisonment. SEC. 615. Any person who shall knowingly make or cause to made, or conspire, combine, aid, or assist in, agree to, arrange be or in any wise procure the making or presentation of a false for, fraudulent affidavit, declaration, certificate, statement, voucher, or paper, or writing purporting to be such, concerning any application or for insurance or reinstatement thereof, waiver of premiums or claim for benefits under National Service Life Insurance for himself or other person, shall, upon conviction thereof, be punished by a fine any of not more than $1,000, or imprisonment for not more than one or by both such fine and imprisonment. year, SEC. 616. The provisions of Public Law Numbered 262, Seventy. fourth Congress, approved August 12, 1935 (49 Stat. 607), and titles II and III of Public Law Numbered 844, Seventy-fourth Congress, approved June 29, provisions 1936 (49 Stat. 2031), insofar as they are applicable, shall apply to the of this part. SEC. 617. In the event of a disagreement as to claim arising under this part, suit may be brought in the same manner and subject to the same conditions and limitations as are applicable to United States Government (converted) life insurance under the provisions of seetions 19 and 500 of the World War Veterans' Act, 1924, as amended: Provided, That in any such suit the decision of the Administrator as to waiver or non-waiver of premiums under section 602 (n) shall be conclusive and binding on the court. SEC. 618. This part may be cited as the "National Service Life Insurance Act of 1940". Part II-Crediting Military Service for Annuity Purposes Under the Railroad Retirement Acts SEC. 625. The Act entitled "An Act to amend an Act entitled 'An Act to establish a retirement system for employees of carriers subject to the Interstate Commerce Act, and for other purposes', approved August 29, 1935," approved June 24, 1937 (50 Stat. 307), is hereby amended by inserting after section 3 the following new section: "MILITARY SERVICE "SEC. 3A. (a) For the purposes of determining eligibility for an annuity and computing an annuity, including a minimum annuity, there shall also be included in an individual's years of service, within the limitations hereinafter provided in this section, voluntary or involuntary military service of an individual prior to January 1, 1937, within or without the United States during any war service period: Provided, however, That such military service shall be included only subject to and in accordance with the provisions of subsection (b) of section 3, in the same manner as though military service were service rendered as an employee: Provided further, That an individual who entered military service prior to a war service period shall not be regarded as having been in military service in a war service period with respect to any part of the period for which he entered such military service. 47 "(b) For the purpose of this section and section 202, as amended, an individual shall be deemed to have been in 'military service' commissioned or enrolled in the active service of the land or naval when forces of the United States and until resignation or discharge therefrom; and the service of any individual in any reserve component of the land or naval forces of the United States who was ordered to active duty in any such force for a period of thirty days or less shall be deemed to have been active service in such force during such period. (e) For the purpose of this section and section 202, as amended, a war service period' shall mean (1) any war period, or (2) with respect to any particular individual, any period during which such individual (i) having been in military service at the end of a war period, was required to continue in military service, or (ii) was required by any Act of Congress, any regulaton promulgated, order issued, orinproclamation made, in pursuance of such Act, to enter and continue military service. '(d) For the purpose of this section and section 202, as amended, a 'war period' shall be deemed to have begun on whichever of the following dates is the earliest: (1) the date on which the Congress of the United States declared war; or (2) the date as of which the Congress of the United States declared that a state of war has existed; or (3) the date on which war was declared by one or more foreign states against the United States; or (4) the date on which any part of the United States or any territory under its jurisdiction was invaded or attacked by any armed force of one or more foreign states; or (5) the date on which the United States engaged in armed hostilities for the purpose of preserving the Union or of maintaining in any State of the Union a republican form of government. "(e) For the purpose of this section and section 202, as amended, a war period' shall be deemed to have ended on the date on which hostilities ceased. "(f) Military service shall not be included in the years of service of an individual unless, in the calendar year in which his military service in a war service period began, or in the calendar year next preceding such calendar year, he rendered service for compensation to an employer, or to a person service to which is otherwise creditable under this Act, or lost time as an employee for which he received remuneration, or was serving as an employee representative. (g) A calendar month in which an individual was in military serv- ice which may be included in the individual's years of service or service period, as the case may be, shall be counted as a month of service: Provided, however, That no calendar month shall be counted as more than one month of service. "(h) In determining the monthly compensation for computing an disregarded. annuity, military service and any remuneration therefor shall be "(i) In the event military service is or has been used as the basis or as a partial basis for a pension, disability compensation, or any other gratuitous benefits payable on a periodic basis under any other Act of of Congress, any annuity under this Act or the Railroad Retirement Act 1935, which is based in part on such military service and is with respect to a calendar month for all or part of which such pension or 48 (Pea.801.) 49 other benefit is also payable, shall be reduced with respect to monthsuch by the proportion which the number of years of service that by which military service increases the years of service, or the period, as the case may be, bears to the total years of service, service or the aggregate amount of such pension or other benefit with respect by to that month, whichever would result in the smaller reduction. "(j) Any department or agency of the United States maintaining records of military service, at the request of the Board, shall certify to the Board, with respect to any individual, the number of months of military service which such department or agency finds the individual to have had during any period or periods with respect to which the Board's request is made, the date and manner of entry into such military service, and the conditions under which such service was continued. Any department or agency of the United States which is authorized to make awards of pensions, disability compensation, or any other gratuitous benefits or allowances payable, on a periodic basis or otherwise, under any other Act of Congress on the basis of military service, at the request of the Board, shall certify to the Board, with respect to any individual, the calendar months for all or part of which any such pension, compensation, benefit, or allowance is payable to, or with respect to, the individual, the amounts of any such pension, compensation, benefit, or allowance, and the military service on which such pension, compensation, benefit, or allowance is based. Any certification made pursuant to the provisions of this subsection shall be conclusive on the Board: Provided, That if evidence inconsistent with any such certification is submitted, and the claim is in the course of adjudication or is otherwise open for such evidence, the Board shall refer such evidence to the department or agency which made the original certification and such department or agency shall make such recertification as in its judgment the evidence warrants Such recertification, and any subsequent recertification, shall be conclusive, made in the same manner, and subject to the same conditions an original certification. "(k) In the event that an individual was, on or before the date of enactment of the Second Revenue Act of 1940, denied an annuity but could have been granted an annuity under the provisions of this Act or the Railroad Retirement Act of 1935 had military service been included in his years of service or service period, as the case may be, no annuity shall be payable with respect to such individual, or with respect to his death, by reason of the provisions of this section, unless such individual files a new application with the Board. In determining the earliest date upon which an annuity can begin to accrue for such an individual in accordance with the provisions of section 2, the filing date of the application shall be the date on which such new application is filed. "(1) An individual who, on or before the date of enactment of the Second Revenue Act of 1940, was awarded an annuity under the provisions of this Act or the Railroad Retirement Act of 1935, but whose annuity would have been increased if his military service had been included in his years of service or service period, as the case may be, may, notwithstanding the previous award of an annuity, make application (in such manner and form as may be prescribed by the Board) for an increase in such annuity based on his military Upon the filing of such application, if the Board finds that the military service thus claimed is creditable and would result in an increase in the annuity, the Board, notwithstanding the previous award, shall recertify the annuity on an increased basis in the manner as though this section had been in effect at the time of same the original certification: Provided, however, That if the annuity previously awarded is a joint and survivor annuity, the increased annuity shall be a joint and survivor annuity of the same type except that if on the date the increase begins to accrue the individual has no spouse for whom the election of the joint and survivor annuity was made, the increase on a single life basis shall be added to the individual's annuity: And provided further, That such increase in the annuity shall not begin to accrue more than sixty days before the filing date of the application for an increase in the annuity based on military service, and in the event the annuity is a joint and survivor annuity, the actuarial value of the increase in annuity shall be computed as of the effective date of the increase. "(m) In addition to the amount authorized to be appropriated in subsection (a) of section 15 of this Act, there is hereby authorized to be appropriated to the Railroad Retirement Account for each fiscal year, beginning with the fiscal year ending June 30, 1941, an amount sufficient to meet the additional expenditures necessary to be made during each such fiscal year by reason of crediting under the Railroad Retirement Acts military service prior to January 1, 1937. The Railroad Retirement Board, as promptly as practicable after the date of enactment of the Second Revenue Act of 1940, and thereafter annually, shall submit to the Bureau of the Budget estimates of such military service appropriations to be made to the account in addition to the annual estimates by the Board, in accordance with subsection (a) of section 15 of this Act, of the appropri- tions to be made to the account to provide for the payment of annuities, pensions and death benefits not based on military service. Each such estimate shall take into account the excess or the deficiency, if any, in such military service appropriation for the preceding fiscal year. SEC. 626. Section 202 of such Act of June 24, 1937, is hereby amended by inserting immediately after the second proviso of such section the following new proviso: "And provided further, That for the purposes of determining eligibility for an annuity and computing an annuity there shall also be included in an individual's service period, subject to and in accordance with subsections (a) to (1), inclu- sive, of section 3A of this Act, voluntary or involuntary military service of an individual prior to January 1, 1937, within or without the United States during any war service period, if, in the calendar year in which his military service in a war service period began, or in the calendar year next preceding such calendar year, he was in the compensated service of a carrier, or of a person service to which is otherwise creditable, or was serving as a representative; but such military service shall be included only subject to and in accordance with the provisions of the Railroad Retirement Act of 1935, in the same manner as though military service were service rendered as an employee: 50 TITLE VII-CREDIT AGAINST FEDERAL UNEM PLOYMENT TAXES SEC. 701. CREDIT AGAINST FEDERAL UNEMPLOYMENT TAXES, (a) ALLOWANCE OF CREDIT.