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Prepared by: Mr. Mr. Murphy Mr. Bans 319 PARTMENT INTER OFFICE COMMUNICATION DATE September 17, TO FROM 1941 Secretary Morgenthau Mr. Haas Subject: Current Developments in the High-grade Security Markets; Maturity Preferences of Various Classes of Investors in Government Securities SUMMARY (1) Government securities have shown only small price movements since September 2, with bonds and short-term notes fractionally lower and long-term notes unchanged (Chart I). The average yield of long-term partially tax-exempt bonds, moving inversely to prices, rose from 1.92 percent on September 2 to 1.95 percent at yesterday's close. (2) So far this month the corporate and municipal securities markets have been very quiet with little price movements (Charts II and III) and an extremely small volume of new offerings. For the two weeks ending September 12, new public offerings totaled only $10.6 millions with the volume of the past week the smallest since June 1940. (3) The Treasury Survey of Ownership of Government Securities shows that the apparent con- centration of short-term securities in commercial banks as a class 18 largely the result of the extreme concentration of such securities in several large New York City banke (Chart IV). These New York City institutions are in a stronger position to meet a rise in interest rates than the banks outside New York City which hold longerterm portfolios. Such banks outside New York City, being more vulnerable to a decline in bond prices, would be apt to view a sharp rise in interest rates with mixed feelings. 320 Secretary Morgenthau 3 Secretary Morgenthau 2 321 II. Other High-grade Security Markets I. United States Government Securities Government securities have shown only small price movements since September 2, with bonds and short-term notes fractionally lower and long-term notes unchanged (Chart I). The taxable bond issues declined less than tax-exempt bonds, sustaining, on average, only one-half the small losses of the latter. The high-grade security market has been very quiet so far this month. Not only has there been little price move- ment, but the volume of new bond and note offerings on the New York market has been extremely small. The Treasury average yield of five high-grade corporate bonds has moved within a range of only one basis point since September 2 and, at yesterday's close, was down just one point from the beginning of the month (Chart II). Tax-exempt notes were weaker than taxable ones for near-term maturities and slightly stronger for longer-term The price movement of municipal securities this month has been only slightly greater than the negligible movement of corporate bonds. The Dow-Jones weekly average yield of municipal bonds declined three basis points the first week of September and has since remained constant at 2.02 percent ones. The following table shows price changes by maturity classes since September 2 for taxable and tax-exempt notes and bonds: (Chart III). This is only one point above the record low yield for this average achieved the weeks of August 2 and 9. Average price change September 2 September 16 - Taxable : Tax-exempt : All issues (In thirty-seconde) new public offerings totaled only $10.6 millions, with the week ending September 12 having the smallest volume since ( Notes 1 3 years 3 5 years -2 0 - 8 +1 6 The August lethargy in the volume of new offerings continued into September For the two weeks ending September 12, early June 1940. More than half of these two weeks' volume consisted of $5.8 millions New York, Chicago and St. Louis Railroad Company equipment trust certificates allotted by competitive bidding and reoffered at prices to yield 0.402.40 percent for 1-10 year maturities. This issue has all been sold. Bonds 5 - 15 years to call * 15 years and over to call -16 -14 -13 -13 None outstanding. The average yield of long-term partially tax-exempt Treasury bonds, moving inversely to prices, rose from 1.92 percent on September 2 to 1.95 percent at yesterday's close. week. The fall pick-up, however seems to have begun this Yesterday two issues, $14.7 millions St. Paul Union Depot Company refunding bonds and $2.1 millions Wichita Union Terminal Railway Company bonds, were offered for com- petitive sale. Both of these issues were purchased by syndicates headed by Salomon Bros. & Hutzler, and are being reoffered today at prices to yield 3.00 percent for the 30 year St. Paul Union Depot bonds and 0.40-2.88 percent for the 1-20 year Wichita Union Terminal Railway bonds. III. Maturity Preferences of Various Classes of Investors in Government Securities It has long been known that commercial banks have preferred hear-term issues of Government securities, while insurance companies and mutual savings banks have followed policy of holding greater percentages of the medium- to longer-term issues. New data secured by the Treasury Survey . 322 Secretary Morgenthau - 4 of Ownership of Government Securities shows that a surprisingly large share of the preference for short-terms by commercial banks as a group is accounted for by the extreme preference for such securities by a few large New York City institutions. The Treasury Survey shows that on July 31 the three banks in New York City having over $2 billions each of assets (Chase National Bank, National City Bank, and Guaranty Trust Company) had their Government security portfolios almost completely invested in securities with first call or maturity dates of 5 years or less. Ninety-three - percent of the holdings of Government securities (including guaranteed securities) by these institutions were in this maturity class. All other New York City banks, on the other hand, held only 58 percent of their Government security portfolios in maturities of under 5 years, although 51 percent of the total outstanding marketable debt consists of such securities. The following table compares the percent distribution of maturities of all outstanding marketable Government seouri- ties with the maturity distribution of the portfolios of the leading institutional investors: Total out- standing marketable issues Three Other Banks Mutual savings Insur- NYC NYC outside banks banks NYC 11% 26% 15% 14% 1 - 5 years 40 67 43 36 29 31 Under 5 years 51 93 58 50 33 34 5 - 10 years 22 26 26 32 27 6 10 15 years 19 13 18 29 20 1 Under 1 year 15 - 20 years 00 100 100 6 banks 4% 6 ance companies 3% 19 3 100 100 100 100 323 Secretary Morgenthau - 5 It will be noted from the table and from Chart IV that the distribution of maturities of the commercial banks out- side of New York City approximates the distribution of maturities of all marketable Government securities outstanding, indicating that these banks possess a representative cross section of all maturities. The well-recognized concentration of bank portfolios in short-term issues is to be found, therefore, not in the portfolios of banks outside New York City, but in the holdings of the New York City institutions, particularly the three largest banks. This concentration of New York City banks in shortterms places them in a stronger position to meet a rise in interest rates than those banks outside New York City with longer-term maturities. Because of their large commitments in short-term Governments the large New York City institutions would not be severely affected by the decline in bond prices which would necessarily accompany such a rise in interest rates, while at the same time they would be able to derive a substantial benefit from such a rise, both on their commercial loans and through reinvesting their Government security portfolios as they mature during the next few years. Interior banks, which hold longer portfolios and consequently are more vulnerable to a decline in bond prices, would be apt to view a sharp rise in interest rates with more mixed feelings. Attachments 324 Chart I CHANGES IN THE PRICES OF U.S. SECURITIES Points Plotted Represent the Difference from December 20, 1940 Price of Each Maturity Class 1941 MAR. MAY 1941 1942 SEPTEMBER AUGUST JULY JUNE SEPT. POINTS POINTS (NET CHANGE) Saturday Quotations (NET ORANGE) Daily II +14 +3 +1 +1 +2 +1 Boans. OVER 15 Yes. TO CALL +1 + NOTES NOTES 3-5 Yes. THE 1-3 Yes. 0 0 0 - - -1 NOTES 1-3 Yrs. NOTES 3-5 Yas -1 -13 L -3 BONDS 5-15 Yes. TO CALL -1 BONDS, 5-15 Yes + TO CALL -11 BONDS -2 OVER Yes -5 TO CALL -24 -21 -24 -6 -2) -24 -24 -7 -3 - -34 -6 - H H -9 -34 -4 -10 -4 -4 - - Statistics JULY SEPT. 1942 7 the Secretary of the Treasury MAY mm will 14 21 JUNE 26 $ MAR. -4) 19 12 JULY 26 2 JAN. JAN. 16 9 -11 NOV. AUGUST 23 30 $ 13 4 20 SEPTEMBER 1941 F 153 305 Chart II AVERAGE YIELDS OF LONG-TERM TREASURY AND CORPORATE BONDS 1941 FEB 1940 .. MAR MAY JUNE 1941 JULY AUG OCT. SEPT. NOV. APP PEC JAN FEE MAR APR MAY JUNE JULY SEPT. AUG OCT NOV AUG JULY DEC SEPT Inverted Scele PER CENT PER CENT WEEKLY. Saturday Quotations 1.8 18 . 