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187 SEFFICE OF TREASURY DEPARTMENT WASHINGTON STATE ANT CREAM 4-9-41- To: The Secretary From: Mr. Sullivan There is attached a schedule showing the salaries and representation allowances received and expenses claimed, as disclosed by an examination of certain available income tax returns of the United States diplomats. The examination discloses that, with one exception, representation expenses claimed as deductions for income tax purposes have been itemized on the returns. The Bureau in the audit of cases obtains a certificate from the Secretary of State which discloses whether or not the representative is required to make expenditures falling within the scope of Executive Order dated June 8, 1931, in his representative capacity and for the benefit of the United States. Representa- tion expenses incurred and deducted on returns filed are analyzed in the audit of the cases before the conclusion has been reached that they constitute ordinary and necessary business expenses deductible as such. Except as noted in the attached schedule the amounts of the representation expenses claimed on the income tax returns examined have been allowed as deductions. Ths SCHEDULE OF SALARY AND REPRESENTATION ALLOWANCE AND EXPENSES OF UNITED STATES DIPLOMATS Representation Representation Year Name 1938 Harriman, Hon. Florence J.(Norway) 1939 Harriman, Hon. Florence J.(Norway) Allowance Reported Salary $ 1,500.00 $10,000.00 10,000.00 17,500.00 17,500.00 1,500.00 None None Included in salary item 23,549.92 17,500.00 None None 1938 Phillips, William (Italy) 17,500.00 10,000.00 10,000.00 10,000.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 15,414.20 3,220.19 1,085.08 1,539.79 1,987.01 2,360.46 1938 Locatelli, Ercole H. (San Marino) 1937 Atherton, Ray (Bulgaria) 1938 Atherton, Ray (Bulgaria) 1939 Atherton, Ray (Denmark) 1938 Johnson, Nelson T. (China) 1939 Johnson, Nelson T. (China) 1936 Bowers, Claude G. (Spain) 1937 Bowers, Claude G. (Spain) 1938 Bowers, Claude G. (Chile) 1939 Bowers, Claude G. (Chile) - $ 1,975.00 2,100.00(a) None 1937 Davies, Joseph E. (Russia) 1938 Davies, Joseph E. (Belgium) 1,608.33 None 23,763.00 29,945.16 2,422.58 4,740.49 1,309.65 1,539.79 1,789.26 2,360.46 793.60 793.60 1,535.28 1,535.28 1,200.00 None None 931.09 Expenses Expenses Claimed 8,585.94 6,740.17 None 1938 Grew, Joseph C. (Japan) 1939 Grow, Joseph C. (Japan) 1938 Daniels, Mr. and Mrs. Josephus (Mexico) 17,500.00 1939 Daniels, Mr. and Mrs. Josephus (Mexico) 17,642.08 Representation Disallowed $ None None 600.00(b) None None None None 6,975.19(a) 1,886.58(d) None None None None None None 303.65(e) None None None 931.09 None (a) No analysis was submitted with respect to the representation expenses claimed as a deduction. (b) This item represents salary paid to Mrs. Grew's personal maid, which was erroneously classified as representation expense. (c) The cost in the amount of $6,975.19 of the removal of furniture and personal effects from Moscow to Brussels has been held to be personal expenses. As a basis of settling the tax liability, the amount of $1,886.58 was disallowed as a deduction. (d) (e) Since the evidence indicates that the taxpayer's representation expenses amounted to $1,231.63, the amount claimed in excess of this amount was disallowed as a deduction. 3/14/41 189 On 3/10/41 Mr. Sullivan at the 9:30 meeting a the Secy he had prepared a one-page statement on the subject matter of this memo. The Secy told him to ask for an ap- pointment and bring it in and explain it. I checked with Sullivan's office today, and Mr. Sullivan said he still had the memo and was waiting for a chance to see the Secy. pl Mrs. McHugh 190 March 6, 1941 John Sullivan Secretary Morgenthan Is there some special ruling on a law or something which permits American diplomats to deduct in a lump sum their expenses abroad from their income? Please be sure to speak to no about it. Discussed at 230 meeting 3/6/41-mill report further Discussed at9:30 meeting 3/10/41 and told Ombleine toak for affirth and come in to talk about it - 191 CONFIDENTIAL April 9, 1941. MEDIORANDUM TO: Admiral Waesche, Commandant, U. S. Coast Guard FROM Mr. Gaston Reference is made to your nemerandum of April 8, transmitting with comment the request of the British Admiralty, through the United States Naval Attache in London and the Chief of Operations, United States Havy, that Coast Guard officers or enlisted persennal be available in the status of ship observers for approxinately six months aboard the outters to be turned over to the British under the Lease-Land Act. I have discussed this matter with Secretary Morgenthan and he saye that it is clearly out of the question to have any Goest Guard personnel aboard these shipe in any capacity after they have been turned over to the British and are on active service. There will be no objection to permitting personnel of the Coast Guard to remain aboard the ships for advice and instruction of the British officers and arows for a reasonable period after the transfer but only so long as the ships remain in American waters. Gaston NEG/mah 192 THE COMMANDANT OF THE UNITED STATES COAST GUARD WASHINGTON S-B-C-R-E-T 8 April 1941. MEMORANDUM FOR - The Secretary of the Treasury The following is quoted from a secret communication dated April 5th, 1941, from the Chief of Naval Operations to the Commandant of the Coast Guard: "The British Admiralty is also desirous of having Coast Guard officers or enlisted personnel available in the status of ship observers for approximately six months. Observers should be thoroughly experienced with electrical installations of the ships." The policy as to whether or not Coast Guard personnel shall remain on these vessels after they go into active service with the British Navy is, of course, a matter for determination by higher authority, and there- fore, the Commandant of the Coast Guard is expressing no opinion on this point. However, it is believed desirable for the Commandant to advise the Secretary as to the need of technical Coast Guard personnel on board these vessels to insure a normal satisfactory operation of the machinery after title is transferred to Great Britain. The Commandant held a conference with officers at Coast Guard Headquarters five of whom had been engineer officers on vessels of this type, and-four of whom had been commanding officers. Two of these engineer officers were the first chief engineers of two of the electric-drive cutters when they were first commissioned. The substance of the conclusions of this conference is as follows: (1) That the machinery of these cutters is to a large extent foolproof and no more trouble should be expected to develop in the operation of this machinery than in the operation of any other modern marine propulsion equipment. (2) That any trouble that might develop in the operation of the machinery of these cutters would most likely be mechanical troubles the same as might develop on any other type of propulsion equipment. (3) That an intensive training period of approximately two weeks to in the interior waters of the United States should be sufficient train the British crows in the operation of these ships. 193 (4) That after this two weeks training period the assignment of three or four key men to these vessels to serve with the British while in active service for a period of three or four months would probably be a desirable precaution but not necessary. Three of the engineer officers above referred to stated that they would be satisfied to take these ships out without such key men. Two of these officers stated that these key men would be very desirable. (5) No member of the conference felt that any benefit would result to the British in the operation of this machinery by keeping observers on board for a pe riod of six months. As a result of this conference the Commandant is of the opinion that: (1) Some benefit would result by keeping on board each vessel for a period not exceeding three months a small group of observers, but that an intensive training period of two-weeks should be sufficient for training the new crows for the normal operation of the machinery of these vessels without observers for an additional period. (2) If an observers' party is left on board it should consist in each case of the present engineer officer of the vessel and four chief petty officers (artificer ratings) who should remain on board for a period not exceeding three months. R. R. WAESCHE. 194 NAVY DEPARTMENT OFFICE OF THE CHIEF OF NAVAL OPERATIONS WASHINGTON April 5, 1941 Op-23E-RSM (SC)QS13/EF13 Serial 037523 SECRET From: Chief of Naval Operations. To : Commandant, U. S. Coast Guard. SUBJECT: Transfer of ten Coast Guard vessels of the TAHOE Class to the British. 1. The Naval Attache' London has advised the Navy Department that the Admiralty is desirous of obtaining the following concerning the subject vessels: (a) By cable: (1) Complements broken down into ratings with particular emphasis on engineering branch. (2) General description of machinery installation with greatest detail concerning electrical installation, (b) By airmail: (1) Booklet plans or equivalent of tank capacities and machinery arrangement. 2. The British Admiralty is also desirous of having Coast Guard officers or enlisted personnel available in the status of ship observers for approximately six months. Observers should be thoroughly experienced with electrical installations of the ships. 3. The Naval Attache' London has been informed that the above informa- tion will be transmitted to the British Naval Attache' for further transmittal to the Admiralty. 4. It is requested that the Commandant of the Coast Guard confer with the British Naval Attache' in Washington concerning the foregoing. /s/ R. H. ENGLISH, By direction 5. The urgency of delivery of this document is such that it will not reach the addressee in time by the next available officer courier. The originator therefore authorises the transmission of this document by registered mail within the continental limits of the United States. Copy to: Op-16. 195 April 9, 1941 10:05 a.m. Present: Mr. Young Mr. Cox Mrs. Klotz HM,Jr: If by Monday night the boys don't clear it up for me, I want to write a letter to the President along the lines that the President said he would give us $25,000,000 out of the $7,000,000,000 for the ships. And Harry hopkins said, "I will do it at ten o'clock Thursday morning." He told me that Wednesday night. Mr. Cox: I think, to avoid the kind of snarl we got in before, what I would suggest is that Phil, in his capacity as Chief Executive Officer of the Lease-Lend, get up a request to the Budget and state in the request that the President is agreeable to it, or do it informally, and that Mr. Hopkins was, 80 that puts the Budget where they have to do their talking before. HM,Jr: Anyway, I don't expect to get the runaround from you two fellows. I am too smart! Mr. Young: And we know it! HM,Jr: Well, anyway, I want the $25,000,000 and I want It red, white and blue. Mr. Cox: We can step in, in our capacity as Treasury employees, and make it the first order of business. HM,Jr: And also, Mrs. Klotz, for Monday noon, see if these fellows can't write this letter relieving 196 -2- me as of the 15th of March of all responsibility in handling purchasing. Then I will take it and put it on the President's desk Monday at lunch. Mrs. Klotz: Again? HM,Jr: I haven't done it yet. I have been relying on Hopkins. If I can't get these two men to do something on it between now and Monday, I will do it myself. But I have to have a letter to sign, which these men will write. We have gone through McReynolds on it, too. Mr. Young: Hopkins has the letter. HM,Jr: If he won't do it by Monday noon, I will just walk over there and the President will sign it. Wasn't it good about the Danish ships? Mr. Cox: Yes. HM,Jr: Wonderful! Mr. Cox: It would have been another week if you had not got on the ball. HM,Jr: I sicked Donovan on the Maritime Commission on the 60 ships. You have your machinery set up for Budget? Mr. Cox: Yes. HM,Jr: Good. What did you do for yourself yesterday? Cox: Nothing much. I am still working on the shipping. We are getting up a new map, also some pro- posals as to how the President can change the bombat and other belligerent areas by proclamation. 197 -3- HM,Jr: That was all on the assumption you would get some ships. Mr. Cox: That's right. Another possibility on the ships is what the British will do with the Norwegian ships which have not been on the North Atlantic route. Apparently the Far East and South America. HM,Jr: You saw what Jerry Land said in his speech last night. He didn't see any sense giving them any more ships. They would only be sunk. Mr. Cox: I think the next problem, which is much more difficult, is integration of the flight delivery of aircraft into the convoy system. HM,Jr: What's that mean? Mr. Cox: It means instead of just flying a plane over with no armament, no bombs, as part of the delivery you use it in convoy and get more of them delivered. That's the advantage of the Greenland-Iceland thing and the advantage of getting greater distribution of long range and medium range bombers. HM,Jr: You mean fly over the convoy? Mr. Cox: Do part of the reconnaissance in spotting submarines and also use them to put submarines out of com- mission. One of the people up at the British Embassy told me this. On one of these four-engine bombers which was unarmed, it spotted two submarines and the submarines ran, and this plane had nothing on it, no arms or bombs; nothing. HM,Jr: And if it was armed it could have dropped a depth bomb. Mr. Cox: Yes. It's a possibility which I think is worth exploring. 198 -4- HM,Jr: Oh, sure! You know, I am waiting on you (Mr. Young) for delivery on those things. Did you ask for them? Mr. Young: I have asked the British. Guess I had better ask the Army. Maybe I can get the answer quicker. On Treasury Procurement, Cliff Mack is doing a swell job in getting into shape requirements for Yugo- slavia and Greece. I am getting Cliff Mack's survey 0. K'd, passed by the British today, before we send it over to Budget and get an allotment of money, because we have adopted the general policy on these smaller British allies, the Norwegians, the Greeks, the Turks, the Yugoslavians, that we will not accept a requisition direct from the country unless it is passed on by the British. HM,Jr: How about the $2,200,000 we sent over to Mack. What's happened to that? He was told to go ahead and buy. The first order. I will ask him. (Placed phone call for Mr. Mack.) Mr. Young: The original idea was to do all this stuff directly through the British and then it was decided to salve diplomatic feelings to let the companies put in requisitions and have them countersigned by the British. (At this point the Secretary spoke to Mr. Mack and record of their conversation follows this page.) 199 April 9, 1941 10:09 a.m. H.M.Jr: Hello. Operator: Mr. Mack. Clifton Mack: H.M.Jr: Yes, sir. Good morning. Mack, on that original order which you got to buy $2,290 odd thousand for the British - the Army asked you to buy that for them - the first order I saw. M: Yes. H.M.Jr: Have you gone ahead with that? M: Yes, sir, we have. H.M.Jr: How much of that have you placed? M: We have placed about $700,000 and the others are in the process of final negotiation and will be completed very readily, that is, within the next - we hope that practically all of that will be completed by the end of the week. H.M.Jr: M: H.M.Jr: M: I hope so. Did you get a clearance on the balance of around $90,000 that they hadn't cleared? We have that now. Now, have you got anything else to work on when you're through with this this week? Yes, sir, we have. We have the Greek and Yugoslav list and those are quite sub- stantial. H.M.Jr: M: How much do they amount to? Well, now, the quantities that they want for immediate delivery would be on the Greek list - just a moment please - on 200 2- the Greek list it will be approximately $5 million. That's within the next couple of weeks, and on the Yugoslav list, that would run about $750,000. H.M.Jr: M: Now, does this come the way the other does? Are you doing this at the request of the Army or are you getting it directly from I'm getting this directly from Budget. That is, on the Yugoslav and Greek list Phil Young 18 going to Budget today, I understand. He evidently had some talk with them yesterday. H.M.Jr: He'8 sitting here with me and he's listening. His face is so I can't tell anything by his face. M: (Laughs). Well, now, evidently or rather presumably we'll get a clearance from Budget today to go ahead and make commitments for these Greek and Yugoslav requirements. H.M.Jr: Well, let me ask Phil. (Talks aside). M: Splendid, and as soon as we get word that He hopes to do something this morning. the funds are available, we'll go ahead immediately on the Greek and Yugoslav list. H.M.Jr: Clif, I'm going to try five days a week until further notice to call you up around between 10:00 and 10:15, 80 you might have your stuff on your desk ready for me. M: H.M.Jr: I'11 do that and that's fine. I mean I'll try to call you every morning until this thing gets going around this time. M: All right, sir. H.M.Jr: O.K. If you get in any trouble don't wait until I hear about it from somebody else. 201 -3M: No, I sure won't. H.M.Jr: Come and see papa first. M: (Laughs). Thank you. H.M.Jr: All right. M: Good-bye. 202 -5- HM,Jr: All right, gents. 00o-00o Class is dismissed. 203 April 9, 1941 10:15 a.m. RE BANK HOLDING LEGISLATION Present: Mr. Delano Mr. Upham Mr. Williams Mr. Foley Mr. Bell Mr. Sherbondy Mr. O'Connell Mr. Kuhn Delano: Mr. Secretary, I don't think you have met Mr. Williams. He is our expert from the Pacific Coast. H.M.Jr: Hello, Cy. Upham: Good morning. H.M.Jr: I haven't seen you (Sherbondy) for some time. You have been out on the West Coast have you? Has everybody read this? Bell: I haven't. I have just started. Foley: How do you want to do it, Mr. Secretary? Do you want to read it aloud? H.M.Jr: I don't want to read it. If somebody could read it. Foley: All right, I will read it. The memorandum on top is merely a discussion of plans for the hearing and the parts different people 204 -2- would play. That we can leave until after- ward. H.M.Jr: Yes. Foley: Before we start, I want to say that so far as the examples of situations where the small bank has been driven out of the community by the holding company, the examples that the Comptroller's office gave us were in connection with the bank of America, and in those instances the answer, the complete answer, is that we didn't have to grant a license to open the branch and you don't need the holding company bill to prevent expansions of that character. So we have summarized, rather than reciting, individual cases of that character. H.M.Jr: Well, are you perfectly sure on the law that he has the right to reject? Foley: There is no question about that. Delano: Since we have been there, Cy and myself, there haven't been any granted and they haven't slowed up this expansion program. H.M.Jr: No branches? Upham: None to the Bank of America. Foley: And Downey, of course, is on this committee and Downey will represent the interests of the State of California. I think you have to face squarely when you appear before the committee the responsi- bility for the Comptroller's office under the previous Comptroller, and I think we will 205 -3 just have to say that we are making no excuses for that, that we found out what was going on and changed Comptrollers and we have got a Comptroller there now who hasn't granted a single branch for this kind of thing. H.M.Jr: For the benefit of the California citizen, we can say, "Two Whites don't make a wrong." (Laughter) Don't they ever talk like that back in your office? Upham: Worse than that. Delano: You understand what Mr. Foley means, Mr. Secretary, when he ways that there is complete discretion in the Comptroller's office about these things. H.M.Jr: I know it. We have always been explained with this thing. How in the hell are we going to explain that they ever opened the damn bank in '33? Foley: That is right. You can't excuse or defend what was done from '33 forward until you took some action in respect of the Comptroller's office, and I don't think you can go down there and defend it. I think you will have to write that off at the beginning. H.M.Jr: I know. We have been through that. That is the thing that they have always held up to time I have started on this thing. said, "Well, I won't but we will go forward anyway. time I get kind of weak-kneed me it," I have every always about defend it, Every Cy Upham comes along and urges me to go along. (Laughter) 206 4- You (Upham) can't shake the responsibility for this. Upham: Well, you are not weak-kneed at the moment, so I don't need to urge you. H.M.Jr: Are you? (Laughter) No, my knees are all right. Bell: Do you want to stop as you go through? H.M.Jr: Sure. Foley: Sure, because this is obviously only a first attempt, and you will want to make a lot of changes. Bell: I thought he might want to read it through and then go back. Foley: "The bill under consideration is designed to curb the extent to which banks insured by the Federal Deposit Insurance Corporation may be controlled by holding companies. At present the activities of such holding companies are almost wholly unrestricted. There is power in the Federal Reserve, but it has never been exercised. Bell: It isn't effective. It is ineffective. Foley: Ineffective or hasn't been used. "In brief the bill, which would be administered by the Federal Deposit Insurance Corporation, to own or more 10 cent of the voting any would for per any make company it unlawful, after control stock June of 30, bank 1944, than insured by the Federal Deposit Insurance Corporation, or to control in any manner the 207 -5management or policies of an insured bank. The bill also would confer upon the Comp- troller of the Currency, with respect to national banks, and the Federal Deposit Insurance Corporation, with respect to other insured banks, the authority to veto the payment of excessive dividends by insured banks. "I favor the enactment of the measure. Its purpose is to protect and safeguard the banking structure which has been strengthened during the past eight years by the patient efforts of bankers and government alike. Today bankers are cooperating wholeheartedly in the national defense program. It is be- cause I want to help bankers and protect bank depositers, especially in the small local banks, that I favor legislation to deal with the bank holding company problem. To my mind, holding company domination is a serious menace to our banking structure." H.M.Jr: Just in line with that, I want to protect the bank depositors first and the bankers second. Foley: Right. "I do not intend to burden you with an involved discussion of the evils inherent in holding company control of banks. In there is no necessity for a mass or for extended on this committee. A part my of subject opinion testimony by hearings substantial committee that of the very excellent report of your at the close of its stock exchange investi- gation was devoted to the bank holding problem." Bell: Right there I wonder if you want to tell the committee there is no necessity for a 208 -6mass of testimony? That is really a matter for them to decide. You can say that they are thoroughly familiar with it as they have rendered a very complete report on it. Don't you think so? H.M.Jr: Another point, a lot of people on that Foley: That is true. H.M.Jr: I would - I think Dan has got a good point. Foley: All right. committee want their say, too. I would put a question mark after that. I think that is a good point. "This morning, I want to discuss briefly, some of the abuses in the operations of bank holding companies as disclosed by that report and, perhaps, bring to your attention further abuses not taken up at that time. "One of the greatest dangers involved in the expansion of bank holding companies is the resulting monopolistic trend in the banking field. Monoply in banking is just as vicious and just as antagonistic to our free democratic order as it is in fields of steel, oil, or aluminum. The small unit banker needs protection against monopoly just as much as the small manufacturer. Bell: And other fields. Does the Secretary of the Treasury want to point out the industries in which there are monopolies, or just say, "in other fields"? H.M.Jr: I don't know. I would question it. 209 7Foley: "Our records disclose several instances in which a holding company has threatened to establish a branch of one of its captive banks to compete with a small, independent institution, unless the independent bank sold out to the holding company. H.M.Jr: Is that word "captive" bank, is that a recognized term? Upham: It is new to me. Does that come from the utility field? Sherbondy: Utility field. O'Connell: I don't know where it comes from. It seems to me to pretty well describe what a bank is in a holding company set-up. You use the word "captive" mines in the coal field. H.M.Jr: I like it, but I just never heard it. Upham: I never did either. H.M.Jr: Do you like it? Foley: It is all right, yes. I think it is journalistic jargon, but I O'Connell: I thought so, too. (Laughter) H.M.Jr: It is all right. It is just new. Foley: "In this connection the statement of the Upham: think it is a descriptive word. president of a small independent bank, taken from our files, is pertinent. He said, **** it now appears that a move is being made to attempt to scare us into selling out against our own wishes, or the alternative, to be 210 -8obliged to compete with this bank in a branch to be established here if a charter can be procured.' , If Bell: You usually put a footnote, don't you, of O'Connell: Well, it is taken from the files. Upham: Give the name of the banker? Bell: Yes, in the footnote. (Laughter) Foley: "A manufacturer in the same community wrote, where your quote is taken from? 'There is a feeling in all classes that the petition of the large branch banking institution for a branch in this city is a 'squeeze' play calculated to force the sale of our own independent bank. , If "After a bank has been absorbed into a holding company system, it is exposed to the danger of intragroup deals at fictitious values. This is self-dealing. It is the typical holding company practice with which the public became familiar in the Ivar Kreuger and McKesson & Robbins cases." Bell: I raised the question that McKesson & Robbins is not a holding company. H.M.Jr: How about Associated Gas and the one in Chicago? What is that? O'Connell: Insull, Samuel Insull. H.M.Jr: Why not instead of using that, use Insull and Associated Gas? Foley: O.K. All right. H.M.Jr: All right? 211 -9Foley: Yes. "It is particularly important that banks and their depositors __" H.M.Jr: The State Department would object to using a Swede right now. (Laughter) Foley: It might have retaliatory effect. "It is particularly important that banks and their depositors be protected against it. When a bank is in a holding company system, it is frequently used to keep afloat the weak affiliated enterprises of the holding company. This is done by dumping into the captive bank, depreciated real estate or other assets of af- filiates. The bank is forced by the holding company to pay fictitious prices for these assets in order to bail out the affiliates. "The bank holding company tends to drain the resources of the banks in the system in order to maintain the dividend policy of the holding company. The maintenance of the market value of its stock is fundamental to the continued prestige and growth of a bank holding company. The value of that stock depends primarily upon the dividends paid by the holding company, which in turn are made up from dividends paid to the holding company by its subsidiary banks. The result is that the bank holding company is frequently so much concerned with maintaining an undiminished flow of dividends from its controlled banks, that it is unwilling to recognize the dangerous effect of an excessive dividend policy upon the soundness of the banks. The investigation of your Committee disclosed documentary evidence of the strong pressure by holding companies in Detroit to compel controlled banks to pay dividends in 212 - 10 excess of the amounts deemed advisable by the bank directors. Ever since 1933 the office of the Comptroller of the Currency has endeavored to persuade one large national bank controlled by a holding company group to reduce its dividend rate. Instead the dividend rate has steadily increased from 6% to approximately 20% at the present time. "The complicated structure of a bank holding company system is a constant temptation to evasion and circumvention of the banking laws. Several years ago the national bank examiners directed a large national bank controlled by a holding company to charge off some $35,000,000 of bad assets. Such a charge off by the bank probably would have necessitated suspension of dividends by the bank to the holding company. To avoid this possibility, the bank entered into a series of unjustifiable inter company deals. Instead of charging off the $35,000,000 of assets, the bank turned them over to an affiliated company, which promised to pay the bank $35,000,000. This deal left the affiliated company holding the bag. To rescue the company, the bank deliberately wrote up the value of its bonds by $14,000,000 -- a purely paper transaction. The bank then credited this pumped up $14,000,000 against the $35,000,000 owed by the affiliate, in effect excusing that much of the debt. Thus the holding company forced the bank into a series of devious, unsound deals in order to keep the dividends flowing to the holding company." H.M.Jr: That so far is good. The "bank then credited this pumped up. Something else. Foley: Inflated? H.M.Jr: All right. Better use some other word. 213 - 11 Foley: This fourteen million dollar write-up. Kuhn: Yes. Inflated, swollen -- H.M.Jr: Something. Foley: Watered. Sherbondy: How about the words, "fictitious amount"? H.M.Jr: It is easy. Go ahead. Foley: "Your Committee reported that certain of the bank holding companies investigated deliberately prepared their statements and reports in such a form as to misrepresent the real condition of their controlled banks. The experience of the office of the Comptroller of the Currency has shown that the structure of some bank holding companies is so confusing that adequate examination and supervision of the national banks controlled by such companies is at times all but impossible. "One of the prevalent methods of misusing the funds of a bank controlled by a holding company is to force the bank to lend money to the holding company or to make loans on stock of the holding company. One of the easiest ways for the holding company to maintain the market price of its stock is to have the bank lend money to friendly persons so that they can buy the holding company's stock. H.M.Jr: You don't want to give that example of the Half Moon -Foley: Paganucci? 214 - 12 H.M.Jr: And he had to buy this stuff. Foley: We thought about using it, Mr. Secretary, but that came from the SEC and didn't come from us, and the only thing that we have in our files on that is a memorandum of a conference at your house back in '38 attended by Chester Lane and Clarence Opper and other people from the SEC, so we don't have that deal in our files, you see. It is only a second-hand reproduction of the deal that we have. H.M.Jr: Well, we made our files available to them. Is there any reason they shouldn't make theirs available to us? But you don't think it is necessary? Foley: We can reconsider it, but we didn't put it in here because of that fact. H.M.Jr: Supposing they say, "Give us an example." Foley: We have got an example. H.M.Jr: All right. Foley: "For example, the former National Bank of Kentucky loaned approximately $5,800,000 of its funds on stock of the holding company which controlled the bank. When the holding company collapsed the bank suffered a loss of almost $2,000,000 on those loans." And that gets it away from the Trans-America thing and gets it on to another holding company. H.M.Jr: That is right. 