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DIARY
Book 481
January 1 - 3, 1942
-ABook
Page
481
398
Airplanes
Shipments - British Air Commission report - 1/3/42.
Alien Property Custodian
Eccles' telegram to Hopkins endorsing Treasury
administration of foreign funds and advocating all
alien property custodianship be placed in Treasury -
1/1/42
174
HMJr transmits to Budget Bureau Department of
Justice's proposed Executive Order and Treasury's
proposed Executive Order which embodies agreement
between Biddle, Crowley, HMJr, and Foley - 1/2/42
a) Discussion with Miss Tully - 1/2/42
227
248
1) Miss Tully reports FDR's comment 1/3/42
346
Appointments and Resignations
Carroll, Mollie Ray:
Viner considers unsuited for personnel work - 1/2/42
Millis-White conversation concerning - 1/2/42
Viner, Jacob: Appointed Special Assistant and
Consulting Expert - 1/1/42
193
195
114
-BBarth, Alan
Editorial Opinion on Foreign Affairs: Testament of
Faith - 1/2/42
British Purchasing Mission
United States takes over aircraft contracted for by
United Kingdom; War Department letter concerning
payment therefor - 1/1/42
278
131
a) HMJr thanked for "invaluable help"
-cCanada
See Lend-Lease
Carroll, Mollie Ray
See Appointments and Resignations
Censorship, Office of
"Mouthpieces" used discussed by Treasury group 1/2/42
175
China
Cochran, H. Merle: Summary of trip - 1/1/42
a) Chen wishes to withdraw from Stabilization
135
b) Kung's specific proposals
Financial aid for Chinese students in United States
discussed in Treasury letter to Ernest B. Price,
143
Board
Director of International House, Chicago, Illinois -
1/1/42
150
Frese and Taylor: Resume' of 'plane possibilities 1/1/42
153
- C - (Continued)
Churchill, Winston
Thanks HMJr for Christmas greetings and records 1/1/42
Cochran, H. Merle
Book
Page
481
130
See China
Congress for Industrial Organizations
Production lag laid at door of Office of Production
Management in Congress for Industrial Organizations
advertisement - 1/3/42.
a) Murray-HMJr conversation - 1/3/42
341
337
Correspondence
Mrs. Forbush's resume' - 1/2/42
264
-EEmanuel, Victor
Principal business interests - chart
287
Resume's - 1/2-3/42
315,429
Exchange Market
-FFinancing, Government
Joint statement by Federal Reserve Board on interest
rates simultaneously with Budget Message discussed
by HMJr, Bell, Morris, and Murphy - 1/1/42
a) Proposed statement
1
28.29
Special fund for bomber, gun, etc., discussed by
HMJr and Foley - 1/2/42
253
Defense Savings Bonde:
Sales since May 1, by months, on basis of issue
price - 1/1/42
122
Comparative statement of sales during October,
November, and December, 1941
123
Supply of Series E Savings Bonds in the Field Haas memoranda
126.25
Women's Programs - new announcements - 1/3/42
Foreign Funds Control
366
Enemy property as distinguished from alien: Byrnes
asks for figures - 1/2/42
a) Foley-Pehle memorandum
Spain: United States dollar currency held there disposition of discussed in American Embassy, Madrid,
cable - 1/2/42
184
188
321
-Gold
See U.S.S.R.
.
Progress report - 1/2/42
262-A
-Japanese in United States
West Coast farm situation - Foley memorandum 1/3/42
Book Page
481
392
Johnson, Louis
Federal Bureau of Investigation report on
"off-the-record address" in New York concerning
Pearl Harbor attack - 1/1/42
115
-Lend-Lease
Canada: Purchases of completed defense articles White memorandum - 1/2/42
310
U.S.S.R. : Resume' of requisitions to date 1/2/42
314
Purchases for week ending January 3, 1942
410
-MMaritime Commission
Todd Shipbuilding facilities - British request
that Commission purchase facilities owned by
British
a) White memorandum - 1/1/42
401
b) HMJr's letter to Commission - 1/3/42
400
c) Land-HMJr conversation: See Book 482,
page 289 - 1/6/42
d) HMJr tells Phillips he has recommended to
Maritime Commission: Book 484, page 137 1/9/42
Military Reports
Reports from London transmitted by Halifax 1/1-2-3/42
160,324,430
Coordinator of Information reports:
Iran - a threat to Britain - 1/1/42
164
Axis propaganda in the Moslem World - 1/1/42
165
Roumania - financial situation - 1/2/42
327
War Department bulletin:
German antiaircraft artillery in Russia -
employment of - 1/1/42
Kamarck summaries - 1/2/42, 1/3/42
Mint, Bureau of
166
328,433
Five-cent coin - elimination of nickel from:
White report - 1/3/42
381
-Office of Production Management
See Congress for Industrial Organizations
-P
Book
Page
481
309,391
Price, Ernest B. (Director of International House, Chicago)
See China
Procurement Division
Steel: Resume' of semi-finished steel requirements for
the British - Mack memorandum - 1/2/42
-RRevenue Revision
Federal-State-Local Fiscal Relations: Preliminary
report submitted by Gulick and Groves - 1/1/42
Bureau of Budget tax program for fiscal year 1943 1/2/42
30
263
-SSelf-Help Cooperatives
Washington and Richmond: Foley reports on conference
with Edy (Federal Works Agency) and Dryden (Work
Projects Administration) - 1/3/42
365
Spain
See Foreign Funds Control
Speeches by HMJr
"The Job Ahead" - broadcast January 4, 1942
a) First draft - 1/2/42
197
b) Second draft - 1/2/42
209
c) Third draft - 1/3/42
351
d) Reading copy: See Book 482, page 4 - 1/4/42
Stabilization Agreements
Resume' - 1/1/42
158
Steel
See Procurement Division
-TTaxation
See Revenue Revision
-UU.S.S.R.