2.0 20 20 Long Term Treasury 2.2 22 Partially tax-exempt 22 Treasury Bonds or years or more to earliest call detail 2.4 24 2.4 2.6 26 20 Corporate 20 2.8 28 High-Grade 3.0 3.0 Corporate Bonds 30 3.2 3.2 32 3.4 1.4 14 3.6 3.6 36 PER PER CENT CENT PER CENT 100 100 1.00 Spread between Treasury and Coporate Bonds .80 80 80 Spread 60 60 60 40 40 40 20 20 20 0 a Just - UNE JUNE AUG SEPT OCT. NOV bet JAN FOR MAR APR MAY JUNE 194 - is the Secretary the Treatury . Change in composition of Long Term Treasury average . MAY DEC . APR NOV JULY 24 . MAR OCT " FEB SEPT 1940 - to 10 - AUS AND 1941 . JAN 0 1 AUX aller SEPT 87 o Chart III AVERAGE YIELDS OF LONG-TERM TREASURY AND MUNICIPAL BONDS Yields Based on Saturday Quotations 1940 MAR JAN 1941 SEPT APR DEC FEB APR JUNE JULY AUG SEPT OCT NOV DEC OCT Inverted Scale Inverted Scale PER CENT PER CENT Partially tax-exempt Treasury Bonds (12 years or more to eprivest call date) 18 18 2.0 2.0 2.2 2.2 2.4 2.4 26 2.6 Dow-Jones Average Twenty 20-Year Municipal Bonds 2.8 2.8 30 3.0 32 3.2 PER CENT CENT PER 60 60 Spread between Treasury and Municipal Bonds 40 40 20 20 JAN FEB --- MAR APR MAY - III ..... o - AUG SEPT OCT NOV DEC 10 AND JULY 1940 AUG SEPT OCT IT NOV DEC JAN FEB MAR APR MAY JUNE JULY T 1941 "Break - line indicates change in compension of Lang Term Treasury average offer the Secretary the Treasury F-134-B 0 Chart IV 327 MATURITY DISTRIBUTION OF GOVERNMENTAL SECURITY HOLDINGS" OF SELECTED INVESTORS As Percentage of Total Held 1-5 5-10 10-15 15-20 YEARS YEARS YEARS YEARS UNDER YEAR PCR PER CENT CENT 90 90 80 x 80 x x x 70 70 x x x x x 60 60 x x x x x xx x 50 x 50 x x x x x x x x x x x x x x x x x x x x x x x x 40 x x 40 x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x 30 x x x x x x x 30 x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x 20 x x x x x x x x xx x x x x x x x x x 20 x x x x x x x x x x x x x x x 10 10 x x x x x 0 N.Y.C. OTHER BANKS MUTUAL TOTAL BANKS N.Y.C. SAVING MARKETABLE OUTSIDE N.Y.C. BANKS 0 ISSUES OVER BANKS INSURANCE COMPANIES $2 BILLIONS . INCLUDING GUARANTEED SECURITIES - and - Secretary of the Treasury F 209 September 17, 1941 328 My dear Mr. Minister: I wish you would thank Lord Beaverbrook for his very kind message and extend to him my warmest greetings. Yours sincerely, (Signed) H. Morgenthau. Jr. The Honorable Sir R. I. Campbell, K.C.M.G.,C.B., Minister Plenlpotentiary, British Charge d'Affaires ad interim, British Embassy, Washington, D. C. By Messenger 3:00 file n.m.C. September 17, 1941 329 My dear Mr. Minister: I wish you would thank Lord Beaverbrook for his very kind message and extend to him my warmest greetings. Yours sincerely, (Signed) H. Morgenthau, Jr. The Honorable Sir R. I. Campbell, K.C.M.G.,C.B., Minister Plenlpotentiary, British Charge d'Affaires ad interim, British Embassy, Washington, D. C. By Messenger :00 September 17, 1941 330 My dear Mr. Minister: I wish you would thank Lord Beaverbrook for his very kind message and extend to him my warmest greetings. Yours sincerely, (Signed) H. Morgenthan, Ja. The Honorable Sir R. I. Campbell, K.C.M.G.,C.B., Minister Plenlpotentiary, British Charge d'Affaires ad interin, British Enbassy, Washington, D. C. By Messenger 3:00 331 BRITISH EMBASSY, WASHINGTON. September 15th, 1941. Dear Mr. Secretary, I have just received a telegram from the Foreign Office asking me to convey the following message to you from Lord Beaverbrook:"The measures you have taken recently to reduce the time involved in completing purchases under the Lease- Lend bring us reciprocal help and immense encouragement. Our gratitude to you is deep. We owe much indeed to all the generous assistance you give and the benefits you confer on us.' " Believe me, Dear Mr. Secretary, Very sincerely yours, The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D. C. R.I. Capbell 332 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE September 17, 1941 Secretary Morgenthau TO Mr. Kamarck FROM Subject: Airplane Deliveries to the British Summary 1. A total of 51 planes shipped is reported in the latest statement received. All of the planes went to the United Kingdom. 2. Seventeen Bell Airacobra (P-39) planes were shipped to the British during the week. This is by far the largest shipment of the type to date. The British now have 48 Aira- cobras in England. Division of Monetary -2- 333 Research Airplane Shipments to the British (From February 1 to September 13 by air January 11 to August 23 by sea) Table A. - Shipments by Area Total Latest Reported To Date Week To the United Kingdom Light and medium bombers Heavy bombers Naval patrol bombers Pursuit 34 857 0 43 73 O 17 57 Total to United Kingdom 1,030 51 To the Middle East Light and medium bombers Pursuit 190 o 516 0 Total to Middle East 706 0 To the Far East Light and medium bombers Naval patrol bombers Pursuit Trainers 6 0 9 o 0 145 0 55 Total to Far East 215 0 Totals Light and medium bombers Heavy bombers Naval patrol bombers Pursuit Trainers Grand Total 1,053 34 43 0 82 0 718 17 55 0 51 1,951 334 Division of Monetary -3- Research Table B. - Shipments by Types Latest Week Bell Airacobra (P-39) Boeing B-17 Brewster Buffalo Consolidated Catalina Liberator Curtiss Tomahawk Douglas Boston I Boston II Boston III Glenn Martin Maryland Grumman Martlet II Lookhead Hudson I Hudson III Hudson IV Hudson V North American Harvard II United Chesapeake Grand Total - All Types 17 O o Total Reported To Date 48 21 145 0 82 o 22 O 516 o O 5 0 1 72 213 150 0 9 0 1 29 203 0 18 0 344 O 55 0 51 51 1,951 Division of Monetary Research 335 Table C. - Plane Deliveries to the British by Weeks Light Heavy Bombers Feb. 8* Feb. 15* Feb. 22* Mar. 1* Mar. 8* Mar. 15* Mar. 22* Mar. 29* 22 25 - Apr. 5* Apr. 12* Apr. 19* Apr. 26* 21 - Bombers Pursuit Trainers Total - - - 25 - 100 - 139 - 27 3 39 - 35 - 62 - 25 5 16 26 17 4 37 - 10 - 3 29 - - 1 31 - 22 - 2 21 2 20 101 - 27 2 3 46 - 73 7 41 - 18 3 4 - 52 - 32 5 23 2 1 36 1 13 30 10 July 6* July 13* July 20* July 27* 19 2 8 61 June 1* June 8* June 15* June 22* June 29* - 28 56 15 27 106 10 - 3 61 28 19 7 - 25 65 - 21 5 55 100 - 59 - 5 37 2 - 45 45 29 34 1,053 52 50 1 3 - 3 - - - - 48 32 - 24 - 11 - 15 - - 1 51 84 96 - 20 1 1 36 44 4 - 53 49 20 - 34 41 4 1 - 45 46 - 7 26 28 - - Aug. 3* Aug. 10* Aug. 17* Aug. 24* Aug. 30* Sept. 6* Sept. 13* Patrol 7 May 3* May 10* May 17* May 25* * ( Bombers Naval - Week Ended and Medium 42 - 85 - 74 - 69 - 56 - 12 11 69 - 61 - 48 - 49 5 - - 4 - - 43 34 - 1 - 17 82 718 51 - 55 1,951 The date given is for shipments by air. Shipments by water start three weeks earlier. That is, the statement reporting the shipment of planes by air for the week ending September 13 would report the shipment of planes by water for the week ending August 23. 336 C 0 P Y FEDERAL RESERVE BANK of New York September 17. 