215 - 13 Foley: "Although existing law restricts loans by member banks of the Federal Reserve System to executive officers of such banks, the spirit of the law is frequently circumvented by loans made to officers and directors of bank holding companies or affiliated interests. I have in mind an officer of a corporation affiliated with a bank holding company who had inadequately secured loans of over $7,000,000 outstanding at one time from a bank controlled by the holding company." That is the A. 0. Stewart situation. H.M.Jr: You don't want to say, "At the time he was Chairman of the Federal Reserve at San Francisco"? Foley: That is bringing in another fight. H.M.Jr: I have got to brush up a little bit on this stuff, but I remember most of it. Foley: "The fact that bank holding companies list their stocks on national exchanges is an ever-present menace to the banks controlled by the holding companies. Declines in the market price of the holding company stock affect the public confidence, not only in the holding company, 'as a distinct entity but in each and every banking unit of the whole, regardless of its own inherent soundness. (page 284) "Strong banks in a holding company group are often endangered by weak banks. As your Committee succinctly expressed this criticism: "The most patent deficiency in group banking is that the group is only as strong as its 216 - 14 - weakest unit. # # # When the shock of adversity * * * dislodges confidence in any one of the units, the entire structure is destined to collapse. Unit banks which might otherwise have survived are doomed because of their affiliation in the public mind with the weaker units.' "After its careful investigation this Com- mittee concluded that: * * Little justification, economic or social, exists for the holding company as presently constituted and conducted. Holding companies, whether employed in the banking, public utility, or railroad field, have been catastrophic to the American public.' (page 382) "The intensive investigation made by this Committee in 1934 and the very positive condemnation of holding companies by your Committee in its monumental report, show that legislation is needed to end the domi- nation of insured banks by holding companies. And nothing has happened to diminish the need. In fact our experience in more recent years will, I believe, lend additional support to that proposition. "The impelling necessity for bank holding company legislation was made increasingly clear as a result of recent difficulties which the office of the Comptroller of the Currency, in cooperation with the other Federal bank supervising agencies, encount- ered in the examination and supervision of one of the largest national banks, which is a unit in a complicated holding company system. I refer to Transamerica Corpora- tion and its relationship with the Bank of 217 - 15 - America. In that case, the value of the holding company stock depended to a marked degree upon the dividends paid by the bank to the holding company and many of the financial transactions of the holding company group involved the questionable use of funds obtained from the bank." H.M.Jr: I will come back. We want to think carefully That is the first time you have done it. whether we want to say that and name names. Foley: That is the first time we have named them. H.M.Jr: I just wonder whether you want to do that. Foley: "The bank, under the domination of the holding company group, refused to follow recommendations and directions of the Comptroller of the Currency to reduce its excessive dividend rate, improve its capital position, charge off certain losses set up by the national bank examiners, drastically reduce excessive loans to the holding company--" H.M.Jr: Just a second. Rewrite that page so I can have it without naming the names and see how it looks. I would much rather say, "Well, I don't know whether I ought to tell you. "Well, we want to know." "Well, I don't know." All right. Then reluctantly I tell them. Foley: O.K. We can do that. Bell: Reluctantly? H.M.Jr: Reluctantly. Kuhn: They would ask you anyway, wouldn't they? 218 - 16 Upham: Oh, they will know anyway. Foley: Most of the men there will know. H.M.Jr: I thinkit.we should put up a little fight about Kuhn: You can make sure that they will ask. Bell: Well, I don't think you ought to mention it at this time. I don't know, you may have repercussions in the attempt of the Securities and Exchange Commission to settle their differences with them. H.M.Jr: Are they settling them? Bell: I understood they were trying to. Foley: I think that they will approve this. We will clear it with them first before you do it. H.M.Jr: My own first reaction is to tell the story and don't mention the names. I think it is just as effective, and if they want to know the names, we can tell them. It puts it on a higher plane. Foley: " .... holding company and affiliated and allied interests, eliminate excessive real estate holdings, and take other steps considered by the Comptroller of the Currency as necessary to protect the soundness and stability of the bank. "Some of the sanctions given the Comptroller of the Currency under existing legislation are so weak that their use would have been ineffective, while others are so drastic that their use might have done excessive injury to the bank. Consequently, for approximately three years a tug of war went on 219 - 17 between the bank on the one hand and the office of the Comptroller of the Currency and the other regulatory agencies on the other. Finally, as a result of constant pressure over those three-years, the bank agreed to make a number of the changes insisted upon by the Comptroller of the Currency, although it did not agree to any reduction in its dividend rate of 19.2 percent. Although it is believed that the changes agreed to by the bank, if faithfully carried out, will greatly benefit the bank, it is probable that the continued domination of the bank by the holding company group will lead to further difficulties. "It is potentially dangerous, when the future of some of the largest banks in the country, as well as thousands of small banks, is tied to the career of a few holding companies. Banks are established, not to--" H.M.Jr: Excuse me again. On the bottom of page 11. I would rather leave it saying that we have done this and up to now they have been a good boy, that idea, and not say, "The holding company group will lead to further dif- Foley: ficulties. I don't want to say that. All right. H.M.Jr: I mean, everybody has agreed that for the last three months or so they have-- Delano: Yes, they have improved the bank. H.M.Jr: They have improved the bank, and I don't think this will weaken it. I will have some other suggestions to make. But that thing of leading to further difficulties, I don't want to leave that tone. I would much rather 220 - 18 say, "We have done all this, and we find recently they have been cooperating." Delano. You do understand there is one point that is still left out there, and that is in the process of being settled, but it is not settled yet. H.M.Jr: If you want to say, "Not all of our difficulties are settled." But I don't want to say, "Well, now, we have done all this I don't want him to say that we have done all this and Morgenthau is forecasting, and he will say, "We have tried. No matter " what we do, it will lead to difficulties." I think it puts me in a weak position. I would rather lean on the side of saying something a little bit too nice about him, than to give him a chance to say - grab that sentence, "No matter what I do for that soand-so, we can't settle it." And I have got an interesting thing to suggest there. Why is he coming up if he thinks he is such a swell guy - if you read his history, it doesn't leave any doubt, but I don't want to say, "No matter what he does, the fellow isn't going to be good." That is what I think, but I don't want to say it in writing. Upham: I think that whole last sentence ought to H.M.Jr: Yes. Bell: You can say, "The changes made have greatly improved the banks." H.M.Jr: Yes. Foley: But the dividend rate hasn't been reduced. come out of there. 221 - 19 H.M.Jr: Don't you think it has, Cy? Upham: Well, greatly. They have more capital, yes. H.M.Jr: Well, I think we ought to leave it on this They have better protection. tone, that the situation has improved, has steadily improved, say for the last three months or last six months. Foley: That the dividend rate hasn't been reduced, and that still ties in with what you have already said. H.M.Jr: That is all right, isn't it, but the dividend rate hasn't been reduced and certain other difficulties have not been eliminated? Delano: I just wanted to mention that one so you would be clear. H.M.Jr: That is right, and certain other difficulties have not been cleared up, but there has been an improvement. Delano: Very definitely. Kuhn: You could say, "In any case, it is potentially dangerous when these banks are tied up this way. H.M.Jr: Not there. I have got an idea on that which I want to give later. Foley: "Banks are established, not to nurture holding companies, but to serve the depositors and the general public. The Federal Government, as charterer, examiner, and supervisor of banks, has the responsibility of taking every possible step to assure the soundness of such banks." 222 - 20 Bell: Assure? Sherbondy: I wondered whether the Secretary ought to say that the Government was an assurer. Upham: I am responsible for that. It is theoreti- Foley: I think that is all right. H.M.Jr: You fellows settle that. Foley: cally assured. The banks are assessed. "The various agencies intrusted by Congress with that responsibility cannot function effectively unless Congress enacts legislation conferring adequate powers upon such agencies. "In 1938 an interdepartmental committee com- posed of representatives of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Reconstruction Finance Corporation, and the Treasury Department gave considerable attention to the bank holding company problem and reached the unanimous conclusion that the operations of bank holding companies should not be allowed to expand, that the principle of bank holding companies is not in the best interests of the country and that something should be done about them. The opinion of that committee was communicated to the President. Shortly, thereafter, in his message to Congress, on April 29, 1938, the President recommended the enactment of bank holding company legislation in the following language: H.M.Jr: You can skip that language. Foley: All right. 223 - 21 Foley: "That was almost three years ago. Congress has not yet taken any action to deal with the problem. The bill under discussion carries out the President's recommendations. "Some may assert that during the present crisis, when our energies are centered primarily on matters of national defense, we have no time to deal with problems essentially domestic or to worry about internal reforms. But unhappy events abroad have made it abundantly clear that a nation is likely to collapse from weaknesses in its internal social and economic structure as it is from external forces. Whether the democratic form of government will survive depends to a large degree upon its ability, during national and international crises, to continue to protect the lives, the rights and the interests of its citizens, not only against oppression from abroad, but against oppression from within. Domination by economic or financial oligarchies such as bank holding companies, is in some respects just as undemocratic and oppressive as domination by a totalitarian government." 224 - 22 H.M.Jr: That is our lead. I want to start off with that. I want to start, you see, with this, and then I want to say this, so that the entire thing isn't on Congress. I want to say this, and then I next want to start with this thing here. "Some may assert." But certainly this last page comes first. Then I want to say, pick up some sentence from this report and say, Eight years have passed since this Committee made a very magnificent and comprehensive and intelligent and so forth and so on report, and I, as Secretary of the Treasury, assume part of the blame, if there is to be any blame, that I haven't pressed for this legislation harder than I have," you see, "and from the day that this report was written, down to 1938 when the President set up this thing in April, '38, no action was taken by either end of the Avenue, but on April 29, '38, the President did send the following message, and from that day to this nothing has happened, and therefore I am here today to remind the Congress that three years have passed since the President sent this mess- age, and while I realize that no time is a good time for a thing like this" - I mean, that is what people say - this is the thought that you haven't got. The reason why I think it is a good time is because our banking structure is stronger today than it has ever been in the last ten years, and that is the time to make --" Foley: "The improvements." H.M.Jr: "the improvements and not to wait until we are faced with economic reconstruction, and then all of these things, these defects in our banking system, become of major importance, and I grant that they are not of major importance now, but this is the time, in good times, to do it and 225 - 23 - not to wait until we have an economic collapse." Do you see? I want to stress that. "And it is time now to prepare toward the day spending these billions for the national defense, and the strain will again be on our banking system for the readjustment period, and therefore I come to you today," - I want to stress this - "when the banking system is the best it has ever been, and I don't want to when there may be peace and when we won't be wait until this terrific strain is again thrown on it and the Comptroller's office is faced with a rule to regulate these things, and he hasn't got the power to tell a fellow not to pay the dividends." That is the thing which is missing which I want to get in, and I would like to get that in at the beginning and then sum up again on that same tone at the end. What do you think? Delano: All right. H.M.Jr: You see. Why do it now? Well, the reason we are doing it now is "because the banking structure is in the best shape it has ever been, but we can see the day where you will again be forced, as you were in '32 and '33, and you haven't got the instruments of control to work with. The time to do it is in good times and not in bad times. That is the thing which is missing. Ferdie, do you like it? Kuhn: Sure. H.M.Jr: What do you think? 226 - 24 - Upham: There is one way in which you will have to modify that. After that 1934 report, of course, the Congress did pass bank-holding company legislation, in the Banking Act of 1935, which I think was considered by the Inter-departmental Banking Committee and approved. Of course, that hasn't been effec- tive, but we can't say that they didn't do - that neither end of the Avenue did anything. H.M.Jr: Well, make my statement technically correct, but it is the tone which I want to get, you see. "Why does Morgenthau come up here when we are all worrying about national defense and talk about - and annoy us with a thing like this," you see, "why does he annoy us with a thing like this?" Well, the thing is that I am a hundred percent sincere that the time to correct evils is in good times, not to wait until the thing has crashed and have an investigation as to why we had the crash. I want to drive home the point. The time to do it is when things are good. Dan? Bell: I agree. H.M.Jr: And not sit around, and the one other thing which I want to see, I would like a reference. You have got certain controls with the Federal Reserve Board which they haven't used. Are you going to leave those there? Aren't you going to point out something about that? I am not conscious that you point out the fact that they have got this licensing control. Delano: They have got voting permits. H.M.Jr: I don't see why we don't point it out. 227 - 25 - Bell: That is on new organizations. Foley: Any holding company, in order to vote the stock Bell: I am not familiar with the law, but I thought that they took action under that. Have they of its affiliate. got any power to undo it? Foley: Sure, they can undo it now. They were granted this kind of license a long time ago, and they are operating under that license. Delano: That is one of the contingents that he made about H.M.Jr: Haven't I put my finger on something that is not included in here? Foley: Yes, if you want to make an attack on the Federal this situation. Reserve Board. H.M.Jr: You put those things so crudely. (Laughter.) I just want to enlighten Congress. Upham: This legislation will nullify that whole voting permit system. H.M.Jr: I think that should be pointed out. Here is the thing that is running through my mind. The Federal Reserve come up. Let's say they are stupid enough to oppose this. Well, why do they oppose it? Well, we pointed out why. They have had this thing, they could have done this thing, they didn't do anything about it. They have had eight years to do it. They had A.O. Stewart as Chairman of the Federal Reserve Board, and these fellows have had this thing, and they could have controlled it at any time, and they didn't do it. Therefore, we think after eight years - when were they given it? 228 - 26 Upham: H.M.Jr: 'thirty-five. They have had six years to do this thing. They haven't done anything. Now we want that power given to the FDIC and the Comptroller's Office, but I think mention should be made so that when the Fed comes up they will say, "Oh, well, they are just - that is sour grapes," you see. "Morgenthau said they could have done it for six years, and they didn't." I think it ought to be worked in in a very nice, genteel manner. What? Delano: Yes. H.M.Jr: Why do you want this? "If the Federal Reserve did a good job," You have just got to point out that they have had this authority for six years and didn't do anything with it. See what you can do with it, will you? Delano: Yes. I was thinking about the question of what sort of power they really had and how they applied it. If you want to look into that a little bit. The thing was pretty much - the power - was it a strong power that they had? Upham: Delano: Upham: H.M.Jr: Oh, I think so, yes. You mean the power to deny voting permits? I think so. Remember when we sat up nights on that, Cy? Upham: Yes. Plenty authority in the law, don't you think? Sherbondy: Yes. It is poor administration. 229 - 27 - H.M.Jr: Let's look into that. Outside of that, I can't think of anything. It is a perfectly swell statement. Upham: Of course, they are about to spring a suprise on us. They are just about to hold officially that Trans-America is a holding company affiliate of the Bank of America. H.M.Jr: Who is "they?" Upham: Federal Reserve Board. You see, that has been in dispute for several years and -- Foley: Upham: Maybe this will bring it about. I think they are right on the point of holding that officially, and then Trans-America will have to get one of these holding company permits, and if we do this, they will immediately get very firm. H.M.Jr: Well, what is my object? My object is good administration of the banking system. Upham: That is right. H.M.Jr: That is what I want. And if, somehow or other, they have heard of this and this forces their hand, what the hell? Foley: When do you want to see us again? H.M.Jr: We will just find out. Foley: Barkley is away. He is down in Miami, Palm Beach, or somewhere. H.M.Jr: We will let Glass handle this. Now, have you thought over how we will do this? 230 - 28 - Foley: That tary. is that memorandum on the top, Mr. Secre- H.M.Jr: Is it the Comptroller, Crowley and I? Delano: Yes. The question is whether we would employ some other testimony. H.M.Jr: I don't know. I think by the time that Crowley and Delano and I talk, I think that is enough. Foley: That is what we think. H.M.Jr: It will lose its effect. Foley: Yes. Somebody will have to tell the story of the Bank of America, because that will come out whether you say it directly or wait for them to bring it out in their questions. Whoever is the best fellow in the Comptroller's Office to do it, it ought to be somebody who actually made the examination and who has personal knowledge of the transactions and can talk with ease and with -Delano: We have a man. H.M.Jr: Who would that be? Delano: It would be either Mr. Sedlacek or Mr. Williams. They will be at my elbow when we are testifying, and we will be able to take care of the technical aspects of it. H.M.Jr: I would like to see a copy of that report of the bank holding company thing, the '33 report. Have you heard how the notes are going? Bell: H.M.Jr: No, the bank was very good. I think it is a swell statement. I think it could 231 - 29 - be condensed a little bit more. Blue pencil it, Ferdie. It is a little repetitious. (Mr. Hadley entered the conference.) H.M.Jr: How is the opening? Hadley: The seven-eighths is opening at par twelve to sixteen, and the one and one eighth issue at par twenty to twenty-four. These are both unofficial quotes, but they look like they will stay for the day and that is pretty close to what we had estimated. H.M.Jr: Very close. Thank you. Hadley: The reception is very favorable. They think it is good. (Mr. Hadley left the conference.) H.M.Jr: I don't want to tie everybody up. I will ask him. -I will tell him that we are ready any time beginning with Monday. Delano: The -- H.M.Jr: We are ready any time Monday to testify. Foley: To start the hearings? H.M.Jr: Yes. Delano: Now, Mr. Secretary -- H.M.Jr: Delano: We will start any time beginning Monday. We are preparing a statement in collaboration with these gentlemen here -(Telephone conversation with Mr. Smith, secretary to Senator Glass, follows.) 232 April 9, 1941 11:07 a.m. H.M.Jr: Hello. Operator: Senator Mr. Smith.Glass is in Lynchburg. I have Rixey Smith: Yes, Mr. Secretary. H.M.Jr: How are you? S: H.M.Jr: I'm fine, sir. How are you, sir? Fine. Mr. Smith, I wish you could get in touch with Senator Glass and tell him that anytime beginning with this coming Monday we'd be ready to start to testify on this bank holding bill. See? S: H.M.Jr: Yes, sir. And what would his pleasure be? S: All right, sir. That's the subcommittee H.M.Jr: I suppose so. S: I don't know whether Wagner is back or not. H.M.Jr: Well, they tell me Wagner is quite sick. S: isn't it? Yes, I'm afraid he is. But if it's the subcommittee, which I'm sure it is, the Senator can go ahead with these hearings whenever you are ready. H.M.Jr: Well, we'll be ready any time beginning Monday and when I say we, I mean Mr. Delano, Mr. Crowley and I. S: All right, sir. I'11 let your office know. H.M.Jr: Will you do that? Yes, sir. S: H.M.Jr: Thank you. 233 - 30 - Upham: Does Crowley know, too? Foley: Somebody to call him.ought to tell Crowley. Maybe we ought Delano: Somebody has got to tell Crowley. H.M.Jr: I will call him up myself. Well, I want to do this again tomorrow. I would like to meet with you gentlemen again tomorrow at eleven. Is that crowding you too much? Would you rather have it in the afternoon tomorrow? Kuhn: Afternoon. Foley: Yes, afternoon will give us a little more time. H.M.Jr: Three-thirty tomorrow afternoon? Delano: That is all right. H.M.Jr: Three-thirty tomorrow afternoon. I think this is good, Have you got a copy so that you can look Dan. this over? Bell: Yes, I have that is all. got a copy. I just hadn't read it, H.M.Jr: Will you? Bell: Yes. H.M.Jr: Bell: I value your opinion on this. It isn't worth much. H.M.Jr: Yes it is. Bell: I will read it over. H.M.Jr: But if you can change that for me and them summar- ize again onthe the end. same tone, even if you repeat a little bit at 234 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE Secretary Morgenthau April 9, 1941. E. H. Foley, Jr. Attached is a draft of statement, prepared in anticipation of your appearance before the Banking and Currency Committee of the Senate in support of the bank holding company bill. As you suggested, both Mr. Kuhn and Mr. Duffield worked on it with us. No definite decision has as yet been made as to the witnesses to be called in support of the bill. Of course, you and Mr. Delano and Leo Crowley will carry a major part of the burden. Since a great deal of attention must be given to a development of the Transamerica-Bank of America story, it would seem that who- ever in the Comptroller's office is most familiar with the set-up should be prepared to go into it in detail. I understand that the men in the Comptroller's office most familiar with the subject are Mr. Sedlacek and Mr. Williams. Some thought was given to using Dean Bates for this, but I doubt its practicability, since his knowledge is second-hand at best. We considered the advisability of getting a banker to testify for the bill, but have abandoned the idea, largely because no one could think of a banker who is in favor of it. It was also suggested that Commissioner Healy of the Securities and Exchange Commission might testify on the evils of holding companies generally and that Judge Pecora might be asked to re-state some of the material developed in the banking investigation he carried on a few years ago. We have since come tentatively to the conclusion that neither Judge Pecora nor Commissioner Healy could contribute enough to a discussion of the bill under consideration to justify asking them to testify. It seems to me that we ought to plan on not more than four or five witnesses, with you leading off, followed by Mr. Delano and the bank examiner or examiners who is to discuss Transamerica, and ending up with Mr. Crowley. E.1.7.ht. 235 April 8, 1941. The bill under consideration is designed to curb the extent to which banks insured by the Federal Deposit Insurance Corporation may be controlled by holding com- panies. At present the activities of such holding companies are almost wholly unrestricted. In brief the bill, which would be administered by the Federal Deposit Insurance Corporation, would make it unlawful, after June 30, 1944, for any company to own or control more than 10 percent of the voting stock of any bank insured by the Federal Deposit Insurance Corporation, or to control in any manner the management or policies of an insured bank. The bill also would confer upon the Comp- troller of the Currency, with respect to national banks, and the Federal Deposit Insurance Corporation, with re- spect to other insured banks, the authority to veto the payment of excessive dividends by insured banks. I favor the enactment of the measure. Its purpose is to protect and safeguard the banking structure which has been strengthened during the past eight years by the patient efforts of bankers and government alike. Today 236 -2- bankers are cooperating wholeheartedly in the national defense program. It is because I want to help bankers and protect bank depositors, especially in the small local banks, that I favor legislation to deal with the bank holding company problem. To my mind, holding company domination is a serious menace to our banking structure. I do not intend to burden you with an involved discussion of the evils inherent in holding company control of banks. In my opinion there is no necessity for a mass of testimony or for extended hearings on that sub- ject by this committee. A substantial part of the very excellent report of your committee at the close of its stock exchange investigation was devoted to the bank holding problem. This morning, I want to discuss briefly some of the abuses in the operations of bank holding companies as disclosed by that report and, perhaps, bring to your attention further abuses not taken up at this time. One of the greatest dangers involved in the expansion of bank holding companies is the resulting monopolistic 237 -3- trend in the banking field. Monopoly in banking is just as vicious and just as antagonistic to our free democratic order as it is in fields of steel, oil, or aluminum. The small unit banker needs protection against monopoly just as much as the small manufacturer. Our records disclose several instances in which a holding company has threatened to establish a branch of one of its captive banks to compete with a small, independent institution, unless the independent bank sold out to the holding company. In this connection the statement of the president of a small independent bank, taken from our files, is per- tinent. He said, "### it now appears that a move is being made to attempt to scare us into selling out against our own wishes, or the alternative, to be obliged to com- pete with this bank in a branch to be established here if a charter can be procured." A manufacturer in the same community wrote, "There is a feeling in all classes that the petition of the large 238 -4branch banking institution for a branch in this city is a 'squeeze' play calculated to force the sale of our own independent bank." After a bank has been absorbed into a holding company system, it is exposed to the danger of intragroup deals at fictitious values. This is self-dealing. It is the typical holding company practice with which the public became familiar in the Ivar Kreuger and McKesson & Robbins cases. It is particularly important that banks and their depositors be protected against it. When a bank is in a holding company system it is frequently used to keep afloat the weak affiliated enterprises of the holding company. This is done by dumping into the captive bank depreciated real estate or other assets of affiliates. The bank is forced by the holding company to pay fictitious prices for these assets in order to bail out the affiliates. The bank holding company tends to drain the resources of the banks in the system in order to maintain the dividend policy of the holding company. The maintenance of the market value of its stock is fundamental to the continued prestige and growth of a bank holding company. The value of that stock depends primarily upon the dividends 239 -5paid by the holding company, which in turn are made up from dividends paid to the holding company by its sub- sidiary banks. The result is that the bank holding company is frequently so much concerned with maintaining an undiminished flow of dividends from its controlled banks that it is unwilling to recognize the dangerous effect of an excessive dividend policy upon the soundness of the banks. The investigation of your Committee disclosed documentary evidence of the strong pressure by holding companies in Detroit to compel controlled banks to pay dividends in excess of the amounts deemed advisable by the bank directors. Ever since 1933 the office of the Comptroller of the Currency has endeavored to persuade one large national bank controlled by a holding company group to reduce its dividend rate. Instead the dividend rate has steadily increased from 6% to approximately 20% at the present time. The complicated structure of a bank holding company system is an constant temptation to evasion and circum- vention of the banking laws. Several years ago the national bank examiners directed a large national bank con- 240 -6trolled by a holding company to charge off some $35,000,000 of bad assets. Such a charge off by the bank probably would have necessitated suspension of dividends by the bank to the holding company. To avoid this possibility the bank entered into a series of unjustifiable inter company deals. Instead of charging off the $35,000,000 of assets the bank turned them over to an affiliated company which promised to pay the bank $35,000,000. This deal left the affiliated company holding the bag. To rescue the company, the bank deliberately wrote up the value of its bonds by $14,000,000 -- a purely paper transaction. The bank then credited this pumped up $14,000,000 against the $35,000,000 owed by the affiliate, in effect excusing that much of the debt. Thus the holding company forced the bank into a series of devious, unsound deals in order to keep the dividends flowing to the holding company. Your Committee reported that certain of the bank holding companies investigated deliberately prepared their statements and reports in such a form as to mis- represent the real condition of their controlled banks. 241 -7- The experience of the office of the Comptroller of the Currency has shown that the structure of some bank holding companies is so confusing that adequate examina- tion and supervision of the national banks controlled by such companies is at times all but impossible. One of the prevalent methods of misusing the funds of a bank controlled by a holding company is to force the bank to lend money to the holding company or to make loans on stock of the holding company. One of the easiest ways for the holding company to maintain the market price of its stock is to have the bank lend money to friendly persons so that they can buy the holding company's stock. For example, the former National Bank of Kentucky loaned approximately $5,800,000 of its funds on stock of the holding company which controlled the bank. When the holding company collapsed the bank suffered a loss of almost $2,000,000 on those loans. 242 -8Although existing law restricts loans by member banks of the Federal Reserve System to executive officers of such banks, the spirit of the law is frequently circumvented by loans made to officers and directors of bank holding companies or affiliated interests. I have in mind an officer of a corporation affiliated with a bank holding company who had inadequately secured loans of over $7,000,000 outstanding at one time from a bank controlled by the holding company. The fact that bank holding companies list their stocks on national exchanges is an ever-present menace to the banks controlled by the holding companies. Declines in the market price of the holding company stock affect the public confidence, not only in the hold- ing company, "as a distinct entity but in each and every banking unit of the whole, regardless of its own inherent soundness." (page 284) Strong banks in a holding company group are often 243 -9endangered by weak banks. As your Committee succinctly expressed this criticism: "The most patent deficiency in group-banking is that the group is only as strong as its weakest unit. # # * When the shock of adversity * # # dislodges confidence in any one of the units, the entire structure is destined to collapse. Unit banks which might otherwise have survived are doomed be- cause of their affiliation in the public mind with the weaker units." (page 294) After its careful investigation this Committee concluded that: "* # * Little justification, economic or social, exists for the holding company as presently constituted and conducted. Holding companies, whether employed in the banking, public utility, or railroad field, have been catastrophic to the American public." (page 382) The intensive investigation made by this Committee in 1934 and the very positive condemnation of holding companies by your Committee in its monumental report, show that legislation is needed to end the domination of insured banks by holding companies. And nothing has happened to diminish the need. In fact our experience in more re- cent years will, I believe, lend additional support to 244 - 10 that proposition. The impelling necessity for bank holding company legislation was made increasingly clear as a result of recent difficulties which the office of the Comptroller of the Currency, in cooperation with the other Federal bank supervising agencies, encountered in the examina- tion and supervision of one of the largest national banks, which is a unit in a complicated holding company system. I refer to Transamerica Corporation and its relationship with the Bank of America. In that case, the value of the holding company stock depended to a marked degree upon the dividends paid by the bank to the holding company and many of the financial transactions of the holding company group involved the questionable use of funds obtained from the bank. The bank, under the domination of the holding company group, refused to follow recommendations and direc- tions of the Comptroller of the Currency to reduce its excessive dividend rate, improve its capital position, charge off certain losses set up by the national bank examiners, drastically reduce excessive loans to the 245 - 11 holding company and affiliated and allied interests, eliminate excessive real estate holdings, and take other steps considered by the Comptroller of the Currency as necessary to protect the soundness and stability of the bank. Some of the sanctions given the Comptroller of the Currency under existing legislation are so weak that their use would have been ineffective, while others are so drastic that their use might have done excessive injury to the bank. Consequently, for approximately three years a tug of war went on between the bank on the one hand and the office of the Comptroller of the Currency and the other regulatory agencies on the other. Finally, as a result of constant pressure over those three years, the bank a greed to make a number of the changes insisted upon by the Comptroller of the Currency, although it did not agree to any reduction in its dividend rate of 19.2 percent. Although it is believed that the changes agreed to by the bank, if faithfully carried out, will greatly benefit the bank, it is probable that the continued domination of the bank by the holding company group will lead to further difficulties. 