-Against the tax imposed by section 901 of the Social Security Act for the calendar year 1936, 1937, or 1938, or against the tax imposed by the Federal Unemployment Tax Act for the calendar year 1939, any taxpayer shall be allowed credit for the amount of contributions paid by him into an unemployment fund under a State law- Before the sixtieth day after the date of the enactment of this(1) Act; (2) On or after such sixtieth day (except in the case of the tax for the calendar year 1939) with respect to wages paid after the fortieth day after such date of enactment; (3) Without regard to the date of payment, if the assets of the taxpayer are, at any time during the fifty-nine-day period follow- ing such date of enactment, in the custody or control of & receiver, trustee, or other fiduciary appointed by, or under the control of, a court of competent jurisdiction. The amount of such credit, in the case of contributions with respect to the calendar year 1939 paid after the last day upon which the taxpayer was required under section 1604 of the Federal Unemployment Tax Act to file a return for such year, shall not exceed 90 per centum of the amount which would have been allowable as credit on account of such contributions had they been paid on or before such last day. The provisions of the Social Security Act in force prior to February 11, 1939 (except the provision limiting the credit to amounts paid before the date of filing returns) shall, with respect to the tax for the calendar year 1936, 1937, or 1938, apply to allowance of credit under this section, and the provisions of the Federal Unemployment Tax Act (except section 1601 (a) (3)) shall, with respect to the tax for the calendar year 1939, apply to allowance of credit under this section. The terms used in this subsection shall, with respect to the tax for the calendar year 1936, 1937, or 1938, have the same meaning as when used in title IX of the Social Security Act prior to February 11, 1939, and shall, with respect to the tax for the calendar year 1939, have the same meaning as when used in the Federal Unemployment Tax Act. The total credit allowable against the tax imposed by sec. tion 901 of the Social Security Act for the calendar year 1936, 1937, or 1938, or against the tax imposed by section 1600 of the Federal Unemployment Tax Act for the calendar year 1939, shall not exceed 90 per centum of such tax. (b) REFUND.-Refund of the tax (including penalty and interest collected with respect thereto, if any); based on any credit allowable under this section, may be made in accordance with the provisions of law applicable in the case of erroneous or illegal collection of the tax No interest shall be allowed or paid on the amount of any such refund. Approved, October 8, 1940, 11 p.m., E. S. T. 292 GRAY GM (Paris) Vichy Dated January 24, 1941 Rec'd. 10:51 p.m. Secretary of State, Washington. 100, January 24, 6 p.m. FOR THE TREASURY FROM MATTHEWS. A decree published in today's Journal Official stipulate that in view of Rueff's "outstanding services" to the State in the field of political Economy and because of his EXCELLEN record in the great war he is EXEMPTED from the provisions of anti-Jewish law of October 3, 1940 and may continue to hold the rank of inspector of finance, first class. An arrete of the Minister of Finance also appearing in this issue accepts Rueff's resignation as Under Governor of the Bank of France and appoints him honorary Under Governor. DE Bletry, Controller General of the Bank, is named Under Governor in place of Rueff. Rueff told ME when last I saw him that he would not remain with the bank if Bouthillier stayed on as Minister of Finance in view of strong differences of opinion on policies. In fact he indicated that his reluctance to talk about 293 -2- GMW 100, January 24, 6 p.m. from (Paris) Vichy about disposition of the Belgian gold was due to Bouthillier' insistence. (Telegram number 1164, DECEMBER 20, 9 p.m.) LEAHY GW 294 THE ADVISORY COMMISSION TO THE COUNCIL OF NATIONAL DEFENSE FEDERAL RESERVE BUILDING WASHINGTON, D.C. January 24, 1941 Dear Henry: I was very pleased with the manner in which you promptly responded to my request that you be personally available to John Hamm, my Deputy, while I am away. I hope he won't have to tres- pass on you but I have asked him to send you a note from time to time as to how things are getting along. Sincerely yours, Jean Leon Henderson Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D. C. IS 295 WAR DEPARTMENT OFFICE OF THE CHIEF OF STAFF WASHINGTON January 24, 1941. Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Dear Mr. Morgenthau: Thank you very much for the following reports, which you sent me this date: Part I - Airplanes Deliveries of and New Orders for Airplanes, June 9, 1940 - January 18, 1941; Unfilled Orders and Estimated Deliveries on January 18, 1941. Part II - Airplane Engines Deliveries of and New Orders for Airplane Engines, June 9, 1940 - January 18, 1941; Unfilled Orders and Estimated Deliveries on January 18, 1941. Faithfully yours, Chief of Staff. TREASURY DEPARTMENT 296 Office of the Secretary Technical Assistant to the Secretary Date January 24, 1941 TO: Secretary Morgenthau Room I hed dictated these few lines before attending our meeting this afternoon. I have not dealt with the separate items, but submit my general views for your personal information. From: MR. COCHRAN 297 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 24, 1941 Secretary Morgenthau Mr. Cochran FROM I think the Special Report to Congress by the Board of Governors of the Federal Reserve System, the Presidents of Federal Reserve Banks and the Federal Advisory Council was ill-timed and not handled in the way most likely to achieve desirable results. I regret, however, the lack of harmony between the Board and the Treasury, and would not like to see this perpetuated or in any way widened to include possibly a considerable part of the banking and financial community on the side of the Board. The recommendations had the approval of the entire Federal Reserve System and have had favorable comment from the country's financial and banking press, even though they may have little chance of acceptance by Congress. Is it worthwhile for the Treasury at this point to oppose in most part the recommendations, now that serious financing is about to begin and in circumstances which are not entirely propitious therefor? Freezing rumors are already causing security and dollar sales by foreigners, which may conceivably develop into a fairsized flight of capital. Is it necessary and wise that the Treasury defend throughout the coming four years all of the monetary and financial measures adopted during the first term? If not. the time to change gracefully may be now at the beginning. Considering the borrowing that must be done, I should much prefer to see the Secretary of the Treasury have the confidence and real support of the financial conmunity through turning in the direction of an orthodox financial and monetary policy. as generally accepted, rather than insist upon retaining powers which are generally believed inflationary and dangerous, and which I doubt that the Secretary himself would ever care to use. Until the whole problem of authority and responsibility in the monetary and finencial fields is worked out, perhaps through hearings before Congress, it would seem advisable to endeavor to suppress the public quarrel between the Federal Reserve and the Treasury. I feel that some honest cooperation can be informally achieved. It should be recalled that some advisors who formerly stood well with the Treasury, such as Professor John Williams and Dr. Randolph Burgess, are in favor of the recommendations. Such men as these might be helpful in working out the desired cooperation. The impression in foreign Treasury and Central Bank circles, at least, during recent years has been that the Treasury under the guidance of Secretary Norgenthau has been more conservative and dependable than the Federal Reserve System under Governor Eccles. I should regret very much to see the slightest reversal of this impression. In all of our emergency measures I think we should keep in mind a long-time policy centering upon the United States as the world's financial center dollar as of and the an international unit currency. K.M.P. 298 MEMORANDUM January 24, 1941 TO: The Secretary FROM: Mr. Young RE: British Planes at New York I have now been advised that there was a total of 41 British aircraft awaiting shipment at New York on January 22, 1941. The detail of this total is as follows: Brewster Buffalo Curtiss Tomahawk Douglas Boston Glenn Martin 5 20 2 12 Lockheed Lodestar Total 2 41 P. 299 JAN 24 1941 My dear Mr. President: I know that you will find the attached memorandum concerning Ruesian buying of interest especially at this time. In this instance your Limison Committee for Coordination of Foreign and Domestic Military Purchases, which I wrote you about on December 19th, has again demonstrated its usefulness by bringing together the various branches of the Government dealing with Russian purchasing activities. It was agreed by representatives of the Office of Production Management, the Bureau of Foreign and Domestic Commerce, the Var Department, the Navy Department, the Office of the Administrator of Export Control, and two divisions of the Department of State that purchasing of machine tools by Russia should be cleared through the Liaison Committee in accordance with the regular procedures already established for other countries. I might add that prior to this time the various interested agencies of the Government had been dealing with this situation without full knowledge of each other's activities. Faithfully yours, The President, The White House. PY:bj 1/24/41 P4. By - 35 300 January 24, 1941 MEMORANDUM TO: The Secretary FROM: Mr. Young Re: Machine Tools for Bussia