See also Lend-Lease
Gold:
Sale of $20 million of gold for future delivery
discussed by Gromyko and White - 1/1/42
Agreement between Treasury and U.S.S.R. - 1/3/42
Soviet Aid Program as provided in Moscow Protocol
Agreement - re-establishment of assured by Treasury
in accordance with FDR's wishes - 1/3/42
United Kingdom
See British Purchasing Mission
134
404
406
-Viner, Jacob
See Appointments and Resignations
1
January 1, 1942
10:40 a.m.
FISCAL MEASURES
Present: Mr. Bell
Mr. Morris
Mr. Murphy
H.M.JR: All right, sir, I think I can stay away
for an hour if you can.
MR. BELL: You remember that we discussed at
several meetings on the draft of the budget message the
question of putting in the rate, two and a half percent,
or the limit on rates that we should pay for war financing.
H.M.JR: Yes.
MR. BELL: I don't know what will be in the budget
message, and this will all have to be checked when it
comes out, but we thought that we might want to issue
a statement at about the same time that the budget message - a joint statement of the Federal Reserve Board
and the Treasury on interest rates, and we have worked
with Ronald Ransom and Goldenweiser. This statement
hasn't been cleared with anybody else over there. We
have talked to the members of the board in town and
they have several suggestion, but the principle of the
thing is all we want this morning, to see whether or
not we can get something on paper that can be issued
quickly if we want to.
H.M.JR: Look, have you got a copy there?
2
-2MR. BELL: Yes.
H.M.JR: Why George Haas doesn't come in when
everybody else is working today, I don't know. Doesn't
he know?
MR. BELL: He is coming in.
H.M.JR: But not until one o'clock. I mean, every-
body else - he should have asked. Did he ask anybody?
MR. BELL: Well, I think you said yesterday at
the luncheon of the nine-thirty staff meeting--
H.M.JR: Well, I won't get angry about it.
MR. BELL: I think that is probably true of a
number of them around.
afternoone.
there,
in our my
and so
H.M.JR: I said I wouldn't call anybody until
"There is I need will keep borrowing" word. Now, starting forth, I
don't like that statement, "There is no need." I am
willing - I would say this: "Our borrowing to finance
is apt to incur--"
MR. BELL: "Should be" or "will be"?
H.M.JR: "Should not be conducted at a high rate of
interest." Is that all right with you? I mean, it
puts the emphasis different.
MR. MORRIS: I would like to avoid "it should not
be" because it sounds like you are not too sure that
it won't have to be.
H.M.JR: Well, I am not.
MR. MORRIS: Well, I am not either.
H.M.JR: "There is no need--"
MR. BELL: There was some question in the Board
3
-3over there as to whether that whole paragraph shouldn't
come out. It is a little argumentative. I think we have
got to make it strong.
H.M.JR: Well, I think if you said the Secretary
of the Treasury pledges to carry out the policy and so
forth, and then just add one sentence. It is our joint
purpose - well, let me give you my idea. The way you
had it in that one sentence was satisfactory to me.
You remember you went over and over that thing, the
thing we finally sent over to the Budget on interest
rates, that very last thing.
MR. BELL: Well, that is quoted there.
H.M.JR: Here?
MR. BELL: Yes, that is quoted.
H.M.JR: Well, I would say, The Secretary of the
Treasury has the power to carry out," period. I would
stop right there.
MR. BELL: I think we ought to go further.
H.M.JR: Well, you will have to do a little selling
on me.
MR. BELL: I think the market and the people ought
to know that we are going to--
H.M.JR: Look, Dan, old man, I will go that far,
and I will say we will do everything in our power to
carry out that thing, a low interest rate, just the
way that is, but I have seen - I worked with the Federal
Reserve Board, and I - my God, they went three days
after December 7 and got cold feet.
that.
MR. BELL: Yes, but they have got to get over
H.M.JR: Have you ever convinced Marriner Eccles
n
-
of anything fundamental? Have you ever won an argument with him? Now, give me a yes or no. Have you
ever won an argument with him?
MR. BELL: I suppose not.
H.M.JR: All right.
MR. BELL: But I think this is war, and we have
got to go to town here.
H.M.JR: Well, I am willing to stop right there.
MR. MORRIS: There was one thought, it may not be
a good one, for getting in the other two. It was that they
would so commit the Federal that they couldn't get
cold feet any more.