246 - 12 - - - It is potentially dangerous, when the future of some of the largest banks in the country, as well as thousands of small banks, is tied to the career of a few holding companies. Banks are established, not to nurture holding companies, but to serve the depositors and the general public. The Federal Government, as charterer, examiner, and supervisor of banks, has the responsibility of taking every possible step to assure the soundness of such banks. The various agencies in- trusted by Congress with that responsibility cannot function effectively unless Congress enacts legislation conferring adequate powers upon such agencies. In 1938 an interdepartmental committee composed of representatives of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corpora- tion, the Reconstruction Finance Corporation, and the Treasury Department gave considerable attention to the bank holding company problem and reached the unanimous conclusion that the operations of bank holding companies should not be allowed to expand, that the principle of bank holding companies is not in the best interests of 247 -13- the country and that something should be done about them. The opinion of that committee was comunicated to the President. Shortly, thereafter, in his message to Congress, on April 29, 1938, the President recommended the enactment of bank holding company legislation in the following language: "We have seen the multiplied evils which-have arisen from the holding com- pany system in the case of public utilities, where a small minority ownership has been able to dominate a far-flung system. "We do not want those evils repeated in the banking field, and we should take steps now to see that they are not. "It is not a sufficient assurance against the future to say that no great evil has yet resulted from holding com- pany operations in this field. The possibilities of great harm are inherent in the situation. "I recommend that the Congress enact at this session legislation that will effectively control the operation of bank holding companies; prevent holding companies from acquiring control of any more banks, directly or indirectly; prevent banks controlled by holding companies from establishing any more branches; and make it illegal for a holding company, or any corporation or enterprise in which it is financially interested, to borrow from or sell securities to a bank in which it holds stock. 248 -14- "I recommend that this bank legislation make provision for the gradual separation of banks from holding company control or ownership, allowing a -- time in an time for it for to this be done accomplishment orderly reasonable manner enough and without causing inconvenience to communities served by holding company banks." That was almost three years ago. Congress has not yet taken any action to deal with the problem. The bill under discussion carries out the President's recommendations. Some may assert that during the present crisis, when our energies are centered primarily on matters of national defense, we have no time to deal with problems essentially domestic or to worry about internal reforms. But unhappy events abroad have made it abundantly clear that a nation is as likely to collapse from weaknesses in its internal social and economic structure as it is from external forces. Whether the democratic form of government will survive depends to a large degree upon its ability, during national and international crises, to continue to protect the lives, the rights and the interests of its citizens, not only against oppression from abroad, but against oppression from within. Domination by economic or financial oligarchies such as bank holding companies, is in some respects just as undemocratic and oppressive as domination by a totalitarian government. 249 April 9, 1941 11:10 a.m. H.M.Jr: Hello, Rouse? Robert Rouse: H.M.Jr: R: Yes. Good morning, sir. How is it going? Very well. Everybody is delighted with it. The question subscribe for. 18 how much can they H.M.Jr: I got the - the 1-1/8 is a little bit high, isn't it? R: Yes. H.M.Jr: The 7/8's doesn't seem to be. R: It's a full rate. Well, I think that was regarded as being very liberal, reflecting extent the market might be fully insulated against it. Yeah. Well, the war news is as bad as perhaps concern about the news and to what H.M.Jr: you can make it. R: Yes, it is. H.M.Jr: And I'm tickled to death that we've got the R: extra cushion. Well, everybody is delighted with it and as I say it's a question of how much they can subscribe. There'11 be no markets made in it today. One chap called me Rich of Hanseatic and he made the remark that it looked to him like the year and a half was worth close to 1/2 in yield and 1/2 in price and that the 1-1/8 looked like about 3/4's yield and 3/4's in price, but they're not getting down to brass tacks on that until tomorrow morning. H.M.Jr: All right. 250 -2R: The other section of the market - the tax exempt market - prices are lower this morning; there has been a little selling. One corporation came in to sell a block of the old and new 21's of the tax exempt ones. They've been pretty well taken on a scale down. The market is small but there is a good firm undertone. People won't reach up to buy them under these conditions but they will buy. H.M.Jr: All right. R: I hope your cold is better. H.M.Jr: A little better, thank you. R: Fine. H.M.Jr: Thank you. 251 April 9, 1941 11:25 a. m. Present: Mr. Sullivan Mr. Blough Mr. Tarleau Dr. Haas Mr. Sullivan: That is the list of men who are here with the Defense Commission or the War Department who are connected with one of the 100 companies getting defense contracts. HM,Jr: Does it show how many? volved. Mr. Blough: Forty-seven men and 16 companies in- HM,Jr: Who did this job? That was a quick job. Mr. Sullivan: Mr. Blough. Mr. Blough: The combined staffs of ours and George's worked together. HM,Jr: From 13 to 18 is steel. Is that right? Mr. Blough: Yes. HM,Jr: I would like to study this a little bit. Mr. Sullivan: Now, the last communication we had from Mr. McReynolds, who did not purport to be right up to the minute on personnel, and this may have to be supplemented by another memorandum when we get the current information from OPM 252 -2- Mr. Blough: We got a second memorandum from Mr. McReynolds, but even it is not fully up to date. HM,Jr: 0. K. (Mr. Sullivan handed the Secretary the attached statement "Tax Changes Aggregating Approximately an Additional $3,000 Million of Revenue" .) HM,Jr: Now. Individual income taxes. That is as of yesterday? Mr. Sullivan: That's right. HM, Jr: And estate? Mr. Sullivan: Right. HM,Jr: And gift? Mr. Sullivan: Right. HM,Jr: And Corporation. Is that the same? Mr.Blough: That's new. HM,Jr: What's that surtax? Mr. Sullivan: This: instead of increasing the normal tax from 24% to 30%, if that becomes a surtax rather than a normal tax, it reduces the value of the exemption on tax-exempt securities. HM,Jr: I see. Mr. Blough: Partially exempt. HM,Jr: Eccles, you know, asked if we could not freeze it at 24%. 253 -3- Mr. Sullivan: There was a rumor around in New York, while you were away, that we would reduce the corporation tax to 6 and then put on a 24% surtax, which wouldn't of course be honest. HM,Jr: But this is a surtax on what? Mr. Sullivan: Additional tax of 6% on corporate net incomes. Mr. Blough: Simply called a surtax. HM,Jr: What was the normal tax? Mr. Sullivan: 24. Dr. Haas: I suggest they do that because yesterday, you remember, when you were trying to price that thing there were several different assumptions. HM,Jr: Would it get as much? Mr. Sullivan: Exactly. HM,Jr: But you just call it a different thing. Mr. Sullivan: Yes. HM,Jr: Clever! Mr. Sullivan: I think we should resist all at- tempts to increase the individual normal tax. There will be a good deal of pressure to increase the normal tax. HM,Jr: What effect would it have? Mr. Sullivan: It affects our collections. Many of those bonds are exempt from normal tax. HM,Jr: I see. I see. Now we come to soft 254 -4- drinks. Gasoline. Mr. Sullivan: I have a question on gasoline. That's raising it for cent and I think it could stand le. HM,Jr: I would certainly put it 1g and let them cut it. HM,Jr: Check tax, telephone, jewelry, candy, toilet preparations, club dues, sporting goods, bowling alleys, playing cards, safety deposit boxes. Mr. Tarleau: We have one on them now. HM,Jr: That only comes to $3,000,000,000. Mr. Sullivan: That's right. HM, Jr: You needed $3,500,000,000, don't we? Mr. Sullivan: That's right. HM, Jr: the gives us $127,000,000 more? Mr. Sullivan: That's right. HM,Jr: Does it? No. Yes. Where are you going to get the other 3 or 400 million? Mr. Sullivan: I thought we were going to discuss the liquor question. HM,Jr: Not today. Mr. Sullivan: We have another $190 million, another $220 million -- $192 million, increase of a dollar a barrel on beer and a dollar a barrel on liquor. HM,Jr: No. Haven't you got some other place to go? 255 -5- HM,Jr: How much extra do corporations pay? $900,000,000? Mr. Sullivan: That's right. Mr. Blough: It went up $900,000,000 because these are separate estimates and when they are combined one tax affects the base of the other. It won't be that high. Of course, there are ways of making that considerably more. HM,Jr: Have you got any suggestions? Mr. Sullivan: Yes. Yes, we have a number of them. In the first place, there are two things I think I should bring to your attention. If these taxes that appear on this page were passed tomorrow, we would not get $3,000,000,000 in Fiscal '42. HM,Jr: I know. Mr. Sullivan: That may be ample justification for our asking for a great deal more than $3 billions and letting them whittle it down. HM,Jr: That's right. Mr. Blough: We have income tax schedules that will give us $1,736,000,000,000. HM, Jr: That fellow back there (Mr. Tarleau) is getting nervous. Mr. Sullivan: There will be a lot of people get nervous. Mr. Tarleau: That's worth studying, that $1 billion 7. Dr. Haas: I told John to take it out at the source. Mr. Sullivan: I can show you how that operation is performed. 256 -6- HM,Jr: I want my two-thirds. Haven't you got some other excise taxes you can stick in there? Mr. Blough: Yes, Mr. Secretary. Give us a little more time to hunt. It isn't as easy as it may appear. HM,Jr: I don't see why you might not put 24 more on gasoline. Mr. Blough: And of course any of these can be increased higher. HM,Jr: I want to go before the President with 31 billions. That's the figure you gave me, isn't it? Mr. Sullivan: That's right. HM,Jr: I want to go before him with 31. Mr. Sullivan: (To Dr. Haas) Has A1 done any more work on the excess profits? Dr. Haas: They are working on it now. HM,Jr: When I go before the President I want to be able to say, "We said two-thirds. Here it is. This is the way to get it." How much more would this give? Mr. Sullivan: Very nearly $600,000,000. HM,Jr: This would do it, wouldn't it? Mr. Sullivan: You bet it would. That would do a lot of things, that one. HM,Jr: What's the matter with this one? This does not look so bad. Why won't this one do it? You need that much? 257 -7- Mr. Sullivan: No, not quite. HM,Jr: I will tell you what I would do. I would suggest 2 on gasoline. See. And then can you jack up corporations any? Mr. Sullivan: 2d on gasoline will give us an additional $360,000,000. HM,Jr: Then you need an other $140,000,000. HM,Jr: Would you take it out of the incomes or out of the corporations? Mr. Blough: Can do it either way. There are a variety of things that could be done to income taxes to increase its yield. HM,Jr: Well, think it over. Mr. Sullivan: All right. HM,Jr: I don't see why gasoline isn't a perfectly good thing to tax. It goes with the automobiles. It's a luxury thing. Mr. Blough: In part. A great deal of gasoline goes into business use and will enter into the cost of business. HM,Jr: How much is the gasoline tax now? Mr. Sullivan: Taxed 4d average by States and the Federal Government imposes lie. It was le until last year and we raised it the We recommended 1g increase. HM,Jr: Let's say 2c. And then come back. Maybe you have a schedule in between this one. Got another? Mr. Sullivan: We don't. 258 -8- HM,Jr: You have got to pick up some money some- where. I want my 31! Mr. Sullivan: You will get it. HM, Jr: How about 11 o'clock tomorrow? Mr. Sullivan: Fine! HM,Jr: I will try not to be so late. And, John, you have to have my statement on how we arrive at 31. Mr. Sullivan: Statement for whom? HM,Jr: For the President. How we arrive at the 3à billions. He will say, "How do you arrive at 31." So much expenditure, so much, so much. On the expenditure picture. Mr. Sullivan: Oh, yes. You asked to have a letter prepared to be sent to the Governors of States asking them to follow bur lead and issue taxable securities. That does not help us very much because our securities are now taxed by our own Government and they can come back and say, "All we have to do is tax our own securities and that will not help you any." But the letter has been prepared along the line of interesting them to help in our program. HM,Jr: You see, the War Department is in on the taxing of gasoline in Florida and I asked them to put Greenbaum on that and the War Department has done that and Patterson says he will accept anything that Greenbaum says. I am sending out a telegram to the Governors asking them to appoint committees on National Defense bonds. We had better get together. This telegram asking for the committee has to go. Let me get that out 259 -9- and then bring it to me again. Mr. Sullivan: Yes, sir. 000-000 I will. 260 419141 441-4 Tax changes aggregating approximately an additional $3,000 million of revenue 1 Source : Estimated increase (In millions) : ividual income taxes $1,150.7 Increase surtax rates by adopting attached rate schedule tate and gift taxes 321.0 Estate tax changes: (1) reduce exemption to $25,000; 2 adopt the attached estate tax rate schedule; (3) reduce insurance exclusion to $25,000 Gift tax changes: (1) reduce exemption to $25,000; 2 increase the gift tax rates to three-fourths the rates in the estate tax schedule rporation taxes 903.5 (1) Surtax on normal tax net income, 6% (2) Excess profits taxi Reduce the average earnings credit from 95 to 75 percent and the invested capital credit from 8 to 6 percent 533.5 370.0 200.8 bacco Cigarettes: Additional 75 cents per 1,000 Cigars, tobacco and anuff: Double rates 125.2 75.6 Gasoline 132.5 127.7 her excise taxes Soft drinks 744.7 Admissions (reduce exemptions to 9 cents) Automobiles, parts and accessories 55.0 78.3 56.0 43.5* 37.00 Check tax Tires and tubes Telephone, telegraph, cable, radios, etc. 30.0 Telephone bill assenger transportation 30.0* 25.0 levelry 19.0* 19.0* 13.0* Candy, chewing gum oilet preparations Photographic apparatus, etc. Clocks, watches, etc. 11.0 Club dues, initiation fees 9.5* Matches 8.0 Cabarets 7.5° 7.2 Dentifrices, toilet soap, etc. 6.5° Sporting goods 6.0 urs 5.0* 5.0* Radio receiving sets Musical instruments Bowling alleys 5.0 4.0 Playing cards 2.0* 2.0* runks, suitcases and other luggage Safe deposit boxes Summation of items $3,320.7 Less: Allowance for interrelated tax bases (approximate) Total 320.7 $3,000.00 April 9, 1941. Only the separate effects of interrelated changes have been taken into account. The extent to which the simultaneous enactment of these changes would reduce the yield of the separate proposals has not been estimated. Estimates for individual income taxes are on basis of calendar year 1941 levels of income: all other estimates are at business levels estimated for the fiscal year 1942. Tentative figure supplied by Bureau of Internal Revenue. asury Department, Division of Tax Research 261 441-4 Individual surtax rate schedule $1,150.7 million without defense tax $1,261.3 million with defense tax 2 Total surtax cumulative : 0 $ (percent) : of dollars) Bracket rate : Surtax net income : (in thousands 10 200 $ 2 4 12 4 6 14 6 8 16 10 18 10 12 20 12 14 22 14 16 24 16 18 26 8 18 20 28 20 22 30 22 26 33 26 32 36 32 38 39 38 44 42 44 50 45 50 60 49 60 70 52 70 80 55 80 90 58 90 100 61 100 150 62 150 200 250 300 - 200 63 250 64 300 66 400 68 400 - 500 500 - 1,000 1,000 - 2,000 2,000 - 5,000 Over 5,000 70 72 73 74 75 440 720 1,040 1,400 1,800 2,240 2,720 3,240 3,800 4,400 5,720 7,880 10,220 12,740 15,440 20,340 25,540 31,060 36,840 42,940 73,940 105,440 137,440 170,440 238,440 308,440 668,440 1,398,440 3,618,440 - Treasury Department, Division of Tax Research April 9, 1941 262 441-4 Comparison of surtax schedules under present law and proposed Schedule Surtax net income :: Bracket surtax cumulative Present rates (percent) : Total Present : - 4- 6 4% 8 b 10 8 6 8 : 4 2 : - law 10% - $ $ 12 - 440 80 720 16 200 18 360 1,040 1,400 1,800 2,240 2,720 3,240 3,800 4,400 5,390 5,720 7,160 7,880 10,220 12,740 15,440 20,340 25,540 31,040 36,840 42,940 73,940 105,440 137,440 170,440 238,440 308,440 488,440 668,440 12 10 20 12 14 16 18 20 22 25 26 30 32 38 44 50 - 560 14 12 22 800 16 15 24 18 18 26 20 21 28 22 24 30 25 27 33 26 27 33 30 30 36 32 30 36 38 33 39 44 36 42 1,100 1,460 1,880 2,360 3,170 3.440 4,640 5,240 7,220 9.380 11,780 16,180 20,880 25,880 31,180 36,780 65,780 95,780 126,780 158,780 224,780 292,780 467.780 647,780 50 40 45 60 44 49 60 70 47 52 70 80 50 55 80 90 53 58 56 61 750 - 1,000 1,000 - 2,000 2,000 - 5,000 Over - 5,000 200 14 10 90 - 100 100 - 150 150 - 200 200 - 250 250 - 300 300 - 400 400 - 500 500 - 750 Proposal : 2 : 0- Proposal : $ law : ($000) 58 62 60 63 62 64 64 66 66 68 68 70 70 72 72 72 73 73 74 74 75 75 1,377,780 3.597.780 Treasury Department, Division of Tax Research - 1,398,440 3,618,440 - March 31, 1941 441 4 Comparison of present and proposed individual income taxes on net incomes of selected sizes 1 Married person - no dependents : 60 $ tax : : : 1,000,000 5,000,000 tax 66 51 128 141 70 264 290 110 420 462 150 576 634 317 928 528 1,258 2,336 3,843 14,128 27,768 43,476 330,156 717,584 1,320 1,870 2,484 3,904 5,594 16,404 30,054 45,584 326,904 706,864 1,021 1,452 2,057 2,732 4,294 6,153 18,044 33,059 50,142 344,214 736,178 3,916,548 3,816,824 3,935,142 858 Proposal Percent Proposal : law :defense :defense Without de-: With de-:Without de-: with de - : defense : 3,000 4,000 5,000 6,000 8,000 10,000 12,500 15,000 20,000 25,000 50,000 75,000 100,000 500,000 11 $ : 2,500 $ :Present:Without: With With Increase in tax Amount : $ : Without : defense : Proposal : : 2/ Proposal : personal : Present law exemption : Effective rates : : Amount of tax : before : : Net income .4% 1.0 1.8 2.2 2.5 4.0 5.3 6.9 8.4 11.7 15.4 28.3 37.0 43.5 66.0 71.8 78.3 tax : tax :fense tax :fense taxidefense taxifense ta: 2.4% 4.3 6.6 8.4 9.6 11.6 13.2 15.0 16.6 19.5 22.4 32.8 40.1 45.6 65.4 70.7 76.3 2.6% $ 4.7 7.3 9.2 10.6 12.8 14.5 16.5 18.2 21.5 24.6 36.1 44.1 50.1 68.3 73.6 78.7 49 $ 55 97 110 194 220 310 352 426 484 611 704 792 924 1,012 1,226 1,568 1,751 2,276 2,286 2,108 1,199 1,474 1,958 2,310 3,916 5,291 6,666 14,058 18,594 18,549 - 3,252 - 10,720 - 99,724 445.5% 500.0% 312.9 277.1 281.9 284.0 192.7 150.0 117.3 97.5 67.1 45.6 16.1 354.9 314.3 320.0 322.7 222.1 175.0 139.7 117.2 83.8 60.1 27.7 19.1 15.3 4.3 2.6 8.2 4.8 - 1.0 - 1.5 - 2.5 Treasury Department, Division of Tax Research 1/ Under the proposal, the attached surtax rate Schedule 2 Maximum earned income assumed. is substituted for the present schedule. .5 264 441 4 # Estate and gift tax rate schedule $321 million combined effect without defense tax: $288 million from estate tax and $33 million from gift tax assuming gift tax rates are equal to three quarters of estate tax rates, the specific exemption under both taxes is reduced from $40,000 to $25,000 and that the insurance exclusion under the estate tax is reduced from $40,000 to $25,000 (Estimat ed fiscal 1942 business levels) tax on higher amount : $ 1,000 2,000 3,000 4.000 5,000 6,000 7.000 3,000 9,000 - : 20 30 40 60 80 100 150 200 250 300 500 - : 10 : 5 (Percent) Cumulative : 0$ Bracket rate : of dollars) : specific exemption (in thousands : Net estate after 200 4 5 $ 10 20 12 30 16 40 20 60 23 80 26 100 29 150 32 200 35 250 38 300 41 500 44 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9.000 10,000 47 10,000 - 20,000 20,000 - 50,000 Over - 50,000 500 8 49 51 53 55 57 59 61 63 65 67 69 1,800 3,400 5.400 10,000 15,200 21,000 37,000 54,500 73,500 94,000 182,000 417,000 907,000 1,417,000 1,947,000 2,497,000 3,067,000 3,657,000 4,267,000 4,897,000 5,547,000 12,247,000 32,947,000 - 70 Treasury Department, Division of Tax Research March 31, 1941 265 441-4 Proposed estate tax rates compared with present estate tax rates Net estate after : Proposed rates 1 Present rates 1 : Cumulative specific exemption: Bracket rate Bracket rate : Oumulative (in thousands :tar on higher tax on higher (percent) (percent) of dollars) : : : amount $ 20 12 20 30 16 40 20 40 60 23 60 80 26 80 100 29 100 150 32 150 - 200 35 200 250 38 250 - 300 41 300 500 44 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 47 500 - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 - 10,000 - 20,000 20,000 - 50,000 Over 100 2 50,000 600 8 10 30 200 $ 10 49 51 53 55 57 59 61 63 65 67 69 1,800 3,400 5,400 10,000 15,200 21,000 37,000 54,500 73,500 94,000 182,000 417,000 907,000 1,417,000 1,947,000 2,497,000 3,067,000 3,657,000 4,267,000 4,897,000 5,547,000 12,247,000 32,947,000 70 - Treasury Department, Division of Tax Research 1 Exclusive of temporary defense tax. 200 2 600 4 6 8 10 12 12 14 14 17 17 20 20 20 23 23 29 32 35 38 41 44 47 50 53 56 59 61 63 65 67 69 70 1,200 2,000 4,200 6,800 9,600 18,100 26,600 36,600 46, 600 89,600 222,600 557,600 952,600 1,407,600 1,922,600 2,482,600 3,072,600 3,682,600 4,312,600 4,962,600 11,662,600 32,362,600 - 5 4 5 : 0$ $ amount April 9, 1941 441-4 Comparison of proposed estate tax with present estate tax on net estates (before exemption) of selected sizes 1/ : : 1,527,680 1,933,750 2,706,220 3,052,750 5,430,260 5,530,750 12,799,38012,230,250 27,978,50026,029,750 43,268,06039,929,500 74,068,060 67,929,5 $ : 1,000 2,000 4,000 6,000 10,000 20,000 40,000 60,000 100,000 $ : 100 200 400 600 2,200 4,620 21,780 64,460 113,740 232,100 597,960 2,600 4,400 8,850 13,900 45,750 127,000 217,250 405,250 894,750 220 660 : 80 $ 2,860 4,840 9.735 15,290 50,325 139,700 238,975 445,775 984,225 2,127,125 3,358,025 6,083,825 13,453,275 28,632,725 43,922,450 74,722,450 Treasury Department, Division of Tax Research : defense : law 0.4% 1.1 2.8 4.6 10.9 16.1 19.0 23.2 29.9 38.2 45.1 54.3 64.0 69.9 72.1 74.1 tax defense tax 5.2% 5.7% 7.3 8.1 11.1 13.9 22.9 31.8 36.2 40.5 44.7 48.3 50.9 55.3 61.2 65.1 66.5 67.9 12.2 15.3 25.2 34.9 39:8 44.6 49.2 53.2 56.0 60.8 : : : 50 60 : tax tax : law 2 (000) :Present: Without : With : exemption : Proposal $ Increase in tax Amount : Present Effective rate : before $ Proposal with Without defense defense : Amount of tax Net estate, Percent Without : With :Without: With defense :defense:defense: defense tax : tax : tax : tax 2,380 $ 2,640 1081.8% 1200.0% 3,740 6,650 9,280 23,970 62,540 103,510 173,150 296,790 406,070 346,530 100,490 4,180 7.535 10,670 28,545 75,240 125,235 213,675 386,265 599,445 651,805 653,565 566.7 302.3 200.9 110.1 97.0 91.0 74.6 49.6 26.6 12.8 1.9 67.3 - 569,130 653,895 - 4.4 71.6 -1,948,750 654,225 - 7.0 73.2 -3,338,560 654,390 - 7.7 74.7 -6,138,560 654,390 - 8.3 633.3 342.5 231.0 131.1 116.7 110.1 92.1 64.6 39.2 24.1 12.0 5.1 2.3 1.5 April 9. 1941 1 Under the proposal the attached rate schedule is substituted for the present schedule and the specific exemption is reduced from $40,000 to $25,000. 2 Includes 10 percent defense tax. .9 441-4 INDIVIDUAL INCOME TAX RATES 1940 AND PROPOSAL Combined Normal and Surtax Rates PERCENT PERCENT 90 90 80 80 70 70 60 60 50 50 40 40 30 1940 Proposal 30 Excluding Defense Tax 20 20 10 10 0 20 40 60 100 200 400 600 1000 SURTAX NET INCOME IN THOUSANDS OF DOLLARS 2000 4000 6000 0 10 6 4 441-4 EFFECTIVE INDIVIDUAL INCOME TAX RATES WITH DEFENSE TAX Married Person, No Dependents PERCENT PERCENT 90 90 80 80 70 70 Proposal Without Defense Tax 60 60 50 50 1940 40 40 30 30 Proposal 20 20 10 10 O 10 20 40 60 100 200 400 600 NET INCOME IN THOUSANDS OF DOLLARS 1000 2000 4000 6000 0 6 4 2 1 441 4 ESTATE TAX RATES. WITHOUT DEFENSE TAX Bracket Rates PERCENT PERCENT 90 90 80 80 70 70 60 60 Proposal 50 50 40 40 30 30 Present Law (1935 Act) 20 20 10 10 0 10 20 40 100 200 400 1000 2,000 4,000 NET ESTATES IN THOUSANDS OF DOLLARS o 10,000 20,000 40,000 100,000 4 1-4 EFFECTIVE ESTATE TAX RATES, WITH DEFENSE TAX Proposal Computed on Basis of $25,000 Exemption PERCENT PERCENT 90 90 80 80 70 70 60 60 50 50 Proposal Proposal Without Defense Tax 40 40 30 30 Present Law (1935 Act) 20 20 10 10 o 10 20 40 100 200 400 1000 2,000 4.000 10,000 20.000 NET ESTATES BEFORE EXEMPTION IN THOUSANDS OF DOLLARS 40,000 o 100,000 List of individuals formerly connected with one of the 100 corporations receiving the greatest volume of defense contracts 1/ and now serving is scase capacity with one of the national defense organizations (Amounts in millions of dollars) Defense Bank of oom-1 Capacity with defense organization organization, Division 2/ Company with which previously connected Position of defense contracte) 4. Pratt, John L. O.P.M. Production 5. Johnson, E. F. O.P.M. Production 6. Collins, Wts. M. 7. Brooks, Geo. A. N.D.A.C. N.D.A.C. Industrial prod. Industrial prod. 8. Horner, Fred C. 9. Heron, S. D. N.D.A.C. Transportation N.D.A.C. Industrial prod. General Motors Corp. Chief, Ordnance section Member, prod. planning board Chief, aircraft ordnance & tools branch General Motors Cory. Secretary to the Commissioner General Motors Corp. Legal staff Consultant on private trucking General Motors Corp. Asst. chief, aircraft engines section Ethyl Casoline Corp. 3/ 10. White, H. J. N.D.A.C. Raw materials 11. Wright, T. P. O.P.M. 12. Lombard, A. E. O.P.M. Production Production Specialist, systhetic textiles Asst., aircraft section Chief, prod. planning unit aircraft section 13. Stettinius, Ed. R. Jr. O.P.M. Priorities Director 14. Conover, Mr. O.P.M. Labor Labor consultant 15. East, J. D. N.D.A.C. N.D.A.C. Raw materials Raw materials Chief economic statistician 16. Jackson, Roy 17. Lynch, R. J. N.D.A.C. Raw materials Asst. to the Commissioner U. S. Steel U. S. Steel U. s. Steel 18. Raynor, Hayden N.D.A.C. Raw materials last. to the Commissioner U. S. Steel 19. Mead, George J. O.P.M. Production 20. Kuhrt, Wealey A. N.D.A.C Industrial prod. Asst.to ohief aircraft structure United Aircraft United Aircraft 21. Chapman, E. S. O.P.M. Production Chief, small arms & ammunition Chryaler Corp. O.P.M. Production General Electric Co. General Electric Co. 22. Cliffe, Frank B. Curtiss-Wright Curtiss-Wright U. S. Steel U. S. Steel Consultant,acronautical section O.P.M. Priorities O.P.M. Production Procurement materials, ship- 25. Vance, E. S. N.D.A.C. Industrial prod. building section Director, machine tools and 26. Britton, Mason N.D.A.C. Industrial prod. Asst. director, machine tools 27. Deupree, R. R. O.P.M. Production 26. Haloomb, Charles O.P.M. Priorities Consultant, agriculture & forest products section 29. Folson, Marion B. N.D.A.C. Raw materials commercial aircraft group Asst. section executive, mining 30. Holden, G. R. 31. Stevens, Robert T. N.D.A.C. Raw materials Economic adviser N.D.A.C. Raw materials Group executive, textile prod. 32. Mokernan, J. F. 33. Harrison, W. H. O.P.M. Production Chief, equipment section N.D.A.C. Raw materials Chief, shipbuilding construction 23. Reed, P. D. 24. Lynge, Carl M. Da Post office manager Consultant, aluminum & magnesium Consultant heavy ordnance section Studebaker Corp. and heavy ordnance section Studebaker Corp. Proctor & Camble st.group executive, Eastman Kodak Co. Eastman Kodak Co. J. P. Stevens & Co. Western Electric Co. supplies branch 83 50 34 45 52 28 56 26 O.P.M. Production 36. Hitchoock, H. W. O.P.M. 37. Hull, Blake D. 38. Kahler, Mn. V. 39. White, E. N. O.P.M. Production Production Special adviser, shipbuilding Am. Tel. & Tel. construction & supplies Technical asst., shipbuilding,du Southern Calif. Tel. Co. and metals branch 62 23 63 22 4/ 35. Dunn, Joseph V. 4/ 5/ Southwestern Bell Tel. Co. 5 Illinois Bell Tel. Co. . . Staff sec. supervisor New England Tel. & Tel. New England Tel. & Tel. New England Tel. & Tel. 5/ 5/ Anc. Tel & Tel. O.P.M. Labor O.P.M. Labor O.P.M. Labor N.D.A.C. Labor Consultant, training in industry Asst. district representative District representative Asst. to the director 44. Thompson, L. S. Jr. O.P.M. Labor Special consultant Standard oil Co. of N. J. 45. Coler, Carl S. O.P.M. Labor District representative 46. Omborse, L. E. O.P.M. Production Chief, artillery fire control and optical unit Westinghouse Electric Westinghouse Electric 47. Spencer, Frank E. O.P.M. Production Specialist on alloy steel 42. McDavitt, C. C. 43. Diets, J. W. 23 32 Am. Tel. & Tel. Asst, to executive, minerals 40. Lane, Michael 41 Keith, Wayne E. 215 4/ Priorities O.P.M. 382 Am. Tel. & Tel. O.P.M. Special adviser Special adviser 423 Prootor & Gamble 34. Laird, E. C. Jr. Production Production 509 General Electric Co. and mineral products OFP.M. 601 General Motors Corp. General Motors Corp. 9 Production 6 O.P.M. $901 4 Director General 3. Clancy, A. R. Bethlehem Steel Co. 3 2. Kaudsea, Ma. S. O.P.M. Specialist, forgings & castings 2 O.P.M. Western Electric Co. Crudible Steel 4/ 5/ 5/ 22 63 71 18 81 14 88 12 of 1/ Contracts awarded to Feb. 26, 1941, exclusive of contracts to government arsenals and shipyards. Does not include contracts 2 O.P.M." Office of Production Management. N.D.A.C.* National Defense Advisory Commission. In cases where individual held position with 3 Fifty percent of comon stook owned by General Motors Corp. and fifty percent by Dow Chemical Company. Company is not included among the 100 corporations with largest volume of defense contracts but is parent company of Western Electric Company is not included among the 100 corporations with largest volume of defense contracts but is subsidiary of in. Tel & Tel. 4/ defense contracts 1 Production 1. Hooker, George F. Amount of : pany-(volume : Individual less than both $10,000. groups only O.P.M. position was shown. Co. Comparison of present and proposed individual income taxes on net incomes of selected sizes 1 Married persons - no dependents : : - 132 - 11 200 31 268 70 424 - $ 110 580 150 756 317 1,258 2,336 3,843 14,128 27,768 43,476 330,156 717,584 1,128 1,540 2,110 2,744 4,224 5,964 16,894 30,644 46,234 327,644 707,624 3,916,548 3,817,604 528 858 : : Treasury Department, Division of Tax Research .4% 1.0 1.8 2.2 2.5 4.0 5.3 6.9 8.4 11.7 15.4 28.3 37.0 43.5 66.0 71.8 78.3 : 64 - $ Proposal under proposal Amount : law Increase or decrease in tax 4.3% 6.6 8.0 8.9 10.6 11.6 12.6 14.1 15.4 16.9 18.3 21.1 23.9 33.8 40.9 46.2 65.5 70.8 76.4 $ 1 : 1,000,000 5,000,000 : 1,500 2,000 2,500 3,000 4,000 5,000 6,000 8,000 10,000 12,500 15,000 20,000 25,000 50,000 75,000 100,000 500,000 : Proposal 3 law Effective rates Present : $ Amount of tax : Present : Net income before personal exemption 2/ Percent 64 132 189 237 354 470 606 811 1,012 1,252 1,486 1,888 2,121 2,766 2,876 2,758 - 2,512 - 9,660 -98,944 1,718.2% 764.5 505.7 427.3 404.0 253.8 191.7 145.9 118.1 80.8 55.2 19.6 10.4 6.3 - .8 - 1.4 - 2.5 March 31, 1941 Under the proposal personal exemptions are reduced from $800 to $500 for a single person and from $2,000 to $1,000 for a married person, and the attached surtax rate schedule "A" is substituted for present schedule. 