As the result of a meeting held on January 22, agreement was reached on a procedure for handling the coordination and clearance of Russian machine tool orders which I believe will eliminate such of the difficulty which we have heretofore had with this problem. As you know, the aschine teel situation has been a source of irritation to the Russians ever since the establishment of export control over machine tools OR July 2, 1940. While export licenses have been issued for a great many of these, there have been others which have been diverted by manufacturers with OF without proper authority from the United States Government, as well as some which have been commandeered. As a result, the Russians have found that the tools previously ordered are not available to them, and 11 has been impossible to secure quotations on new OF replacement tools for any near delivery. Consequently, they have been constantly in touch with the State Department and the Administrator of Export Centrol with a succession of lists which eventually resulted in considerable confusion as to what they are to get and when. While this was going on, I conferred with the Ambassador on October 31 with reference to the elearance procedure required on new orders for aschine tools and other critical items. on December 6 the President's Maison Committee received requests for clearance on sine proposed new orders for machine tools, which were forwarded to the Army, Navy, and Defense Commission for clearance is the usual manner. In the COUPOO of their consideraties of these requests it became important to know whether the teels covered by these new orders had already been cleared in discussions between the State Department and the Russian Ambassador. It was extremely difficult, however, to arrive at any decision on this point because of the number of different lists which had been placed before the State Department by the Russian Government and the difficulty of arriving at any definite conclusion in the absence of any central contact point which would have the whole story. 301 2 In the course of this investigation it was found that there were several agencies within our Government which were actively interested in the Russian machine tool exports, but which were not all equally aware of the work the others were doing. It was obvious, therefore, that the first step toward an efficient, intelligent, and consistent handling of the Russian machine tool problem was to get representatives of all these people together and exchange information. Accordingly, the Liaison Committee arranged a meeting on January 22, at which were represented the European Divisio of the Department of State, the Division of Controls of the Department of State, the Machine Tool Section of the Office of Production Management, the Bureau of Foreign and Domestic Commerce of the Department of Commerce, the Office of the Administrator of Export Control, the War and Navy Departments through their members on the Machine Tool Committee of the Apay and Navy Munitions Board, and the President's Liaison Committee. At this meeting there was a complete exchange of information so that each agency was fully aware of the work being done by the other agencies and a complete sanvass of the problem from a policy standpoint. There was very definitely a feeling that there should be one place where the Russians could come and work out their machine tool problems without bethering officials of the State Department and other officials whose regular duties leave no time for liaison work of this type. Accordingly, it was the sense of the meeting that all lists heretofore filed by the Russian Ambassador on the machine tool problem should be disregarded, and in the future each order, either for additional tools or to replace those diverted or commandeered, must be considered individually in accordance with the regular clearance procedure which has already been established by the Liaison Committee for other countries. To this end the State Department will refer any additional material submitted by the Russians on machine tools to the Liaison Committee and instruct the Russians that their clearance problems will have to be taken up through that Committee as a liaison agency between their government and the interested United States Government agencies. JCB:er 302 JAN 24 1941 My dear Cordell: I an enclosing for your information a copy of a letter to the President with an attached memorandus concerning the purchase of Russian machine tools. I would like to thank you for the splendid cooperation which the Department of State has accorded the Limison Committee for Coordination of Foreign and Domestic Military Purchases. Sincerely, Henry The Henorable Cordell Hull, The Secretary of State. PY:bj 1/24/41 P. Bv Memmer 3rd 303 My dear Oordell: I - enclosing for your information a copy of a letter to the President with an attached memorandum concerning the purchase of Russian machine tools. I would like to thank you for the splendid cooperation which the Department of State has accorded the Limison Committee for Coordination of Foreign and Domestic Military Purchases. Sincerely, The Fenorable Cardell Hull, The Secretary of State. PY:bj 1/24/41 304 My dear Oordell: I - enclosing for your information a copy of a letter to the President with an attached memorandum concerning the purchase of Russian machine tools. I would like to thank you for the splendid cooperation which the Department of State has accorded the Lisison Committee for Coordination of Foreign and Domestic Military Purchases. Sincerely, The Fenorable Cardell Hull, The Secretary of State. PY:bj 1/24/41 305 JAN 24 1941 My dear Mr. President: I know that you will find the attached memorandum concerning Russian buying of interest especially at this time. In this instance your Lisison Committee for Coordination of Foreign and Domestic Military Purchases, which I wrote you about on December 19th, has again demonstrated its usefulness by bringing together the various branches of the Government dealing with Russian purchasing activities. It was agreed by representatives of the Office of Production Management, the Bureau of Foreign and Domestic Commerce, the Var Department, the Havy Department, the Office of the Administrator of Export Control, and two divisions of the Department of State that purchasing of machine tools by Russia should be cleared through the Lisison Committee in accordance with the regular procedures already established for other countries. I might add that prior to this time the various interested agencies of the Government had been dealing with this situation without full knowledge of each other's activities. Faithfully yours, (Signed) Morgenibas,Jr. The President, The White House. For PY:bj 1/24/41 306 see Hm's teathery of 1/29/41 77TH CONGRESS 1st SESSION H.R. 2653 IN THE HOUSE OF REPRESENTATIVES JANUARY 24,1941 Mr. DOUGHTON introduced the following bill; which was referred to the Committee on Ways and Means A BILL To increase the debt limit of the United States, to provide for the Federal taxation of future issues of obligations of the United States and its instrumentalities, and for other purposes. Be it enacted by the Senate and House of Representa- 1 2 tives of the United States of America in Congress assembled, 3 That this Act may be cited as the Public Debt Act of 1941. SEC. 2. Section 21 of the Second Liberty Bond Act, as 4 amended, is further amended to read as follows: 5 6 "SEC. 21. The face amount of obligations issued under 7 the authority of this Act shall not exceed in the aggregate 8 $65,000,000,000 outstanding at any one time." 9 SEC. 3. Section 22 of the Second Liberty Bond Act, as 2 1 amended (U. S. C., title 31, sec. 757c), is amended to read 2 as follows: 3 "SEC. 22. (a) The Secretary of the Treasury, with the 4 approval of the President, is authorized to issue, from time 5 to time, through the Postal Service or otherwise, United 6 States savings bonds and United States Treasury savings 7 certificates, the proceeds of which shall be available to meet 8 any public expenditures authorized by law, and to retire any 9 outstanding obligations of the United States bearing interest 10 or issued on a discount basis, The various issues and series 11 of the savings bonds and the savings certificates shall be in 12 such forms, shall be offered in such amounts, subject to the 13 limitation imposed by section 21 of this Act, as amended, 14 and shall be issued in such manner and subject to such terms 15 and conditions consistent with subsections (b), (c), and 16 (d) hereof, and including any restrictions on their transfer, 17 as the Secretary of the Treasury may from time to time 18 prescribe. 19 "(b) Savings bonds and savings certificates may be 20 issued on an interest-hearing basis, on a discount basis, or on 21 a combination interest-bearing and discount basis and shall 22 mature, in the case of bonds, not more than twenty years, and 23 in the case of certificates, not more than ten years, from the 24 date as of which issued. Such bonds and certificates may be 25 sold at such price or prices, and redeemed before maturity 3 1 upon such terms and conditions as the Secretary of the 2 Treasury may prescribe: Provided. That the interest rate on, 3 and the issue price of, savings bonds and savings certificates 4 and the terms upon which they may be redeemed shall be 5 such as to afford an investment yield not in excess of 3 per 6 centum per annum, compounded semiannually. The denomi- 7 nations of savings bonds and of savings certificates shall be 8 such as the Secretary of the Treasury may from time to time 9 determine and shall be expressed in terms of their maturity 10 values. The Secretary of the Treasury is authorized by regn- 11 lation to fix the amount of savings bonds and savings certifi12 cates that may be held by any one person at any one time. 13 "(c) The Secretary of the Treasury may, under such 14 regulations and upon such terms and conditions as he may 15 prescribe, issue, or cause to be issued, stamps, or may provide 16 any other means to evidence payments for or on account of 17 the savings bonds and savings certificates authorized by this 18 section, and he may make provision for the exchange of sav- 19 ings certificates for savings bonds. 20 (d) The provisions of section 7 of this Act, as amended 21 (relating to exemptions from taxation), shall apply to savings 22 bonds issued before the effective date of the Public Debt 23 Act of 1941. For purposes of taxation any increment in 24 value represented by the difference between the price paid 25 and the redemption value received (whether at or before ma- 4 1 turity) for savings bonds and savings certificates shall be 2 considered as interest. The savings bonds and the savings 3 certificates shall not bear the circulation privilege. 4 "(e) The appropriation for expenses provided by sec- 5 tion 10 of this Act and extended by the Act of June 16, 6 1921 (U. S. C., title 31, secs. 760 and 761), shall be avail7 able for all necessary expenses under this section, and the 8 Secretary of the Treasury is authorized to advance, from 9 time to time, to the Postmaster General from such appro10 priation such sums as are shown to be required for the ex11 penses of the Post Office Department, in connection with 12 the handling of savings bonds, savings certificates, and stamps 13 or other means provided to evidence payment therefor. 