1941. Mr. H. Merle Cochran, Treasury Department, Washington, D. C. Dear Mr. Cochran: At Mr. Knoke's suggestion, I am enclosing for your and Mr. Pehle's information a copy of a letter to the Board of Governors of the Federal Reserve System, analysing international movements of United States currency during recent months. Another copy will undoubtedly be forwarded to the Treasury Department by the Board. Very truly yours, /s/ Walter H. Rozell, Jr. Walter H. Rozell, Jr. Enclosures Copy:mew 9/18/41 FEDERAL RESERVE BANK OF NEW YORK September 16, 1941. Sirs: Pursuant to the Board's request of March 14, 1941, I should like to comment, rather briefly, on the movement of United States currency between the Second District and abroad since my letter of April 29, 1941. As can be seen from the enclosed monthly reports, covering the period from April to August, the export of American bank notes continues to be limited almost entirely to Western Hemisphere countries, the only exception being $100,000 which were shipped to Portugal during April. Of the Western Hemisphere countries, the principal recipient of American currency in recent months has been Cuba, which, according to the reported figures, received a total of $7,075,000 between the end of April and the end of August. These shipments, most of which apparently were consigned to the Cuban branches of large New York banks, were in bills of large denominations (over $20). In investigating these shipments, we were told that it is the practice of the American banks in Cuba to settle their clearing balances in cash. During certain seasons, therefore, there is a rather heavy demand for American bank notes in Cuba. The recent shipments, however, have 337 -2 - September 16, 1941. 338 FEDERAL RESERVE BANK OF NEW YORK been substantially larger than the movement for comparable periods in past years. In fact, the only previous year in which there have been heavy shipments to Cuba during the May to August period was 1940, when a total of $5,306,000 was shipped. At that time, it will be remembered, freezing regulations had just been promulgated here and rumors of their further extension were current. Some of the foreigners, whose accounts here had not yet been affected, were therefore inclined to withdraw their funds from this country, often, for reason of concealment, transferring actual cash abroad. The shipments during the past four months may reflect, in part, a resump- tion of this flight of funds as a result of our freezing Orders of June 14 and July 26, together with the publication of the "Proclaimed List," which had the effect of extending the freezing control to certain Latin American firms. There may be an additional factor, however, in the recent shipments of our currency to Cuba. According to the press, wealthy Cubans may now be hoarding United States paper currency in an attempt to evade the Cuban export tax on capital. An examination of the movement of American currency be- tween this country and Cuba during recent years seems to provide further evidence that the heavy shipments last year and again this year were associated with a hoarding demand (arising from attempts to evade either our freezing regulations or Cuban taxes) rather than with a seasonal movement in connection with the settlement of clearing balances by American banks in Cuba. If the latter - ==vegent would be expected to be in both directions. 3. September 16, 1941. FEDERAL RESERVE BANK OF NEW YORK with the currency going to Cuba during certain periods of the year, such as the sugar grinding season, and returning during the slack seasons. This, however, is not the case. The movement has been predominately in one direction during recent years. Since the beginning of 1936. a reported total of $30,556,000 has been shipped to Cuba, but only $2,374,000 of American currency, probably left there by American tourists, has returned to the United States through reporting channels since that time. The Dominican Republic, Puerto Rico, and Canada were the only other Western Hemisphere countries to which any appreciable amount of American currency has been shipped in recent months. However, since these shipments were composed mostly of smaller denomination bills and were part of a two-way movement between the United States and these countries, the element of hoarding does not appear to be present in this case. As might be expected, receipts of United States currency from abroad have likewise been limited primarily to imports from this Hemisphere. Of total receipts of $6,774,000 during the last five months, nearly two thirds, or $4,098,000, came from Canada. These receipts were well in excess of the shipments to Canada, mentioned above, and presunably represented to a large extent the return flow, through banking channels, of American bank notes taken abroad by tourists. There has also been an inflow of United States currency from Argentina, which, although not excessive, may be of some significance. Following negligible receipts from Argentina in previous months, $66,000 of American currency was reported to have 339 340 4. September 16, 1941. Federal Reserve Bank of New York been imported from Argentina in June and these receipts increased to $301,000 in July. An additional import of $275,000 from Argen- tina in August increased the total for the past three months to $642,000. Of this amount, $424,000 was consigned to a New York bank by one of the leading foreign currency dealers in Buenos Aires. This Argentine firm is not on the #Proclaimed List" and apparently is financed by Argentine capital. The remainder of the recent imports from Argentina was composed largely of currency returned by the Buenos Aires branch of a New York bank. There are certain factors which raise the question as to whether some part of the bills coming in during the past three months may not represent currency which Germany seized in occupied territory and has been able to dispose of by selling it in South American markets against either dollars or local currency. In the first place, going back to 1935. there has been no month in which imports of United States paper currency from Argentina has exceeded the movement in either last July or August. Except for $225,000 in October, 1939 and $134,000 in the following November, reported monthly receipts from Argentina normally ranged from $1,000 to $70,000. The timing of the recent receipts may also be important. It will be recalled that in November, 1940 $180,000 of American bank notes were received from Germany by air mail via South America and that these shipments continued at the rate of $120,000 a month through February, 1941, when this practice was stopped. There were, on the other hand, no receipts from Argentina until February, when 19,000 was received. Since that time, the isports have cont imand, 5. September 16, 1941 FEDERAL RESERVE BANK OF NEW YORK although it was not until July that the amounts were large enough to arouse suspicion. The evidence available at present, however, is not strong enough to reach any definite conclusions, except on empirical grounds. I have already inquired informally of the Argentine Central Bank as to the reason for the recent increase in Argentine shipments of American bank notes to us and I shall forward to the Board any additional information this inquiry may produce. Receipts of American bank notes from other Latin American countries have been small during the past five months, with the exception of $310,000 from the Canal Zone in August. It is not unlikely that this may be associated with a return of bills taken there by our military forces and defense workers in that region. Faithfully yours, L. W. Knoke, Vice Prosident. Board of Governors of the Federal Reserve System, Washington, D. C. Enclosures WHR:EC Copy:mew:bj:alm:wec:9-18-41 341 AND RECEIPTS OF U. S. PAPER CURRENCY FOREIGN COUNTRIES I MONTH OF AUGUST, 1941 SHIPMENTS By 10 Monthly Reporting Banks $5 to $20 Over $20 81 & $2 Bills Bills Bills ? R Notes 7 R Notes *By Other Banks and Total Firms Total Shippents ries Nic $1,000,000 $1,000,000 $1,000,000 $25,000 $160,000 240,000 15,000 200.000 240,000 200,000 240,000 12,500 50,400 $450.400 8,000 70.900 $32.000 102,900 31,510,900 32.000 $1,542,900 37.500 31,023,000 RECEIPTS 10 Reporting Banks f 14,000 on bite 35,000 37,900 26,000 98,900 orion 275,000 4,500 310,300 46,500 636,300 2,016,600 133,000 14,000 $2,912,800 1,542,900 1,369,900 seipts peate Crez Shipments 10 Questionnairee sent out - monthly series 7 S had transactions RENT no transactions 343 10 Monthly Reporting State 83 to 130 over $80 to & $2 Billa F. R. Notes Tie $20,000 40,000 18.750 VE 750 Total 7. $800,000 $130,000 207,000 3,000 15,000 16,000 30,950 16.500 60.800 370,950 39.500 10 Reporting Banks 0 19,000 6,500 52,500 44,000 40,000 Lea 16,500 300,000 25,000 15,000 55,000 41,000 Indies 8,000 $ 800,000 WORK 150,000 847,000 REDUCTION dies By Other Billa Butta 145,000 I . RECEIPTS or U. 8. PAPER CURRENCY TO AND OM FOR ET COUNTRIE IN MORTH OPEN 1941 SHIPMENTS By 10 Monthly Reporting Banks $5 to $20 $1 & $2 Bills Bills F. R. Notes Over #20 *By Other Bills 7. R. Notes Total ries Jublic $100,000 $395,000 $3,875,000 55,000 Banks and Firms 33,875,000 550,000 Total Shipments $3,875,000 550,000 America $25.500 5,700 $105,700 tol 28,000 423,000 23,000 23,000 14,300 $3,967,300 4,496,000 48,000 40.000 74.500 25,500 23,00 97.00 4,570.50 RECEIPTS 10 Reporting Banko 1.000 tries Indies epublic ada 50,300 9 000 44,000 otal 103.800 65,500 3 000 17,000 tal 85,500 Bent Indies otal 43,000 5,000 3,400 51,400 3,000 367,400 612,100 otal Receipts Total Shipments hipments over Receipts 10 Quostionnaires sent out - monthly sories 8 Banks had transactions 2 Banks had no transactions of currency shipped not known 4,570,500 3,958,400 345 By 10 Monthly Reporting Banks 15 to 120 Over 120 Bills X & $2 Bills 7. R. Notes 7. R. Notes $ 25,000 180,000 36,000 $243,500 Total Shipments $ 25,000 1,400,000 1,400,000 10,000 50,000 230,000 50,000 230,000 50,000 25,000 30,000 2,500 25,000 30,000 2,500 25,000 30,000 2,500 6,500 $46,500 Total Banks and Firms $ 25,000 $1,400,000 $40,000 Lie *By Other Bills 10,000 $1,525,000 52,500 $1,815,000 $45,000 $45,000 97,500 $1,860,000 RECEIPTS 10 Reporting Banks $ 5,000 las Indies 80,000 110 39,000 111,000 64,000 294,000 3,000 17,000 20,000 231,200 36,000 5,000 $1.000 5,000 eceipts Hipments over Receipts 10 Questionnaires sent out -monthly - perios ? Banks had transactions had no Free nations 596,800 1,860,000 1,263,800 346 By 10 Monthly Reporting Banks Over $20 $5 to $20 Bills a & $2 Bills Has public 1 F. R. Notes *By Other Bills 7. R. Notes Total Shipments $100,000 $100,000 85,000 150,000 55,000 I 25,000 $ 25,000 $40,000 20,000 50,000 360,000 35,000 150,000 55,000 12,800 $72,800 31 200 3106,200 4,000 $99,000 48,000 $278,000 Total Banks and Firms 55,000 $155,000 105,000 $433,000 RECEIPTS 10 Reporting Banks 3 10,000 untrios It Indies 147,000 Republic to lands 71,900 166,000 30,000 414.900 tal D. America oa 2,000 2,000 2,900 19,000 34,500 60,400 212,600 Total - 49,000 6,000 55,000 1,800 Total Total Shipments Total Receipts Receipts over Shipments 10 Questionnaires sent out - monthly series 6 Banks had transactions 4 Banks had no transactions $58.000 154.700 381,700 COPY 347 London Undated Rec'd. September 17, 1941 6:20 a.m. Secretary of State, Washington. 4348. CONFIDENTIAL FOR SECRETARY MORGENTHAU. In accordance with the recent statement of British export policy on Lend-Lease goods contained in the White Paper, the Board of Trade which administers exports will have to determine what goods are in short supply in the United States and what goods cannot be obtained in the United States. The Board of Trade is desirous that the United States Government should have in London a man who will be familiar with these situations. They are also, I believe, suggesting to Washington through other channels that there be set up a committee to which can be referred the difficult cases on exports. This question is doubtless of interest to several Departments in Washington. Coe will be back in Washington in a few days and will give you further details. I would appreciate a copy of this message going to Mr. Hopkins and your discussing this problem with him. WINANT. Copy:hr: 9-18-11. C 348 W.T.1117/204/41 BRITISH EMBASSY Confidential WASHINGTON, D.C. September 17th, 1941 Dear Cochran, We have been informed by London that general certification has been given to banks in the United Kingdom to debit sterling account (whether kept at London Office or at a branch in China) of British firms and British nationals resident in China for the purpose of making payments to or for account of individuals and firms resident in sterling area. Sterling balances of branches in China of Chartered Bank of India, Australia and China, Hong Kong and Shanghai Banking Corporation, Mercantile Bank of India, E.D. Sassoon Banking Company, Ltd., Chase National Bank of City of New York and National City Bank of New York have been freed for payments in sterling area against receipt of undertakings to block sterling balances held with them in China and se- curities or gold held in sterling area on behalf of residents of China and Japan. Such branches have also been authorized (a) to purchase sterling by debit of Chinese accounts whether blocked or not in order to enable account holders to meet their normal obligations in China. The phrase "normal obligations" is intended to cover all normal day to day transactions including payments for goods shipped to China from sterling area, (b) to honour drawings under travelers letters of credit, (c) to debit blocked Chinese accounts in Shanghai to meet inward document bills from sterling area. Export bills under any credit authorized by Bank of England will automatically carry a license to charge a blocked Chinese account, (d) to give instructions necessary to liquidate sterling contracts entered into before July 29th, 1941. Mr. Merle Cochran, U.S. Treasury Department, WASHINGTON, D.C. 349 We are prepared when approached, to extend the same authority to Dutch banks. Subject to normal exchange control regulations Chinese accounts whether blocked or not may be credited. Yours sincerely, (Sgd.) R. J. Stopford Copy:wec: 9-18-41 c 350 TERASURE DEPARTMENT UNIVERS STATES COAST GHARD Y WASHINGTON 17 September 1941. From: Spagent, Shanghai, China. To : Underecerotary Doll. In reference to your radio of the 8th, you are advised that this office and its Hengkeng breach, acting on Mr. Cochrea's isstructions, have been cooperating with Fox and his assistants since their arrival is China. During Mr. Taylor's visit to Shanghai, August 12th to 27th, the writer provided his with office space and gave his undivided attention morning. seen, and night, Sundays and holidays. Tayler's work is Shanghai was a complete success. He gained the respect and confidesce of the local beaking community of all nationalities. and 11 is indood infortunate that his services is Shanghai have been discontinued. Our Shoughai office has and is working long hours handling Fex's extraordinary cable traffic. and the coding, deceding, and dietribution of the board's instructions of September 7th to the local beaks was accomplished w this office without upsetting the market and without arousing any conflist between the banks. We shall be pleased to fursich Fee with copies of our daily exchange of messages to the depart- ment, and otherwise cooperate of our ability. We understand that Horse Smith of the Classifilate has been designated to set as limises between the board11and consulate. EEthe IS M 10 18 (signed) NICHOLSON. Copy:bj:9-17-41 SECREE RECEIVED C 0 P 351 STABILIZATION BOARD OF CHINA Y Central Bank Building TAOMENKOU, CHUNGKING VIA AIR MAIL 17th September, 1941. CONFIDENTIAL Mr. H. Merle Cochran, Director of the Stabilization