1 2 3 Maximum earned income assumed. Without 10 percent defense tax. 273 April 9, 1941 11:41 a.m. Leo Crowley: up at the White House right now just trying to do a little work for Wisconsin. H.M.Jr: Can you talk a minute? C: Sure. H.M.Jr: Or as Eccles would say, "Can you listen a C: H.M.Jr: minute?" That's right. (Laughs). I wanted to let you know that I called up Carter Glass' office - he isn't there and told Rixey Smith that I was ready to go ahead now any time on this bank holding thing. C: Fine. H.M.Jr: Now, I've got a statement which I prepared and I'd like you to go over it and get your suggestions. C: I'd be very happy to do that. Who has it? H.M.Jr: Foley. C: H.M.Jr: May I get in touch with Ed and get it? I wish you would and then we're counting on you and Delano also to go up along at the same time. C: H.M.Jr: C: That's perfectly all right. Now Delano's preparing a statement which he's going to show me and I'm sure he'd be glad to show it to you. Fine. Well, we'll go right along, we know the picture and you know what we'll do with it. H.M.Jr: Well, would you be ready next week? 274 -2C: Any time that they're ready. See, we've got our old charts and everything from years ago, don't you know. H.M.Jr: C: Now, Leo, I think it would be just - hello? Hello. just as wise H.M.Jr: Operator: Hello. C: Wait a minute, operator. H.M.Jr: I think it'd be just as wise if this didn't C: That's right. That's right. I'll be glad H.M.Jr: And I'd like your advice on it. C: Fine and dandy. H.M.Jr: Thank you. get out any too soon. to get in touch with Ed and go over it so that I get a cue from your testimony too. 275 April 9, 1941 2:14 p.m. H.M.Jr: Hello. Operator: Mr. Foley. H.M.Jr: Ed. Ed Foley: Yes, Mr. Secretary. H.M.Jr: F: H.M.Jr: F: H.M.Jr: Can somebody listen to my conversation with you? I want to give you some ideas. Right now? Is it possible? Oh, I can give it to you. You'll get it. All right. In In this thing that we talked about on the bank holding, there is this point which was not included, that the way of American life a bank which is controlled in its community is just that much more wholesome an institution along the same lines that we encourage people to own their own homes. F: Yeah. H.M.Jr: And I don't think that that was stressed, F: Right. Absentee management. H.M.Jr: That was not stressed. F: No, and we discussed that when we came out that the importance of having a community controlled bank as against the bank which has remote control. and we're going to put something in on that. H.M.Jr: Now, that's No. 1. No. 2, where there are there is more chance to get a loan. That's going to interest the man on the street. more banks in a community to give competition, If you've got four banks in a community, you can go around and shop and the chances of getting a loan are just about four times 8.8 good as when there is only one bank. 276 -2F: Yeah. H.M.Jr: And that this whole tendency towards less banks - I mean, it's all right up to a certain point but I think we should stress that. A fellow says why sure, in my community when we had three banks I used to be able to get a loan; they took an interest in me. F: H.M.Jr: F: Yeah. Local management, I knew the fellow, I saw him at night, I played pool with him and bowled with him and And if you've got a pretty good account, you can take it out of the bank that won't give you a loan and go around and give it to the fellow that will. H.M.Jr: And that wasn't stressed. Those two things. F: All right. H.M.Jr: Don't you think they sound good? F: Yeah, they're both good and they ought to be in there. O.K, thanks. 277 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE April 9. 1941 TO Secretary Morgenthau FROM Mr. Cochran STRICTLY CONFIDENTIAL Sir Frederick Phillips, Sir Edward Peacock and Mr. T. J. Carlyle Gifford were luncheon guests of the Secretary at 1 p.m. today in the Treasury. Mesers. Walter Stewart, Earry White and Merle Cochran also were present. The Secretary's invitation to the British visitors had resulted from his desire to let them bring him to date with respect to their problems, and particularly as a result of an expressed wish on the part of Sir Edward Peacock to acquaint the Secretary with particular questions which have arisen is connection with the liquidation of British direct investments in the United States. Secretary Morgenthau opened the business part of the conversation by inquiring of Gifford how the sale of securities was progressing. Mr. Gifford replied that everything was moving satisfactorily. The Secretary observed that the liquidation had been Mr. proceeding at a good pace. In answer to his further query as to whether Gifford thought the market was being pressed too heavily at the current rate of sale, the latter replied in the negative. He thought the market had been able to absorb with facility and without jury to it the sales which the British had made. He said that his sales had even used a fillip to the market along in February. At that time a Kress distribution had gone poorly and one or two proposed distributions, including that of Republic Steel, had been called off because of the unpropitious market atmosphere. When Gifford then successfully launched the distribution of $11,500,000 of common stock of United States Steel, this gave renewed confidence to the market. He remarked, however, that there were some weeks, such as the present one, in which little progress could be made. The principal cause of his hesitancy to offer many securities this week resulted from the fact that there was one very large private financing operation scheduled. The Secretary added that the war developments of the past two days might also have added to the undesirability of being active just at present. He reminded Mr. Gifford that in a similar situation some weeks ago he had counseled that Gifford go lightly with the mar- the ket. Gifford confirmed this and added that there had been no pressure whatever on Secretary's part in connection with the liquidation program which is now being followed. he While Gifford was pleased with the way the market has been receiving his offerings, also admitted that bad news from the British front might easily worsen the market. He remarked that the decline in the Dow Jones average, which the luncheon group thought reflected market hopes rather accurately, might also indicate a forced let up in liquidation. The Secretary then turned to Sir Edward Peacock and asked if he could have the inside story of the Viscose transaction, since he had received various accounts thereof, but nothing directly from Sir Edward. Peacock explained that this had investment been a very to special transaction. Since this appeared to be the best choice of an word commence the liquidation, he had already been examining the prospects when certain came from the Secretary that there should be some concrete result reported within a 278 -2period. Sir Edward had then gotten in touch with two concerns which could most appropriately take the lead. These two concerns, in turn, had been obliged to call in some twenty other firms to help with the transaction. The plan which was followed, and for the origin of which idea Sir Edward gave the Secretary credit, was that of requiring a certain down payment, with the balance to be paid after a more thorough investigation and the distribution had been consummated. In the present instance the down payment, which is to be made tomorrow, amounts to $40,000,000. less a deduction for certain expenses and a 5 percent commission. To the extent that the final proceeds go beyond $40,000,000, 90 percent thereof will go to the British Treasury and 10 percent to the American banking group. In answer to the Secretary's inquiry as to whether the bankers' charges were high, Messrs. Peacock and Gifford replied that they did not feel that they were excessive in the circumstances. They pointed out that when it came to the point of clearing the transaction in a specified period of from fourteen to eighteen hours, terms had to be offered which would be accepted without argument or without necessity of reference to absent partners, etc. The transaction was of a most exceptional nature, and there is no scale of charges established for such an operation. The two British agents were positive that in any circumstances a charge of 9 percent would have been absolutely necessary. and that the possible range would have been from 9 to 10 percent. Sir Edward confirmed that this transaction definitely passes control to United States interests, except for the 5 percent retained by the British parent concern. The latter had hoped to retain 10 percent, but Peacock had pushed this down to 5 percent in ier that there should be no question whatever as to the actual transfer to American control. In this connection he complimented highly the attitude of the Viscose officials concerned. In answer to the Secretary's inquiry as to how much he expects eventually to receive from Viscose, Sir Edward replied that this was difficult to establish but that he is at present bringing all the pressure he can to obtain the highest possible return, and expects the total price to range between $70,000,000 and $85,000,000. He believes that this will be a satisfactory return. On the other hand, he felt that if complete cash sale had been necessitated such a thing would either have been absolutely impossible, or would not have resulted in a price much beyond the $40,000,000 now received as the down payment under the other scheme. The firms which have taken a part of the Viscose distribution have in some cases remarked that they are happy to go into this, but might have to think a while before entering a second operation, and definitely apparently would not be have in plenty a position of liquid to participate capital. but in a the third. investment That is, concerns banks in such this as country those sandling the Viscose transaction do not carry enough cash on hand for such important transactions, and are obliged themselves to borrow. The Secretary then referred to the message which he had given Sir Frederick Phillips 0 the effect that he had approved the idea when Mr. Jesse Jones had told the Secretary Merican loan sufficient to management desiredan R. F. C. permit them this tofor buy out the He ritish interest in their concern. Peacock thanked the Secretary message. that the Brown and Williamson people had been seeing him some days ago and that the aid that he had received a letter from the Brown and Williamson people which indicated that Mr. Jones was willing to go ahead with the loan. The Secretary felt that this could ot be considered definitely a commitment since Mr. Jones was still to see him tomorrow 279 - 3. this point and that Mr. Jones would undoubtedly not make a final commitment without having consulted the Secretary thereon. At the Secretary's request, Sir Edward described proposed transaction in some detail, reading a few excerpts from the letter and Williamson in his pocket. He and Gifford, as well Brown the which he had as Phillips, from agreed that theproposition was not at all clear and needed considerable investigation. It was explained that the proposal was for the American management to borrow $35,000,000 from the R. F. C., of which $15,000,000 would be utilized to pay off bank loans and notes, and the balance of $20,000,000 to go to the British Treasury. The information was developed, however, that this transaction would not involve a transfer of control from the British group to the American management. The proposal seemed to be somewhat of the character of that originally discussed with respect to Viscose, the difference being that Morgan and Company would have given a loan of $50,000,000 against Viscose, whereas the present loan of $35,000,000 would be given by the R. F. C. against Brown and Williamson. Discussing Brown and Williamson, Sir Edward made the point that this company had done exceedingly well through having a splendid management which enabled it to prosper in spite of the close competition which exists in the tobacco industry. He had the feeling that at least the two top men in this organisation would drop out if control changed. At present this concern is curing some 200,000,000 pounds of tobacco. In this connection, Sir Edward raised the basic question as to whether the Secretary definitely insisted that British direct investments should actually be liquidated. That is, would the Secretary be satisfied if practically the same amount of dollar exchange could be made available to the British Treasury through a loan against the assets of the concern in question as from a liquidation thereof. Mr. Morgenthau replied that this was a very important point policy which he would necessarily have to think over, and upon which he could give no map judgment. At this point the Secretary was obliged to leave the group, with the understanding that they would continue to discuss any further points which the British desired to raise. Before leaving, he thanked the visitors warmly for coming in, and emphasized to Mesers. Peacock and Gifford that they should feel free to call on him whenever they have any questions, and that such a long period of time should not be permitted to lapse betreen visits hereafter. The following notes cover the points dealt with after the Secretary retired from the meeting. For his convenience these points are arranged under topical headings. In approaching the various categories of investments which he has to handle, Sir Edward Peacock pointed out that the Viscose had been the natural one to take first since it is comparatively simple in make-up, and there had been the pressure to dispose of something substantial within a given time. The Secretary had confirmed the circumstances, pointing out that he had not been able to go before Congress and give testimony on the appropriation phase of the Lease Lend arrangement in the absence of concrete results in the British liquidation program. The sale of Viscose had come at a very opportune moment and the publicity which had been given thereto had been exceptionally good and well handled. On this point, Sir Edward explained that he and Harold Stanl ey had actually seen the press people but that a Morgan man had been chiefly responsible for working out the publicity. Sir Edward added that the other concerns which he had chosen to work arrival on 4a sequence were the larger industrial ones. He had, however, learned since his TO that two of those from which most important returns could have been expected are sside of his control due to their status of Dutch ownership. These are Lever Brothers and Dutch-Shell. There remain a few comparatively large industrial concerns on his list. 280 SIZE LIMIT FOR TRANSACTIONS concerns are to be Sir raised the as to consider Considering the large amount of work involved in having expert accountants and engineers investigate question to whether and it properties might not which be advisable liquidated, dealing Edward with properties of a certain minimum market value. He thought that some minimum could be determined below which the work and difficulties involved would be so great as to negative the advantages of endeavoring to liquidate. He had no definite minimum limit in mind, but took the level of $500,000 as an example. He thought it would be a great relief to the concerns involved if it could be let known that there is no plan contemplated for the disposal by the British of concerns having a value below the fixed sinimum. At present, he said there was much nervousness on the part of all Britishcontrolled concerns in this country, with some of them losing business, and others losing employees, particularly skilled labor, to war industries and other establishments offering more permanent or attractive employment. CONCERNS DEPENDING ON FUNDS RAISED IN ENGLAND Sir Edward set forth the problem involved in trying to dispose of a branch or Agency in this country, such as one handling the sale of rubber, which depended entirely upon the parent concern in London raising the credit therefor. He felt that if the American concern was detached from the English parent which raised the credit, there would little liquidating value. COMPANIES WITH VALUABLE TRADE MARKS AND GOOD WILL As another category of difficult concerns to deal with, Peacock reported that there vere certain concerns which if detached from the British parents might retain their present names and compete disastrously on the world market with the British parent concorns, especially where a world organization is involved. PERSONAL REPRESENTATIVE As another category, Peacock mentioned an individual in New York with a splendid business reputation and standing who together with British Metals constitutes the American part of the parent British concern. Much of the value of this establishment consists of the American's personal standing. How could such a business be easily liquidated? SCIENTIFIC RESEARCH Sir Edward mentioned Burroughs and Welcome as an old established British concern taking high-class pharmaceutics which devotes an important part of its profits to scientifie research in the matter of developing drugs of a benefit to humanity. Would the American Government insist upon the liquidation in the United States of the American part this organization which shares in the research work of the parent concern? FAMILY CONNECTIONS Sir Edward Peacock cited one instance in which a business has been carried on by IF generations of two families, one British and the other American. The relationship between these two families has been so close over successive generations that the 281 -5children in the American family are given the names of the British family and viceversa. Is it to the advantage of anyone that such connections be interrupted? PUBLISHERS Difficulty would also be experienced in liquidating such publishing concerns as Kemillan and Company and the Oxford Press. The risk would be taken of German or other mdesirable interests buying out Macmi llan's and perhaps utilizing their newly-acquired interest for disseminating propaganda or policies inimical to Great Britain. Should rich an educational setup as the Oxford Press be required to pass from British control! INSURANCE COMPANIES Peacock admitted that he had put insurance companies at the bottom of his list since exceptional difficulties would be involved in disposing of them. There are some forty British concerns operating in the United States. It would be absolutely impossible to dispose of all of these in a comparatively short period of time, even if this were found desirable. The British have depended upon three sources of invisible income items: (1) Shipping: (2) Finance and (3) Insurance. The first two are now practically nonexistent with war conditions and the British exchange control. The third would suffer heavily If liquidation of the American affiliates of British insurance companies is carried out. Not only would Great Britain lose the income from the insurance business, but would also lose certain foreign trade and other advantages which their insurance agents are able to them. Peacock emphasized the degree to which insurance is a matter of agents, her than of parent concerns. That is, the agent attracts the business largely because his own standing and connections and the individual is not particular as to the choice the insuring firm. Peacock feels that if liquidation were forced agents of some of the British concerns might leave in a group and procure new backing with the result that skeleton would be left which had little value. If the policy of permitting loans against assets of British concerns, rather than requiring definite liquidation, is found acceptable by the Secretary, something could be more easily done with the insurance compa- kies, either through their borrowing on their individual credit, or under an omnibus scheme. Peacock thought that the first alternative of individual borrowing would be referable. COMPLICATED SETUPS As another instance of difficult cases, Peacock chose the example of the important ritish borax concern, which owns half interest in a potash company, which in turn holds arious properties in the United States. He has sent for the head man in the British company to come to the United States to help do something with this concern. There are ther instances similarly complicated. At this point Mr. White made the suggestion that It might be practicable not to make any definite statement as to what are the difficult ases, but for the British to proceed with the easier cases and solve the difficult ones their turn for liquidation arrives. AMERICAN LEGISLATION Without questioning the fairness of our American laws, Peacock pointed out that 180 prevented him in many instances from endeavoring to dispose of British concerns to the most likely purchasers, namely, the competing American concerns. If it were not 282 - our anti-trust laws some of these transactions would be comparatively simple. The RATE possibility of new ownership of some of these British controlled concerns, is, lovever, causing some communities to become worried. For instance, the Mayor of a city store a million-dollar British controlled firm is operating has written in complaining that acquisition of this plant by a competing American concern might result in the closing Lown of the plant and the loss of this industry to the community. Skilled workmen are Leaving organisations of this type in view of the risk of their being discharged under conditions that would follow liquidation. AMERICAN TRUST ARRANGEMENTS Sir Edward vas happy to report that a very generous gesture had been made by the lstor family with respect to real estate held in trust for them under American trust arrangements. That is, the four members of the Astor family who are the principal beneficiaries under such arrangements have written to their trustees in the United States affering to have their property liquidated with the understanding that the dollar proceeds go to the British Treasury and they accept sterling. Sir Edward made the point that the British have no control over such trust funds, but would be naturally delighted If the American trustees may see fit to approve. In this connection Mr. Stewart raised question and Phillips replied that the arrangement with respect to direct investments different somewhat from that through which the British Government vests title in martable securities. Further legislation required with respect to the direct investments now under consideration. PHILIPPINE RAILWAYS Sir Edward raised the question of Philippine railways. Mr. Cochran explained that representatives of White, Weld and Company had called on him again yesterday and he had inferred them a second time to the Export Import Bank, since there was no chance of the liabilisation Fund helping in the proposed transaction of the Philippine Government rising $10,000,000 on the American market to purchase from British holders a block of heir securities held on the English market. Peacock said that he would be most appredistive of anything which the American Government could do to facilitate this transaction. 3. Cochran remarked that he had taken this matter up with the Export Import Bank, follow- conversation with Mr. Gifford, and upon the initial visit of Mr. Kimber of White, eld and Company to his office. It had been ascertained that there was little liklihood the Export Import Bank helping in this case unless it could be developed that some sport or import transaction involved. Mr. Cochran reminded the British guests that 3. White was therepresentative on the Export Import Treasury was Bank Board and was Mr. kept White aformed of conversations with Mr. Gifford and the White Weld representatives. subted whether this transaction could be handled by the Export Import Bank without a roader interpretation of its authority but raised the question as to whether the R.F.C. light not do something. REPORTING SECURITY SALES In answer to Mr. Cochran's question, Mr. Gifford stated that following his converation with Mr. Cochran last Saturday he had taken up the matter with J. P. Morgan and company and it had been arranged that the latter get in touch with the Federal Reserve t of New York and give the latter such information with respect to sales of British ested American securities as the Federal might require. Mr. Gifford assured 283 - Cochran that this did not embarrass him in any way. At 4 o'clock this afternoon H. Cochran gave this message to Mr. Knoke with the observation that both Mr. Gifford and Norgan and Company apparently were anxious to meet our requirements, now that any misunderstandings have been cleared up. CONCLUSION It was agreed that Mr. Cochran should prepare this memorandum for the Secretary's Immediate information and for possible use in connection with his conversation tomorrow with Mr. Jesse Jones, since the British look to the latter to explain to the Secretary the present status of negotiations with Brown and Williamson. The British, in turn, agreed to prepare a detailed memorandum upon the problems which they expounded to the treasury group today, submitting concrete examples of the problems involved. It was folt that the meeting had been quite helpful in covering considerable ground. The british officials.were appreciative of the opportunity for an exchange of views. I 284 April 9, 1941 3:23 p.m. H.M.Jr: Gifford and Phillips and they don't know an awful lot and I told them that I was going to hear from you tomorrow, and they said as soon as I heard from you, they'd like very much to hear from me. Secretary Jones: I see. H.M.Jr: The main thing though was that they told me - I asked them point-blank had they put any pressure on Brown and Williamson and J: H.M.Jr: they said absolutely not, and this story that they told them that they had to close last Friday just wasn't 80 and that they had not put any particular pressure on them. They had a letter from their lawyer, Colonel Hartfield intimating that - saying that they could borrow $35 million from you. Yeah. I haven't agreed with them on any figures but I've discussed it. They were talking about a substantially higher figure. I see. Now what they were going to do was to see what - they may start to make inquiries what they think the company is worth if they sold it outright. J: H.M.Jr: J: Yeah. But I'll wait until I hear from you. All right. Now, are you going to be in Friday? H.M.Jr: I'll be here Friday forenoon. J: Well, now tomorrow being Cabinet day I might not be ready. H.M.Jr: Well, do you want to set a time for Friday J: Yes, I'd like to. forenoon now? 285 -2H.M.Jr: Because I get booked up fairly solid. I don't know, I haven't talked to my wife, but I thought maybe Good Friday as a good Jew I ought to go away. J: O.K. I think it's all right. H.M.Jr: I mean Friday afternoon. J: That's all right. H.M.Jr: How about 10:45? J: That'11 be all right for me. H.M.Jr: Jesse Jones, 10:45. Thank you. J: O.K. 286 April 9, 1941 4:00 p.m. H.M.Jr: Hello. Operator: Major Smith. Major Smith: Yes, Mr. Secretary. How are you? H.M.Jr: S: H.M.Jr: S: H.M.Jr: Fine. Major, I wonder if the War Department couldn't give me a little quicker service in that these cables for instance that leave London the 4th, dated the 5th in Washington, I receive them this morning the 9th. Why, yes, Mr. Secretary. I didn't know there was that much delay on them. I haven't been opening them lately. I have this one before me in regard to gasoline. It says London, filed the 4th, received at the War Department 11:40 the 5th, and I got it at 10:44 on the 9th. Yes, indeed, Mr. Secretary. That's about the way all of them have been running; that's a little worse though than some. I tell you, I've got cables here received at the War Department on the 7th, I got those today, and if you don't mind my saying it, that's one day longer than necessary. S: No, we can hurry them over. I think part of that may be if the messenger goes over there and doesn't find - happens to get there when the Aide is not in, why he doesn't leave them; he brings them back. It may be that sometimes our messengers hold them up a day longer too. H.M.Jr: Would you check up because in these times when things are moving 80 fast, the cables that you got in in the morning, if I could have them the same day I'd appreciate it. S: Yes, Mr. Secretary. We can fix that. H.M.Jr: Thank you very much. S: You're quite welcome, sir. 4/9/41 TO: - the Secretary President has called a conferen a tomorrow 1100 to 1145 for am, Present are to be: Seety. of state "" Treasury Was " " Harry Naplkins From: LIEUT. STEPHENS n 288 TREASURY DEPARTMENT Washington FOR IMMEDIATE RELEASE, Wednesday, April 9, 1941. Press Service No. 24-51 William F. Green, president of the American Federation of Labor, this afternoon promised Secretary Morgenthau that his organization would put its whole-hearted support behind the sale of Defense Savings Bonds and Stamps. The new bonds and stamps will be ready for distribution and sale on May 1, Mr. Green said that he intended to issue an endorsement of the Defense Savings program to all the A. F. of L. unions, and through them to their 4,000,000 members. In addition, he offered to distribute pamphlets, posters and other information to all A. F. of L. members, and to include news of the Defense Savings program in A. F. of L. publications. Mr. Green told the Secretary that he considered the financing of the defense program a "noble cause" which would appeal to the workingmen of America. "Nothing could be finer for national psychology at this time," Mr. Green said to the Secretary. He added that he was sure the A. F. of L. unions would wish to buy Savings Bonds with their union funds and would also enoourage their members to buy as individuals, Secretary Morgenthau assured Mr. Green that none of the pressures exerted by employers on employees during the 1917-1918 Liberty Loan sales would be used in the present Defense Savings effort. The buying of Defense Bonds and Stamps, he said, must be entirely voluntary. At the end of their fifteen-minute talk, Mr. Morgenthau said that he thought Mr. Green's offer was highly encouraging for the success of the Defense Savings program. 289 -2Today's meeting was the first time that Mr. Green had ever visited any Secretary of the Treasury. -00o- 290 APR 9 1941 My dear Mr. Secretary: In the sale of Defense Bonds and Stamps to finance the National Defense Program, the support of the farm population is urgently needed. - our campaign begine May 1, and it would help greatly if on that day you would personally broadeast a message to the farmers. We would like to have you speak from Washingtea on the National Farm and Home Hour (Thursday, May 1) for eight or ten minutes. Our staff will gladly suggest the material to be used in the talk. will you please let me know whether you could conveniently make this talk for us? Sincerely, (Signed) H. Morgenthau, Jr. Secretary of the Treasury. The Honorable, The Secretary of Agriculture. HNG/mff CC to Mr. Thompson My 2.kc Dispatched from Mr. Graves' office 291 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 9. 1941 Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns £81,000 £ 6,000 Open market sterling was first quoted at 4.03-1/2. During the afternoon, it moved to 4.03-1/4, and closed at that level. Transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns £ 3,000 -0- There was an improvement in the Cuban peso to 4-7/8% discount, as compared with 5-1/8% yesterday. In New York, the closing rates for the foreign currencies listed below were follows: Canadian dollar Swiss franc (commercial) Swedish krons Reichsmark Lira Argentine peso (free) Brazilian milreis (free) Mexican peso 12-7/8% discount .2322 .2384 .4005 .0505 .2325 .0505 .2066 In Shanghai, the yuan in terms of our currency was quoted at 5-5/16 off 1/32#. Sterling advanced 1-1/2$ to 3.94-1/2. There were no gold transactions consummated by us today. The State Department forwarded a cable to us stating that the Chase Bank, Bongkong, shipped $1,518,000 in gold from Hongicong to the Chase National Bank, Bank of valued at was us and we that the consignee is to the was shipped for account Central San Francisco. We China. have A been similar informed shipment, that gold $628,000. reported of by the Reserve sold to the San Francisco as Federal on March 24, Bank have of New since York. Instead of being be changed to Mint, the willlearned be melted and refined by the Mint, in originally accordance reported, the latter gold the with arrangements made, and New York Assay Office will deliver an quivalent amount of gold to the Federal Reserve Bank of New York, to be earmarked for be account of the Central Bank of China. It is likely that the shipment of $1,518,000 will handled in similar fashion on its arrival in San Francisco. 292 -2- To were informed that the Bombay gold price for April 5 was equivalent to $34.68, representing a decline of 63# from the quotation of March 29. Silver was from it is to note equivalent to 44.41 on April 5. off 7/16 According to a cable received from Boabay, the decline in the silver quotation was due primarily to sales imports America, In this connection, interesting that against the Bureau of Foreign and Domestic Commerce reported on April 8 that four shipments of refined silver bullion, containing a total of 1,572,000 ounces, had been made from New York to Bombay. In London, a price of 23-1/2d was again fixed for spot silver. The forward motation was 23-7/16a, off 1/16d. The U.S. equivalents were 42.67 and 42.56 respectively. Handy and Harman's settlement price for foreign silver was unchanged at 34-3/40. The Treasury's purchase price for foreign silver was also unchanged at 35$. Te made one purchase of silver amounting to 150,000 ounces under the Silver Purchase Act. This consisted of new production from foreign countries, for forward delivery. M unif CONFIDENTIAL Treasury Department 293 Division of Monetary Research Date To: April 10, 41 19 Secretary Morgenthau The appended memorandum was prepared mainly to straighten out our own records of Belgian gold holdings. Perhaps its most puzz- ling conclusion is this: The $260 million of gold which the Belgians are claiming from French earmarkings in this country is more than they are known to have transferred to the French and, added to the amounts they have in the United States and in the custody of the British, would bring their total gold holdings to about $775 million. This is about $25 million more than they are known to have had all together. HDW MR. WHITE Branch 2058 - 210 294 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 9, 1941. TO Mr. White FROM Mr. Felsenthal Subject: Belgian Gold Holdings I. Belgian gold holdings as reported by various sources total between $700 million and $751 million. An unknown portion of Belgian gold deposited with the French Government at Dakar, French West Africa, has been turned over to the Germans. The total of $700 million to $751 million does not take transfers from Dakar to the Germans into account. The distribution of the gold holdings as reported by three different sources is given in the following table. Allowance must be made for discrepancies in this table because of slight differences in the points of time for which the data have been taken. Federal Reserve Bank British National Bank of 1 Embassy Belgium (In millions of dollars) Gold held in U.S. (earmark) 167 Gold held in England Gold held in Dakar Total 168 348 184 734 700 734 Special Fund of the Belgian Treasury Total 17 751 734 Belgian gold claims against France according to our information amount to roughly $223 million at present. This would be $37 million less than reported Belgian gold claims against France. It was reported in the New York Times article of February 6 that the exiled Belgian Government has put its gold claims against France at $260 million. According to the New York Times story from London under a March 22, 1941, date line, the Belgian claims against France were about $233 million. This figure would come closer to our estimates. The "gold-exchange rate" of 1 belga = $0.1695 is used for all figures given in belgas. This exchange rate was the official conversion rate between April 1936 and December 1939. Cable transfer quotations in New York were somewhat lower (1 belga - $0.1674) on the latest available date, May 1940. Source: Federal Reserve Bulletin, September 1940 and March 1941. . 