14 (f) The board of trustees of the Postal Savings System 15 is authorized to permit, subject to such regulations as it may 16 from time to time prescribe, the withdrawal of deposits on 17 less than sixty days' notice for the purpose of acquiring sav18 ings bonds and savings certificates which may be offered by 19 the Secretary of the Treasury; and in such cases to make 20 payment of interest to the date of withdrawal whether or 21 not a regular interest payment date. No further original 22 issue of bonds authorized by section 10 of the Act approved 23 June 25, 1910 (U. S. C., title 39, sec. 760), shall be made 24 after July 1, 1935. 25 "(g) At the request of the Secretary of the Treasury 5 the Postmaster General, under such regulations as he may 1 2 prescribe, shall require the employees of the Post Office 3 Department and of the Postal Service to perform, without 4 extra compensation, such fiscal agency services as may be 5 desirable and practicable in connection with the issue, deliv- 6 ery, safekeeping, redemption, or payment of the savings 7 bonds and savings certificates, or in connection with any 8 stamps or other means provided to evidence payments." 9 SEC. 4. (a) Interest upon, gain from the sale or other 10 disposition of, and the principal of, obligations issued on or 11 after the effective date of this Act by the United States or 12 any agency or instrumentality thereof (except a Territory, 13 possession, or the District of Columbia) shall not have any 14 exemption, as such, and loss from the sale or other disposi15 tion of such obligations shall not have any special treatment, 16 as such, under Federal tax Acts now or hereafter enacted; 17 except that any such obligations which the United States 18 Maritime Commission or the Federal Housing Administra- 19 tion has, prior to the effective date of this Act, contracted 20 to issue at a future date, shall when issued bear such tax21 exemption privileges as were, at the time of such contract, 22 provided in the law authorizing their issuance. 23 (b) The provisions of this section shall, with respect 24 to such obligations, be considered as amendatory of and 25 supplementary to the respective Acts or parts of Acts author- 6 1 izing the issuance of such obligations, as amended and 2 supplemented. 3 SEC. 5. (a) The authority granted in the following pro- 4 visions of law to issue obligations is terminated: 5 (1) Section 32 of the Act entitled "An Act to provide 6 ways and means to meet war expenditures, and for other 7 purposes", approved June 13, 1898, as amended (U. S. C., 8 1934 edition, title 31, sec. 756) (authorizing the issue of 9 $300,000,000 certificates of indebtedness) ; 10 11 (2) Section 6 of the First Liberty Bond Act, as amended (U.S.C., 1934 edition, title 31, sec. 755) (authorizing the 12 issue of $2,000,000,000 certificates of indebtedness) : and 13 (3) Section 6 of the Second Liberty Bond Act, as 14 amended (U. S. C., 1934 edition, title 31, sec. 757) (au15 thorizing the issue of war savings certificates) . 16 (b) Section 301 of title III of the Revenue Act of 17 1940 (54 Stat. 526) (creating a special fund for the retire18 ment of defense obligations) is repealed. 19 SEC. 6. This Act, except section 5, shall become effective 20 on the first day of the month following the date of its 21 enactment. 307 Chaunco 901 TIME From: L. W. Engine January 24, 1941 Subject: affect on foreign transactions is this market of last weekend's articles regarding freesing of all foreign funds. As sentioned at the time over the telephone, ea January 20 and January 21, the three leading basks is New York reported that they had not noticed any unusual operations. One other bask stated that there had been some surrency withisonals primarily for Italian account (just over $500,000 on January 20 for Italian account, about $350,000 for Mexican account and a few small with drawals procusably for Swiss account). Withiravals for Italian account were mostly is denominations of $50 and $100, others mostly is thousand dellar notes. On January 22 the Chase Bank reported that they had last from 3 to w of their foreign deposite during the week but added that they did not of course know whether that had to do with the newspaper reports. The whole, they stated, vas not alarming. Oa January 23 the Guaranty frust reported that they were beginning to see some signs of flight of foreign money particularly for Swiss account. The same day the Irving Trust informed me of further currency with- dravals of about $100,000 each for Italian and Mexican account, all is demoninations of $50 and $100. Ordere for the purchase of foreign exchange is amounts larger than usual have security base is the market here-for several million Argentine poses from Svotes - from Switcoriand and for about Swiss france 3 million from Switeerland. Restrotwiee the effect es the rates has been a rise is the valoo of from, say, 2360 to 2375 for the Argentine pess and from 2321 to 2326 for the Swiss frese. Today the market had remore to the effect that the Swiss National Beak would no longer purchase dollars (except for commercial transactions of a strictly legitimate character). 308 2 Sales of American securities for Swise account which, during the week ending January 18 according to proliminary Signates of the S.B.C. - as I said to you ever the telephone this morning they are not complete but give a fair indication of the treat - were less than $100,000 do day. is the last three days, have amounted to $621,000 for January 21. $743,000 for January 22 and $450,000 for January 23. So here. I would eay. is a very definite indication of servencness ea the part of Swice holders. The sale of securities is, of course, the first stay which new seens to be followed by the transfer of dollar pressols of these sales into Swiss frence. Meet of our banks seen to have received is recent days eables from shread asking for as expression of opinion as to whether OF not those remore foreshaloving further fressing of foreign funds is this warket were accurate. As you know we curseives have received such as inquiry from Benefit and another from Switcorient. L.V.K. 309 33 Georgetown, British Guiana, January 24, 1941. French restrictions on purchases in the United States. I have the honor to submit herewith an untranslated copy of what is purported to be a notice which the Governor of French Guiana has served on the importers of that Colony,* stating that recent interruptions of gold movements (caused by the decision of the British authorities at Port of Spain to seize all French Guiana gold being shipped to the United States via Pan American Airways) had caused a shortage of dollar exchange and that purchases in the United States must therefore be reduced to a minimum, and suggesting that French Guiana importers form an organization to handle the ordering, payment, and transportation of goods purchased in South America. The notice closed with a list of Brazilian firms able to supply certain essential articles. The result of this restriction of commerce will be to weaken further the Colony's already strained economic position. French Guiana imports most of the articles she consumes; little is produced locally. Agriculture has long been neglected; the Colony produces only a small percentage of the fruits, vegetables and cereals it requires. With the fall of France and the resulting lack of shipping facilities, the one export crop, bananas, was allowed to rot on the trees and the plantations were abandoned. Once important items, rosewood oil, balata, and timber are produced in limited amounts. There are no industries. Confidential; copy of notice forwarded by Mr. Sainte Claire, Pan American Airways agent, Cayenne, French Guiana. 310 -2The economic life of the Colony has long been dependent on direct homegovernment subsidies, the expenditures of government employees (whose salaries account for four-fifths of the Colony's budget), and gold production. Of late it has been this last item which has kept the Colony on its economic feet. All the gold mined is required by law to be turned over to the Bank of Guiana, which ships it by air to the United States. There the dollar exchange obtained is used to purchase food stuffs and other articles which the Colony must import to survive. The British seizures at Port of Spain have disrupted this commerce and have forced French Guianese to turn to South America, notably to Brazil, to find a market for her gold and an alternate source of imports. While the dollar volume of trade affected may be comparatively small, the United States has none the less lost one of her Western Hemisphere export markets. Respectfully yours, William O. Boswell, American Vice Consul. Enclosure: Decree, as stated. 631 WOB/ed COPY:aja 311 BRITISH EMBASSY, WASHINGTON, D.C. PERSONAL AND SECRET. 24th January, 1941. 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, Work Both The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. 312 Telegram from London of the 23rd January, 1941 Naval. An His Majesty's trawler and rescue tug Saint Cyrus were mined and sunk in Humber area January 22nd. 2. An East Coast convoy unsuccessfully attacked by enemy aircraft in Themes Estuary. 3. Damaged Italian submarine at Las Palmas is reported to have refueled and to be preparing to leave. 4. Tomnage of damaged merchant vessels under repair or awaiting repair amounts to over 1 million tons. 5. Military By January 21st, our southern column had reached a point 26 miles east of Tessenei without meeting enemy. 6. Kenya. Italian somaliland front. Our troops have occupied an Italian post 57 miles North-east of Garisea. 7. Royal Air Force. Night of January 22nd/23rd. 40 aircraft were sent to industrial targets at Dusseldorf - all returned safely. Results not yet available. owing to heavy cloud they had very great difficulty in finding their primary/ 313 -2- primary targets but fires were started in the area of attack which assisted later aircraft. Several alternate targets were also attacked. 8. on January 22nd, aircraft from Aden dropped over a ton of bombs on a stores depot on Jibuti Adis Ababa railway. 9. German Air Force. January 22nd. Enomy activity was confined to reconnaissances by single aircraft off the East coast and Thames estuary. Night of January 22nd/ 23rd, there was very little enemy activity. 10. Aircraft casualties in operations over and from the British Iales. ENEMY DESTROYED DAMAGED 2 3 By our fighters Bombers British: 1 Bomber missing. 314 RESTRICTED G-2/2657-220 No. 300 M.I.D., W.D. January 24, 1941 12:00 M. SITUATION REPORT I. Western Theater of War. 1. Air. Weather unfavorable; no offensive air action over the British Isles or the Continent. German planes continued to operate against shipping at sea and claim hits on 4 vessels. II. Greek Theater of War. 1. Ground. Stiff fighting is going on north of Klisura. In the coastal area, Greek pressure toward Valona continues. 2. Air. No important operations. III. African and Mediterranean Theaters of War. 1. Ground. The British are consolidating their gains at Tobruk and are patrolling to the west. In East Africa, pressure on the Italians continues. 2. Air. No important operations. 3. Political. Haile Selassie, the deposed Emperor, is reported to have crossed into Ethiopia to coordinate native military efforts with those of the British. Note: 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. RESTRICTED CONFIDENTAL 315 Paraphrase of Code Cablegram Received at the War Department at 8:40 hoMes January 24, 1941 London, filed 23145, January 24. 