(Mr. Murphy entered the conference.)
H.M.JR: Good morning. Draw up a chair.
When you say, "The Treasury and the Board of
Governors pledge all their power and authority to carry
out
ful. the policy,an thus and so, that is saying a mouthMR. BELL: Yes, but that might mean a rate of two
and three-quarters, and then your two and a half's would
go down to ninety-five.
H.M.JR: I don't want something like that to hit
me in the face, I mean the lower part. I will go this
far this morning, down to the middle. That is all I
will do this morning.
MR. BELL: The market of course didn't take it
very seriously yesterday, apparently, the fifty billion
dollars--
H.M.JR: You were wrong on that. You thought
when the budget came out on the big thing, they would,
5
-5and there was nothing about taxes in this to offset
it.
MR. BELL: But I am still a little afraid of next
Wednesday.
H.M.JR: Well, there can't be anything worse.
MR. BELL: I say it may have discounted this whole
budget program, but it may still be a shock, and you
may want some pretty strong statement.
H.M.JR: All right. Well, as of right now, as
of this morning, I will go half way through, I will
go half way through and then I draw a Maginot Line.
MR. MURPHY: It is half way down the paper, but
I don't think it is nearly half way through the state-
ment.
H.M.JR: But Henry, I don't want to sit here a
year from today with you three gentlemen and maybe pay
two and three-quarters percent, which wouldn't be so
God awful, and then have somebody call me up from the
White House, "Well, what about that?" Or Jesse Jones
or somebody that would like to make trouble for me.
"Why don't you carry out your contract?" That is a
contract.
MR. BELL: No, I don't think that is a contract.
It is a commitment of the Treasury to do everything in
its power. We may spend a lot of money trying to do
it.
H.M.JR: That is good enough.
MR. BELL: We may fail.
H.M.JR: Dan, you can't get me beyond that.
MR. BELL: I think it is important.
H.M.JR: All right. Well, don't let's take too much
6
-6time on that. You can write something else, and I will
take another look at it, but as of this morning, half
way down.
MR. BELL: Well, I think we ought to have something Wednesday.
H.M.JR: Well, I am here Friday, Saturday, and
Sunday, and so forth and so on.
MR. BELL: Because if anything should happen, it
would be psychologically a good thing if we could issue
it right after the Budget to show that we were ready on
the thing.
H.M.JR: Now, if you want me to, we have something
in my Sunday night statement - I am going on the air
Sunday night.
MR. BELL: Next Sunday night?
H.M.JR: This Sunday night, on Defense Bonds.
MR. BELL: That might help.
H.M.JR: And the time is before it happens. After
it has happened, it is too late.
MR. BELL: That is the what, sixth or seventh? Is
it this coming Sunday? That is before the budget message. We had in mind before trying to put something in
your speech of the twenty-seventh.
H.M.JR: Well, it is three days from now that I am
going on the air.
MR. BELL: Well, we would have to think about that.
I don't know whether that ought to come out before the
budget message. You might put something in there.
H.M.JR: Well, I am just throwing that out at you.
MR. BELL: O.K. The next thing is, you remember
7
-7that Eccles discussed with you two weeks ago the ques-
tion of getting the law changed so that the Federal
could buy securities directly from the Treasury.
H.M.JR: I passed my word on that.
MR. BELL: Yes, you said that is O.K. I think
maybe we ought to think about it a little more because
it might disturb people. We are afraid that we can't
finance this war and that we are just laying the
groundwork for--
H.M.JR: Well, I don't agree with you at all, but
I passed my word, and I don't see anything in it. I
think it is good business. I think the way we do now,
we just play every time into the hands of the dealers.
If you could unsell Eccles on it, all right, but I
I am perfectly willing to have you argue with Eccles.
told him I would go along.
MR. BELL: I am not so sure I want to unsell him,
but I think we should talk about it a little more, as
to what effect it might have on the minds of the people.
H.M.JR: I can't see it.
MR. BELL: You don't see it, and you are not
afraid of it?
H.M.JR: No. I think it is a mechanism that they
ought to have.
MR. MORRIS: I think it is a mechanism that they
ought to have, but its having been removed to do it
at this time is going to scare some people.
it.
H.M.JR: Well, let them get scared and get over
MR. BELL: You and Eccles were going to see Glass,
you know.
H.M.JR: Well, I talked to him,and Glass didn't
8
-8come to that Byrd economy meeting.
MR.bill.
BELL: Well, anyway, this ought to be in any
omnibus
MR. MORRIS: What it really is, is a mechanical
proposition.
H.M.JR: I will bet it will go through and nobody
will even write it up.
MR. BELL: I hope so.
H.M.JR: You don't need to worry.
MR. BELL: All right. The next is the refunding.
Now the budget message is coming out, I take it,
about Wednesday the seventh.
H.M.JR: Well, I find now that the President is
only going up to Congress on Tuesday with his annual
message, and you and I know that he likes two days in
between, so my guess is the budget will be on the
eighth.