295 -2- II. Information on Belgian Gold Holdings 1. Summary of weekly statement of National Bank of Belgium of June 25, 1940 (reprinted in Honatsbericht, Schweizerische Nationalbank No. 12, Dec. 15, 1940, p.44). Gold, foreign exchange and gold-values (or, devises etrangeres et valeursor). In million belgas In million dollars 4,423 750 The same statement is reprinted in the Monthly Bulletin of Statistics of the League of Nations, Vol. XXI, No. 9, Sept. 1940, p. 330. 2. Federal Reserve Bulletin, Jan. 1941. Since June 1940 Gold and foreign exchange (In millions of dollars) 734 Treasury gold fund 17 (total) 751 3. Weekly report of the Federal Reserve Bank of New York, Jan. 29, 1941. Belgian gold under earmark $166.8 million . 4. Memorandum of Mr. Pinsent of the British Embassy to Mr. Cochran, Nov. 25, 1940 (U. K. Gold files). Million b Gold in custody of 87 348 Eamarked in the U.S.A. 42 168 At Dakar 46 184 175 700 Bank of England (total) 5. Millions of dollars Various other sources, particularly cables and consular reports, contained the following information on Belgian gold: (a) Nov. 2, 1940. Financial Counselor of the British Embassy reports that the Belgian Minister of Finance has told British officials that the Belgian gold holdings at Dakar amount to $184 million. 1 Exchange rate: B 1 - 34 1 296 -3- (b) Nov. 6, 1940. The American Consul at Daker cabled that 1,500 kilos of gold were shipped by air from Dakar to Marseilles (approximately $1.848 million). Whether this gold was a part of the Belgian or other gold holdings is not stated. (c) Nov. 24, 1940. The American Consul at Dakar reports that 4,994 cases of gold belonging to the Belgian Central Bank were removed from Dakar. (d) Nov. 25, 1940. The American Embassy at Vichy, France, cabled the content of an interview with Rueff in which he mentioned that the Germans have demanded surrender of the Belgian gold now at Dakar. (e) Dec. 28, 1940. The American Embassy at Vichy, France, cabled that the French authorities gave consent to turn over to the Germans the Belgian gold holdings at Dakar provided the transaction was approved by the National Bank of Belgium, which has however refused consent. The French then agreed to deliver the Belgian gold at Dakar to the Germans without the approval of the Bank of Belgium. In the same cable the former counselor of the Belgian Embassy at Paris is reported to have stated that the Belgian gold at Daker represent- ing the total gold stock at Brussels at the time of invasion amounted to about 7 billion Belgian francs ($237 million). (f) Jan. 2, 1941. American Embassy at Vichy, France, cable. Couve de Murville, head of the foreign financial services of the French Treasury stated that the Belgian gold formerly at Dakar and now being turned over to Germany had a total value of about 8 billion French francs ($189 million). (g) Jan. 28, 1941. American Embassy at Vichy, France, cable. Belgian gold worth 8 billion French francs ($189 million) was shipped to Dakar in the Spring of 1940. Most of it is still in North Africa. The French have deliberately slowed down deliveries to Germany. 297 4- (h) Jan. 31, 1941. American Embassy at Vichy, France, cable. A French commercial pilot stated that he had flown part of the Belgian gold to France, from Oran to Marseilles. The Germans have received 150 million French francs (approximately $3 million). III. The Federal Reserve Board's figures on the Belgian gold holdings are based on the report of Governor Janssen of the National Bank of Belgium in the half-yearly balance sheet of the Bank, issued June 25, 1940, summarized in the B. I. S. Press Review of September 9, 1940. The B. I. S. review is based on a Frankfurter Zeitung article of September 6, 1940. In the report, Governor Janssen gives the following figure: Million Belgian gold held abroad Million Belgian francs Dollars 24,350 734 If the gold held in the Special Treasury Fund of $17 million which Governor Janssen does.nnot mention, is added to the $734 million, the total would be in accord with the previously given figures. Whether or not the Treasury fund can be added, cannot be determined at this time because of lack of information. Between May 8th (the date of the prior statement of the Bank) and June 25, gold worth 1,487 million Belgian francs had been given to the Bank of France for the exchange of Belgian against French bank-notes, presumably brought in by Belgian refugees in France. B F 452 million worth of gold may return to Belgium since the Belgian bank-notes not yet handed over to the Belgian National Bank on June 25th were being used by the Bank of France for re-exchange against French bank-notes. A further item entitled "gold reserves at the Bank of France", amounting to B F 558 million still belonged to the Belgian National Bank. It was intended for the purpose of covering the exchange of Belgian against French bank-notes and any advances which the French Treasury may want to extend to the Belgian Treasury. In summary, the Bank of France still holds B F 558 million unutilized Belgian gold. The Belgian coins and notes redeemed by the Bank of France but not yet returned to the National Bank of Belgium amount to B F 452 million. They too may at least partly be claimed by the National Bank. By adding the Dakar holdings to these claims against the Bank of France, the total Belgian claims against France amount to $223 million, according to our computations. 298 - IV. The latest statistical reports of the Institute International du Commerce of Brussels (January 20, 1941, p. 437) brings the figures on Belgian gold up to date. The gold holdings (encaisse or) of the Banque Nationale de Belgique of January 30, 1941, were belga 4,674 million ( = $792 million). No information has been received which would explain the increment. It is suspected that the Banque Nationale has taken account of the actual devaluation of the belga since the German invasion of Belgium in terms of gold. Such a procedure would increase the belga- value of the gold-holdings. An actual addition to the gold-holdings of the Banque Nationale is very unlikely. 299 Treasury Department Division of Monetary Research Date April 10, 1941 To: Secretary Morgenthau From: Mr. White 19 The British Budget The new British budget has several interesting features: 1. Two million new income taxpayers are reached by the reduction in the personal allowance from $680 to $560 for married persons and from $400 to $320 for single, and by the reduction in the earned income allow- ance from a sixth to a tenth. 2. "Forced saving# is introduced by allowing a post-war credit of up to $260 on the above increases in the income tax and of 20 percent in excess profit tax net payments. 3. The rate on the first $660 of taxable income is increased from 25 to 32-1/2 percent, and the socalled "standard" income tax rate is increased from 42 2 to 50 percent. 4. Total expenditures are estimated at $16.8 billion, or about 50 percent of the national income, but do not include payment to us or Lend-Lease advances. Over 80 percent of expenditures will be for war purposes. About 58 percent of expenditures will be borrowed. 5. Government subsidies for stabilising prices are to be extended from food to fuel, shipping and railroad charges. 6. The monetary front is still quite sound and the gross or average cost of borrowing is 2-1/2 percent and the Chancellor said "we have no intention of borrowing on worse terms". HOW 300 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 9, 1941 TO Mr. White FROM Mr. Adler Subject: The British Budget 1941-2 1. British Budgets 1940-42 (In millions of dollars at $4 - 1) 1940-41 (Actual) Revenue Expenditure Deficit 5,636 15,468 9,832 1941-42 (Estimated) 7,144 16,828 9,684 Percentage Increase 1941-2 on 1940-41 + 26.8 + 8.8 - 1.5 2. The expenditures for 1941-2 are not strictly comparable with those of 1940-41, as they do not include either the value of products becoming available under Lend-Lease or payments to the United States under existing orders. With these two items the Chancellor indicated that total expenditures would far exceed $20 billion. (From April 1940 to March 31, 1941, the B.P.C. will have spent here over $1.8 billion.) Even without these items they will absorb about 50 percent of the national income. 3. Of the budgeted expenditures of $16,828 million, $14 billion, or 83.2 percent, were for strictly war purposes, $1,740 million, or 10.3 percent for civil purposes, and $1,088 million, or 6.5 percent, for interest and management of debt. The actual domestic expenditure is estimated at $14.8 billion, which would leave about $12 billion of the total $14 billion of war expenditures to be spent in the United Kingdom itself. The Chancellor rightly indicated that it is the figure of $14.8 billion of domestic expenditures which is relevant in considering the "inflationary gap". In the first year total domestic expenditures were $8.22 billion, and in the first half of the second year of war at the annual rate of $12.76 million. 301 -2- Division of Monetary Research 4. The only major tax changes are in the income tax. (a) The standard rate is increased from 42-1/2 percent to 50 percent, and the rate on the first $660 of taxable income from 25 percent to 32-1/2 percent. (b) Relief for earned income is reduced from one-sixth, with a maximum allowance of $1000 to one-tenth, with a maximum allowance of $600. (c) The personal allowance is reduced from $680 to $560 for married persons and from $400 to $320 for single, and the exemption limit is reduced from $480 to $440. The changes in (b) and (c) bring in 2 million new taxpayers, and all three changes will produce about $400 million this year and $500 million in a full year. Income tax will yield about $3 billion. 5. The increases in taxation under 4(b) and (c) up to a maximum of 260 are to be treated as a credit to be available to the taxpayers after the War. In this way the Keynesian proposal for "forced saving" is being introduced, though on a lower scale than Keynes recommended and by a different method. A 20 percent post-war credit on excess profits tax net payments is also allowed (without a maximum limit). Thus a substantial amount of current income tax receipts represents in fact additional borrowing. 6. As in previous war budgets the estimated expenditures and deficit will probably turn out to be too low, if the war continues. 7. Gross savings yielded $5.34 billion in 1940-41 and net savings about $4-1/2 billion. The weekly average of gross savings has increased about 50 percent since the beginning of the savings campaign in November 1939. The rate of saving is now running at about $6.4 billion per annum and is expected to run at about $7-1/2 billion for the whole fiscal year. The Chancellor optimistically hopes that the forced saving devices he is using may actually increase voluntary saving. 8. The Chancellor claimed that the monetary front is still quite sound and there is no immediate threat of inflation. 302 -3 - Division of Monetary Research (a) Rates of interest are low and much smaller than in the last war. (In 1916 Treasury Bill rates reached 6 percent -- now they are 1-1/8 percent lower.) The gross or average cost of borrowing is now 2-1/2 percent, "and we have no intention of borrowing on worse terms." (b) The Government is controlling prices and raw materials concentrating production, and also using taxation and "forced saving" to curtail civilian consumption. (c) The Government is spending $400 million a year to stabilize food prices and will spend more this year to stabilize fuel and shipping prices and probably railroad charges. The aim is to keep the cost of living index down to the present level of 25 to 30 percent above pre-war. (d) If estimated revenue yields are realized and expenditures not exceeded and savings amount to the optimistic estimate of $7-1/2 billion, the inflationary gap between revenue and domestic expenditure will have been eliminated. (Source: Cable No. 1374, London, April 7.) Mille REPORT No. 24 303 give to TIFE OF AIRCRAFT DATE: Wednesday April 9, 1941 KEEKLY REPORT OF ACCEPTED AIRCRAFT COMPILED FROM TELEGRAMS RECEIVED FROM L.L.D. INSPECTORS' REPORT ON PRODUCTION PROGRESS AT 4 P.M. EVERY TURSDAY CONTRACT NUMBER DELIVERIES NUMBERED CUMULATIVE ORDERED CONTRACTUAL kakas IPPROXIMATE FOR WEEK STATUS TOTAL DELIV DUE 4-218 170 Breaster "Buffalo" A-71 170 2 1/2 months 58 170 127 8 Ball "Airsoobre" behind 3 Allison 3 enginee on hand, Deliveries of aircraft directly governed by further engine deliveries, Firm could deliver at 3/day, were enginee available, bet anticipated engine deliveries 3 months Anticipate 18 deliveries during April, Balance of a/o deliveries dependent upon receipt of behind A-642 147 450 - Browster *Berauda 340 A-64 960 680 631 - Curtise-Fright A-1835 560 12 Grumman A-1548 100 13 4-224 400 "Kilty Bank 9 Protety U.S. New folding wing design to Or shortly, our production to follow, Possible 5 in April 1/2 months - 24 148 150 150 3 F-272 50 24 Boeing #B-17-C* A-5077 20 20 Boeing *314 4-967 3 "Cheesepeake V 156* 1 1 2 26 12 40 & 59 12 3 8 A-37 Second Flying Boat should be delivered is Yas, third in June. 2 months Firs production position on this craft should permit delivery in advance of contractual. ahead delivery schedule. 1 month Same as above ahead "Catalina 18 3 weeks 3 AUS-58 4 Anticipated 1/mouth deliveries for next several months should be maintained. behind "Catalina" 7-677 139 F-294 100 20 1 month behind 4 20 3 F-677 "Laberator I° Consolidated 2 Weeks 3 P-210 Anticipate 2 to 3 deliveries weekly. behind "Catalina" Consolidated Anticipate 2 deliveries next week to complete. 3 complete with self-sealing tanks delivered, and 17 balance should be ready for delivery in April Dying Boat" Consolidated 1 1/2 months 20 . Consolidated Lack of extrusions, eastings, and forgings likely to cause serious delay of production A/O. Production aircraft deliveries articipated 12 in July, One each prototype expected April and May 2 months behind 3 F-229 Consolidated behind behind Maryland 167 United Aircraft First 680 now complete, with U.S. Arey requirements taking April production. Mequate provisioning of embodiment loan goviment will permit respection of deliveries with 6/day rate in May, enclosering release, and lack of adeptable personnel, Anticipate no deliveries before June. 9 of 10 fixed wing a/o accepted to date, one fixed ving craft undergoing performance tests. "Baltimore 187 Martin (Glenn) 2 Weeks - Martin (Glenn) Subcontract tool program 90% let, but whole progres delayed considerably due Moda., late 1 month behind - Curtise-Wright Martlet II* 3 months behind ahead "Tomabank" engines, Balance of 16 should be delivered in April and May. 9 in final assembly and will follow first 20 LB-308 diverted from U.S. - "Liberator II* Douglas 100 97 See - reparks "Havoo II* 300 14 A-1749 409 213 A-68 348 157 8 A-87 8 Douglas "Beaton III* Lookhead 160 23 *Rateon y Lockheed 71* "Hutson III* Lockheed 600 A-242 "Lightning" a A-1451 9 9 1 Lookheed 125 6 Marrard II* 1 1/2 months First 71 not long range should complete this month. Hudson T current and long range Budson III 320 will follow regular in July, Antisipate prototype to fly shortly with production deliveries to begin May dependent on receipt of materials, entodiment loan equipment, and purchased parts. U.S. Army program for R-38 N/C RAY seriously affect Lichtaine deliveries. 2 Weeks One delivery next week should complete contract. 1/2 months - A-250 19hof this month. behind ahead - North American Rapid acceleration toward 4/day putput foressen. Long Range deliveries should begin about 1 month 8 A-457 2 months behind behind "Lodestar" North American Rapid acceleration anticipated toward 3/day production. 4 1/2 months 133 667 1 month behind behind 55+ Contract complete except for serial numbers AN 431 and AH 463 which are held for test; should be released in April, 34 behind "Mustang" CUMULATIVE CONTRACTUAL DELIVERIES FOR TEXAS TOTAL DUE Harvard II deliveries will continue against this contract with approxciately 16-20 a work, and should complete in May contract E-704 will follow along is June After CAN 15 following 197 complete Production demand now raised to permit delivery as airfrence due to non-delivery of Allison , 3R Incines. AirCome to be stored partiar receipt of encloses. 16 Airfrence without engines. Enginee installed in 6 previously reported airfrence. Complete Airplanes. DELIV One reported in New York. Date of official 1955 1367 71 C.W. BW Birector of Airfress Production 304 ONFIDENTIAL (To Keep You Posted) April 9, 1941 To: The Secretary From: Mr. Young Re: British Aircraft Shipments Attached herewith is the latest statement of aircraft shipped to the United Kingdom and other points. This statement shows the number of planes which have been received at the assembly points during the past week P.Y. 305 STATEMENT NO. 9 AIRCRAFT SHIPPED TO U. K. & OVERSEAS COMMANDS By Sea DESTINATION TYPE CURTISS Tomahawk CONSOLIDATED Catalina GLENN MARTIN Maryland I Middle East ASSEMBLY POINT during week ending March 15/41 Alexandria 10 Takoradi 63 U. K. U. K. Middle East Alexandria 6 Takoradi 9 Lockheed Hudson III U.K. Hudson V U.K. By Air during week ending April 5/41 7 U.K. 4 (via Gander) TOTAL British Air Commission April 8, 1941 U.K. 2 90 11 306 CONFIDENTIAL (To Keep You Posted) April 9, 1941 To: The Secretary From: Mr. Young Re: British Aircraft Shipments Attached herewith is the latest statement of aircraft shipped to the United Kingdom and other points. This statement shows the number of planes which have been received at the assembly points during the past week. . Dy. 307 STATEMENT NO. 9 AIRCRAFT SHIPPED TO U. K. & OVERSEAS COMMANDS By Sea TYPE DESTINATION ASSEMBLY POINT Middle East Alexandria during week ending March 15/41 By Air during week ending April 5/41 urtiss Tomahawk Takoradi 10 63 encolidated U.K. Catalina U.K. 7 lenn Martin Maryland I Middle East Alexandria Takoradi 6 9 ockheed ludson III U.K. Hudson V U.K. TOTAL ritish Air Commission pril 8, 1941 U.K. 4 (via Gander) U.K. 2 90 11 RECEIVE APR 9 1941 Treasury Department Office of Philip Young 308 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 9, 1941 TO FROM Secretary Morgenthau Mr. White Subject: German Exploitation of Denmark There is transmitted herewith a memorandum on German Exploitation of Denmark, prepared by Mr. E.H. Clark of this Division. Germany's record in Denmark is of peculiar interest because of the Nazi claim that, if the nations of Europe will only submit to German "leadership" without armed resistance, they will all enjoy the blessings of the "new order". Denmark submitted, with the following results: 1. Germany has paid for her net imports of Danish goods and for the expenses of her army of occupation by giving the Danes Reichsmark credits which the Danes are unable to use. These credits amounted, on March 1, 1941-- after approximately eleven months of German occupation-to roughly 1,100, 000, 000 kroner ($210,000,000). These cre- dits are, in effect, forced long-term loans which amount to nearly twice the kroner total of the ordinary national budget and to approximately one quarter of the whole national income of the country. 2. In 1940, Germany bought, over and above her 1939 imports, approximately 175 million pounds of butter, 600,000 live pigs, 12 million head of cattle, 200 million pounds of bacon and ham, and 10 million chickens. In addition, she requisitioned 700 locomotives, 9,000 freight and cattle cars, 33,000 trucks, the patrol and torpedo boats of the Danish navy and the important Danish shipyards. Further, Germany obtained control of the 375,000 tons of Danish merchant shipping still in Danish hands. 3. Since the invasion, taxes have been increased, but the budget surplus of the fiscal year 1940 1s being conver- ted into a large deficit for 1941. Industrial production 1s down 15 to 20 percent. Agriculture has been permanently 309 -2- Division of Monetary Research injured by the destruction of the livestock and poultry capital of the country. Unemployment is high and may reach a record in 1941. Bank notes and deposits have expanded rapidly. Many goods, and especially fuels, are scarce. The cost of living index has risen 22 per- cent. 4. German interference with the daily life of the people has been less harsh and obvious in Denmark than in Norway or the Netherlands. Formally, Danish civil administration goes on as before. However, the reality of the Nazi control of the whole life of the country is apparent to the Danish population, and they are not reconciled to the indefinite continuance of Nazi rule. 310 C 0 P DEPARTMENT OF STATE Y WASHINGTON Is reply refer to is 840. 51 Frozen Credits/1556 April 9, 1941 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and encloses two copies of a paraphrase of telegram no. 131 dated April 7, 1941 from the American Embassy at Chungicing, regarding French funds which are frozen in the United States. Enclosure: No. 131, April 7, from Chungking. (2) 311 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Chungking. DATE: April 7, 1941, noon. NO. : 131. During a visit on April 5th the Counselor of the French Embassy stressed the delicate situation facing the French administration in the French Settlements at Shanghai and Tientain and the French diplomatic and consular service because the French are unable to secure funds which up to this time had come through Indochina and which are now held up or stopped by the freesing of French funds by the United States. In my opinion the situation is one which is deserving of special consideration on our part, and I hope that we will do whatever we can to facilitate French peaceful control by promptly remitting the required funds. This telegram has been sent to the Department and repeated to Shanghai and Peiping. JOHNSON EA:MSG LG Copy:b 312 eht COPY PARAPHRASE OF TELEGRAN RECEIVED FROM: American Embassy, (Paris) Vichy DATE: April 9. 1941, 1 p.m. NO.: 417 Reference is made to telegram of March 29, 6 p.m., no. 277 from the Department. On the fifteenth of March instructions were issued to banks by the Foreign Exchange Office directing the banks to submit to it lists giving the balances maintained with them by physical and moral persons "French" of their holdings in "8" foreign currencies and sterling, as of April 30, 1940 and February 28, 1941. Physical and moral persons "French" are described as French and foreign residents of France, French companies, and foreign companies in so far as concerns the branches or offices maintained in France by the foreign companies. An arrete of April 30, 1940 gave the definition for "a" foreign currencies (see May telegram and despatch to the Department). These currencies included the currencies of the British Empire - except Canada, Hong Kong and Newfoundland - Egypt, Iraq, and Anglo-Egyptian Sudan: belgas, Luxemburg francs, Dutch florins, Dutch East Indies florins, Canadian dellars, Swiss francs, America dollars, Argentine pesos, Portuguese escudos. It is stated in the instruction of the Foreign Exchange Office that these data are necessary for administering the recent law concerning settling debts which are payable in foreign currencies. This statement is corroborated by a high official in the Finance Ministry, who asserts emphatically that the Germans were not responsible for the issuance of the instruction. BY Usually the Foreign Exchange Office gives banks in the unoccupied territory permission to transfer to the United States the dollar balances belonging to American citizens who have given up their residence in this country. END MESSAGE. LEAHY. EA:LWW 313 BRITISH EMBASSY, WASHINGTON, D.C. April 9th, 1941. PERSONAL AND SECRET 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, Halifex The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. 314 TELEORAM FION LONDON DATED AFRIL 7TH, 1941. HAVEL. Greek 7,000 ton ship in convoy attacked by aircraft 170 miles northwest of Bloody Foreland A.M. April 6th. Believed hit by torpedoes still aflat and considered salvageable. 2. on April 0th air attacks on shipping east coast continued. One big ship damaged, one small sunk by bomb. Piraous air raided night of April 6th/ April 7th. Three ships hit, several burnt out, one ship blowing up along side caused many fires ashore and on ships. Forth had sailed earlier. Calcutta and Ajax reported safe sailed magnificently through thick smoke and over mines. 3. Three escorted French serchant vessels all with troops and one other ship passed Gibraltar west= bound P.M. April 6th. At 7.30 A.M. April 6th, three Gersan des4. troyers attacked by coastal aircraft off Cherbourg. One hit foreward with bomb not seen to e xplode. At 12.30 Beaufort torpedoed one destroyer accompanying shipe; heavy anti-aireraft fire prevented waiting to see results. Brest at 2.00 p.m. April 6th. One battle 5. cruiser Oneisenau was undocked and lying Rade d'Abri. At 6.30 P.M. ship believed to be tanker close alongside her. c. MILITARY. At 6.00 P.M. April 6th enemy positions reliably reported as follows: XL Aray Corps advanting on Skopljey second armoured division from PETRIC advancing westward in the direction of STIP. Opposition in this sector reported alight. Sixth mountain division east of Lake Doiran and believed saving southward. This division being not by determined/ 315 -2- determined counter attacks. Fifth mountain division with one infantry effectively blocked in Rupel Pass in spite of heavy German divo bombing attacks. Enemy thought to have suffered c onsiderable casualties here. No reference to any enemy movements in N. Yugoslavia. 7. LIBYA. On April 6th enemy force of one lorry borne battalion with light artillery attacked NECHILI but was repulsed. Later six enemy tanks reported shelling MECHILI and enemy column of more than 150 lorries with its head ten miles east of ZT. MSUS reported. 5 p.m. Position obscure. ERITREA. Same day British officer met Italian Admiral in Massawa who r efused terms for 8. surrender. Operations against town continued at 1 P.M. on April 6th. 9. ROYAL AIR FORCE. April 6th. Shipping off the Dutch Coast and Steel Works in Holland success- fully attacked. During offensive patrols by fighters over northern France aerodrome and military objectives machine gunned; one ME 110 probably destroyed and one ME 109 damaged. 10. Night of April 6th/April 7th. 114 aircraft sent out of which 71 were for Brest, weather unfavourable. Other targets included a erodrones and Calais harbour. One aircraft missing. LIBYA. On April 4th/April 5th six heavy 11. bombers attacked Tripoli harbour and hit power station. 12. GERMAN AIR FORCE. Night of April 6th/April 7th 51 enemy aircraft (40 mine laying) plotted. 13. Two eneay aircraft damaged by fighters during the day and one at night. 316 RESTRICTED G-2/2657-220 M.I.D., W.D., April 9, 1941 No. 361 12:00 M. SITUATION REPORT I. Western Theater of War. Air: German. Strong attacks were made over England last night, with the main concentration directed against Coventry. British. Last night the R.A.F. repeated its heavy attack on Kiel. Emden, Bremerhaven and Rotterdam were also raided. II. Balkan Theater of War. Ground: German forces entered Salonika at 4:00 A.M., April 9th. The German High Command announces that all Greek forces east of the Vardar have capitulated. German troops have captured Skopule and thus severed communications between Greece and Yugo- slavia. Another German column has captured Nish and is now threatening Belgrade from the south. A junction between the German Army and the Italian forces in Albania should shortly be attained. German troops are invading Yugoslavia from south- ern Austria. The city of Maribor (Marburg), in Slovenia, has been captured. Albania. Apparently only local activity involving Italian, Greek and Yugoslav forces. Air: German close support and strategic bombing continued in Yugoslavia. Apparently only close support in Macedonia. III. Mediterranean and African Theaters of War. Ground: Libya. Axis forces are pushing on toward Tobruk, former Italian naval base 77 miles southeast of Derna. Eritrea. Massaua, important Italian Red Sea port, has been captured by British forces. 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 317 Paraphones of Code Callegreen Received at the New Department at 7:48, April 9, 1942 London, filed April 9. 1941. 1. atr activity - the Continent s Day Light April s. British air activity was limited to booking attacks - traffic off the Betheriande and military objectives in Danish Netherianda and compied French parte. Destruc- time included a - at a Harregian airfield. Right of April 7.6. Beeking attacks were made on airfields in compled France and on the Channel Coast, Heavy soate booking of the dedgards at Keil, Endon and remited in very serious destruction, The hundred beature took part in the said - Keil and 36 elembare over German parts. 2. activity - Britain s Might of April so Information is looking as to the destruction a in small raids in the viainity of Dristal. Heavy Contain booking attacks were nade over the Midlands especially over Coventry. Daylight April s. German air activity was limited to attacks - seaborne traffic on the east coast and accuting patrols ever the east and southeast coast of Regiant. Information is looking as to resultant damage. Right of April 7.6. Clanger and Chydeside was the targete for healty Certion booking. A large fire was reported in - shipped Short's Airplane Fastary at Reshester suffered light damage in suide CONFIDENTIAL CONFIDENTIAL 318 which also included Belfast and Thomashaven. 011 storage facilities were not fire in the latter visinity. In all 395 German bombose was employed over Britain, so Me I British s Right of April 78. Five planes failed to return after mide over General. 4 - Right of April as. Night pursuit formations I for five Common please destroyed and one damaged. s Dayfight Agess a. - - plan destroyed. 4. ate nativitie in mada Test s DayLight April 7. 2) (Greene) Large - nuter - and pater bested in the visinity of Stamitas. 2) (Italian East Africa) Structures and facilities at Dessie were set fire in British booking attacks. s Right of April 6-7. 2) (Greece) Bailroad committees and facilities as Sette, the railmy bridge over the River Strum north of Petrich, railway facilities at Germa-Djways and General vehicle conveys in these - - boubed in large some valid w British airwart. so Anda atr artistic in made East the s Day Light April % 2) (Segnalavia) - 100-Clying attack business supported ground wage and beaked Depender - - airtress of Happy as will as attacking artillery positions east of Lake CONFIDENTIAL CONFIDENTIAL 319 2) (Italian East Africa) No entay activity reported. 