Fund, U.S. Treasury, Room 279, WASHINGTON, D.C., U.S.A. My dear Cochran, I should have liked very much to have written you and others in the Treasury but time does not permit. I desire, however, briefly to call you attention to a few matters. I little dreamed when I accepted the appointment as a Mem- ber of the Stabilization Board that 80 many difficulties would be encountered. Sone of these, of course, have been unavoidable. Communications have been unbelievably bad. I am enclosing the wrapper of a package you sent me on June 26th which was handed to me on September 12th. It had gone to Peiping by mistake. The most distressing problem facing the Board at the present time is the uncertainty of its operations by reason of the creation of the Exchange Control Commission or Agency as provided in the exchange of letters of April 25th. This unquestionably, as I pointed out in Manila, creates a Frankenstein which is going to make for really serious trouble. Just as we are finally succeeding in working out a fairly satisfactory arrangement regarding Shanghai, there emanate from Chungking almost daily press statements which could not help but keep the market uneasy and stirred up. I do hope that either the plan reported to me in Manila or some other arrangement will have been worked out by the time this letter reaches you. While in Shanghai we heard considerable criticism from American businessmen of the Universal Trading Corporation because of their fear that it was encroaching upon their territory. From all I have observed since I would say that the operations of the Universal instead of being curtailed should be greatly expanded. The stories I heard in Manila and in Hongkong about trucks and the commissions charged in the acquisition of them are really fantastic. If the practice as revealed in dispatches from the High Commissioner regarding such commissions are true, every effort should be made to extend the field of operations of Universal. For some time past we have been hearing rumours in Chung- king about the return of K.C. Li of the Wahchang Trading Company. I under- 352 Mr. H. Merle Cochran -2- 17th September, 1941. stand that he is being brought back by Dr. Kung to become head of the Ministry of Foreign Trade which Ministry would absorb the Foreign Trade Commission, and that P. W. Tsou, the very capable Vice-Chairman of the Foreign Trade Commission, intends to resign. This will do the Universal no good. From my angle the trip to Manila was well worth while for it helped to clarify many problems that would otherwise have been very difficult to handle by cable. I cannot over-emphasise the value of our Manila conversations which have already had beneficial psychological repercussions here and I should like again to express my gratitude to you and Bernstein for all you have done. I wish it were possible to take advantage of such opportunities more often. It convinced me of the urgent necessity of taking time out as soon as things are running fairly satisfactorily to return to Washington for a week or two in accordance with my original plan. I find some American experts here who have become anchored for a very long time but I am not at all in sympathy with such a procedure and will not personally become a party to it. With kindest personal regards to the Under-Secretary and you, I am, Very sincerely yours, (Signed) A. Manuel Fox A. Manuel Fox P.S. Southard, who has spoken highly of you on a number of occasions, would want to be remembered if he knew that I was writing. C 0 SHANGHAI P 353 Y September 17. 1941. To: Secretary Morgenthau From: Mr. Fox "Following is translation of final draft of principles of organization of the Exchange Control Commission which it is confidently expected will be adopted today in Chungicing." Article 1. The National Government of the Republic of China shall set up an Exchange Control Commission for the purpose of controlling matters related to foreign exchange. Article 2. The Exchange Control Commission shall be vested with power and authority to deal with matters re- lating to: lv The Study and Formulation of the Policy or Exchange Control; 2- The examination and approvel of applications for the purchase of Foreign Exchange; 3- The control over the compulsory sales of foreign exchange derived from exports; 4 The supervision and direction of the remittances of the overseas Chinese; 5- The disposition of the Foreign Exchange assets frozen in foreign countries; 6- The distribution and utilization of foreign loans and credits; 7- The planning and supervision of the collection -- 354 of gold and silver; 8- The investigation and research on problems of Exchange Control. Article 3. Exchange Control Commission shell consist of 11 to 15 members to be appointed by the National Government of the Republic of China,with the Minister of Finance acting concurrently as its Chairman and 5 to 7 standing members to be chosen from among the members. Article 4. The Exchange Control Commission shall have one secretary general two deputy secretaries general, who shall have charge of the office in accordance with the instructions of the chairman. Article 5. The Exchange Control Commission shall have four departments and subdivisions thereof: 1- The first department 2- The second department 3- The third department 4 The fourth department. Article 6. The first department shall have charge of matters relating to the examination and approval of the applications for the purchase of Foreign Exchange. Article 7. The second department shall have charge to matters relating to the control over the compulsory sales of foreign exchange derived from exports and immigrant remittances and the planning and supervision of the collection of gold and silver. 355 Article 8. The third department shall have charge of matters relating to the disposition of the foreign exchange assets frozen in foreign countries and disposition of foreign loans. Article 9. The fourth department shall have charge of the drafting, correspondence, receipt and delivery of mails, office seals, custody of archieves, personnel, office accounts, general affairs and other affairs which do not specially fall under the jurisdiction of the other departments. Article 10. The Exchange Control Commission shall have four directors and four vice directors to be in charge of the affairs of the respective departments, to be assisted by a number of divisional chiefs, members and assistants. Article 11. The Exchange Control Commission shall have two secretaries and a number of technical experts, inspectors and translators. Article 12. The Exchange Control Commission may, when deemed necessary, establish offices at suitable places in China and forwarding offices abroad. The regulations for the organization of these offices shall be separately drafted. Article 13. The Exchange Control Commission shall have regular meeting of the standing members once weekly and regular meeting of the whole commission once monthly and special meetings, when necessary, subject to call by the Chairman. Article 14. The Exchange Control Commission shall file reports on its work with the Ministry of Finance for record. 356 Article 15. The detailed regulations governing the procedures of the work of the Exchange Control Commission shall be separately drafted. Article 16. These principles shall come into force from the date of promulgation? Section two to follow. Copy: bj:9-20-41 357 SHANGHAI September 17, 1941 To: Secretary Morgenthau From: Mr. Phlox ? (Fox) "Sent by Board through Hong Kong Committee (Fund A) to Hong Kong and Shanghai Banking Corporation Shanghai for distribution. 1. As from Monday August 18, 1941 the Stabilization Board of China will provide U. S. Dollars at the rate of 5-11/16 for cash delivery to the banks licensed under U. S. Treasury General License 59 and 61 against legitimate imports to China, provided that such sales satisfy the requirements and conditions of U. S. General License 59. 