1. On Thursday, January 23, planes of the Constal Command engaged in regular patrols during which one German plane was shet down. A Polish fighter plane squadron from England equipped with Harrisans fighters launched successful lev-level raids on German troops and on several airtroms on the coast of France. During the preceding night a raid against Dusseldorf was earried out by a small number of planes of the British Bember Command. Targets could be located only with great difficulty and results could not be observed. Searchlights, airfields and ports in Germany were the targets of single British planes. 2. On January 23 a small number of German planes were active against marehant shipping over the coasts of Norfolk and Suffelk and along the Thomas Estuary. Other German planes were on recommission missions over Britain. German aircraft lesses were two bombers destrayed and three bombers damaged. That night there were no German planes over England. 3. Apellenia and Derna, Libya, were bombed and the Toback region was patrolled by British planes based in Egypt. Fifteen thousand Italian priseners were taken by the British mopping-up foress in the Toback area. The British sustained only 600 camulties in the Tebrule operations while Italian lesses were estimated at more than 2,000. CONFIDENTIAL 316 CONFIDENTIAL 4. Meritas - the Into of Medias was boubed by British planse from Greese and - Italian supply base - the Midis Djibouti railreed was heavily attached. Military installations and airfields in Sieily were concernfully attented by British planes based on Malta. A total of four Italian places were destroyed in British raids against targets in the idem, Sudan and Mage regions. 5. Malta was attached four times by Axis bombers during the day and night of January 23 but no damage has been reported as yet. 6. More than one million tens of marchant shipping we in England waiting for repairs or being repaired. 7. Repairs have - been completed on the damaged Italian U-boat which was forced to " into haster at Lee Palmer in the Consury Islands and she is propering to deposit. A British reseue tug and a truder street mines in the Member river and smok. SGANLON Distributions Secretary of New State Department Secretary of Treasury A Secretary of Nar Order of staff Ner Plans Division office of Reval Intelligence Air Corps as CONFIDENTIAL .2. 317 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE January 24, 1941 Secretary Morgenthau FROM CONFIDENTIAL Mr. Cochran Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns £ 48,000 2169,000 Of the sterling purchased, £100,000 came from an American mining company, and the balance resulted from various commercial transactions. The Federal Reserve Bank of New York sold £16,000 in registered sterling to two non-reporting banks. Open market sterling held steady at 4.03-1/2. Transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns -0£1,000 Although the Canadian dollar declined to a new low of 17-1/2% discount around noontime, it subsequently recovered to close at 16-7/8% The Swiss franc, whose recent improvement has been associated with rumors that the U.S. would extend its foreign funds control to cover all foreign assets in this country, rose sharply to close at a three-year high of .2328, as compared with .2321-1/2 yesterday. The New York banks attributed today's advance primarily to the report from Switzerland that Swiss banks will only accept dollar exchange arising from normal commercial transactions. Closing quotations for the other currencies were: Swedish krona .2385-1/2 Reichemark .4005 .0505 .2375 .0505 Lira Argentine peso (free) Brazilian milreis (free) Mexican peso Cuban peso Chinese yuan .2066 7-13/16% discount .05-1/2 There were no gold transactions consummated by us today. -2 - 318 The State Department forwarded to us a cable stating that the Westminster Bank, London, would ship $98,000 in gold to Brown Brothers Harriman, New York, for sale to the New York Assay Office. In Bombay, gold was priced at the equivalent of $34.01, off 5$. Silver was 1/8 lower at the equivalent of 44.65+ The prices fixed in London for spot and forward silver both advanced 1/16d, to 23-1/4d and 23-3/16d respectively. The dollar equivelents were 42.21d and 42.104. Handy and Harman's settlement price for foreign silver was unchanged at 34-3/4d. The Treasury's purchase price for foreign silver was also unchanged at 35. We made three purchases of silver toteling 350,000 ounces under the Silver Purchase Act. Of this amount, 200,000 ounces represented a sale from inventory, and 50,000 ounces consisted of new production from foreign countries, for forward delivery. The other 100,000 ounces represented part of the Central Bank of China's recent chipment to this country. BMS CONFIDENTIA 319 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION STRICTLY CONFIDENTIAL TO Secretary Morgenthau FROM Mr. Klaus DATE January 24, 1941 FBI reports: December 28. A constant decrease in Japanese official balances is indicated. During November the Consulate General's account was reduced from $67,527.31 to (24,951.55; cash withdrawals by 33 checks exceeded $50,000 (there had been $16,000 of deposits); in all cases the denominations requested were in notes of $100 or less. The main Japanese commercial account went from $168,380.50 on October 30 to $5,286.62 on November 14, 1940. The special account of its manager went from 684,509.21 to $15,675.32. January 3. Otto Ahnert and his brother Alfredo own and operate a lead silver mine in Durango, Mexico, and Alfredo is endeavoring to secure a mercury mine in the United States in which enterprise he appears to have American associates who may not be aware of the pro-Nazi purposes of the Ahnerts. January 10. Jakob Goldschmidt, refugee engaged in German dollar bond repatriation, received commissions from the Germans and also received or is entitled to receive from the sellers a brokerage fee of $2.50 per bond and commissions totaling over $100,000. Goldschmidt is said to have stated that the repatriation of German debts in the United States was an idea of Dr. Westrick in order to bolster Germany's credit and that since Westrick's return to Germany activity in the repatriation of German securities has become more intense. The A.E.B. American Corporation (made up of Paul Ernst Gottlieb, Dr. Alfred Rosenfeld, and other refu- gees) has been associated in these transactions with Kollmar and Von Gibara, who are tied up with the Chemical National Bank and have been doing their business through Lazard Freres, among others. In Jakob Goldschmidt's account is a check of over $50,000 dated October 31, 1940, to Adele R. Levy (Adele Rosenwald Levy?). Kollmar arrived from Germany December 9, 1940, and was observed to carry certain mail, which had not been found by the British at Bermuda; among the various letters the Customs Agent noticed one addressed to ex-President Hoover which Kollmar said was given him by a Mr. Hartigan, Hoover's assistant in Berlin working on food supplies. Chemical National has been proposing to send Kollmar to England on the bank's business. Joseph A. Bower, Vice President of the Chemical National and Treasurer of the New Jersey Republican State Committee, who is backing Kollmar, was originally interested in the release of Arnold Bernstein and Kollmar was present at the American Consul's office in Hemburg when Bernstein signed away his German possessions to the German government. Marcus Wallenberg, Jr., representing the Stockholms Enskilda Bank, has made $2,658,000 of purchases of German dollar securities for German correspondents through Brown Brothers Harriman and Company, stating that the securities had been shipped to the Banco Hispano Americano at Madrid and Credito Italiano in Rome. Wallenberg told rown Brothers that he had advised Treasury Department officials of his activities in representing German correspondent banks and the purchasing of securities for them. On September 3, 1940, Brown Brothers was advised by the Reichsbankdirektorium to address all future mail destined for them to Banco Germanico de la America del Sud, Mexico City. 320 January 24, 1941 9:30 A.M. GROUP MEETING Present: Mr. Sullivan Mr. Pehle Mr. Wiley Mr. Young Mr. Thompson Mr. White Dr. Viner Mr. Gaston Mr. Cochran Mr. Schwarz Mr. Foley Mr. Bell Mr. Graves Mr. Kuhn H.M. Jr: I am getting my teeth into this question of a national campaign for defense investment, whatever you want to call it, defense savings, defense something or other. I am going to put more and more time on it, and one of the things, Bell, I don't know whether it is being done or not; but if it is, I am not conscious of it - you see, I suppose roughly we have got to raise about a billion dollars a month, haven't we? Bell: That is right. H.M.Jr: And I just wondered whether Dr. Viner would have the time to just concentrate for us get people permanently but keep the thing running, the various strata of society that 321 -2we can appeal to to get this thing, where we should go, where we should look, where we can do the greatest good and the least harm, you see, and make sure that all the other agencies are kept informed, which I don't have the time to do, but just as this tremendous campaign gets underway - I mean, would you have the time to just sort of be economic adviser to this defense campaign to raise money? Viner: I don't know. H.M.Jr; I mean if you had two or three men, either who are already in or could be brought in, so the thing could be continuous. Viner: I don't think I am any good at that sort of thing. H.M.Jr: Well, that answers that. Well, I want somebody, Dan - I want to get the second-best economist -- Viner: Thank you. (Laughter) H.M.Jr: Wherever he is, who will just do that and nothing else, you see. I mean, have no other responsibilities, no administrative responsibilities, but just - you think about it too, Harry; where is the man in the United States who can just sit back and have a desk and a place to put his feet and just think -- Bell: How to reach the various -- H.M.Jr: Well I mean what are the effects and repercussions. I am going to move awfully fast now, and I want this fellow to sit back and make sure that - now, from the stand- 322 -3point of an economist. He can say, "Well now, wait a minute, here are the places where there is the most fat, but you can't take it away from there because of this or Bell: that or the other thing." All right. H.M.Jr: In a sense he will be advising on priorities as to where the money - where we should go for the money. It is an awful lot of money. Bell: That is right. It is. That probably is one of the reasons why we didn't get such large subscriptions yesterday. They thought there was a lot of it coming along, and they didn't have to go in so heavily. H.M.Jr: Don't you think, Jake, we need a top economist? Viner: Yes, I think there ought to be somebody here who is giving all he can to that problem. H.M.Jr: Who would you think of? Viner: Off hand, I would rather be given an hour to think than just try to think of some- body here. H.M.Jr: That is reasonable. Bell: Are you going to have some time the first of the week to look over what already has been done and the type of obligation that we can sell? H.M.Jr: Yes. Bell: We have quite a folder on it. Viner: I would like to suggest a little study to -4be made of the war experience along a certain line. Possibly it can't be done, but I would like to see a little study made of how long each class of subscribers held on to their bonds. K.M.Jr: I think we have that, don't we? Bell: I am not so sure about the classes. Viner: I mean including our savings bonds now. Bell: Well, we have got quite a bit of data on the savings bonds, but