MR. BELL: Normally he comes back from the Capitol,
from the state of the union message, and has a press
conference, and then the budget message goes up the next
day at twelve.
H.M.JR: That is all right.
MR. BELL: That would be Wednesday. Normally we
would offer a refunding issue on Thursday, the eighth.
H.M.JR: I didn't realize that.
MR. BELL: Yes. You see we have got a maturity of
three hundred million.
H.M.JR: When?
9
-9MR. BELL: On the fifteenth, for the RFC, and
then there is a call issue of two hundred thirty-six
million, I think.
H.M.JR: How much?
MR. MORRIS: Two hundred thirty-six, Federal Farm
Mortgage.
H.M.JR: No, we can't do it that weekend.
MR. BELL: Well, there is a billion and seventy-
six million of which five hundred million, a little
over, matures on the fifteenth, and there is a hundred
and thirty-six million, I think, a hundred and three
million that matures on March 1, and four hundred
twenty-six million on March 15.
H.M.JR: Now, wait a minute. Have you got that
written down?
MR. MORRIS: This is a carbon.
H.M.JR: That is all right. Henry Murphy has got
everything in his head.
MR. MORRIS: It is those four items, totaling a
billion and seventy-six.
H.M.JR: A billion and seventy-six?
MR. BELL: That is the total refunding that we
announced to the press that would be--
H.M.JR: It is three ten, four twenty-six, two
thirty-six, and a hundred and three, is that right?
MR. BELL: Yes.
H.M.JR: A billion and seventy-five?
MR. MORRIS: Yes. I have left fractions off. It
10
- 10 -
does come to an extra million.
MR. BELL: It is a billion seventy-six million
and sixty-three thousand.
H.M.JR: You can't do all that.
MR. BELL: That is what worries us. Now, you
have got two of them that come in on the fifteenth.
H.M.JR: Well, we will just have to--
MR. BELL: And it is a little difficult to pay
them off in cash, because we have announced there is
going to be a refunding. There are some right values
there.
H.M.JR: What did we say? Which one did we say
we paid off?
MR. BELL: We didn't say we would pay any of them
off. We said we would refund all of them for - early
in January.
H.M.JR: Well, refund them into Federal securities.
MR. BELL: Into Federal securities, that is right.
H.M.JR: Why can't you do it the week of the
fifteenth?
MR. BELL: Well, the week of the fifteenth-H.M.JR: Why can't you do it on the twelfth?
MR. BELL: That is Monday.
H.M.JR: Yes, give them certificates.
MR. BELL: Well, to do it on Monday doesn't give
you time to get your securities in.
- 11 -
11
H.M.JR: Well, yes it does. You can leave it
open for two days.
MR. BELL: Well, let's see, Wednesday is the
fifteenth, isn't it?
H.M.JR: Yes.
MR. MURPHY: We discussed that at some length
and it seemed to Mr. Haas and myself that it might be
done without even making physical delivery of interim
certificates, if that was impossible. There is no
cash changing hands except an interest adjustment,
because it is merely an exchange of securities, and we
could issue securities the next Monday that would be
dated back to the fifteenth if necessary, and the--
MR. BELL: If the people will do that. Most of
them will. Your big banks wouldn't care whether they
got immediate delivery or not. They don't often
take interims anyhow.
H.M.JR: This is in the hands of the big banks
anyway.
MR. BELL: Seventy-six percent of the total is.
There is about two hundred twenty-one million outstanding in the hands of the public. We don't know
where it is.
H.M.JR: I think I would do it on Monday, the
twelfth.
MR. BELL: That means that we would have to make
up our minds on Saturday.
H.M.JR: Yes.
MR. BELL: And announce it over the weekend.
H.M.JR: Well, nothing can happen over the weekend.
MR. MURPHY: When you are in war, less can happen
12
- 12 over a weekend really than in peace.
H.M.JR: The only thing that might happen, some-
thing in the Philippines, and certainly by the twelfth
we will know - by the tenth.
MR. MORRIS: It looks now as though that is
going to be over soon.
H.M.JR: I say by the tenth of January we will
certainly know about the Philippines. What? What
do you think about the twelfth?
MR. MORRIS: Well, it is only the mechanical
end that is troublesome. Certainly from every other
point of view, it is better. I don't like doing it on
a Monday.
H.M.JR: Well, I won't do it the week before.
MR. BELL: I don't know whether we could do it
Friday. That would only give us one day.
H.M.JR: We ought to give the market a chance to
adjust itself.
MR. MURPHY: It seems to me we ought to give them
two full days since there are two F.F.M.C.'s and there
are still a substantial number of individual cases of
persons who took them in exchange for mortgages and
who are not hair-trigger operators.
H.M.JR: What I would do is give it out Saturday
for the Sunday papers, so that they would have it
Sunday and that would give them an extra day's notice.
MR. BELL: Of course, we could leave this open
right up to the fifteenth. It is a refunding opera-
tion, and there is nothing much they can do with the
securities except to exchange them.
H.M.JR: Oh, two days is enough. Sunday's papers
13
- 13 -
will carry it and that gives them three full days.
What?
MR. BELL: Yes.