2. (Omitted is ? (in) instructions to banks not licensed by United Kingdom) as from Monday August 18, 1941 the Stabilization Board of China will provide pounds sterling cover at the rate of 3-3/16d for cash delivery to the following banks for legitimate imports to China: Hong Kong and Shanghai Banking Corporation, Charted Bank of India Australia and China, Merchantile Bank of India, National City Bank of New York, Chase Bank, Central Bank of China, Bank of China, Bank of Communications and Farmers Bank of China provided that such imports are from the Sterling Area and that the beneficiary is a resident in the Sterling Area. - 3. The banks referred to in paragraph one and two who require such cover should make application to the temporary office of the Board at 104,105 and 106 Hong Kong Bank Building Hong Kong through their Hong- Kong offices or agents and give a written undertaking to the Board in the following terms: - The Bank or agent on behalf of the applicant undertakes to furnish the Board within two weeks with duly executed application forms in triplicate and agrees to resell any exchange purchased from the Board which may sub- sequently be found to have been used for other than authorized imports as specified in paragraph one and two or for goods found to be on the prohibited list published by the Chinese Maritime Customs on July 4, 1939 with subsequent additions and amendments. 4. U. S. Dollars and pounds sterling cover will be provided through an application ? (applicant's) branch or agent in Hong Kong. Upon receipt of the Boards notification that an application ? (applicant's) cover has been provided the Bank or agent shall then confirm to the Board in its usual form of confirmation to the effect that payment of the equivalent amount of fapi has been effected by telegram to the Shanghai offices of the National City Bank of New York or the Chase Bank in the case of U.S. dollars and to the Shanghai offices of the Hong Kong 358 -and Shanghai Banking Corporation and the Chartered Bank of India Australia and China in the case of pounds sterling" Copy bj:9-19-41 359 360 EJ GRAY Hong Kong via N.R. Dated September 17, 1941 Rec'd 11:18 a.M., 18th Secretary of State, Washington. 366, September 17, 2 p.m. STRICTLY CONFIDENTIAL FROM FOX FOR TREASURY. "Hall-Patch states that United Kingdom Treasury is compiling a list of European undesirable consignEES because London in granting Export licenses for China wishes 'to facilitate transactions beneficial to China and to hanper transactions from which the Japane SE derive any advantage'. As a first step in this program the following message from their London offices is being passed through Hall-Patch to the three British banks operating in China. 'At the request of authorities WE instruct you to make EVERY Endeavor to avoid financing trans- actions likely to benefit Japanese Either directly of indirectly. You should also KEEP in constant touch with Embassy and give Embassy all possible help and information in regard to standing and affiliations of merchants and others likely to have Japanese 361 -2- #366, September 17, 2 pens, from Hong Kong via II. R. Japanese interest as well as in regard to transactions generally in favor Japanese'. I recomend that parallel action be taken by the Treasury and that the American institutions be notified Either directly from Washington or through American Consulates in Shanghai and Hong Kong or both. SOUTHARD RR 362 CORRECTED COPY GRAY RS Hong Kong via N.R. Dated September 17, 1941 Rec'd 11:20 a.m., 19th. Secretary of State, Washington. 367, September 17, 3 p.m. CONFIDENTIAL FROM FOX FOR SECRETARY OF STATE: Delighted to learn that country committee has been appointed to Explore possibilities of trade between the United States and China. Find genuine interest in many quarters here in such an agree- ment. Needless to say I am nevertheless vitally interested in the program and anything I can do to advance the progress of agreement I shall be only too happy to find the time to do. Cable from Honduran Legation indicates that Venezuela has decided to publish report prepared by United States mission two years ago. I shall greatly appreciate details regarding this and if you deem it advisable have the American Ambassador, Dr. Frank Corrigan, for whose abilities I have great respect, convey to the President of the Republic of Venezuela and the 363 -2-, #367 from Hong Kong, September 17, 1941; Rec'd 11:20 a.m., 19th. and the Minister of Finance my deep appreciation and thanks for this decision. SOUTHARD CSB 364 C 0 P Y AF GRAY Chauncey Shanghai via N. R. Dated Sept. 17, 1941 Rec'd 1:23 p.m.; 19th Secretary of State, Washington. 1298, September 17, 9 a.m. Reference Department's 629, September 16, 5 p.m. and my 1268, September 13, noon. Moscow Norodny Bank Shanghai reports it seldom has any need to purchase exchange in any large amount and probably no occasion to apply for stabilization funds, but rather supplies exchange to Shanghai market to cover Union of Soviet Socialist Republics commitments for shelter, repairs, and other official expenses, in amounts in the past up to as much as United States dollars 500,000 monthly, but may be less in future. It sells against its New York credits to Charters Bank, Shanghai at sta- bilisation rates. Norodny Bank is willing to turn these funds over to board through any channel desired. If board desires different procedure than that now followed, Moscow Norodny Bank would appreciate special advices as desires cooperate fully. LOCKHART NPL Copy:bj:9-23-41 365 TEM GRAY Hong Kong via N. R. Dated September 17, 1941 Rec'd 11:05 p.m. 19th Secretary of State, Washington. 365, September 17, noon. FOLLOWING FOR FOLEY, ACTING SECRETARY TREASURY FROM AIKIN. "Impact freezing on American and Chinese normal trade negligible. Operation general licenses satisfactory, however, important Chinese commercial banks including Bank of East Asia, third largest in Hong Kong resent failure to have been specifically named in general license 59 Especially since several unimportant foreign banks included in the general license. Some Chinese apprehensive possibility Treasury may take action based on TFR_300 reports the ultimate Effects of which will be to force surrender their United States assets to Central Bank of China. Inclusion of Hong Kong in sterling area presents real 366 -2- #365, September 17, noon, from Hong Kong via N. R. real problem and predicts serious interference EX tropoot finance and trade of Hong Kong. Chinese resent necessity of reporting United States assets to British authorities and possibility they will be obliged to surrender their United States assets to Hank of England. If obliged to surrender, many Chinese prefer Bank of England to Central Bank of China. Southard and Fox approve my departure September 27 Clipper to Manila, where I plan consult with Sayre and Aarons prior to returning Washington on Clipper scheduled leave Manila October 3, subject to accommodations made available through Pan Ameri- can Airways Priority Board, San Francisco and your approval. If SOUTHARD NK 367 PM Tokyo Dated September 17, 1941 Rec'd 1:20 a.m. Secretary of State, Washington. URGENT. 1470, September 17, 1 p.m. Embassy's 1465, September 16, 5 p.m. As the Japanese note verbals appears responsive to our side memoire of August 9 and of SEptEmbEr 9, the Embassy assumes that there is no objection to proceeding with the fulfillment of the conditions therein in order that the Consular officers and the Embassy may negotiate drafts and checks. Instructions would, however, be appreciated at the Department's earliest convenience. GREW. KLP 368 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE September 17. 