the only data we would have on t he war would be, probably, the size of the holdings that were registered, and we have nothing to do with the coupons, you see, bonds. H.M.Jr: I am not sure that you are right about your estimate of your own ability on this thing, see. Think it over. White: Mr. Secretary, until you get somebody, I would suggest that Viner be appointed chairman of a small group of two or three or four within the Treasury, as many men as he wants to pick out, and proceed on a number of reports bearing on the subject which could be quickly prepared. I don't agree with him at all when he says that is not in his line. I don't know what he is talking about. He is talking about problems which are definitely economic and definitely in his line. H.M.Jr: I didn't understand, either. He did that bank study. White: But he may feel it is going to take too much of his time, but at least he can initiate and outline the studies, and other men can 323 -5- 324 carry it on while he is not here, which can be independent of your getting some- body else you want to follow it, but I think that should be done. Viner: Well, I am willing to give some thought to it. I have some ideas. I have been thinking a little about it. But the question of continuing responsibility with any staff and so on, I can't handle my desk, let alone a couple of other desks. H.M.Jr: Well, I wish you would think about it. Well anyway, and if you would talk to Professor Odegarde, you would get more than any place else what I have done up to the minute. Viner: I have been talking to him and I will con- Gaston: That reminds me I have this folder that tinue. Professor Odegarde wanted me to give back H.M.Jr: Gaston: to you. There is very sound stuff in there. It is interesting? Yes. Some of our men, Elmer Irey and the like, have been approached by the counsel for this sub-committee on wire tapping of the Senate, Interstate Commerce committee, and told that they were going to be requested to come up and testify before the committee. They are considering the whole subject, not only this Celler Bill which would give authority to the F.B.I. under direction of the Attorney General to tap wires, but whether there should be general authority; and we would like to have some guidance as to what those men should say. Personally, I would favor permitting them to say that they think wire tapping for detection of felonies should be permitted 325 -6- H.M.Jr: Foley: under proper safeguards. All right? You know how I feel about it. Well, Maloney who is counsel for that committee called and said that he had understood from Elmer Irey that we had some legal studies of the problem and that he wanted to come over and talk, so I spoke to Larry Bernard, one of the boys down in his office has done the work, and he is going over and see him and what they are thinking about, and I think it is all right, as legislation which would authorize any investigative agency of the government to tap wires after submitting application to a federal judge or the Attorney General or one of the United States attorneys. H.M.Jr: Hobbs, of the House Judiciary Committee, re- introduced our old Bill which gives it to the head of the department without court order. Foley: That follows a constitutional amendment in New York. H.M.Jr: Well, we have been over that. Gaston: Well, your position was somewhat different. I take it you wouldn't object if the committee favored a bill permitting it, under court order, for all agencies of the government. You would not object? White: I hope you will object unless the court order specifies the wire. H.M.Jr: If there is going to be an argument, let's postpone it, and we will take it up again, because I haven't got time. 326 -7White: It has terrible possibilities. H.M.Jr: Let's talk about it again. Herman Oliphant was awfully right on this. I think you ought to look over what he did. Gaston: I would be glad to look it over, but I wouldn't agree that he was right. H.M.Jr: Then you had better surely look it over. But if it is going to be a conference, I don't want any conference this morning. It is Friday. We will take it up again Monday. Anything else? Gaston: That is all I have. I would like to talk to you about a couple of matters when you have some time if you are not too pushed. H.M.Jr: We have been going at some speed around here, with some success. Ask the boys out- side, will you. Gaston: Surely. H.M.Jr: I just don't know. The position on the Coast Guard that I put up to Frank Knox was that, what about the seven cutters, you see, and he is going to talk it over. Gaston: They know perfectly well they can get that. It isn't any concession at all. It isn't what they want. They want a run, the mer- chant ships, that is the real fact, and I think it is all started by Admiral Woodward in New York, who thinks he ought to be the boss of New York harbor. H.M.Jr: Well, I don't think that applies to Frank Knox. 327 -8Gaston: I don't of it. think he understands what is back H.M.Jr: I told him to look into it, and he said he would, and he has got some pretty good reasons. Gaston: Personally, as I told you in that note, I think that actually in time of war, there is no real reason for the Coast Guard being a part of the Navy. H.M.Jr: You can't get the money for the Coast Guard, that is the trouble, and the Navy can, and he has got great responsibilities which the President has placed on him, and he has re- considered. He is very quiet about it. He is going to talk to me again. He could just take it. it. He could get it any time he wants Gaston: I don't doubt it. H.M.Jr: We can't get the appropriation. The President won't approve appropriations for Coast Guard, and that way they will get a million dollars. That is the answer. Gaston: That is never understood by the Coast Guard. H.M.Jr: I question that, but let's see what we hear from Frank Knox. I mean, I have put up the fight for seven years, but I think when it comes a time like this where it is granted that somebody down the line wants it by theirs also - he is carrying great responsibilities. I haven't got much to argue with. Gaston: No, I - it isn't a personal matter with me. I think they would just make a mistake is all. 328 -9H.M.Jr: That may be so, but if I was in Frank Knox's shoes I wouldn't be sure that I wouldn't take over all the big cutters. Gaston: They could take those over without the others. There is no trouble about that. H.M.Jr: O.K. Foley: There was another meeting yesterday in Berle's office on this executive order for freezing and export control. It has really - Berle has done a flip-flop now, and he wants the export control in State Department. He says it would give the Treasury too much power to have it over here. H.M.Jr: He never flip-flopped. Foley: Well, that is their attitude. H.M.Jr: I think they always wanted it over there. Foley: Well, probably, but he said it was all right once. H.M.Jr: And now he says it is -- Foley: Yes, he had a bad day yesterday, apparently, and he thought it was outrageous the way the Treasury drafted the Lease-Lend Bill, and he said Mr. Hull had to go down and bear the brunt of it on the Hill, and nothing was shown to him until after it was introduced. Bernie told him that wasn't true. It was shown to Hackworth and Hull, and they made suggestions and changes on it before it was ever shown to anybody else, so it is a mess again. A memorandum is going to be prepared -H.M.Jr: Any use my talking to Berle? - 10 Foley: No. A memorandum is going to be prepared by the Attorney General to the President raising the points that there is agreement among the people on the committee and the ones upon which there isn't agreement, and I suppose there will have to be a meeting over there between you and Mr. Hull and Mr. Jackson. H.M.Jr: Well, Mr. Hull said to me last night, it was very interesting, he said, "I only learned four days after my testimony how embarrassing it was for me to have said the Bill was drafted in Treasury, and I am very sorry that I caused you that embarrassment." He said, "I hope the next one will be made by you and not by me," which was very decent. Foley: Apparently Berle was going to go out and make some speeches in the Middle West on the Lease-Lend Bill over the weekend. All of this conversation about our grabbing it and drafting the Bill and not letting them in on it, and for them to go down on the Hill and bear the brunt of the board before the committee is apropos of his going out and talking on the Bill. H.M.Jr: Is he going out? Foley: Yes. H.M.Jr: To talk? Foley: Yes, out in the Middle West. He is going to make three speeches over the weekend, Friday, Saturday, and Sunday, so he said. H.M.Jr: Well, I would just as lief call him up and say that if he makes any statements publicly that the Bill was drafted in Treasury, I will 329 - 11 - just say publicly he is a damn liar. Foley: Well, I don't know - I think he is going to go out to help the Bill. I don't think he is going to do anything to hinder it. H.M.Jr: I would just as lief call him up. I shouldn't think on that point. You could White: call him up on other matters, because I think he either misunderstands it or -Foley: He doesn't misunderstand it, Harry. He understands it. White: Why have Berle be the only one that represents the State Department on that? Why not get three or four of them around in a group and let them thrash out what their difficulties are, and maybe you can make more progress on it. If he feels that way, it certainly isn't justified. H.M.Jr: What are you talking about? White: About this export control matter. Foley: He was designated on this committee by Mr. Hull, Harry. There have been four or five meetings. Jackson wasn't at the meeting yesterday. Sam Smith and Francis Shea represented him. Here is a memorandum on it. H.M.Jr: What else? Foley: Can we have Ferdie Kuhns' help on this radio talk for Senator George for Monday? H.M.Jr: Sure. Foley: Because I think we ought to do a pretty good 330 331 - 12 - job, and that will determine George's attitude and position on the Bill, and I think if we do a good job, he will be grateful to the Treasury. H.M.Jr: Sure. Schwarz: Senator George is talking this noon at the Press Club. I was going to ask later if I could go to lunch early, and I will write you a memorandum on it. H.M.Jr: Schwarz: Sure. Is that a bribe? It is a deal. Kuhn: Is this an off-the-record speech, Chick? Schwarz: Well, they call it off-the-record. Kuhn: I mean, it isn't published in full, it isn't going to commit him on the Hill next week? Schwarz: Foley: He will give his view point. The radio talk will. Schwarz: Will commit him publicly. This will be an advance indication of what he will say on the radio. Foley: It is the Lease-Lend Bill. He is chairman of the Foreign Relations Committee. H.M.Jr: What else? Sullivan: There was a hearing yesterday afternoon on that amendment. (Telephone conversation with Attorney General Jackson follows:) See page 260. 