H.M.JR: Announce it Saturday for Sunday morning's
papers. What are you worrying about, Dan?
MR. MORRIS: Then they subscribe Monday and Tuesday,
and you close the books Tuesday night.
H.M.JR: Yes.
MR. BELL: I guess we can do it.
H.M.JR: All right.
MR. BELL: We will just have to print up some
interims.
H.M.JR: What are you men thinking about, what
kind of an issue?
MR. BELL: Well, we haven't gotten down to details
yet. We are thinking about a short bond due to the
fact that eighty percent of them are held by banks.
think we ought to have a bond somewhere in the neighorI
hood of '47 to '51 or '52. We did discuss a little the
other day about opening the two's at '48-'50.
MR. MORRIS: Yes, we talked about that yesterday.
MR. MURPHY: They are up nearly a half from there,
but that doesn't bother me.
H.M.JR: By the way, did you men decide to put
some of these long bonds into - what was that fund we
never used?
MR. BELL: I want to discuss that.
MR. MORRIS: Social Security.
- 14 -
14
MR. BELL: I want to discuss that a minute.
H.M.JR: Two's at 48-'50.
MR. MORRIS: They say they are up a little since
we talked about them. They were about one point ten
at the time we talked.
MR. MURPHY: They are about twenty-three now.
There are two forty-eight fifty's, but these are the
ones with the "T." "
MR. BELL: This would put another billion dollars
in the two-year call period which I don't like very
well, but I wouldn't worry much about it. We are
probably going to have to do a lot of filling up before this is over.
H.M.JR: You say it is a little rich?
MR. BELL: It is a little rich at that price.
MR. MURPHY: It is really awfully early to say
whether it is rich or thin until after the budget
message is out.
MR. MORRIS: Yes, I was going to say-MR. MURPHY: You have to change your views on it
every day.
H.M.JR: Could I see that slip I had on the refunding? Then we are in - we are all right on refunding until-MR. MORRIS: July.
H.M.JR: That is very nice. You have done a nice
job of outlining this.
MR. BELL: We got very little this year. It is
pretty good.
- 15 -
15
H.M.JR: Yes, we are in nice shape.
MR. BELL: We have got plenty of cash, though.
Now, the next thing-H.M.JR: How much have we spent to date for
national defense? I mean, what was - how much have
we spent this month?
MR. BELL: This month?
H.M.JR: Yes.
MR. BELL: We have spent a billion seven hundred
sixty million.
H.M.JR: Will it go to two billion?
MR. BELL: A little over a billion eight this
month, December.
H.M.JR: What was it last month.
MR. BELL: Last month it was a billion four fifty.
It has really gone way up. Of course last month was a
short month.
H.M.JR: What is the total for the year so far?
MR. BELL: Eight billion and ninety-seven million.
It will go to eight, one, or one fifty.
H.M.JR: Will they spend - how much will they
spend in the next six months?
MR. BELL: Well, according to those estimates
that you have got, they ought to spend about fourteen
billion dollars.
H.M.JR: Do you think they will?
- 16 -
16
MR. BELL: Which is a little over two billion
dollars a month average. They have got to be up at
better than three billion dollars by the end of
June to do it.
H.M.JR: How much?
MR. BELL: Better than three billion dollars
for the month of June to do it.
H.M.JR: All right, what else have you got?
MR. BELL: Next thing is investments. If we are
going to support this market like we have been on the
fifty-fifty basis with the Federal Reserve System, we
have got to get some decision on what we are going to
use for money, what funds.
H.M.JR: Yes.
MR. BELL: Now, we have authority if we want to
just use the general fund and retire the securities.
(The Secretary left the room temporarily and
returned.)
MR. BELL: I just started to say that if we are
going to continue to go fifty-fifty with the Fed in
supporting the market, we have got to determine as to
what funds we are going to use. Heretofore we have
used largely the Postal Savings and the Federal Deposit
Insurance Corporation. Now, we still have special
obligations in Postal Savings of about sixty million
and in the FDIC of about the same amount. Now, we
got some little amounts in others, but I think we ought
to keep them, and I think we ought to keep about sixty
million in each of those funds as a cushion. If we
had a run on those and they needed money quickly in
either case we could redeem them and give them their
funds quickly. As I suggested to you the other day,
we could use the Federal Old Age and Survivors Insurance
Trust Fund which - we have been investing that fund in
- 17 -
17
two and three-eights percent, special securities. We
have a right to do that under the law. We can buy
securities just out of the general fund and retire
them.
H.M.JR: Well, I will tell you, Dan, you spoke
to me about that before and it gave me a chance to
think about it. I think we may have to come to it, but
I wouldn't like to do it now-MR. BELL: Come to what?
H.M.JR: Using the Old Age Funds. I think we sort
of subject ourselves to unnecessary criticism.
MR. BELL: Well, that is Haas' and Murphy's view.
I don't know why, but what are we going to use then?
H.M.JR: Well, I would much rather do it under the
general fund, right out in the open.
MR. BELL: Then you retire the securities? We
have got a sinking fund, of course.