1941 TO Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns L 62,000 Purchased from commercial concerns 1133,000 Of the latter amount, 1100,000 reportedly represents proceeds of machinery exports. Open market sterling, after opening at 4.03-3/4, returned to 4.03-1/2 and remained there throughout the day. The only reported transaction consisted of 11,000 purchased from a commercial concern. The Argentine free peso again moved off to close at e low of .2360. In New York, closing quotations for the foreign currencies listed below were as follows: Canadian dollar 10-5/8% discount Colombian peso Mexican peso .0505 .5800 .2070 .2755 Cuban peso 7/16% discount Brazilian milreis (free) Venezuelan bolivar Uruguayan peso (free) 4400 There were no gold transactions consummated by us today. No new gold engagements were reported. Spot and forward silver were again fixed in London at 23-1/2 d and 23-7/16d respectively. The U.S. equivalents were 42.67 and 42.55. The Treasury's purchase price for foreign silver was unchanged at 35d. Handy and Harman's settlement price for foreign silver was also unchanged at 34-3/44. We made one purchase of new production silver amounting to 60,000 ounces under the Silver Purchase Act. This silver, which was bought for forward delivery, came from various foreign countries. m.p. Re 369 BRITISH EMBASSY, WASHINGTON. PERSONAL AND SECRET September 17, 1941. Dear Mr. Secretary, I enclose herein for your personal and secret information a copy of the latest report received from London on the military situation. Believe me, Dear Mr. Secretary, Very sincerely yours, R. I. Campbell The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, D.C. 370 SEPARATE 19th,3941 Assess - / off Kerkenah was continued by - / - September 18th-15th and by Wellingtone Laber the - night. Security of results one morehant ship 6,000 tons seriously damaged, one merchant ship damaged, one mirahant ship 18,000 tons sunk by Blenhaims one damaged, one 6,000 tons on fire and two damaged by Swordfish, one 10,000 tons on five and three others damaged by Wellingtone. Debeh submarine reports having sunk by gun five S. 1,800 ton - Sepque and torpedoed mrsahant ship estimated at 6,000 tons which appeared sinking. Both were south bound fully Inden. 8. British 8,000 ton tanker experienced heavy are plosion off outer Dewsing night of September 14th-15th. She was blem in two, both parts afloat. Night of September 15th-14th. Results of air attack on Breat could not be seen but 174 tons high explos- 4. ives were dropped in target area, Night of September 15th-14th. Nearly 13 tons of 3. high explosives were dropped on shipping at Tripoli. The final Vichy repatriation convoy has sailed 6. from Beisus. 7. Reinformament of air craft has arrived safely at Malsa. 8. September 12th-13th. Wellingtons dropped 19 tons of boabs on two Oretean aerodromes causing fires at both. Gorman Air Force September 11th-12th. 9. September 12th-15th. Tobruk boubed and same damage to 12th Rodina area barbed but 371 - 10. Pincers from South East Comel and North from Krenonchug closing. Further German advance Berislav towards Perokop. 372 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS MILITARY INTELLIGENCE DIVISION TENTATIVE LESSONS BULLETIN No. 159 WAR DEPARTMENT Washington, September 17, 1941 G-2/2657-235 NOTICE The information contained in this series of bulletins will be restricted to items from official sources which are reasonably confirmed, The lessons necessarily are tentative and in no sense mature studies. This document is being given an approved distribution, and no additional copies are available in the Military Intelligence Division. For provisions governing its reproduction, see Letter TAG 350.05 (9-19-40) M-B-M. GERMAN STRATEGICAL PICTURE OF SMOLENSK AND KIEV SOURCE This bulletin is based upon a translation of an article which appeared on August 17, 1941, in Presse-Gebedienst, a German news service. In reading this bulletin, intended propegandistic effects should be borne constantly in mind. NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS - 373 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS GERMAN STRATEGICAL PICTURE OF SMOLENSK AND KIEV The strategical picture of the two great encirclement battles of Smolensk and Kiev is characterized by the two concepts, wedge and Kessel.* These expressions are applicable also to the double battle at Bialystock and Minsk; in fact, to the whole of the German operations in the East. The official report of German Army Headquarters described as follows the essential parts of the battle of Smolensk, that splendid example of the art of military leadership: During the breakthrough to the east and northeast of Smolensk by Panzer formations and motorized infantry divisions, in spite of the heaviest counterattacks, the infantry divisions, in closed ranks - by making extraordinary marches and fighting magnificently - covered the flanks of the shock wedge, which was attacked time and again by the enemy. In addition, these infantry divisions carried out the encircle- ment of the enemy forces, which had been broken through by the mobile formations, and defeated them in groups which were still capable of action. Hence, in an area 250 kilometers wide and 150 kilometers deep a mighty battle took place, the key points of which were the towns of Vitebak, Polotsk, Nevel, and Mogilev, all near Smolensk, For almost four weeks the enemy forces sought to regain their freedom, fighting with the courage of desperation and suffering enormous losses, while new troops were thrown into the battle to relieve them. But all these attempts failed because of the flexibility and tenacity of the German troops. The form of the battle of Smolensk is typical of that of the whole operations in the East, as well as of the predominant part played by the two great concepts, wedge and Kensel. From the first day of fighting, and continuing throughout the operations, Panzer wedges were a prominent feature: they thrust themselves into the enemy front like arrow points and penetrated through. Oftentimes these shock wedges executed their breakthrough operations with extraordinary boldness, many times with flanks uncovered and with the enemy on the right, on the left, in front, and to the rear - where the Russians would again assemble after the passing of the wedge. The wedges were a necessary preliminary for the Kessel operations in that they formed the wall which separated the parts of the Soviet *The German word Kessel is A hunting term, applied to an action in which the game is completely encircled, driven in towards the center of the ring, and destroyed. G-2. NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS -2- - 374 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS front and divided the enemy into groups. These wedges of mobile troops were widened and covered by the in- fantry divisions, which had to execute almost superhuman march performances in order to keep up with the Panzer formations and to be able to cover the flanks of the shock wedge and carry out the encirclement and destruction of the enemy groups that were cut off. In the great battle of Smolensk there were many combat centers, and the manifold nature of the separate operations WAS terribly con- fusing for the observer outside and rather confusing for the individual soldier, who was not acquinted with the operation as a whole. The network of operations covered R large area; there were strong points of resistance and encircled areas of various sizes in which Russians were destroyed. As a rule these encirclement operations were carried out in the following manner: After splitting off an enemy group, the shock wedge would swing to the right or to the left and, by quick turns, cut out a sector from the enemy front: this would then be surrounded on all sides with extraordinary rapidity, before the enemy realized what had happened. The Russians tried many times to save the situation by attacking the German wedge on the flanks