332 - 13 H.M.Jr: Well, there you are. Sullivan: During this hearing on the amendment to the time limit within which they could file applications for amortization, the excess profits, the testimony came out yesterday they had 1887 applications. They had rejected one and granted eighty-one, and the others they hadn't been able to get to. H.M.Jr: John, is it a fair question to ask why you are not ready on this so-called Release Bill that you have been talking about? Rclief Sullivan: Yes, it is a fair question. I am ready. H.M.Jr: You weren't yesterday morning. Sullivan: I beg of it. your pardon, sir. We had twelve copies H.M.Jr: Well, you told me not to bring it up. Sullivan: I did because I thought it was very poor management to bring it up before that group. H.M.Jr: Why? Sullivan: Because they have turned it over to George, the entire group, as willing to -- H.M.Jr: But you told me Stam hadn't cleared two of the things. Sullivan: Stam hasn't. H.M.Jr: Then you are not ready. Sullivan: I beg your pardon, sir. We have the whole thing, our position, what we are recommending -- 333 - 14 - H.M.Jr: Sullivan: But you haven't cleared it with Stam. Stam has been working on this for two months. H.M.Jr: Sullivan: I still say you are not ready. You weren't ready. You asked me not to bring it up. I asked you not to bring it up because I knew if those copies were passed around those fellows would take them out, and every tax lawyer in town would get them, and the whole thing would be thrown into confusion. H.M.Jr: But the fact of the matter is that Stam, as the head of this advisory group, has not agreed with the Treasury. Sullivan: H.M.Jr: That is correct. Then you are not ready. When will you be ready? Sullivan: I can't do any more with him than I did the last times. H.M.Jr: Well, you got all through that last time, and I am not going to go through it again. Sullivan: That is right. But if you want to get this before the 15 of March, it is a perfectly fair question, when H.M.Jr: are you ready to go ahead with it? Sullivan: Whenever Stam and George go through this thing. I have been working with George on this since last November, and yesterday after the meeting he came to my office and went all through it. - 15 H.M.Jr: Why didn't you get it to him earlier? Why wait until yesterday when we have all these people here? I mean, why didn't George - why wait until the last second? I can't understand it. Sullivan: Well, I didn't understand that this was the last second. The House Ways and Means wasn't organized until this week and ready to go ahead. H.M.Jr: Well, I can disagree with you. I still don't think that you are ready. Sullivan: We are ready, sir. H.M.Jr: And there is nothing else in your shop that there seems to be any hurry about, that you seem to think there is any hurry about but this. Sullivan: We are ready, sir, and we had this all yesterday. The only question -- H.M.Jr: But you weren't ready for me to give it to this group. Sullivan: No sir, and I wouldn't have been if Stam had agreed with it; and I won't be ready to have it given out until the conferees pass on it. H.M.Jr: Well, sometime do you think you can let me know what is in it? Sullivan: Yes, I will be very happy to give you a copy of it right away. H.M.Jr: I would like to see it myself, because up to the time that I was going to do this thing, or the day before, I didn't even know there was such a thing. I don't know now what it 334 - 16 is. Sullivan: H.M.Jr: I gave you a report after excess profits passed, sir -You don't expect me to remember that. My God Almighty, say you give me reports last July and I am supposed to remember what is in it. Sullivan: No, I wasn't implying that. H.M.Jr: Well, what were you implying? Sullivan: Well, I thought that I hadn't advised you. H.M.Jr: Well, here I have a meeting of the leaders of the Senate and the House, and you want to take something up. I haven't seen it; Senator George hasn't seen it, and you are still bickering with Stam. Sometime or other, I would like to see it. Sullivan: All right, sir. I will send it right in to you. H.M.Jr: I would like to see it in shape that I can understand it. I don't think it is too much when you have all these people, you have nothing to do since the first of January but get this thing ready, and then it isn't ready. It isn't ready now. We went all through that thing. I promised these people, I promised Knudsen we would get together with Stam and all the rest of it. It is either ready from Treasury standpoint and everybody has had a crack at it, or it isn't. Sullivan: It is ready from the Treasury standpoint, sir. 335 336 - 17 H.M.Jr: It isn't ready when the Secretary of the Treasury hasn't even seen it. Sullivan: I will send it right in. H.M.Jr: And nobody else saw it. Bell hasn't seen Sullivan: I am sending it all to them. H.M.Jr: Have they seen it yet? Sullivan: No sir, they haven't. H.M.Jr: Then I say it isn't ready from the Treasury standpoint. If the Under-Secretary of the it. Treasury and the Treasury Counsel haven't seen it, I say it isn't ready. Sullivan: All right sir. H.M.Jr: To go up there with something nobody in the Treasury has seen - Herbert Gaston I asked you to show it to. Nobody has seen it. I don't even know what it is. I may be against it. Let me tell you afterward my conversation with Frank Knox at lunch. Sullivan: Yes sir. Cochran: That British business was finished up in New H.M.Jr: York last night. That is the United Fruit? Cochran: That shipping business. H.M.Jr: Oh, is it in the papers? Cochran: No, sir. Schwarz: We got by it. 337 - 18 - Cochran: So far. H.M.Jr: Is it in? Schwarz: No. Cochran: No, it is not in the papers. H.M.Jr: Has the boat arrived? Cochran: Everything unloaded and put away. H.M.Jr: And nothing on it? Cochran: So far. That was just last night. Schwarz: We haven't had a query yet. H.M.Jr: Nobody has told me, so just as a man on the street - no one has told this to me - that my guess is that Lord Halifax is going to arrive on the Tuscaloosa. Kuhn: Bell: H.M.Jr: It was announced on the radio this morning that he was arriving in America today and that he had crossed on this new British battleship, the King George V and may have gone to Halifax. Somebody said he might come up the Potomac, didn't he? That is why. The Tuscaloosa has to come back from England. Why bring her back empty? I am just guessing. It is very easy for them to run - but they say he is on the new battleship? Kuhn: London announced this morning that he had crossed on the new battleship King George V, and he would arrive in America today. - 19 Bell: Aren't you going to announce about this shipment? H.M.Jr: What do you think? Bell: We did before, didn't we? I understand that this gentleman commanding the ship is rather talkative, and sooner or later it is going to get out. I wondered if you didn't want to announce it. Cochran: His chief doesn't want it done. Bell: Didn't we announce it before? Cochran: Not until after we knew it was going to appear in one of the papers. We got a tip that someone had the story, and then we beat them to it. Schwarz: There were several leaks. Cochran: Pinsent gave me a memo a few days ago on the unfinished business of D'arcy Cooper, the Board of Trade man who was here. H.M.Jr: Did he finish any business? Cochran: He didn't mention that. H.M.Jr: The principal unfinished business of D'arcy Cooper is to sell Lever Brothers in this country. Did he mention that? Cochran: No. H.M.Jr: O.K. Viner: Did you save some time for that Federal Reserve memorandum? We are going to get together on an attempt at redrafting it, and I would like to have some time with 338 339 - 20- you on it after we have agreed on it, because it isn't merely a question of phrasing, of content. it is a question practically H.M.Jr: Lieutenant McKay. Viner: Sometime this afternoon? H.M.Jr: Yes. Viner: O.K. Is it all right with you, Harry? White: Oh, yes, any time. H.M.Jr: And I want Bell there, too. Young: The National Defense Research Council wants to establish an office in London attached to the American Embassy for the exchange of British technical secret information and that sort of thing. The British won't let them do it until they ask you. H.M.Jr: Oh, I am just trying to clean up - is it any of my business? Young: No. H.M.Jr: I won't give any advice. Young: Right. On the Russian machine tool letter which you asked me for yesterday morning, unless you have some objection, it would make a better presentation to put that in a memorandum form with a covering letter on the top of it, unless you want the whole thing written out in a letter. H.M.Jr: Any way you want it. - 21 - Young: H.M.Jr: Pehle: I will have it for you shortly. All right. On remittances, there seems to be a general consensus that we ought to lib- eralize our policy somewhat, remittances for food and shelter for people that are in the invaded area. The policy now is limited to $50 a person or a hundred for a family, which doesn't seem to be sufficient; and we prepared general licenses which I think everybody agrees with, lifting that to $100 a person or $200 a family, in the case of American citizens, $500, which has always been the policy anyhow. H.M.Jr: A month? Pehle: Yes, up to that amount, but it has always been subject to individual licenses. This would take care of it on a general license. H.M.Jr: I want a little time on this, Pehle. Ask Mr. Bell to get us together Monday or Tues- day, will you? It won't make any difference, will it? I don't want to do it like that. I want to know more about what is happening. Anything else? Pehle: That is all. H.M.Jr: Harold? Harry? White: I got in touch with Pinsent several days ago asking him if he couldn't be prepared to give us the latest data in case you had to appear. He said he would on twenty-four hours notice. I called him yesterday, and he will have the latest figures today for us on it. 340 341 - 22 H.M.Jr: I want Sunday afternoon to go over these figures with you. Bell, are you going away tonight? Bell: No. H.M.Jr: I thought you were going away for a week. Bell: Well, I will be in town. I will be available. H.M.Jr: But you are not coming to the office? Bell: Well, we have got all this stuff next week, the hearings. I don't see how I can get away. H.M.Jr: It is all right with me. Bell: And get the material ready. H.M.Jr: Well, sometime Sunday afternoon I want to go over my Monday's testimony. Why don't we set a time now? Five o'clock, that doesn't break the whole afternoon, does it? Bell: It is all right with me. H.M.Jr: Harry? White: Quite all right. It gives me a chance for my siesta. If Bell H.M.Jr: and White and Foley can come. Anybody else? No. Yes, Cochran. Five o'clock at the house. White: Well, Ed said you wanted that ready for Saturday afternoon to take with you. H.M.Jr: Sunday afternoon. White: You don't want to see it before five o'clock? 