H.M.JR: Well, what is the matter-MR. BELL: But I would hate to use the sinking
fund to retire securities that you put out last month.
I think any other securities that have been out some
time you can use.
H.M.JR: Murphy feels the same way I do?
MR. BELL: They feel that this is a bad time to
use that fund, that you might be criticized. I am not
so sure that the criticism might not go the other way,
that here is an opportunity to invest these funds at
two and a half percent, and you are investigating them
at two and three eighths percent.
MR. MURPHY: Of course there is a middle ground
between that, Mr. Bell. I think that a question could
18
- 18 be raised of why we are only getting two and three
eights on them when issues are available at two and
a half, but perfectly as a clear cut way of doing it,
in which you are playing straight as a fiduciary
thing and avoiding all criticism is to cut them in on
a new issue at par because then they are getting two and
a halfs in terms customary for two and a half's, but
the question that would be raised now could be raised
very easily, and we know that almost any questions
that even could be raised about the Old Age Fund is
something to which people are very sensitive. When
these securities were selling for a hundred and three
or more, why weren't they cut in on them at par then?
Why is there only cut in at par at a time when they
appear to be worth more than par. That is, any
security which sells at par by virtue of support is
presumptively worthless. Why should they be taken on
board now? The timing is all wrong from a fiduciary
standpoint.
H.M.JR: Your argument is sound, but it doesn't
help Bell solve his problem.
MR. MURPHY: Of course, we would have a different
solution to the problem.
MR. BELL: What he is saying today has been true
for eight years in the use of trust funds. We have used
trust funds to support the market, and I don't think
from a fiduciary standpoint we had a right to do it at
all.
MR. MURPHY: I concur.
H.M.JR: How much of that last issue have you
got unallocated?
MR. BELL: We have got just under fifty million.
I have allocated only three or four hundred thousand
dollars to the Indian Fund.
H.M.JR: How would you like to allocate that amount?
19
- 19 MR. BELL: That is the next question on the
agenda.
H.M.JR: I will come back to the other thing in
a minute.
MR. BELL: We haven't got anything available to
take up that fifty million dollars except something
like this Old Age. That was the next question I
wanted to suggest.
H.M.JR: Well, I am willing to put the Old Age
in. You have got to pick it up. You can't let it
lapse. I mean, that would be terrible.
MR.BELL: Oh, yes, we can let it lapse, but it
would be better, I think, to pick it up.
H.M.JR: Oh, that would look bad.
MR. BELL: Now, let me read you the law on the
Old Age. It says, "It shall be the duty of the managing trustee to invest such portion of the trust fund
as is not, in his judgment, required to meet current
withdrawals." Then it tells you that you can invest
them in original issues at par or you can issue
specials or you can buy them on the market. Now, it
says that "such special obligations shall be issued
only if the managing trustee determinesthat the purchase of other interest-bearing obligations of the
United States or of obligations guaranteed as to
both principal and interest of the United States on
original issue at the market price is not in the
public interest."
H.M.JR: Say that again.
MR. BELL: "Such special obligations - " that is
the ones you are now issuing to the funds - "shall be
issued only if the managing trustee determines that
the purchase of other interest-bearing obligations of
the United States on original issue at the market price
- 20 -
20
is not in the public interest.
H.M.JR: What does that mean?
MR. BELL: Well, that means the discretion is
entirely yours, and that you have determined up to
this time that the purchase of these securities in
the market is not in the public interest and that it
is in the public interest to keep these funds out of
the market. Now, at the meeting of the Board, the
question was raised at this meeting on December 7,
1939, as to whether the Secretary of the Treasury, as
managing trustee, should be required to go into the
market and purchase securities periodically for this
fund, it will be continually upsetting the Government securities market. From the Treasury standpoint,
which is coincidental with the public interest, it
would seem advisable to continue the policy of investing in special issues and go into the market only
when the Secretary determines that it would not upset
the Government security market. These factors seem
clearly in the public interest. The Board members
agreed that this procedure should be followed.
H.M.JR: Well, there is no reason in the world
why I shouldn't pick up this fifty million.
MR. BELL: Not at all. I am in favor of it.
H.M.JR: So am I. How about you?
MR. MURPHY: Would there be any record as to the
time when it was picked up? Would it appear of record
that they hadn't been picked up until now or would
those allocations all--
MR. BELL: No, they are all--
H.M.JR: Do it as of the first of January. What
is the matter with doing it as of the first of
January?
MR. MURPHY: I think it is all right. I just
21
- 21 had a certain qualm that we didn't pick them up until
after they had gone down, but in view of the fact of course picking them up, as I understand, for this
allocation merely puts more money in the general fund.
It doesn't take any off the market. I think I would
concur.
H.M.JR: Well, you would do it as of the first
of January. "How did you do it?" Well, we were looking over our situation and they had funds to invest."
What?
MR. MORRIS: Yes. I think it is a little bit
wishful thinking, but nevertheless it does give you an
argument at some time if you need it. When you first
asked me to look into this, I got an opinion from
Foley's office as to what "in the public interest" or
"not in the public interest" meant, and they say that
it works both ways and that the public interest is so
tied up with the Treasury that to help make an orderly
market, it is advisable to buy the funds in the public
interest.