6. Als leases is Mana Year a DayLight April % %I 2) (Italian East Africa) Five Italian planos were destroyed and seven damaged by Dritish attacks in Ethiopia, s Night of April 7. A submarine attack off / damaged the will Brittah ordinar Cope Term (4,200 tone). The Cape Term revained after A Daylight April % A British tenher (9,000 tons) and a freighter (2,000 - - - . the - off the east - of England and the letter in action with a - ship 125 miles off Proctem, - cones of Afrim the amiliary Contria (15,243 tase) - also s. Right of April 67% - British ship - ask and these others damaged in - air attacks - the part of the harbor facilities of the part were so severely damaged as to to wales for a period of days. SGANIAN Distributions Security of - State Department Secretary of Treasury Under Secretary of Chief of Staff Assistant Oklah of staff, as - Plans Division office of Reval Intelligence Air Corpa as CONFIDENTIAL 320 Paraphrase of Code Radiogram Received at the War Department at 20 108, April 9, 1941. Ankara, filed April,9, 1941. German troops are in the area between Gunulcine (Gunul jina) and the Turkish frontier, according to statements of Turkish general staff officers. They have already occupied Dedeagatach (Alexandropolis). The Turks intend to fight if the Germans attack them. They will begin with a delaying action and will make their main line of resistance along a defense line at Chatalja and on the Gallipoli peninsula. They believe that in these areas the attacks of mechanised troops can be held up for a considerable period. Please see telegrams Nos. 92 and 93 from the American Minister. KLUSS (0-2 Note: Telegrams 92 and 93 have net yet been received from the State Department.) Distribution Secretary of War State Department Secretary of Treasury Under Secretary of War Chief of Staff Assistant Chief of Staff, G-2 War Plans Division Office of Naval Intelligence Att Corps 321 CONFIDENTIAL Paraphrase of Code Radiogram Received at the War Department at 8:59, April 9, 1941. Sofia, filed April 7. The city of Sefia was bombed on the evening of April 6 at eight o'clock by British planes. Casualties were: 30 wounded, 20 killeds two factories burned; also, several houses and the German motor park in the visinity or the railread station. By cable number 15 should be changed to read 120 casualties caused at Instandil. The Bulgar population is insignant but sala enough otherwise. They are quite ready for some more bombardment. I - syself eresting a bombproof at the Legation. JADWIN Distributions Secretary of War State Department Secretary of Treasury War Plans Division office of Naval Intelligence. CONFIDENTIAL 322 April 10, 1941 10:00 a.m. RE STABILIZATION OPERATIONS - CHINA Present: Mr. Bell Mr. Currie Mr. Cochran Mr. White H.M.Jr: The question of a representative on this Board. Lauchlin Currie does not want to go. Bell: Does not? H.M.Jr: No. Bell: Not even for three months? Currie: No. H.M.Jr: And he suggested one White, and I turned that down because I can't spare him, and he suggested Coe, and I can't spare him. So then he suggested Commissioner Fox of the Tariff Commission. He says it will be entirely acceptable to the Presi- dent. Bell: I don't know him at all. Harry knows him. He suggested him the other day. H.M.Jr: He is a very -- White: He is a good general economist. If he goes, I should very much like to have one of my boys go along with him. 323 -2- H.M.Jr: Who? White: Well, either - if you ruled Coe out - I didn't know you ruled him out for that. Then Taylor, Professor Taylor, University of Iowa, who knows the Far East, knows the foreign exchange, and is a very good man. H.M.Jr: All right? Currie: Yes. H.M.Jr: I don't know him. It will be all right with me. Bell: You see, the member of this Board has to have an alternate. Somebody ought to be over there. H.M.Jr: I know his reputation. I passed on him when he came in. He is the man who talked in Vancouver, isn't he? Don't betme on it, but I think he did. Cochran: Do you think he would be preferable to Towson? White: Oh, yes, I do. Cochran: I know he is a better theoretical man. I didn't White: know whether he had had any practical experience in banking. He has had the kind of experience that would be necessary there. He would pick up the other very quickly. He doesn't have any practical exchange experience, but Towson's experience is very limited. He is just a foreign exchange man in a bank. Currie: I was hoping, Harry, that the American member there might organize a little group that might take the place, substitute in part, for an American economic mission, which Chiang Kai-shek 324 -3- wanted, which I don't think we are really prepared to send. They could do it under very favorable circumstances, a group there. They would be independent of this fund. It is within the terms of reference, it seems to me, as far as the whole budgetary problem is con- cerned, which ties in directly with the problem of stabilization. The stabilization of currency comes right back to the budget. That and transportation are the two main economic problems in China today. H.M.Jr: Who pays the salary of these people? Currie: From the fund. H.M.Jr: We haven't got a regular Treasury fellow to send besides? It would be wonderful training for somebody. Bell: H.M.Jr: Bell: You mean have we got one over there? No, Eddie Bartelt or some young fellow that you would like to give the training to. I don't know. I haven't given it any thought. H.M.Jr: I mean, the books have to be set up. Would it be under Bartelt? Bell: Well, the accounting could come under him. We have nothing to do with the Chinese accounting thing unless we wanted to participate in that like we are doing for South America, like we contemplate doing it. H.M.Jr: I was just thinking, here is a chance to give some Treasury man a little foreign service ex- perience. White: What kind of experience, Mr. Secretary, do you 325 -4have in mind? H.M.Jr: Well, the thing of seeing how another government functions and -- Bell: Fiscal. It might be good experience. H.M.Jr: I am thinking, for instance, that the one thing which the French did which I always admired, was the French Treasury people, the way they would send their men out to their colonies and one thing and bring them back and send them out again. It is one service that I always thought was good. Cochran: It was the best service in France. H.M.Jr: A fellow would go out, and he would come back and build up this thing in the French - it was the one thing - I mean these men - what was the man, the red-head? You take a man like him. He was a very able citizen, but he got his training by going around one place and another, and I wouldn't overlook it. White: I think that is a very excellent thing to do, but I think that the man you send has to go over and get the kind of experience in the field in which he is in. For example, a man in the fiscal field would go over and get fiscal experience. If it is in the field of stabilization fund, it ought to be a monetary man. If it is the field of taxation, it ought to be a tax man. H.M.Jr: But somebody has got to set up the books. Bell: Well, he could sort of be tied in with this group and get the experience on both sides. You re- member we had the discussion the other day and the agreement about getting a report every three months, and Rogers threw up his hands and said to make a balance sheet of this fund would take 326 -5- weeks. We made one upstairs of our fund in about thirty minutes. H.M.Jr: That is what I was thinking about. Who keeps the books on our stabilization? Bell: Mr. O'Daniel. He does a swell job. H.M.Jr: And that is under who? Bell: Bartelt. H.M.Jr: That is what I say. Cochran: They will have to start a new system out there, because the books so far have been kept by one of the British banks. They will have to cut that out. H.M.Jr: I think it is a good idea, don't you, Lauch? Bell: It would be excellent training. H.M.Jr: A man who keeps our books when we go out there and sees that we get the reports. Currie: Yes. I am quite anxious, Mr. Secretary, that for the first three or six months anyway this would act in part as an economic machine, you see. H.M.Jr: Well, Fox is on that end. Currie: That is right, but he needs some good young man H.M.Jr: Well, there would be two. This man would be on the bookkeeping end, and Taylor would -- White: Taylor would have to act as the alternate. there to work with. 327 -6- H.M.Jr: Well, look, gents, I can't give it any more time now, but I am willing to say that if you have you got ten minutes, Bell? Do you want to continue this conversation now? Bell: Currie: We can, but I would like to think about the other end of it. I don't know, Mr. Secretary, whether Fox is available or not. White I don't either. H.M.Jr: Anyway, in order to keep the thing moving, Fox, Taylor, and somebody from Eddie Bartelt's office is O.K. with me. If you want to readjust the thing it is all right. White: You have ruled out Coe. H.M.Jr: Definitely, for personal reasons. Cochran: Is Taylor likely to stay on the department with us here? White: He has got a year's leave of absence from the University, which expires, I think, this summer, and there is some correspondence with the presi- dent. I think he will give him another leave, but -- Cochran: My point was, if we get the experience even on that end for someone, it would be coming back to us. White: H.M.Jr: That would be the understanding I would have with him if he were to go. Of course, this boy in your (Cochran's) shop is a good man. 328 -7- Cochran: Hawkey? Currie: There are two good men in the Reserve, Despres, who already knows the situation there, and Kindleberger, who is with the BIS and who is back there now. H.M.Jr: Don't forget about Hawkey. White: I know Hawkey well. He would be a good young man to send along with, but he wouldn't take the place of Taylor. H.M.Jr: I am just thinking, here is a chance to get some Treasury men some field experience which I have been talking about, and there are few opportunities come up. White: That is something the British Treasury does that we don't do. H.M.Jr: I am saying it. White: The British do it more than the French. H.M.Jr: Did you accomplish what you came for? Currie: I did. 329 April 10, 1941 10:10 a.m. RE AID TO BRITAIN Present: Mr. Cox Mr. Young Mrs. Klotz H.M.Jr: I want the McReynolds letter to the President. Young: Norman has it all ready. H.M.Jr: Who? Klotz: Thompson. H.M.Jr: God, to get something here in my hands. Young: You said to have it ready for a 9:30 meeting, H.M.Jr: Anything new on my getting any money for ten and we didn't have one. Coast Guard ships? Cox: No. H.M.Jr: There isn't? All right. Cox: We haven't had a chance to get up the memorandum to Budget on the thing. 330 -2H.M.Jr: All right. Anything that I should know before the 11 o'clock meeting? Cox: One side issue, on your Consolidated B-24's, we checked with Colonel Myers in the Air Corps, and he said as far as he knew, there were no bugs in the thing. There was one plane that had some minor defect. It had stopped-- H.M.Jr: I got that from the British. Young: I got it from the British. They had trouble with the front landing wheel on it. H.M.Jr: Well, I have asked Philip - somebody told me that all of these Boeings had already gone to England, which isn't true. Young: No. None of them have gone over. H.M.Jr: Well, have any of the Consolidateds gone over? Didn't England announce the arrival of one? Young: That was the first B-24, I am pretty sure. I just checked before I camein, and I will have that information in the next 10 minutes. H.M.Jr: Good. Cox: On the shipping thing, they are still in- terested. We have been reconstructing colored maps for them in terms of what you can do under the Neutrality Act, and we have got one finished in the Middle East, and we are doing one of the world now on an eight by four size showing the places private American vessels can go with arms and without arms and so forth. 331 -3H.M.Jr: Nothing else? Cox: No. H.M.Jr: That thing yesterday, did you get Mack the additional list yesterday? He said he would have it cleared by noon. Young: The two million dollar list? H.M.Jr: On top of the two million, more. He was Young: Oh, on this Greek and Yugoslav stuff. H.M.Jr: Yes. Young: No, we took it up with the Budget people yesterday afternoon, and we will be sending waiting for it. it over to them this morning in the form in which they want it. Instead of the actual detail, the number of pair of shoes and the number of cotton underdrawers and so on, they will go along this way. They want a summary classification and will get along on that basis instead of item by item basis. So we will break it down into clothes and concrete mixers and so on. That is where we are at the moment. Cliff understands that. He was here yesterday afternoon. We are trying to get away from this itemized business if it is possible to do it and get into something on this commercial business. There are a very large number of individual items of all kinds. It is a hard job. My feeling on this whole thing is, I think it is beginning to jell a little now. I think from an organizational point of view, we have made a lot of progress in the last few days in trying to get It into shape so you 332 -4know what is going on and can keep your hands on it. However, this statistical business is getting very serious. We will have to get that straightened out very shortly Indeed. H.M.Jr: No one has talked to Haas or me about it. Young: No, I am talking about it. H.M.Jr: What? Young: I am talking about it. H.M.Jr: Well, you are not Hopkins yet. Young: Shall I get Hopkins to call you or do you want to call Hopkins? (Telephone conversation with Clifford Mack follows. 333 April 10, 1941 10:11 a.m. H.M.Jr: Hello. Operator: Do you want to talk to Mr. Mack this H.M.Jr: In a couple of minutes. Tell him to stand Operator: All right. morning? by. 10:17 a.m. H.M.Jr: Hello. Operator: Mr. Mack. Clifton Mack: Good morning, sir. H.M.Jr: How are you? M: Fine, thank you, Mr. Secretary. H.M.Jr: Do you want to raise anything about the lend-lease purchasing this morning? M: Not anything of special consequence, sir. H.M.Jr: Everything going along? M: Yes, sir. We've completed about $1 million of that War Department list and by the end of the week we'll have the rest of them out. They have withdrawn certain orders - about $300,000. H.M.Jr: of that $2 million 2? M: Yes, sir, and we have some new orders H.M.Jr: totaling about $500,000 that are apart from that War Department list. I see. c 334 -2Now the Greek and Yugoslav supplies - M: we're waiting for the allocation of funds. H.M.Jr: So nothing else has happened other than they've withdrawn $300,000 and added $500,000. Yee, sir. M: H.M.Jr: And the $500,000 comes direct from Hopkins? M: That comes direct through Young on the basis of requisitions. Chemicals, equip- ment and supplies of various kinds. H.M.Jr: I see. M: On the Greek and Yugoslav list we're going to have considerable activity there when that starts. The total of the requirements they've indicated that ought to be bought through us will run around, oh, about $35 millions, but of course only a part of that right away and the rest is extended over a period right up until the end of the year. H.M.Jr: Now, are you getting any allocation of money M: carry it for the time being with our to carry this extra work? Not administrative expense. I think we can organization. H.M.Jr: M: Well, there is $10 million there in the bill. Yes, sir, and we're now taking steps to set up an expediting unit looking ahead a little bit 80 that when these orders start to move, we'11 be able then to have a group that will follow through the shipment. H.M.Jr: Well, if you need any money you'd better M: Very good. I'll do that. speak to Norman Thompson about it. 335 -3H.M.Jr: Don't wait too long. M: All right, sir. I'11 sure do that. H.M.Jr: All right, Mack. M: Good-bye. Good-bye. 336 -5H.M.Jr: To answer your question about the statistical thing, if Harry wants something let him call me up. Young: Right. H.M.Jr: See? Young: Yes, sir. Cox: You know that Currie is interested in ship- ments to Rangoon on the Chinese thing? H.M.Jr: Lauch Currie just left here, and he said for one week since the President told him that he was to look after the Chinese thing, he has been trying to see Harry Hopkins, and he says it is much easier to see the President than it is to see Harry. For one week he has tried to see Harry, and Harry won't see him. Young: I have talked to him several times on the telephone. He has called to find what we are doing and how the thing is shaping up, and so on. H.M.Jr: He has been unable to see Harry. Cox: He has apparently talked to him about this Rangoon thing. On the shipping problem, there are two other things of some interest. One is that, in this room, Land and Vickery had a terrific fight yesterday about five fast boats that the British want. Apparently Vickery thinks they can and should be made available and Land thinks they ought to be stalled, and ought not to be made available; and the thing was left so that apparently Land won't transfer the boats unless the President orders it. 337 -6H.M.Jr: Who instigated that? Cox: Instigated what, the fight? H.M.Jr: The five, not the fight. Cox: I don't know, I think Salter probably asked for them. H.M.Jr: To make the run to where? Cox: I think on the North Atlantic. Young: Are you sure Donovan didn't do it? Cox: I don't know who instigated it. H.M.Jr: Of course in Churchill's speech which I have read in today's papers, the only thing that he can announce is the ten Coast Guard cutters. Cox: That is right. The other thing that hasn't gotten any serious consideration but I think ought to be kept in the back of your mind is the Western Hemisphere line in terms of either transportation or convoy movement in that line. H.M.Jr: You mean Newfoundland and that sort of thing? Cox: That sort of thing and even beyond New- foundland, in terms of the traditional American view that we have got an interest in and have got a right to proceed in the Western Hemisphere. (The Secretary placed call for Mr. Hopkins) H.M.Jr: Do you want to know where he was last night? He was out at Oxon Hill, Summer Welles' 338 -7country place. (Laughter) Isn't that marvelous? Cox: Is this the new Munich? H.M.Jr: Something. Young: Summer is still holding up the thirty Greek H.M.Jr: No? Cox: He is not holding them up -- Young: He isn't doing anything about it. Cox: They are going to get themselves into trouble planes. because Reeves has gone ahead and disposed of them. Young: He has already shipped them. H.M.Jr: Has he shipped them? Cox: Yes. H.M.Jr: All thirty? Cox: He said he had actually shipped fifteen and then he gave orders to ship some others. He says, After all, my job is to get some new stuff. That is water over the dam." H.M.Jr: I want to meet that fellow. Klotz: Who is it? H.M.Jr: Admiral Reeves, retired. They brought him in to handle this stuff. 339 -8 Cox: If you looked at him, you would think he was the ancient version of Caspar Milquetoast. Young: He has a keen sense of humor. H.M.Jr: Look, it is very embarrassing for me to try to get - this is much the way they say some- thing nice in these letters, would one of you go over now to see Hopkins, and when he goes, ask him to get the President to sign this letter? Which one of you wants to go over there for me? Cox: Well, it doesn't make any difference. Phil and I always see him anyway. H.M.Jr: Before eleven? Cox: We can do that. Young: Is Hopkins back? H.M.Jr: Yes, he is on the telephone. Do you have any hesitancy about it? Cox: No. H.M.Jr: Do you? Young: No, except that my only hesitancy is that the thing came from here and that it is or has been my business. H.M.Jr: To do what? Young: I feel a little bit about the same way you H.M.Jr: Then you (Cox) go. do. 340 -9Cox: That relieves me. I haven't any hesitancy. H.M.Jr: And here is an extra copy in case they have lost it. You can go over now and stick this into Harry's hands. Go over there immediately. If I get him on the wire, I will say that I asked you to come over. You can simply say, can't you, "Take this in at eleven and get the President to sign it at eleven o'clock. This is the so-called 'McReynold's letter. Cox: All right. H.M.Jr: And I will take care of the Coast Guard business. The meeting is adjourned. Cox: Thank you. H.M.Jr: Carry on. 341 c April 10, 1941 10:50 a.m. Operator: Bell please. (Pause). Mr. Bell. D. W. Bell: Hello. H.M.Jr: Would you and Gaston put your heads H.M.Jr: together and I'd like you to put in a formal request to the Bureau of the Budget for $25 million for 10 Coast Guard Cutters - for a deficiency appropriation. B: Not as an allotment H.M.Jr: What do you mean allotment. B: Out of the lease-lend. H.M.Jr: oh, I just got through talking with Hopkins. We'11 never get it out of that. B: Really. H.M.Jr: They'11 kid us from now to doomeday on it. He said he was going to put it up to the President to sign it and he promised me he'd do that a week ago today. B: Yeah. H.M.Jr: He'll never do it 80 let's go the other B: route. O.K. I'll talk to him about it. I'll talk to Gaston. H.M.Jr: Yeah, but it just goes from you and Gaston directly to the Bureau of the Budget and from there to the President. See? B: Yeah. H.M.Jr: Otherwise we'11 never get it. B: All right. We'll work out some procedure to get it direct. Say, I didn't tell you this morning about the four o'clock report last night. 342 -2H.M.Jr: No. B: On the short note, $1 688,000,000 and on the longer note $2,038,000,000. We've still got the mail reports to hear from. H.M.Jr: I see. B: So they're really going away up. H.M.Jr: Good. B: O.K. H.M.Jr: Thank you. 342-A April 10, 1941 TELEPHONE CONVERSATION FOLLOW-UP: In phone conversation with Mr. Bell today, the Secretary asked him and Gaston to put their heads together and put in a formal request to the Bureau of the Budget for $25 million for 10 Coast Guard Cutters. this but 10 so cauld father this about if with on Seees The this come a Alilio 343 April 10, 1941 4:15 p.m. RE COAST GUARD TRANSFER Present: Mr. Gaston Admiral Waesche Mr. Foley H.M.Jr: Now, I didn't read that memorandum. (referring to memorandum from Admiral Stark to of Secretary Knox,Hdated March 17.2 per ment) enting 4/14 when showed it 6 Gaston: We have a better copy than this. H.M.Jr: This is all right. Just let me read this thing. Is this the same thing as I have had? Gaston: Yes. I can go get my copy. H.M.Jr: No, no, this is all right. Why does Stark lie to me? He must think I am an awful fool. Gaston: He told you this was the same thing? H.M.Jr: Yes. Why does he lie? draft Gaston: That plan there (see memorandum from Secretaryspent to President, Dated April 10, 1941), provides Press for what the statute provides, which is on order of the President to transfer the Coast Guard to the Navy Department, and includes some statements of how he would propose to operate it after it has been transferred. 344 -2H.M.Jr: Maybe I should say he is under misaprehension. But he argued and I said, "Don't argue with me until I read this thing. I mean, I got quite stern. Don't repeat what I have said. Waesche: No, sir, certainly not. H.M.Jr: Let me just ask you this. Gaston: We have got a memorandum from you to the President embodying your idea with your understanding of the conversation today, the instructions today, with a space for the President's approval, and we made it quite precise. H.M.Jr: That is right. Gaston: We transferred to the Navy everything, including one hundred twenty-five footers, except ice breakers and except ten hundred twenty-five footers which are in process of conversion for use as service - as light- house service boats. Waesche: And two hundred and twenty-five footers which we are using in maritime service training. So there is a total of twelve one hundred twenty-five footers we are retaining. H.M.Jr: Don't you think we ought to say what we are retaining? Gaston: We could easily say that. We are retaining twelve one hundred twenty-five foot patrol boats, ten which are under process of con- version for lighthouse service boats, two which are in the maritime service, and all floating craft smaller than a hundred and twenty-five footers. 345 -3 Waesche: But there are some other craft like the Kickapoo which we are using for ice breakers. If we are going to specify that, I suggest we state all other floating craft not included in that tabulation shall remain and then we simply take the register and see what remains. Gaston: We say all floating equipment, and then we Waesche: Yes. H.M.Jr: I want to ask you (Waesche) this, Are you Waesche: Perfectly. H.M.Jr: Is this what you would like? Waesche: I would rather the whole thing would stay under the Treasury Department. Naturally, define the seagoing fleet as follows. satisfied with this? I don't like the idea of dividing up the Coast Guard, but this is second best. H.M.Jr: Well, let me ask you this, would you rather have the whole organization go under the Navy? Waesche: No, sir, I would rather these functions - that is, with one exception. I feel that the Coast Guard's chief duties are those duties which by law are tied up with the Treasury Department. Now, I feel that the Coast Guard belongs with the department that has that authority. As long as the authority is to remain in the Secretary of the Treasury to control 346 -4shipping, all the duties under the authority of the espionage act remains under the authority of the Treasury Department, there is no question in my mind that that is where the bulk of the Coast Guard belongs, and naturally if that function of the control of the merchant shipping should go to the Navy, H.M.Jr: I think it should all go; but I am just putting that if there -This is what I told the President. "Mr. President, as I understand, you want me to do the life saving." I said, "You want me to protect the revenue of the Government and do the harbor patrol work and the Great Lakes work and the Ice Patrol work." I couldn't think of it all. He says, "That is just what I want you to do. I said, "Then I take it you want Waesche and his organization to stay in the Treasury as a part of the Treasury organization. "Well," he says, "Waesche can make up his mind what he wants to do. He may want to go to sea, but if he wants to stay, that is all right." Waesche: H.M.Jr: I don't know of any seagoing job the Navy would have for me. I am just repeating. I don't know - but I wanted to get over the idea to him. He said, "Well, the Navy doesn't want any of that thing. And then Stark kept sputtering and I said, "Now listen, Frank," to Knox, and Frank Knox said, "Well, I don't want any of those." The President had it very definitely 347 -5in mind. He said, "I don't want the Navy to be bothered with all that harbor stuff." Waesche: H.M.Jr: I think this is the proper thing. I think it is a swell break, personally, because I feel this way. This means that there is enough there that when this show is over, it will continue again and the Coast Guard will be an independent entity under the Treasury. Now, that was the thing that you always were afraid of. Waesche: Absolutely, Mr. Secretary, and that is the thing - I am one of the few officers that has fought the transfer to the Navy all my life. H.M.Jr: I think it has been a swell fight, and -- Waesche: I am thoroughly pleased and thoroughly satisfied. H.M.Jr: Thoroughly? Waesche: With the exception that as long as we have got to give them something. I would be more pleased if we could have everything, but this is - I mean to say - yes, sir, I am pleased. H.M.Jr: Now wait a second. It is this way. It is a question of doing it this way - all going over to the Navy entirely - - Waesche: Well, there is no question in my mind about H.M.Jr: I didn't know but in your heart you wanted that at all. 348 -6to go over to the Navy. Waesche: No, sir, I don't think I have given you any indication of that; and if you go back, even since I have been Commandant and a little bit before, you will know that I have probably been the spear-head in the Coast Guard of the fight to keep out of the Navy for some thirty-five years, or at least fifteen years. H.M.Jr: I knew there was some good reason I made you Commandant. I didn't know what it was, but I knew there was some reason. I tell you what you do, Herbert. Knox is going to be here at nine tomorrow morning. I would like to have you here. I would like to have Foley here and read up tonight, Foley, on the statutory duties of the Coast Guard under the Treasury, if necessary. (facetiously) Gaston: We haven't yet found any law which makes it possible -H.M.Jr: Well, how is he going to do it? How is he Gaston: We detailed two cutters to the Navy, and they are operating under the Navy under the Chief of Operations and on a mere letter of going to transfer part of it. the President directing us to do it. I think it is valid. H.M.Jr: Well, you see, Ed, between now and nine tomorrow morning, we can't operate without a lawyer. Where is an economist? We need an economist. What is that? (Referring to memorandum from the President to Director of the Budget and Secretary, dated April 10.) 349 - -7 Gaston: I decided to split the two things. There is the Bureau of Marine Inspection and Navigation. It would stuck it gum in. the other up pretty badly if we H.M.Jr: I would like Ed to be able to say tomorrow there is no question legally that the President can do it. Now, you have got from now until nine tomorrow morning, and you can get the Coast Guard sea- going lawyer. Who is your lawyer? Waesche: Harrison. H.M.Jr: Do you want a good lawyer? Foley: Sure. H.M.Jr: Well, he is good. Nine o'clock tomorrow morning then, if I don't hear to the contrary this thing is all right, and you will have a legal way of doing it. Foley: Yes. Suppose we come to the conclusion we Gaston: No, don't do that. (Laughter) Foley: Well, we won't unless we have to. H.M.Jr: We will get a new lawyer. (Laughter) Foley: Well, that is what I wanted to know. H.M.Jr: All right. Thank you all. I am tired. I over with, but I think it is the best battle have to have legislation? don't want to do any crowing until it is we have ever taken on with any other department. 350 -8I am tickled pink, but I don't want to crow yet, because old Stark isn't licked yet. Waesche: I am, too. Foley: Does he want it all? H.M.Jr: Oh yes. Read his memorandum. Gaston: What he means by saying this is the same thing, he means that with the transfer to the Navy, he could administrate it in such way, if he wished, as to accomplish substantially the same objects in practical effect. That is the only thing that is true. Otherwise his statement isn't true a at all. 351 COPY CONFIDENTIAL April 10, 1941. TO: The President FROM: The Secretary of the Treasury The following embodies my understanding of your verbal instructions of this day with respect to the assignment of certain equipment and functions of the Coast Guard to the Navy: With the exception of those vessels which are esspecially adapted to use as ice-breakers, and with the exception of cutters needed for operations on the Great Lakes, the entire seagoing fleet of the Coast Guard together with the necessary personnel to man it will hereafter operate as a part of the Navy under the Chief of Naval Operations. The normal operation and maintenance costs of the vessels of the Coast Guard which are to operate as a part of the Navy will be defrayed from Coast Guard appropri- ations. All major alterations and other unusual costs to fit the above ships for Navy service will be defrayed from Navy appropriations. If necessary, legislation is to be obtained to authorize this. Together with the operation of the present seagoing fleet of the Coast Guard the Navy will take over responsibility for (1) off-shore rescue and assistance work; (2) weather observation patrol; (3) Bering sea and Alaskan patrol; (4) international ice patrol; (5) Greenland patrol; (6) transport and supply service to Pacific equatorial islands; (7) off-shore neutrality patrol. With the above exceptions the Coast Guard will re- tain its present organization, functions and equipment. 352 -2The functions which the Coast Guard will continue to perform include the following: (1) All in-shore assistance work. (2) All merchant ship control and other duties performed by Captains of the Ports. (3) Operation, maintenance, repair, construction and development of lighthouses and other aids to naviga- tion. (4) All duties on the Great Lakes normally falling within the scope of operation of the Coast Guard. (5) Ice-breaking in interior and coastal waters of the United States, including the Great Lakes. (6) Training of merchant marine and Coast Guard personnel. Equipment to be retained by the Coast Guard will include: (1) All present Coast Guard shore establishments. (2) All Coast Guard aircraft. (3) All other floating and shore equipment necessary to the performance of the functions listed above. "Seagoing fleet" as used above, is understood to include the following: Seven 327-foot cutters; four 240-foot cutters; seventeen 165-foot patrol boats; twenty 125-foot patrol boats, and the following unclassified seagoing cutters: UNALGA, TALLAPOOSA, NORTHLAND, REDWING, SHAWNEE. APPROVED: April , 1941. 3534 April 10, 1941 4:31 p.m. Jesse Jones: Hello, Henry. H.M.Jr: My name. J: Yes, sir. You've got a terrible cold. H.M.Jr: I'm going home in a few minutes. I'd like to beg off until Monday, instead of Friday. I thought you'd rather do it J: that way. H.M.Jr: Sure. Just a second. That gives me a J: Well, Monday or Tuesday either one. I just H.M.Jr: break. want to Well, don't get too deep in this, Jesse without giving - you know you said you'd consult me. J: I won't. I'll make no commitment until I H.M.Jr: talk to you. Now, let's leave it this way. Have your office call up Monday and we'll work in an appointment. How's that? J: That's all right. H.M.Jr: Or do you want a definite appointment? J: No, I'd rather do it that way. H.M.Jr: Right. J: You see, the two Franks want me to work on this Pan American thing tomorrow and I noticed you had a miserable cold and I H.M.Jr: thought you'd rather put it off. Well, it's entirely agreeable. J: Yeah. O.K. H.M.Jr: Thank you for calling. 354 CONFIDENTIAL April 10, 1941 To: The Secretary From: Mr. Young Re: Deliveries of B-24 Planes With respect to your request concerning delivery of B-24 planes, the British Supply Council has furnished the following information: Two B-24's and one LB-30 (British equivalent of the B-24) have already gone to England. There are two B-24's at Montreal. (Also two Flying Fortresses, B-17). There are two B-24's and two LB-30's at New York. It is estimated that from two to three B-24's or LB-30's will be completed by Consolidated within the next two weeks. With respect to the last two groups, the British will have to furnish information later as to when they will be ready to leave Canada or New York. P.4. 355 CONFIDENTIAL April 10, 1941 To: The Secretary From: Mr. Young Re: Boeing and Consolidated Bombers Mr. Fairey has advised me that of the twenty Boeing B-17C's fourteen are now in various stages of having leakproof tanks and other small items installed. These installations are being made rapidly and should soon be finished. Of the re- maining six, three are being held in Seattle because of bad weather, one is at Wright Field, and two are in Canada ready to be flown to England. With respect to the rumor which you heard concerning bugs in the Consolidated B-24, Mr. Fairey advises me that there are no more bugs in that ship than are to be expected in any new type ship which has never been built before. Whatever bugs have been found are being rapidly eliminated and every thing is proceeding smoothly. Dy. / 356 Please let me have a similar report to the one attached on april 20th CONFIDENTIAL To: The Secretary From: Mr. Young Houz April 10,1941 Re: Boeing and Consolidated Bombers In connection with the information I gave you this morning concerning Boeing and Consolidated bombers, I am attaching herewith for your information a copy of a revised memorandum which I have just received from the British Supply Council. you SECRET 357 CONSOLIDATED B24 BOMBERS Arrvied in U.K. 3 At Montreal 2 At New York, enroute to Montreal 4 April deliveries by Consolidated (forecast) May 6 . 