342 - 23 H.M.Jr: No. Anything else? White: By way of interest, McCarran called up and wanted the latest information on whom you are buying gold from, et cetera, et cetera, and he was leaving on a train. I don't know what he was going to do with it, but I thought you would be interested in knowing that. Did you notice the lumber article in the New York Times this morning? I don't think that anybody knows the story behind that except a few here. H.M.Jr: And me. White: Yes. Well, I think the staff ought to know that story. It is a good story. H.M.Jr: Well, I will tell it the way I know it, and I really got quite a kick out of it. Leon Henderson called me up yesterday to say goodbye, that he was going away for two weeks. Is this the story you know? White: That is the end of it. H.M.Jr: Well, let me tell it. White: I mean that is the latest development. H.M.Jr: And he just couldn't stay in town any longer, the thing was getting his goat, but before leaving town, so he could really have a vaca- tion, could he tell his two men that if they ever got into trouble or ever needed help they could come to see me; and he felt if I could promise them that, he could go away; 343 - 24 and this?I promised him that. Did you know White: H.M.Jr: I didn't know that. And that if his two men, any time they were in trouble, could come to see me, anybody tried to move in on them, and then he went on to say that the figures he used on the price of lumber that he used were George Haas's figures, and he gave every newspaperman and lumber dealer a copy of George's figures and his whole statement was based on that, which I thought was very nice, and I asked him to call up George; and he said he would have Ham do it and thank him and say that he had used his figures. I don't know how much you can supplement that. White: Well, I thought the more interesting part of that, in the light of what appeared this morning in the papers, the column on the front page of the Times, that that dates back to the lunch on the lumber question and your putting the heat on, and this is, in my opinion, the net result of that. I think it is a very good statement, a very good thing to do. H.M.Jr: Well, it goes back to when he sat here and said the price of lumber was beginning to go down, and it is very interesting to watch the stages that Leon has gone through to where he resented terrifically my doing anything or the Treasury doing anything Bell's committee feeding this to me was very valuable--to a position where he can't leave town unless I look after his interests. Gaston: I am very pessimistic about the whole line- up up there. 344 - 25 H.M.Jr: I took it as a real compliment to he Treasury. Gaston: There is another man up there that would like to cry on our shoulder a little bit to get your advice and that is Sidney. H.M.Jr: He sent me that word. I need some shoulders myself. Gaston: I don't while. H.M.Jr: But this thing started, and I never would doubt it. He talked to me quite a have got it if Bell hadn't formed this committee and fed the stuff to me, but I got word from Sidney Hillman's man he wanted to cry on my shoulder. Gaston: This is the other Sidney, Sherwood. H.M.Jr: Oh, you can have him. I meant Sidney Hillman, first assistant, wanted to come over on my shoulder, and I told him to cry on Foley's shoulder. Gaston: It is in the same camp. Henderson, Hillman, Sidney Sherwood. Bell: He is Maxwell's man, isn't he? H.M.Jr: O.K., Harry, we are way behind. White: The malaria material which is in your files is bound, and I wonder whether it would be all right to photostat the pertinent material if we can't get that man here to read them, because a digest, I don't think would be suitable. H.M.Jr: O.K. 345 - 26 White: H.M.Jr: To have it photostated. And we have here the - this letter for your signature which That is a question of the malaria on the Burma Road. Was this approved by Mr. Bell? White: Yes. There is one word taken out of there, "and governments". Dan thought we had better leave out "governments". H.M.Jr: What else? White: That is all. Schwarz: I have a collection of editorials that have now come in from across the country on the Federal Reserve report to Congress. They are classified by the favorable and unfavorable. H.M.Jr: Will you send them up to the house? Schwarz: Yes sir. H.M.Jr: Dan? Bell: The latest figures on the new note are a billion nine, and that is not final. Of course, tonight it might run up to around two, six. They opened this morning at ten thirty-seconds above par and dropped to five, but they think that that is the bottom and it will now begin to strengthen from this point on, so I think Hadley was nearer right than the rest of them. You see, Hadley always figures his the same way they do and then he takes the feeling of the market and takes off or adds thirty-seconds, and I think you will find that Hadley has been pretty accurate in his estimates. 346 - 27 H.M.Jr: Good. Bell: The others are just mathematical without any adjustments for the market. H.M.Jr: It gives me kind of cold shivers. Bell: Yes, it is running pretty close. Ed's boys had a conference yesterday with Beaman, and they made some changes in the Bill which we agreed to last night. I think it will be introduced today, don't you? Foley: Yes. Bell: That is the Debt Bill. H.M.Jr: Yes. Bell: That is all I have. H.M.Jr: Would you (Foley) be willing to call up Berle and just kind of put him on warning not to go around talking about the Bill being drafted in the Treasury in view of what Hull said to me last night? Foley: All right. H.M.Jr: Could you just do that? Foley: Sure, I will call him up. H.M.Jr: I wish you would. Foley: Bernie said that the others there sort of sat up and said, "Oh, was the Bill drafted in the Treasury?" H.M.Jr: I wish you would call him up and just put - 28 - him on warning, will you? : Foley All right. H.M.Jr: Anything else, Dan? Bell: That is all. H.M.Jr: When you go out, will you take Viner in a room and talk to him a couple of minutes, and then I would like to see the two of you together. Thompson? Thompson: I have nothing. 347 348 PLAIN GMW London Dated January 24, 1941 Rec'd. 11:04 a.m. Secretary of State, Washington. 274, Twentyfourth. FOR TREASURY. 1. The Bank of England has issued a notice to banks the purpose of which is to close another exchange loonhole by making it no longer possible for travelers to buy round trip tickets to Britain or British hotel accommodation in foreign centers. This ruling will break a racket which has dEVElopEd in centers such as Lisbon where a black market in return tickets to England has developed, the forsign buyer purchasing at a discount and then asking for a refund of the fare in foreign exchange. The notice reads as follows: "with reference to the notice to travel agencies dated the 9th May 1940 all such agencies, including steamship and railway companies, are required as from the date of the present notice to observe the following additional formalities in connection with travel facilities provided by them to persons travelling from the United Kingdom to destinations outside the sterling area. 1. If payment for travel tickets covering journeys from 349 -2- GMW 274, Twentyfourth. from London from the United Kingdom to places outside the sterling area is made in sterling it must be made before the traveller leaves the United Kingdom. 2. Sums refunded against tickets returned unused may be made available in the United Kingdom only, in sterling. 3. Residents in the sterling area (who must Exhibit to the agency a letter from their bank stating that they are considered "resident" for all purposes of the abovementioned regulations) may pay in sterling for the tickets and other travel facilities necessary to enable them to reach their final destination as indicated by their Exit permit. They should not however be permitted to pay in sterling for transport facilities entailing an ultimate application to the control for foreign currency or for the transfer to a non-resident account of sterling received in payment for such facilities, if a reasonable sterling means of transport exists. If travellers are unwilling to ACCENT any such alternative suggested by D travel agency and are unable to pay in foreign currency from their own resources the CODE should be referred to the Bank of England for decision. 4. Non-rEsidents and transmigrant refugees travelling to destinations outside the sterling area may be allowed b: United Kingdom companies to pay in sterling for the tickets and other travel facilities necessary to enable them to reach 350 -3- GMW 274, Twentyfourth, from London. the first point in their journey outside the area. Further travelling EXPENSES must be paid for in the appropriate currency from their own resources. Refugees to whom sums in forcign currency are due to be released or resold under the terms of F.E. 83 will on application to the control normally be permitted to draw on such currency for this purpose. The offices in the United Kingdom of foreign transport companies should in their own interests insist upon payment being made to them in the appropriate foreign currency in respect of all travel facilities provided by them to nonresidents and transmigrant refugees. 5. No person having arrived at the point in his journey up to which payment in sterling has been permitted may be allowed at any subsequent time to pay in sterling for journeys to be made between places outside the sterling area. 6. Residents of the sterling area may be allowed to pay in sterling for hotel accomodation at any point on their journey outside the area where they have to wait for a connection but then only for the minimum period necessary. 11 2. The FINANCIAL NEWS today under Washington date-line sta tes that the United States Government is proceeding slowly 351 -4- GMN 274, Twentyfourth, from London. slowly with freezing axis balances wishing first to overCOME the delicate situation arising from the fact that "the Catholic authorities in the United States pointed out that this would disclose the amounts ROME receives from this country and would also prevent transfers to the Vatican of such funds." JOHNSON HPD 352 COPY Rome Dated January 24, 1941 Rec'd 5:35 p.m. Secretary of State, Washington. 116, January 24, 8 p.m. It is officially announced today that a decree in course of publication authorizes a new issue of nine year treasury bonds to provide funds (one) for retiring similar bonds maturing May 15, 1941, and, (two) to meet the Treasury's cash requirements. The bonds will be offered at 97.5 lire per 100 lire of par value subscriptions being acceptable (A) in cash, (B) in the above mentioned maturing bonds, or (c) in interest coupons pertaining to the period from February 16 to August 15, 1941 of the principal issues of the public debt. The new bonds will bear interest at 5% and will enjoy the privileges of annual prize drawings and tax exemption characteristics of previous nine year issues. It appears that the sum required for retiring the May 15 maturities will be 4,000,000,000 lire that being the amount in which the respective bonds were issued in 1932. Obviously more important to the government is the excess of subscriptions over that amount which is to provide the treasury with fresh cash. No estimate of the expected volume of subscriptions 18 given. PHILLIPS. END SECTION ONE 353 PARAPHRASE OF SECTION TWO, TELEGRAM NO. 116 OF JANUARY 24, 1941, FROM THE AMERICAN EMBASSY, ROME Some financial circles believe that a leading motive ot the attack by Gayda on stock prices was to discourage investment in common stocks so as to prepare the way for the issue put out by the Government. It is now indicated that consideration is being given by the Government to a policy of supplamenting its public loan financing opera- tions by outright inflation of circulation of bank notes. This procedure is virtually recommended in IL TELEGRAFO, the authoritative newspaper, which carried an article pointing out that resort to the printing press would pradtically constitute the issuance of a forced loan with the advantage to the Government that it would incur no interest charges. If internal prices are subjected to rigid control, the author continues, the Government can avoid the usual dangers of inflation. In commenting on this article one financial source stated that there has already been substantial inflation of bank note circulation. This source's estimate 18 that such circulation is currently between 35 and 40 billion lire as compared with the end of 1939 when it was only 24.4 billion - although they have no means of verifying their estimate. Also, they suggest that the article in IL TELEGRAFO may have as its purpose the eventual realization of 354 -2- need of this be no fact by the public, and to convince it that there injury from inflation. END OF MESSAGE. PHILLIPS. EA:LWW