H.M.JR: Well, that sounds kind of like saying to
the lawyer, "I want to do this. Now give me an opinion
backing me up."
MR. MORRIS: That is right.
MR. MURPHY: It is a good law, but I don't think
it is good public psychology.
H.M.JR: Isn't that right? "I want to do this.
Give me an opinion."
MR. MORRIS: Yes, "Help me out as much as you can."
Put 1 mean we have that, if you need it.
H.M.JR: Well, I don't think we will need it.
It is all right to have it. I am glad you went into
it. Well, Dan, let's say on that we pick that up for
old age and then that still leaves you how much of
22
- 22 these special twos? How many special twos have we
with Postal and with FDIC?
MR. BELL: We have got sixty-three million with
the Postal, and sixty-five million with the Federal
Deposit Insurance Corporation, and we have got six
and a half million with the Government Life Insurance
fund, and five million with the Federal Savings and
Loan Association.
H.M.JR: What is that, a hundred and thirty or
forty million?
MR. BELL: That is a hundred and twenty-eight,
thirty-four, about a hundred and forty million dollars
in that particular fund.
H.M.JR: Which all could be used?
MR. MURPHY: No.
MR. BELL: Yes, they could all be used.
MR. MURPHY: Well, they physically or mechanically
all could, but after all, that would mean that if there
was any fall-off in Postal Savings, you would have to
sell securities in the market in order to meet it. It
seems that there should be some expansion joint left
in the funds.
MR. BELL: Well, we could use them. I think there
ought to be a cushion there too as a reserve, but we
could use that hundred and forty million dollars.
H.M.JR: Well, my own feeling as of this morning,
you have got that, and then if you need fifty to a
hundred or two hundred million dollars, the way I feel
today, I would buy them from the general fund.
MR. BELL: That means retire them.
H.M.JR: Yes.
23
- 23 MR. MURPHY: Is it permissible to raise the more
fundamental question of the desirability of going fiftyfifty?
H.M.JR: Not today. I want to get through the
bottom of this list, you see.
MR. MURPHY: I don't want to begin the new year
wrong.
H.M.JR: No, no, keep raising it.
MR. MURPHY: We feel --
H.M.JR: Go ahead, you feel what?
MR. MURPHY: We feel it is quite inadvisable.
MR. BELL: Well, I feel that way, too, but the Secretary, I take it, feels the other way.
H.M.JR: Well, -MR. PELL: I think we are borrowing money to --
H.M.JR: Well, I -to retire debt -MR. BELL:
H.M.JR: I haven't got any good scientific argument to answer you with, but as I have explained to
Bell, it is a matter of personal relations between
the Treasury and the Board, and you go - as soon as
they buy it all, they immediately get dictatorial.
They have done with it. As long as we take half of
it.
MR. BELL: I think there is a different attitide
now.
H.M.JR: Well, you have seen --
24
- 24 MR. MURPHY: We just haven't got the resources
to go into any big operation.
MR. PELL: If it goes to half a billion, we have
got to re-examine it, your position.
H.M.JR: I wouldn't wait that long (laughter).
I mean, look, Dan, you have seen more of these
people than I have. You think that they have got
religion.
MR. PELL: No, not so much that as they will do
anything you want them to. I think all you have to
say is that,"I want the Federal to --"
MR. MURPHY: Goldenweiser says --
MR. BEIL: And they will do it.
MR. MURPHY: Goldenweiser says Eccles is suffering
from temporary lapse.
H.M.JR: What does that mean?
MR. MURPHY: He says Eccles has temporarily
lapsed into a high interest rate philosophy, but if
we give him time, he will come out of it.
H.M.JR: You didn't explain what the lapse was,
whether it was a lapse of memory or what.
MR. BELL: There is one other question in con-
nection with this fifty million. If we were to do
that right away, we would have to redeem some of those
special securities in the Federal Old Age Survivors'
Organization Fund.
H.M.JR: I can't get that.
MR. BELL: We would have to redeem some of the
securities, because there isn't enough cash. During
25
- 25 the month of January we ought to get in from the
Old Age - for the Old Age Fund, about thirty-five to
forty million dollars, and we ought to increase that
cash, rather than redeeming, but in order to invest
it all, we would have to redeem some of them. Now,
what we have been doing, and which was approved by the
Board when it met in December, '39, was to re --
is to redeem the three per cent obligations in order
to make all benefit payments, and invest all funds
coming in at the two and a half - new rate. You re-
member we discussed the question as to whether we
should redeem all of the three percent obligations
outstanding at that time, and put them in the securities
for the new rate. Miss Perkins thought that we would
be criticised, but she thought that we could redeem
the threes as we go along for current expenditures.
H.M.JR: I vaguely remember it.
MR. BEIL: Well, that is in the record.
H.M.JR: Well, you have been reading the record,
and you can't expect me to remember it.
MR. PELL: That is right, and I am telling you.
H.M.JR: And I am listening. You read it and then
you. say, "Don't you remember it?