and by trying to break through the German encircling movement. They attacked the German encircling forces from the rear, and they endeavoured to carry out encircling operations themselves. Accordingly, there were times when the course of the front was known only to the command, when the individual soldier thought that the front was everywhere, in front, behind, to the right, and to the left. The tenacity of the Russian defense and the manner in which Russian troops were urged to fight and die, rather than to surrender, caused every encircled area to become a bloody battlefield. If it is remembered that the Russians are very skilled in the construction of field works, that they are masters of camouflage and know how to exploit to the fullest the possibilities of every terrain, then it can be understood that the desperate, surrounded masses made use of the space for defense as effectively as possible. Every village, every house, every wall, every strong point, every natural obstacle was utilized and Russian organization completed the defense with barriers. Each encircled area or Kessel was, then, like a fortified area, in which there were not only considerable masses of men for defense, but also large quantities of arms and material, The German soldiers, therefore, after completing an encirclement operation, often had to use strong forces to capture the fortified area within - and we can inagine that the enemy increased his resistance when he realized the hopelessness of his situation. NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS 375 NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS Wherever they were surrounded, the Russians were like game driven together, trying to break out in every possible direction. In the rage of utter desperation they were willing to hazard anything. If it is borne in mind that at one German bridgehead, where the Russians made a desperate attempt to break out, only three hundred Russians were captured while two thousand were killed, then an idea can be had of the desperate resistance offered by the masses which were encircled. If further kept in mind the fact that in the great encirclement battles of Smolensk or Kiev fighting was raging simultaneously in many such areas, the offectiveness and destructive power of such operations, when both sides use enormous masses of men and materiel, can be realized. The narrowing of those areas is the final stage in the strategy of encirclement and destruction, that strategy which was executed with such extraordinary success by the German command in the East and which aims not only to de- feat and drive back the giant masses of the Soviet armies, but to sur- round and destroy them as well. It goes without saying that this system of wedge and Kessel presupposes a superior quality of troop leadership, one that can act with lightning like rapidity, and presupposes soldiers, who in training and battle power, possess the excellent qualities of those in the German army. NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS - RESTRICTED 376 G-2/2657-220; No. 495 M.I.D., W.D. 11:00 A.M., September 17, 1941 SITUATION REPORT I. Eastern Theater. Ground: German forces of the Army Group of General Field Marshal Leeb have captured Volkhovstroi (Zvanka), a town 73 miles east of Leningrad and the junction of the Murmansk and Vologda railroads. There is no specific information with regard to operations on the central front, but it is evident that the vigor of the Russian counterattacks has diminished. German mechanized forces of the central and south- ern army groups have effected a junction at a point about 20 miles northeast of Lubny. Lubny is a town 120 miles southeast of Kiev, on the Kiev--Poltava railroad. The towns of Lubny and Khorol were captured by German forces which had crossed the Dnepr River near Kremenchug. To the northeast of Kiev, other German columns have captured Nezhin and are approaching Priluki from the northeast. On the lower Dnepr River, one German column has ad- vanced to the Russian fortified line on the isthmus of Perekop. Other columns are advancing from the bridgeheads of Nikopol and Berislav in the general direction of Melitopol. Air: Recent action on the Leningrad front has been characterized by strong air supported attack, as well as defensive air activity. The Russian communique reports the use of parachutists and air-borne troops in the second German attack on the island of Oesel. II. Western Theater. Air: The R.A.F. made night raids on Karlsruhe and docks at Le Havre. Southeast England was bombed by the Luftwaffe during the night. III. Middle Eastern Theater. Ground: No developments. Air: Cairo was subjected to its first raid of the war yesterday. Tobruk was raided heavily by German planes while the British raided Tripoli and Benghazi. RESTRICTED CONFIDENTIAL Paraphrase of Code at the War Cablegram Received Department on September 17, 1941 377 London, filed: 4:03 p.m., September 17, 1941. 1. British Air Activity over the Continent. a. Night of September 15-16. The amount of bombs dropped was as follows: on Hamburg, 140 tons of HE, including 5 - 4000 pound bombs, 144 - 50 pound incendiaries, 144 - 25 - pound incen- diaries and 9400 - 4 pound incendiaries; and on Le Havre, 60 tons of HE and 3400 incendiaries. b. Day of September 16. A total of 482 fighters were em- ployed as follows: 218 in the protection of shipping, 77 on interception patrols, 67 on offensive missions and 20 on special operations. A B-17 dispatched to attack Cologne abandoned its mission because of bad weather. 12 Blenheims sank a small motor vessel during an attack on shipping off the Dutch coast. Another flight of 6 Blenheims operated against enemy shipping, but without results. C. Night of September 16-17. 55 bombers were dispatched to attack the industrial area of Karlsruhe and 10 to Le Havre. Most of these aircraft attacked their primary targets. The weather was good. 2. German Air Activity over Britain. a. Day of September 15. 15 reconnaissance aircraft and 10 long range bombers were used. b. Night of September 15-16. 2 night fighters, 10 long range bombers and 20 mine laying aircraft were employed, C. Day of September 16. Defensive fighter patrols were maintained. CONFIDENTIAL CONFIDENTIAL -2- d. Night of September 16-17. Operations on a slightly in- 378 creased scale occurred, consisting of raids over Yorkshire by long range bombers, operations against shipping in the Bristol Channel and from Selsey to Dover off the south coast, sea mining in the Thames Estuary and night fighter activity over East Anglia and the area of Calais. 3. Aircraft Losses Reported. a. British losses. On September 16, 2 Spitfires and pilots and 1 Blenheim were lost. No bombers were lost the night of September 16-17. b. Axis losses. On September 16 these were as follows : 6 Me-109's shot down. 1 Me-109 probably destroyed and 1 Me-109 damaged. A British Havoc destroyed a Ju-88 the night of September 16-17. 4. British Air Activity, Other Theaters. a. North African Theater. Benghazi was bombed by 3 Wellingtons the night of September 14-15. The same night 2 Wellingtons and 4 Albacores attacked Gambut airdrome, destroying 8 Axis aircraft and probably destroying 8 more. Hits were claimed on the docks at Tripoli during an attack by 10 Wellingtons the night of September 15-16. 5. Axis Air Activity, Other Theaters a. North African Theater. On September 14, Axis aircraft bombed Tobruk. Abrassia was attacked the night of September 14- 15, resulting in some military casualties. LEE I. B. # 3 9:45A, 9/18/41 CONFIDENTIAL -3- Distributions Chief of the Army Air Forces CONFIDENTIAL 379 State Department (2) Assistant Chief of Staff, G-2 War Plans Division Office G. H. Q.of Naval Record Section Intelligence (2) Intelligence Branch Secretary of Treasury O.A.S.W. A.S.W.A. Section File Collection Section B.E. 0-3 A.C. CE,B &NE CONFIDENTIAL