11 26 Note: 5 of first 6 will be used for transport purposes, probably trans-Atlantic ferrying for pilots. BOEING B17 At Montreal 2 At Dayton (for final checkup before delivery to Montreal) 1 At Seattle (almost ready for flight to Dayton) 3 At Sacramento and/or Portland for addition self-sealing tanks & other equipment 14 20 RECEIVED APR 10 1941 Washington, D.C. April 10, 1941. Treasury Department Office of Philip Young 358 6/5'41 Miss Chauncey: Mr. Foley said that there was nothing here which the Secretary should have dalled to his attention. McGuire CONFIDENTIAL CONFIDENTIAL 359 COPY FOR: Secretary of Treasury. A WAR DEPARTMENT The Adjutant General's Office Washington AG 020.1 (3-29-41)M-M April 1941. SUBJECT: Procedure Under the Lend-Lense Act. TO: The Chiefs of Arms and Services and the Divisions of the War Department General Staff. The following letter from the Secretary of Bar is quoted for your information and guidance: "1. The Act of March 11, 1941 (Lend-Lease Act) imposes heavy responsibilities on the Tar Department which must be met with promptness and dispatch if the purposes of the Congress and the orders of the President are to be consummated. Strategic results affecting the defense of this country may depend upon the speed with which this Act is administered in the Department. I therefore desire to impress upon all concerned the necessity for prompt action in all matters relating to the Act. 2. Every effort has been made to set up the adminis- tration of this Act in the Department so as to apply to the lendlease program the normal procedure of our procurement agencies. I am confident that our present organization, increased by the augmentation of such personnel as may be necessary, can fully meet the additional responsibilities to be imposed upon it. It appears necessary, however, to set up in the Office of the Under Secretary of Var a division to be called the Defense Aid Division with duties as shown in Exhibit 1 herewith and I have, accordingly, directed that such an organization be created. This division will be concerned mainly with the coordination and acceleration of all phases of the lend-lease program within the Department. It is my desire that all papers pertaining to the program be handled in the "immediate action" category. 3. Attached hereto as Exhibit 2 is an outline of the routine which will, in general, be followed within the War De-partment. The desired budgetary procedure is shown in Exhibit 3. 4. To deal with questions of substance which we can foresee will arise under the Act, Defense Aid Committees, whose CONFIDENTIAL CONFIDENTIAL 360 CONFIDENTIAL functions are set forth in Exhibit 4, will be organized. No new committee has been set up for aircraft inasmuch as the Joint Aircraft Committee, which has heretofore been in operation, is in a position to perform the functions prescribed for the Defense Aid Committees in Exhibits 3 and 4 and, subject to the principles and procedure outlined in such Exhibits, the War Department members of the Joint Aircraft Committee are hereby enpowered, in addition to the powers heretofore exercised by them on the Joint Aircraft Committee, to perform with the British, or other representatives concerned, the functions of the Defense Aid Committees. 5. War Department agencies are authorized to issue necessary regulations, not inconsistent th the policies outlined herein, to administer their activities under the Act. 6. Close contacts between the personnel of the ar Department and the accredited foreign representatives concerned with transactions under the Act shall be sought and encouraged at all times. 7. The organization herein provided for is solely designed to expedite, not to complicate, the work of the existing procurement agencies. It is always subject to change if in the light of experience it does not fulfill its function. /s/ HENRY L. STIMSON Secretary of Mar." By order of the Secretary of Mar: Brigadier General, Acting The Adjutant General. 4 Incls: Exhibits 1 - 4. COPIES FURNISHED: Mr. Harry Hopkins; The Secretary of the Treasury; The Secretary of the Havy; The Secretary of State; Chairman, British Supply Council in North America; Mr. Kim. S. Knudsen, Office of Production Management; and Clearance Committee, Army and Navy Munitions Board. -2- CONFIDENTIAL 361 CONFIDENTIAL April 8, 1941. Office Order: 1. In order to coordinate the functioning of the Mar Department in its relation to the Act of March 11, 1941 (Public 11, 77th Congress), there is hereby created a division in the office of the Under Secretary of far to be known as the Defense Aid Division. 2. The duties of the Defense Aid Division will be as follows: a. To maintain liaison on matters relating to the Act of March 11, 1941, with the following: (1) Such agency or agencies as may be designated by the President to administer the Act. (2) Other government agencies. (3) Foreign governments. (4) Arms and Services of the Jar Department and the War Department General Staff. b. To coordinate requests for aid from foreign govern- ments with interested agencies of the Var Department. c. To coordinate the procurement under appropriations provided to implement the Act, in collaboration with the Production Branch and the Purchase and Contracts Branch, Office of the Under Secretary of Jar; G-4 Division War Department General Staff; and the Office of Production Management. d. To coordinate the distribution of the items to foreign governments, in collaboration with the G-4 Division, ar Department General Staff. e. To coordinate the activities authorized in Section 3 (a) (3) of the Act, in collaboration with the interested agencies of the War Department. f. To supply foreign governments with defense information pertaining to defense articles, in collaboration with the G-2 Division of the War Department General Staff. g. To report to the Administrator of Export Control the defense articles and defense information released to foreign governments. (Exhibit 1) CONFIDENTIAL 362 CONFIDENTIAL h. To furnish information concerning the transactions of the ar Department to the agency designated by the President for the preparation of the quarterly report required by the Act of March 11, 1941. i. To coordinate importation of arms, ammunition, and implements of war. 1. To initiate requests for priorities for materials, equipment, and machine tools for foreign orders for military equipment and supplies through the Priorities Cormittee, Army and Navy Munitions Board, and the Priorities Administrator, Office of Production Management. k. To clear preliminary negotiation reports for procurement of military equipment and supplies for foreign governments other than beneficiaries of the Act of March 11, 1941. 1. To prepare staff action for the approval of the Secretary of War, on all matters pertaining to the Act. m. To clear items for export on the basis of military secrecy, in collaboration with the G-2 Division of the War Department General Staff. n. To maintain the office of record for all transactions of the War Department under the Act of March 11, 1941. O. To furnish such statistical information as may be required, in collaboration with the Statistics Branch, Office Under Secretary of War. p. To participate in the functions of the Joint Advisory Board on American Republics. g. To discharge such additional duties pertaining to the Act of March 11, 1941, as may be prescribed by the Under Secretary of War. 3. To provide personnel for the Defense Aid Division, I hereby transfer the commissioned and civilian personnel of the Army Section, Clearance Committee, Army and Navy Munitions Board, to the Defense Aid Division. /s/ HENRY L. STINSON Secretary of War. (Exhibit 1) -2- CONFIDENTIAL 363 CONFIDENTIAL OUTLINE OF MAR DEPARTMENT PROCEDURE - LEND-LEASE ACT WAR DEPARTMENT ACTION 1. Requests for assistance received from foreign governments whose defense is deemed vital to the defense of the United States under the terms of the Act, to be referred to the Secretary of War. 2. Referred to the Defense Aid Division, O. U. S. 11., for recommendation. 3. Defense Aid Division informally to consult G-4 and, if advisable, other interested Mar Department agencies and prepare recommendation for signature of Chief of Staff. To obtain the basis for recommendation, Defense Aid Division to route requests through the appropriate Defense Aid Requirements Committee, calling for definite recommendations as to disposition of materiel or placement of orders. 4. Reply of Chief of Staff forwarded to Secretary of War for approval. 5. After approval, forwarded to White House. WHITE HOUSE ACTION 6. President issues directive to Secretary of Mar. WAR DEPARTMENT ACTION 7. Directive turned over to Defense Aid Division for preparation of appropriate instructions to "lar Department agencies, and (Exhibit 2) CONFIDENTIAL 364 CONFIDENTIAL submittal to the Secretary of War, through Executive, O.U.S.W. and G-4, for signature, with copy of original action by Chief of Staff (paragraphs 4 and 5 above). Copies of directives will also be furnished to B.O. N.D. 8. Mar Department agencies concerned in executing approved action, including B.O. N.D., to maintain informal contacts with the Defense Aid Division during process of execution and render report to Defense Aid Division on completion. 9. Defense Aid Division to be office of record for LendLease Act transactions and to prepare such reports as the President and/or the Secretary of Mar may prescribe. (Exhibit 2) -2CONFIDENTIAL 365 CONFIDENTIAL OUTLINE OF BUDGETARY PROCEDURE UNDER LEND-LEASE ACT WAR DEPARTMENT Upon receipt of approved expenditure programs or requests for services in the Defense Aid Division of the Office of the Under Secretary of War, they will be transmitted to the Budget Officer of the War Department who will make application for allocations to the War Department of the necessary funds for the approved purposes. Upon receipt of such allocations, the Budget Officer of the iar Department will make apportionments to agencies within the War Department in accordance with the approved expenditure programs or requests for services, informing the Defense Aid Division of this action. The existing accounting methods within the ar Department will be utilized in accounting for Lend-Lease funds. The preparation of expenditure programs and requests for services, as well as the administration of any funds set up for administrative expenses, will follow present procedure. In case future appropriations are required for Lend-Lease purposes, the normal estimating cycle will be completed. (Exhibit 3) CONFIDENTIAL 366 CONFIDENTIAL DEFENSE AID COMMITTEES REQUIREMENTS COMMITTEES There will be created within the Mar Department committees to be known as the Defense Aid Requirements Committees. The function of these Committees within the War Department will be the determination under the Defense Aid program of materiel requirements as to type, quantity and destination. In carrying out this function, the Committees will follow such policies as may be prescribed, from time to time, by the Chief of Staff, subject to such redetermination, if any, as may later be made by the President. In performing their function, the Committees may be com- pelled to plan for the diversion of materiel to uses not contemplated at the time of the placing of the orders. In dealing with this problem, the Committees may propose plans for somewhat distant objectives. However, recommendations for actual diversion should normally be made only sufficiently far in advance to permit arrangements to be made for the effective use of the diverted materiel at the completion of production. The Committees will be organized for each of the following supply arms and services, i.e., Ordnance Chemical Signal Engineer Quartermaster In order to provide continuity and unity of direction to these Committees, they will include a nucleus of personnel which will have membership on all the Committees. This nucleus will be composed of the following: G-4 War Department, Chairman Representative of the Under Secretary of War Representative of the Clearance Committee of the Army and Navy Munitions Board, and Representative of the Foreign Supply Service (in case of the British, the Chairman of the British Supply Council). (Exhibit 4) CONFIDENTIAL 367 CONFIDENTIAL United States and foreign representatives of the arm or service concerned and of the user of the items under consideration shall be members of the respective Committees. In appropriate situations the Training Division or fur Plans Division of the War Department General Staff will be represented. The Committee decisions will be signed by the senior representative of each concurring group. Minority views, if any, will be submitted by the senior member of any non-concurring group. Those will be submitted to the Chief of Staff to assist him to consult with the President under the provisions of the Lend-Lease Act. FACILITIES CO.1 ITTEE Under the Lend-Lcase Act and pending ar Deparment appropriations, there is approximately 1,300,000,000 provided for new facilities and a committee consisting of six general officers has been selected under the authority of the Under Secretary of War to control the facilities program. To consult with this Committee appropriate representatives of the British Supply Council will be appointed with opportunity to present their dissenting views, if any, on matters relating to the necessity for and priority of additional facilities being created, to the Under Secretary of Mar. (Exhibit 4) -2- CONFIDENTIAL 368 4-10/41 77TH CONGRESS SENATE 1st Session DOCUMENT No. 42 PURCHASE OF FOREIGN MERCHANT VESSELS FOR NATIONAL DEFENSE COMMUNICATION FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING A DRAFT OF A PROPOSED JOINT RESOLUTION AUTHORIZING THE PURCHASE OR REQUISITION OF ANY FOREIGN MERCHANT VESSEL LYING IDLE IN WATERS WITHIN THE JURISDICTION OF THE UNITED STATES WHICH IS NECESSARY TO THE NATIONAL DEFENSE APRIL 10 (legislative day, APRIL 7), 1941.-Read; referred to the Committee on Commerce and ordered to be printed To the Congress of the United States: There are now in our ports a large number of foreign merchant vessels which have been here for considerable periods of time and which because of war conditions have not seen fit to depart. Section 902 of the Merchant Marine Act of 1936, as amended by the act of August 7, 1939, authorizes the Maritime Commission, whenever the President shall proclaim that the security of the national defense makes it advisable or during any national emergency declared by proclamation, to requisition or purchase any vessel or other watercraft owned by citizens of the United States, or under construction within the United States, or to requisition or charter the use of any such property, and provides that the owner thereof shall be paid just compensation for the property taken or for its use. The same section provides a method by which compensation shall be determined. There does not appear to be any comparable provision with respect to foreign-owned vessels lying idle in our ports. In view of the growing shortage of available tonnage suited to our national needs, I am satisfied, after consultation with the heads of the interested departments and agencies of the Government, that we 368 4-10/41 PURCHASE OF FOREIGN MERCHANT VESSELS 2 should have statutory authority to take over any such vessels as our needs may require, subject, of course, to the payment of just compensation. It is obvious that our own ultimate defense will be rendered futile if the growing shortage of shipping facilities is not arrested. It is also obvious that inability to remove accumulating materials from our ports can only result in stoppage of production with attendant unemployment and suspension of production contracts. It is therefore essential, both to our defense plans and to our domestic economy, that we shall not permit the continuance of the immobilization in our harbors of shipping facilities. I attach as of possible assistance to the Congress a draft resolution designed to accomplish the purposes above outlined. It will be noted that the draft contemplates the use of funds appropriated by the Defense Aid Supplemental Appropriation Act, 1941, approved March 27, 1941. FRANKLIN D. ROOSEVELT. THE WHITE HOUSE, April 10, 1941. HIT Resolved by the Senale and House of Representatives of the United States of America in Congress assembled, That during the existence of the present emergency the President is authorized and empowered, through such agency or officer as he shall designate, to purchase, requisition, or take over the title to, or the possession of, for such use or disposition as he shall direct, any foreign merchant vessel which is lying idle in waters within the jurisdiction of the United States and which is necessary to the national defense: Provided, That just compensation shall be determined and made to the owner or owners of any such vessel in accordance with the applicable provisions of section 902 of the Merchant Marine Act of 1936, as amended. SEC. 2. Funds appropriated by the Act of March 27, 1941 (Public Law 23, 77th Cong.) are hereby made available to carry out the provisions of this joint resolution. O 369 TO: Secretary Morgenthan For your information. Qsc 11 April 1941 MR. COX - 370 AP 11 941 MKMORANDUM TO: . Harry Hopkins From: 0. S. Cox Subject: World Neutrality procured at meeting 4/11/11 I an sending you herewith a map of the world marked up to show the ports to which private American vessels can carry arms and non-ares under the Neutrality Act of 1939. If you agree, I think this may should also show the Western Hemisphere line and the 80-called German bat sone. If it is decided to put the Western Hemisphere line on this map. I would suggest that a careful recheek be mis of what is the Western Hemisphere in the light of present circumstances. As you know, precisely what is the Western Hemisphere has been defined in different ways. For present purposes, it my be that it will be desirable to use a legal rather than a morely geographical definition. In connection with whatever definition of the Western Hemisphere is worked out, consideration should be 371 given to the possibilities of (a) patrolling the Western Hemisphere so that practically German raiders and sub- marines are kept out of it, and thus lessening the amount of conveying required to be done by the Britishi (b) direct conveying by American naval vessels of British or American ships to the and of the Western Hemisphere; and (c) dolivery of goods in the Western Hemisphere for transshipment to Britain. 5gd (eat) OSC:aja 4/10/41 372 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 10, 1941 TO FROM Secretary Morgenthau H. D. White HDV Subject: The Economic Situation in Belgium The following points may be of interest to you in view of your discussion with Belgian Finance Minister Gutt: The food shortage in Belgium is more acute than in any other European country, excepting Spain and Poland, The present Belgian bread ration is about 56 ounces a 1. week, compared with 80 ounces for Germany, 71 for the Netherlands and 35 for Poland; other foods are comparably short. The basic reasons for the food shortage are: (a) the high industrialization of the country and its consequent normal dependence on imported foods, (b) the destructiveness of the German invasion, and (c) the necessity of feeding several hundred thousand German troops now stationed in Belgium. The Germans are taking about one-fifth of the Belgian national income in "occupation costs" alone. The Belgian national income before the invasion was less than $2 1/2 2. billion per year. The Germans are taking $40 million a month in occupation costs. These occupation costs are five times as heavy as those the Germans exacted in their occupation of Belgium during the years 1914-18. 3. German control over Belgian industries has taken the form principally of the appointment of German commissioners to control the operations of leading Belgian firms. In most cases ownership has remained in the hands of the former Belgian proprietors. However, there have been some major "fusions" of Belgian with German firms. For instance, the great Belgian iron and steel company Ougree-Mauhaye has been fused with Otto Wolff, the German steel producer; the new merged company will operate from Cologne with a branch office in Brussels. Such Belgian concerns as have the necessary raw materials are employed on German sub-contracts. 373 2- Division of Monetary Research The Germans placed all banking institutions under 4. the general control of a Bank Supervision Office for Belgium. This office has control over the books and transactions of all Belgian banks. It also controls the new National Bank of Belgium organized under German supervision. Payments between Belgium and other coun- tries are effected through the multilateral clearing system via Berlin. This bank is also nominally credited by the Germans with the Belgian gold which they are taking from France -- variously estimated at between $183 million and $260 million. 5. The economic disorganization and exhaustion of Belgium are very great -- greater than that of any other occupied country except Poland. The situation in Belgium is so desperate that perhaps 100,000 Belgian workers have found it necessary to accept German offers of jobs in Germany. Stocks of imported raw materials have been exhausted where they were not (as in the case of cotton) shipped to Germany. Even the high-grade Belgian coal minies are not working at capacity. The attempt in Octo- ber of 1940 to float a 10-year 3 billion franc ($100,000,000) 4 percent loan met with dismal failure; voluntary subscriptions by the public did not cover more than one-third of the amount of the flotation, and it was necessary to compel the banks to take up the rest. Currency in circulation must have increased greatly and prices have certainly risen very rapidly, but we have no precise figures on money in circulation and no precise price indices. 6. Belgian assets frozen in the United States have decreased about $55 million during the past year. When the Belgian funds were frozen May 10, 1940, they had a total of assets here of $623 million as follows: (In millions) Gold held on earmark Official dollar deposits Private deposits Securities Other assets $173 1 181 178 90 Since that date they have sold about $7 million of the gold held on earmark, reduced their balances here by approximately $48 million almost entirely from private deposits and there has been no substantial change in their security holdings. 374 FOR THE PRESS IMMEDIATE RELEASE APRIL 10, 1941 STATEMENT BY THE PRESIDENT 1763 Yesterday we signed an agreement with the Danish I Minister in Washington, who acts on behalf of the King of Denmark, as Sovereign of Greenland, including Greenland in our system of cooperative hemispheric defense. This agreement was signed on the anniversary of the day on which German troops invaded Denmark. Last May the Greenland Councils requested the United States to keep in mind the exposed position of the Danish flag in Greenland. I at once offered to make available relief, if necessary; and to assure a continued flow of necessary supplies for the island. The present step is a new proof of our continuing friendliness to Denmark. Under the present circumstances the Government in Denmark cannot, of course, act in respect of its territory in the Testern Hemisphere, but we propose to make sure that when the German invasion of Denmark has ended, Greenland will remain a Danish colony. Meanwhile, we earnestly hope for the quick liberation of Denmark from her present invaders. 375 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE April 10, 1941 TO Secretary Morgenthau FROM Mr. Cochran The Finnish Minister asked me by telephone whether the Secretary would be good enough to receive him for five minutes some day next week, preferably next Tuesday, April 15. I told the Minister that I had mentioned to the Secretary some weeks ago the Minister's interest in having the Secretary support his request for an Export-Import Bank credit, if the matter should come up at the Cabinet. I prosumed that this was no longer in question since a credit had been extended. The Minister confirmed this understanding, saying that he did not desire to take up any loan question with the Secretary, but simply a personal one. Does the Secretary desire to give an appointment? BMP. D will see him at 3 octock A apil 15 376 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE TO FROM CONFIDENTIAL FILES L. W. Knoke F. Dietrich Noted R. 99(e) DATE April 10, 1941 SUBJECT: TELEPHONE CONVERSATION WITH BANK OF ENGLAND. Mr. Bolton called me at 11:45 a.m. today. He prefaced his comments with the statement that hereafter he expected to call me more frequently as a result of certain internal changes which aimed at making him a little bit freer. He then referred to our telephone conversations late in January and early in February with regard to the return by us of dona- tions etc., sent to us for British account. The Treasury Department and they themselves, Mr. Bolton said, were, presumably as & result of our inability to accept those funds in New York, receiving a number of checks drewn in dollars. Was it in order for them with their proper endorsesent, to send the checks to us for collection? If so they would simply include them in the usual list of checks. I replied that our lawyers had considered this matter at the time and were of opinion that there was nothing to prevent us from handling such collections. Should I find out that I was wrong I would advise him immediately. Another matter he was anxious to be informed about was that of the various freezing orders issued by Washington: did they cover old balances only or old balances plus accruals? I replied that they covered everything and explained that in the case of a French account, for instance, anything that had been in the account on June 17, 1940 was frozen and anything that had gone into the account subsequent to June 17, 1940 was likewise frozen. Talking about the job of administering foreign property or exchange control, he mentioned that they in London had started with about 200 men but were not up to 1,350. This, 377 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE DATE CONFIDENTIAL FILES SUBJECT TO L. W. Knoke April 10, 1941. TELEPHONE CONVERSATION WITH BANK OF ENGLAND. FROM 2 however, he thought was the peak and he was hopeful that from now on they could start cleaning up a little bit. I made reference to Bank of England's cable No. 375 of yesterday containing 100 code words, 15 words of which, however, were missing. Mr. Bolton promised that he would see to it that the whole message was repeated in a hurry. I expressed my appreciation of their desire to give us preliminary advice of steps contemplated by them of the nature mentioned in that message. I next made reference to our telephone conversation of January 31 in which I had spoken of inter-bank dealings in registered sterling at rates lying between the official rates, which it seemed were indulged in by some out-of-town banks. I stated that since speaking to him on January 31 I had heard of no further such dealings. Was that due to any steps he had taken? He replied that he had checked up on one or two of the banks there and that that might be the reason for the discontinuance of these operations. In this connection Mr. Bolton commented that New York banks seem to have the idea that London banks were "sort of pinching business". This prompted me to confirm that in my opinion there was some such feeling on the part of some of our banks, not only in regard to English business but also to Canadian business. This, I continued, had prompted me last week to mention this to Mr. Gordon when he was here because it seemed to me altogether advisable that any such feeling on the part of our banks here, if at all possible, should be eliminated because if it spread further it might create a most 378 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE DATE CONFIDENTIAL FILES FROM April 10, 1941. SUBJECT TELEPHONE CONVERSATION WITH L. W. Knoke BANK OF ENGLAND. 3 undesirable atmosphere of irritation. I had had no formal communication from our Foreign Exchange Committee but had gathered from talks with one OF two of our banks that they were a little resentful of losing to British and Canadian banks business which by right should be theirs. I had recently discussed the matter informally with Mr. Loree, Chairman of the Committee. I had told him that if at any time his committee wished me to discuss this matter with Mr. Bolton I would of course be ready to do so. Mr. Bolton replied that one of the rules issued to the market in London at the very outset had been that there must be no competition internally. All customers should continue to do their business with their own banks and English banks were under pledge to the Bank of England to ascertain from a new customer with what bank he had previously dealt. As far as they at the Bank were concerned they had done their best to get rid of market friction. He could not believe that there were many British banks, if any at all, which had gone out of their way to take business away from American banks. He remembered one complaint, he said, but when going to the bottom of it he had found that the New York bank had had all its facts wrong. They were only too anxious in London to do anything they could to smooth down the business. If there were any banks in New York that felt resentful because their British business had suffered, those banks must realize that they were suffering no more than anybody else. The fact of the matter was that there had been a 379 MSC COM 9-40 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE CONFIDENTIAL FILES TO FROM DATE April 10, 1941 SUBJECT TELEPHONE CONVERSATION WITH L. W. Knoke BANK OF ENGLAND. tremendous loss of business which had been felt by every bank in London. Exchange business and foreign business today was practically negligible. Would I send him details by letter of any instances of complaint that might come to my attention in the future? If there was anything he could do to put it right he would. The next time I spoke to Mr. Loree would I tell him very frankly that he (Mr. Bolton) was willing to do his best to right and smooth over any trouble at all. This I promised to do. Was there anything further, I continued, that he might want to tell me in connection with Mr. Tong's letter of December 27 and our telephone conversation of February 4 in regard to the difficulties we were experiencing with the brokers in our market? When I spoke to him on February 4, I said, he had indicated that he might revert to this matter in a little while. Mr. Bolton replied that he was afraid there was nothing that he could do. The situation actually was this that there was too little business left for anybody and as regards the future, the possibilities for the brokers looked very black. It seemed to him the proper thing to do was to tell the brokers the truth. In the circumstances, I replied, I would consider the chapter closed. DV IS WOV LWK:KW 18EVEDBA BECEMED 380 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 10, 1941. Mins TO Secretary Morgenthau FROM Mr. Cochran AL CC: Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns £71,000 £68,000 The Federal Reserve Bank of New York purchased £10,250 in registered sterling from the French-American Banking Corporation. Open market sterling held steady at 4.03-1/4. Transactions of the reporting banks were as follows: -00 Sold to commercial concerns Purchased from commercial concerns & 2,000 In New York, the closing rates for the foreign currencies listed below were as follows: Canadian dollar Swiss franc (commercial) 12-7/8% discount .2321-1/2 Swedish krona Reichsmark .2384 .4005 .0505 .2325 .0505 .2066 Lira Argentine peso (free) Brazilian milreis (free) Mexican peso Ouban peso 4-11/16% discount In Shanghai, the yuan was again quoted at 5-5/16 and sterling was 24 lower at 3.92-1/2. There were no gold transactions consummated by us today. The Federal Reserve Bank of New York reported that the Bank of Canada shipped $3,642,000 from Canada to the Federal for account of the Government of Canada, for sale to the New York Assay Office. The State Department forwarded a cable to us stating that the following gold shipments were made from Australia, for sale to the San Francisco Mint: $4,687,000 shipped by the Commonwealth Bank of Australia, Sydney, to the Federal Reserve Bank of San Francisco. 94,000 shipped by the Bank of New South Wales, Sydney. to the American Trust Company, San Francisco. $4,781,000 Total -2- 381 In London, the prices fixed for spot and forward silver were unchanged at 23-1/2d and 23-7/16d respectively, The U. S. equivalents were 42.67 and 42.564. The Bureau of Foreign and Domestic Commerce reported on April 9 that two lots of refined silver bullion, containing a total of 831,000 ounces, were transported from Monterrey, Mexico, to San Francisco, for trans-shipment to Bombay, India. Together with the 1,572,000 ounces reported by us yesterday as having left New York for Bombay, this makes a total of 2,403,000 ounces consigned to India, The current Hindu marriage season, incidentally, was reported to be one of the factors tending to increase the demand for silver in the Indian basaars, 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 With reference to the four silver exports from New York to India mentioned yesterday, we understand that in one instance, Bombay interests paid 35-1/4 per ounce for spot delivery of the silver in New York. We made no purchases of silver today. A mp CONFIDENTIAL 382 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE TO Secretary Morgenthau FROM Mr. Cochran April 10, 1941 FOR Official sales of British-owned dollar securities under the vesting order effective February 19. 1941: No. of Shares $ Proceeds of Nominal Value $ Proceeds of Sold March 31 April 1 2 3 4 5 Shares Sold 70,918 226,856 35.858 72,065 66,240 20,600 25,000 70,600 47.330 7.046.208-1/2 222.728.950 26,704,650 25,963,272 7,518,145-1/2 232,102,107 Nil 471,937 Nil 25,000 Nil Nil TOTAL 2/22/40 to 4/5/41 Bonds Sold 1,659,484 3,545,141 1,221,974 1,260,693 1,685,865 Nil 9,373,157 Sales from 2/22/40 to 3/29/41 of Bonds Sold 26,775.250 21,205 13,009 Nil 13,116 Nil Nil 26,010,602 Miss Poate reported no sales of non-vested securities for the week ending April 5. XM.P. 383 BRITISH EMBASSY, WASHINGTON, D.C. PERSONAL AND April 10th, 1941 SECRET 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, Halifax The Honourable, Henry Morgenthau, Jr., United States Treasury, Washington, D.C. 384 TELEGRAM FROM LONDON DATED April 8th.1941 NAVAL Photographic reconnaissance on April 7th showed 2 German battle cruisers still at Breat and 2 pocket battleships and 2 Hipper class cruisers at Kiel. 2. As a result of fire His Majesty's Armed Merchant Cruiser "Comorin" abandoned and sunk. Ships company taken off. During air raid Piraeus night of April 6th/7th, 3 ships hit by bombs and mines laid. British ship of 7,500 tons blew up whilet alongside start= 3. ing many fires. Some ships burnt and severe damage caused to dock area. Port will be closed several days. 4. His Majesty's Cruiser "Cape Town" torpedoed by E.boat off Massawa night of April 7th reported still afloat. 5. Attacks on shipping. British Tanker (8,250 tone) mined off East Coast early the 8th and reported sinking and British ship (1,750 tons) reported 2.15 Dome 7th rapidly sinking 125 miles off Freetown. 6. MILITARY. GREECE. To 9:15 Demo April 6th. German advance from Nevrokop towards Drama held up but enemy gained some ground west of Rupel. Position east of Struma report ed intact. 200 German Parachutists landed South of Rupel; all killed or captured. Situation Komotin and X. Sectors obscure. 7. YUGO-SLAVIA. Yugoalavs reported advancing into Bulgerian 385 Bulgerian territory east of Carevo Selo towards Gorna Djumaya. German thrust towards Kamanovo and Skopcolle continues. 8. ROYAL AIR FORCE. April 7th. Six medium bombers again attacked Ijmuiden steel works scored several direct hits. 9. NIGHT OF APRIL 7th/8th. 265 bombers sent out; 229 to attack deck yards at Kiel and 36 to dooks at Bromerhaven and Enden; 2 missing definite and 3 more probably. 10. GERMAN AIR FORCE.April 7th. Only few enemy aircraft came inland. Two destroyed by fighters. 11. Night of the 7th/8th. 395 enemy aircraft operating 5 destroyed and 2 others damaged by night fighters. 12. HOME SECURITY. NIGHT OF 7th/8th. Enemy activity widespread. Main attack on Glasgow and Clydeside where fires started in ship yards but only 1 serious. Other attacks on dock area Belfast where some damage, also Shorts Aircraft Works at Rechester and oil Cisterns at Thameshaven where fires started. Damage though extensive does not seen to correspond with scale of attack and casualties appear slight. 13. STOP PRESS. BALKANS. TO 9:00 A.M. APRIL Veha Latest reports following positions of German forces; 1 armoured division and 1 infantry division Kumanovo moving southwest. Elements of German troops Veles and on road 10 miles south west moving toward Prilep. Infantry division 10 miles/ 386 miles northeast of Stip. An armoured division 5 miles northwest of Lake Doiren going south. One mountain division east of Lake Doiren and another just over Greek defence lines in the Struma Valley. Two divisions 10 miles east of X. Six German divisions reported on Hungarian frontier. 387 CONFIDENTIAL MILITARY INTELLIGENCE DIVISION WAR DEPARTMENT TENTATIVE LESSONS AVIATION No. 15 Washington, April 10, 1941. 0-2/183-345 NOTICE The information contrined in this series of bulletins will be restricted to items from official sources which are reasonably confirmed. The lessons necesserily are tentative and in no sense mature studies. This document is being given an approved distribution, and no additional copies are available in the Military Intelligence Division. For provisions governing its reproduction, see Letter TAG 350.05 (9-19-40) M-B-M. VISIT TO AN R.A.F. FIGHTER STATION SOURCE Information in this bulletin is besed upon recent reports of American official observers in England. CONTENTS 1. THE STATION AND STATION PERSONNEL 2, FORMATIONS 3. TACTICS 4. PILOTS 5. MAINTENANCE, SERVICE, AND EQUIPMENT 6. DEFENSE CONFIDENTIAL -1- 388 CONFIDENTIAL VISIT TO AN R.A.F. FIGHTER STATION 1. THE STATION AND ITS PERSONNEL The group visited by the observers consists of three squadrone of Spitfires, 8 station headquarters squadron, supporting antiaircraft and airdrome defense forces, and a small number of auxiliary and service units. Nearby is a dummy field, as well as a satellite field at which a squadron of Defiants operate as night pursuit. Units are all under the command of a group captain. The establishment is permenent, and the R.A.F. calls it "station." Besides a complete peacetime base, it comprises improvised defense works and temporary buildings added for the expanded garrison after hostilities commenced. The landing field is an irregular oval, and surfaced and gently sloping to the east and south. Running around the edge of the field and flush with it is a paved road called the perimeter track. The area enclosed within the road is roughly estimated at 2500 feet by 3500 feet. Spotted irregularly around the road are twelve or more "dispersal pens," each designed to hold two airplanes. In addition, there are three hangars, each of which may house from one to four air- a planes undergoing work. A few additional airplanes were seen scattered about at the edges of the field, unprotected by the dispersal pens. Although the field has been attacked in four separate daylight raids and several hundred bombs have fallen on the field or in the vicinity, the buildings have thus far escaped damage, except that one permenent building was hit while under construction. The holes in the field and the damaged dispersal pens, were quickly repaired after ench bombing and the field was never out of use for more than 24 hours. Security forces and entiaircreft units are constantly ready, but in the main the work of the station moves on without noticeable interruption. A sod field, if soil and weather permit its establishment, is preferred to ordinary runways, for the latter are hard to camouflage and are not so quickly repaired after bomb hits. Squadron personnel live less than a quarter of a mile from the field. This is essential in the case of interceptor units. The three operational squadrons have very little to do with administrative matters; base personnel attend to such details. Records of personnel and service are kept by the headquarters squadron: supply and equipment paper work is handled by the station equipment brench and the accounting branch: messes are run by organizations other than the squadrons themselves. In fact, squadrons perform only the operational duties of flying and maintenance. CONFIDENTIAL -3- 389 CONFIDENTIAL The station commanding officer delegates practically all administrative detail to an executive called the station administrative officer, who is assisted by an adjutant and an assistant adjutant. There are about 2500 people at this station, of whom 1100 are in the station headquarters souadron and 500 in the three operational squadrons. The remainder are attached antiaircraft, infentry engineers or sappers, and miscellaneous troops. The station headquarters squadron is organized as follows: Officers a. Station Headquarters Section 16 b. Operations Room Section 12 259 88 C. Defense Section Equipment Section e. Accounting Section f. Signal Section g. h. 1. 316 6 d. 21 2 15 2 95 2 Workshops Section Bombing Range Section Airmen 24 0 11 0 Station Engineering Armament, etc. 4 Total 933 44 Women's Auxiliary Air Force 104 5 117 There are about 200 soldiers in antiaircraft, 200 to 300 in infantry, 300 R.A.F. airmen primarily engaged in airdrome defense, and about 60 sappers with rifles in reserve. In the remainder of the garrison, meny of the men are armed with .45-caliber pistols. When the R.A.F. was expending, each squadron was split, and replacements were added to make two squadrons. Present practice is to form new operational units at an operational training center and to continue operational training until these units are ready to relieve active units. 2. FORMATIONS Formations flown by fighter squadrons are based upon the three ship Vee element. They are shown below: a. I Fighter formations ascend and descend through over- cast in three or six-ship flights as training and conditions of visibility warrant. (2) (1) CONFIDENTIAL -3- 390 CONFIDENTIAL Take off in clear weather in flights of six b. planes as in (2) above, and join in twelve-ship aquadron formation of three plane Vee stepped down. In cruising, the leader of the last element does a figure "8" as lookout below. The two wing men of the last element alternate back and forth as lookouts from above and down to the level of 1 the leading element. 34 2 3 When an enemy is sighted, announcement is made over the voice radio in reference to the leader as above or below in clock code. Example: "Six bandits three o'clock below". It should be of interest to note that the last element - lookouts - in this formation are known as "Tail End Charlies" and are referred to in squadron orders as Charlie 1, 2, and 3. c. Cruising formation, six-plane flight. Charlie 1 above and Charlie 2 down to level of leader Same as 1 Cruising formation of three plane flight sometimes sent out as check on depth of overcast or as small patrol. When in the clear, thus: d. CONFIDENTIAL 4 391 CONFIDENTIAL Charlie above and across, never below, leader responsible for rear Some squadrons - 12 planes - prefer to cruise in this manner. When attacked by hostile fighters, they always attempt e. at least to fight in pairs. This formation is very much like our two-ship formation, but elements are more in line. Stepped down Stepped Variation down Below Charlies alternately above and to level of Above and to level of leader leader If attacked by hostile pursuit squadrons go into "line astern" or string stepped down by flights of six. f. CONFIDENTIAL -5-- 392 CONFIDENTIAL Leader and last man check rear in rear vision mirrors "Line estern" is inveriably used for all attacks except when hostile formations are met head-on. g. If enemy pursuit is sighted with altitude advantage, the squadren goes into a defensive circle - our Lufberry circle - and attempts to climb the entire circle to an advantageous altitude. as F the # 4/2 is th as ap H a h. All cruising formetions of any type always have lookouts, or Cherlies. 3. TACTICS a. Attacking Methods Spitfire squadrons cruise in columns of sections as shown in 2b. Planes are close together except for the last section, which forms the rear guerd. The actual formation adopted varies according to the desire of the squadron leader. When attacking, planes usually divide into two flights of two or three sections each, the flights forming "line astern" stepped down - a close string with each pilot aiming and firing individually. Whenever possible, pilots attempt to strike bombers head-on, in which case the flight attacks the bomber formation in a broad Vee. One squadron leader stated that he eimed first at the engine nacelle, since a disabled motor so slows the target plane that it is easy to finish off the cripple in a second attack. Against hostile fighters, "line astern" tactics are employed. If the enemy formation has en altitude adventage, the leader circles and closes the line into a defensive circle - a Lufberry circle - and mainteins it until a position favorable for attack has been gained or until the enemy pullo away. Once formed, the circle usually gains altitude as it moves around. The R.A.F. does not use massed fire - that is, fire in which only the leader aims, and the remainder of the flight fires on his aim. CONFIDENTIAL -6- 393 b. Miscellaneous Long range firing is not used, since British pilots state they cannot afford to throw away rounds at long range with only 15 seconds or less of fire. Bullets are also more likely to miss, to bounce off armor, and to spread more at long renge. Guns are sighted to intersect at 250 yards. The pilot aims at the motor first, and when the hostile plane is crippled, he attempts to cut the tail off. Personnel are apt to be too hard to hit because of armor protection. Pilots of fighters prefer speed first, but climb and maneuverability also are vastly important. Thus some compromise is necessary. One solution is to employ several types and use them as a team in accordance with the situstion. A very fast, high flying fighter, such as the Spitfire, is needed to combat the German fighter. The highly maneuverable, rugged, and dependable Hurricane is more effective against hostile bombers end reconnaissance. The controlling factors are the hostile situation and flying conditions. 4, PILOTS Some information regarding pilots of fighter squadrone is given here. This information was collected in talks with pilots and the group captain at the fighter station. High altitude flying is indispensable to daytime interceptor pursuit. All pilots insist they must meet enemy fighters on equal terms in respect to altitude, elthough of course they prefer to have an altitude advantage. The trend is to engage at ceiling, with each side trying to out-top the other. German fighters raiding Great Britain have the advantage of initiative and a long approach for gaining altitude. The usuel height given e petrol is 30,000 feet and it works up from there if time is available. The only physical reaction normally noticed is a degree of exhaustion efter each flight. In extreme cases, when a pilot is not entirely fit, stomach distress is felt, and some pilots complain of pain from "the bends" in wrists and fingers. Fighter pilots fly from two to four high altitude missions a day, with only one or two days a week to rest. If this schedule is adhered to, they should be relieved from an active sector after about six weeks. Such relief is best provided by removing the entire squadron to a quiet sector. The three squadrons visited had been in action for more then two months, but with winter's shorter days and less action, they were not as fatigued as they would have been in July or August. The average mission, called a "sortie," is less then 1} hours in duration. CONFIDENTIAL -7- 394 CONFIDENTIAL The flying hours of pilots depend upon enemy activity and availability of relief. Some units average 60 hours per month in an active sector, but the average is about 40 hours per month. Pilots are expected to be able to take off with ground visibility as low as 50 yerds, but this is extreme, and it invites accidents. In low ceiling and quarter-mile visibility or higher ceiling, the planes of a flight take off together and climb through the overcast in sections, re-forming on top. The same procedure is followed in descending. When visibility and ceiling are bad at the home field, the squadron is landed at another airport. 5. MAINTENANCE. SERVICE, AND EQUIPMENT a. Maintenance (1) Airplanes Stockage of parts and other supplies is not fixed by percentage of new airplanes, but is based upon consumption records and general availability of materials. Elaborate percentage tables prepared in peacetime are completely disregarded in war, according to the equipment officer. Three spare engines per squadron are allotted to the station: these are assigned directly to the squadrons and are kept by the station engineering section. Very few engine changes occur because of the relatively short life of airplanes in active combat squadrons. Intermediate storage depots, similar to American air corps depots, are used. All classes of property are supplied, or at least controlled, from one intermediate depot. (2) Air Fields Repair of damage to the air field and defense works and emergency repair of roads at the station are functions of a section of Royel Engineers consisting of about 68 men and two or three officers. This unit is stationed at the airdrome for the specific purpose of keeping the air field serviceable. When bombs fall on the field, rubble is dumped into the holes by trucks. A gasoline-operated bulldozer pushes rim earth on top of the rubble in the crater and then runs over it for the purpose of packing it down. The entire petch is finally leveled with a power roller, and sometimes an asphalt and macadam surface is applied. Work commences at daybreak after a night attack, and all holes are filled and surfaced within a few hours. Meanwhile, bed places are marked with flags, and flying continues so long as a sufficiently large undamaged area is available for a take-off. CONFIDENTIAL -8-- 395 CONFIDENTIAL When they are not engaged in making emergency repairs, the engineers install protective sendbags and repair and reinforce blockhouses, earthworks and barricades. The construction, maintenance and repair of structures are responsibilities of the Works and Building Branch, similar to the United States Q.M.C. Original construction, including shelter trenches, dispersal pens, and revetments, was done mostly by private contractors under the direction of Works and Buildings. b. Services (1) Fuel and Oil Fuel and oil are delivered by contractors in tank trucks and then drained into underground storege tanks having a capacity of about 78,000 imperial gallons. They are distributed to airplanes by small, light servicing trucks having capacity of 400 gallons each. These trucks are quickly filled from overhead pipes at the main fuel storage tanks. Airplanes are also serviced from overhead hose lines. The equipment section of the station headquarters squadron is responsible for distribution of fuel and oil to airplanes. (2) Signal The signal section maintains and operates the Tannoy loudspeaker installation for publishing pertinent instructions and information constently. The entire commend may be instantly alerted, ordered to readiness, or told to "stand down." Telephone, radio, and teletypewriter installations, as well as various signal lights in operations control room, are used. In the case of fighter aircraft, radio operators in the squadron replace unserviceable radio sets with serviceable sets as they are needed. Except for simple tests and replacement of dead tubes, no rrdio repair is attempted in operating squadrons. Complete radio sets for airplanes are always at hand for installation in fighter airplanes with minimum loss of time. (3) Ammunition and Armament. Machine gun ammunition is issued daily to flights in small lots from the station armement section storehouse. A small stock - enough for one day's operations - is kept on hand in each dispersal pen. Stock consumed is replaced the following day. CONFIDENTIAL -9- 396 CONFIDENTIAL In operating flights, the number of machine guns kept on hand as spares is equal to ten per cent of the total number in use. In the Spitfire, machine guns are located in the wings and are completely covered. They are heated by air ducts leading from the radiator to each gun. The blast tube opening is covered over with a fabric patch coped to the wing as a protection against weather on the ground and against moisture or ice in flight. At the first burst of gun fire, the patch is blown off. Of eight guns, three usually fire ball ammunition: one gun, incendiary Mark IV, slightly explosive; two guns, armor piercing ammunition; and two guns, outboard, ball ammunition except for the last 50 rounds, which are tracer. There are 350 rounds for each gun, or enough for 15 seconds of fire. Total fire power amounts to 160 seconds at the rate of 1100 rounds per minute per gun. C. Equipment. (1) Flying Clothes In general, British flying clothing is similar to that used in the United States: electrically heated clothing was not used at the station visited. Hip length woolen stockings procured from the Royal Navy were issued to pilots to protect their knees from the cold. The pilot usually wears gloves, a sweater, and a scarf; he always wears a helmet, en oxygen mask, goggles, and R.A.F. flying boots. If he wears a flying suit, it is an Irvin suit, with or without wool liner. Some cockpit warmth is gained from the engine, but there is no cockpit heater provided. Pilots frequently open cockpit hoods when they are in action. Some vilots grease their faces between oxygen mask and helmet, since goggles slide or blow off and cheek bones become exposed to the cold air streams. In combat, goggles with partial face masks are considered essential to protect the pilot against gasoline, prestone, fire in the cockpit, or glass particles sprayed in the face from hits on the windshield. Few pilots remove goggles when entering combat. A primery consideration in flying clothing for the Fighter Command or interceptor pursuit pilot is the time factor at the take off. Since R.A.F. boots are suitable for wear about the field, in the mess, or in the air, the pilot's feet are always ready when he is "available" or "in readiness." The helmet assembly has earphones, microphone, oxygen tube, and goggles attached. It is split up the back, and when the pilot is preparing for a take off, he can quickly pull on CONFIDENTIAL -10- 397 CONFIDENTIAL the assembly and adjust it. It may be kept in the cockpit. If the helmet is donned outside, the oxygen tube and redio cords must be plugged in. This is very easily done. (2) Oxygen Oxygen equipment is similar to that used in the United States. It consists of high pressure bottled oxygen with a regulator valve. The tank is charged to about 1800 or 2000 pounds per square inch, and the automatic regulator can be set for normal feed according to eltitude. Manuel control allows for excessive rate of supply if this is desired. Except when feeding is at the normal rate, supply is likely to run out before fuel is exhausted. Pilots are not in favor of pressure cabins. They fear the effect of bullet or cannon shell holes end also the impairment of vision, particularly in dives. At the present time Spitfire cabine tend to ice up inside of the windshield in a long dive as a result of body and breath moisture, cold glass - particularly the one-inch bullet-proof glass - and imperfect ventilation with no cockpit heater. Pilots generally believe that this condition would be aggravated in pressure cabins. If pressure is needed they argue for pressure suits as lighter, cheaper, and more dependable, even if they are clumsy to wear. 6. DEFENSE a. General The defense of the airdrome and its airplanes against attack from the ground by parachute troops, against attack from the air by transport or by flying columns of invading forces, and against sabotage is the responsibility of the airdrome defense officer. Revetments pre used for the protection of airplanes. Fighter planes stend in dispersal pens in the open, ready for action, except when undergoing their 30, 60, and 90-hour periodic inspections. These take place in a hangar. The following passive defense measures against air attack are used: (1) Dispersal; (2) Camouflage; (3) Shelter trenches for personnel; (4) Revetments for airplanes; (5) Underground and partly bomb-proof shelters for gasoline, oil, and ammunition; (6) Sandbag protection at critical points; (7) Warning system to alert the entire command. CONFIDENTIAL -11- 398 CONFIDENTIAL The following active defense means are used for olose-in defense of the air field: (1) Half battery of four 4.5-inch antiaircraft guns; (2) Half battery of four 40-mm. Bofors entiaircreft guns; (3) Several armored trucks, each mounting two .303-celiber machine guns; (4) About six block houses containing two machine guns each; (5) A system of trenches and earthworks forming strong points near each block house; (6) A barbed wire barricade completely encircling (7) the post; A company of infantry to man ground defenses, and prevent sabotage; (8) A section of Royal Engineers, all trained riflemen; (9) R.A.F. personnel of the airdrome defense section, some of whom trained machine gunners for air or ground defense, and others riflemen; (10) A system of spotters, who keep a constant watch from a point on a hangar roof; (11) Intelligence received from sector control (operations room) by Tannoy and telephone; (12) Fighter Aircraft for interception of the enemy, although such aircraft would not normally operate for close-in protection. b. Camouflage Camouflage of the entire station was planned by a technical expert and the work was performed by station personnel. Paint and turf have been used, and there are shelter trenches, revetments, and a small amount of netting around gun emplacements. This station is not easily located from the air because of its irregular outline, its arrangement of hangers and other buildings, the close proximity of the village, and absence of any distinguishing landmarks. Peinted stripes on the turf landing area simulate hedgerows when seen from aloft and seemingly break up the large field into seemingly small fields. These simulated hedge-rows must be renewed frequently, since the paint tends to wash away when it rains. The dummy air field nearby has attracted a great many bombs. It is fairly obvious that this station could not have escaped severe damage had it been located, like many American airports, in the bend of a river or on a shoreline. The first essential for concealment of an operational air field is a naturally inconspicuous location. CONFIDENTIAL -12- 399 CONFIDENTIAL C. Chemical Defense The chemical defense system comes under the station gas officer, who, in turn, is under the airdrome defense officer. He is in charge of the gas defense center, decontemination units, gas equipment reserve, and gas defense squads, and he is responsible for gas training. Each unit also has its own gas officer. For equipment, every individual on the post is issued a No. 5 gas equipment set: civilian employees draw sets on loan. The set consists of a gas mask with container, anti-dim, six pairs of eye shields, a cape, e hood, and in some cases trousers. About a third of the personnel also have gauntlets and overboots. Each squadron has on hand, in a convenient storeroom, a 200 per cent reserve of No. 5 ges equipment and special equipment for decontamination squads. In the headquarters squadron storeroom are gum boots, short coats, trousers, gauntlets, lanterns, wheel- barrows, picks, shovels, and long-handled brushes - enough to equip 28 men, or four squads, for decontaminetion work. In nearby storage sheds there are many tons of bleaching powder. Dumps of loose sand and piles of sandbags are located at intervels of approximately 200 feet all over the post. While the sand is used primerily to quench incendiary bombs, it is also available for gas defense purposes. Shovels are posted at the entrances of all buildings. Each squadron has trained decontamination squads. All occupied buildings end all shelters are provided with double gas-proof blanket frames at entrances, although blankets are not always in place. The danger of invesion is now held to be remote, and consequently gas attack is not considered imminent. With the exception of the fact that gas blankets are absent from some doorweys, all possible precnutions against gas attack appear ready for instant use. Gas alerms are strategically located, and the Tannoy speaker would doubtless be used to issue general warning as soon as hostile gas actions were reported. In addition to normal reserves of anti-gas clothing, large stocks of light weight enti-ges hoods, coats, trousers, overboots, and gauntlets are maintained for issue to those whose duties require them to work out doors when subject to gas exposure. CONFIDENTIAL -13- CONFIDENTIAL 400 Persphrase of Code Cablegram Received at the War Department at 13:00, April 10, 1941. London, filed 18:30, April 10. The War Office has released the fellowing information to date of mean today. 1. The British situation east of Tobruch in Idiga is serious. 2. In Greese there is evidence of a German double envelopment of the Basters Nasodenian Greek forces fres Salenika. The Germans are apperently taking up positions in the Variar Valley. 8. Reports have been received that a Germa force has advanced south into Tageslavia from Hungary. 4. Germa mechanised columns took Fresevas and are proceeding to Printing and The columns advancing from Prilep to Menastir have proceeded as far as Nogila. The columns which took Wish and have now proceeded as far as Proinspije and Basanj consisted of 5 German divisions some necktained. Other columns crossed the Demise as Tekijo and Kindeve. Virevities and Koprivaion were captured by forces which cressed the Drava River. SCANSON Retributions Secretary of War State Department Secretary of Treasury Under Secretary of Bar Chief of Staff War Plans Division Office of Naval Intelligence Gas Mr Gerps CONFIDENTIAL CONFIDENTIAL California of the War Department 401 at 10:11, April 10, 1941. London, filed 15:35, April 10, 1941. 1. British Air Activity over the Continent. 4. Daylight, April 9. Operations were limited to sweeps of pursuit ships over occupied France and Belgium and airplane conveys ever seaborne traffic off the coasts of England. One freighter was damaged by Constal Command fighters in raids off the Holland and Breton soasts. b. Right, April 8-9. Serious destruction is claimed for British flights totaling 160 planes over Kiel and 39 over Bremerhaven and Retterian. Persuit squadrone were active in bonbing German air fields in coopied France with some success reported. 2. German Air Activity over Britain. a. Night, April 9-10. Binningham and Type were heavily bombed in a series of widespread raids. Information as to damage is lacking. k. Daylight, April 9. German operations were limited to seattered flights of single planes over Partamouth and Pools and three over Deal. 3. Air Lesses British Theater. &. British, night of April 8-9. Five British planes failed to return from raids over Holland and Germany. None was lost in the raids over cocupied France. h. German, night of April 9-10. Night pursuit ships shot down four German planes with two more probable and two damaged. Daylight, April 9. Four enemy planes were shet down with two probable and four damaged. CONFIDENTIAL CONFIDENTIAL 402 4. British Air Activity in Middle Eastern Theater. British air forces were active in operations from Greece and Egypt against German ground troops, mechanised vehicles, and planes in Yugoalavia, Greece, and Bangasi, Libya. 5. Intelligence from British authorities in both Greese and Exypt is much retarded in reaching London. 6. Heavy destruction is reported as result of the Germin reids of 180 estimated planes night of April 8-9, especially in Coventry. The Dainler factory and other important works bombed in secondary raids on Portsmouth suffered serious damage. 7. British Military Intelligence reports that at the time of the Genein attack on Yugoalavia six armies out of seven were not fully mobilised and the one which was mobilized (3d Army) was advancing tennis Albania. Disposition of arries was as follows: 4 - Northern Yagoalavia. 2nd Army - partly to Sarajevo Aren, the rest seattered in other amies. 1st Army - partly in Pirot Area, rest driven west of Shoplie. SCANLON Distribution Secretary of War State Department Secretary of Treasury Under Secretary of War Chief of Staff War Plans Division Office of Naval Intelligence Air Corps Assistant Chief of Staff, 0-3 -2- CONFIDENTIAL CONFIDENTIAL 403 Paraphrase of Code Ballegria Received as the Yes as 13:53, April 10, 1941. Softa, filed 20:30, April 9, 1941. 1. In reply to your Subtograph Newber Six. - Balgurian divisions are definitely I to be located as follows: frestier: Second Rapid Division (Half only), 1st, Sad (Half only), 3ml, 4th, 5th, Stan, 9th, 10th, 15th Informay divisions. treatter - Regis (Half only), Red Infentity Division (Half only), 18th, 39th. can, 7th (less 39th Inf. Regt.), asea, 26th (tromplete) infortay divisions. 14th informay divisions. a. Selging from the German treep dispositions, as attack - Togoslavia - libely at - time. Their divisions are placed as follows: Section area " frestier s or 5 divisions. Aves S.W. of Beftal , or s divisions including - medicained division. Princish ml - south of Please - Street tember 4w3 divisions. - I total treatment 4 w divisions placed in year of the Dal- Secretary of Mar office of Naval Intelligence State Department Secretary of Secondary Union decretary of Year obses of Staff Mar Please Division CONFIDENTIAL CONFIDENTIAL 404 Paraphrase of Code Cablegram Received at the Mar Department at 10:12, April 10, 1941 Lossion, filed 14:45, April 10, 1941 1. In reference to your request for information dated April 7th in regard to strength and disposition of the British in the Balkans, this office has accured unofficial information confirming our report of strength of the British armies in Greece embled on April 8th.* All troops are from General Wavell's communi and are now in defensive positions approximately Veria-Dessedetrove and south of the Monastir gap. 2. At the beginning of the Middle East operations Prime Minister Charahill personally prohibited the Ministrice from reporting strength, disposition or movements of British troops, High authorities requested that we be given the information you acted for without success. It is not impossible that the desired information may be submitted direct to the President. SCANLON # Resumes Two infantry divisions, an amored group and my antiairwaft batterios, eight bombows, three fighter and - - cooperation spatress. Distributions Secretary of Mar State Department Secretary of Treasury Under Secretary of War Chief of Staff Assistant Chief of staff, 0-2 War Please Division office of Naval Intelligence Air Oarge CONFIDENTIAL CONFIDENTIAL 405 Paraphrase of Code Indiagram Deceived at the Mar Department at 10:22, April 10, 1941. Dame, filed 14:05, April 9, 1941. Large Italian and German foress have been concentrating near Brindies and Bari. They include ensered elements. The can- contention has been in progress for the last four days. The intembies is a leading operation es the vest coast of Greese. This is based on statements of a thoroughly trustworthy source. FINER Distributions Secretary of War State Department Secretary of Treasury Valor Secretary of Mar Whief of Staff Your Pleas Division office of Naval Intelligence Air Garge CONFIDENTIAL