MR. BEIL: That is a figure of speech (laughter).
H.M.JR: Well, an yway, what is your suggestion?
MR. BELL: I think for this that if we redeem any
of them, maybe we had better redeem some of the two and
three eighths. This is really not a current expenditure
in the terms that it is used.
H.M.JR: How many would we have to redeem?
MR. BELL: We would probably have to redeem twenty
million, because all the funds won't come in by January
15th.
26
- 26 H.M.JR: That is too bad.
MR. MURPHY: Is there any reason, Mr. Bell, why
this -- do you think it would -- why this whole amount
of the two and a halfs has to be allocated? That was
a bogey, that wasn't a commitment, was it?
MR. PELL: Well, I would have to look up. I don't
know whether we said in the press statement it would
be allocated within thirty days.
H.M.JR: Oh, I think it would look very bad to
do that. You can't have an overdraft for ten millions
for old age.
MR. BELL: No.
H.M.JR: Well, look, Dan, when you get down to
that end, I will leave it to you three gentlemen.
MR. PELL: Well, I will tell you what we might do.
We might go to the Unemployment Trust Fund, which is
about the same character, and we will get some money
in there in January, and we might invest that.
H.M.JR: Well, having decided we want to invest
it with those funds, how you do that, I will leave that
with you.
MR. BELL: O.K. You are willing to invest anyhow
this fifty million in those?
H.M.JR: Yes.
MR. MORRIS: Somewhere in the region.
MR. BELL: Well, that is all I need.
H.M.JR: Now, what else have you got?
MR. BELL: Well, we have got a lot of financing
to do, and I suppose it is all right for us to go
27
- 27 ahead and work on various types of financing, and we
may want to discuss some different types with you
pretty soon. We have got a big --
H.M.JR: All right. You ask for the time.
MR. BELL:
problem ahead of us.
H.M.JR: All right. Do you think that is enough
for today?
MR. BELL: I think that is enough. Now, I have
got some things on the Bank of America.
H.M.JR: No, not on New Year's Day.
MR. BELL: It has been hanging fire for a little
while.
H.M.JR: Let me just see whether Foley is in,
because I have got a job to do with him. We will have
more time on the Bank of America.
MR. BELL: Yes. Well, I have got a couple of those
same kind of cases that I would like to have you go over.
H.M.JR: Well, I want to see the Comptroller and
have him in.
MR. BELL: He has given me a memorandum on the two
types of cases and you may want to approve them all
at once, or just one at a time.
COPY
28
DRAFT (12-29-41)
JOINT STATEMENT OF THE SECRETARY OF THE TREASURY
AND THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
The President's Budget Message, submitted to Congress
on January , 1942, after discussing the necessity for
additional taxes, the necessity for allocating and controlling
all production for defense purposes, and the necessity for
curtailing production and consumption of many consumer's
goods, made the following statement with respect to financing the war program:
"With adequate funds available for investment in Government securities and with the effective
operation of a program of allocations and rationing
we can finance our war effort without danger of
disruptive inflation and without departing from our
low interest rate policy."
The Secretary of the Treasury and Board of Governors of
the Federal Reserve System pledge all their power and
authority to carry out the policy thus enunciated by the
President.
We should clearly realize that the total amount available to be borrowed is no greater at a high rate than at a
low one. It is determined only by our willingness to restrict our expenditures for purposes other than the war
effort. There is no need that our borrowing to finance the
deficits incurred during this period be conducted at a high
rate of interest.
Our longest bond issue sold in the week prior to the
attact on Pearl Harbor pays 2-1/2 per cent. We do not
intend to pay a higher rate for the financing of this war
except for securities especially designed for small savings,
like our present Series E Savings Bonds. Furthermore, we
do not intend to let the present long-term securities outstanding in the market fall below par.
29
DRAFT (12-29-41)
JOINT STATEMENT OF THE SECRETARY OF THE TREASURY
AND THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
The President's Budget Message, submitted to Congress on January
1942, after discussing the necessity for additional taxes, the necessity
for allocating and controlling all production for defense purposes, and
the necessity for curtailing production and consumption of many consumer's goods, made the following statement with respect to financing
the war program:
"With adequate funds available for investment in
Government securities and with the effective operation
of a program of allocations and rationing we can finance
our war effort without danger of disruptive inflation and
without departing from our low interest rate policy."
The Secretary of the Treasury and Board of Governors of the Federal
Reserve System pledge all their power and authority to carry out the policy
thus enunciated by the President.
We should clearly realize that the total amount available to be
borrowed is no greater at a high rate than at a low one. It is determined
only by our willingness to restrict our expenditures for purposes other
than the war effort. There is no need that our borrowing to finance the
deficits incurred during this period be conducted at a high rate of
interest.
Our longest bond issue sold in the week prior to the attack on
Pearl Harbor pays 2-1/2 per cent. We do not intend to pay a higher rate
for the financing of this war except for securities especially designed
for small savings, like our present Series E Savings Bonds. Furthermore,
we do not intend to let the present long-term securities outstanding in the
market fall below par.
30
MEMORANDUM FOR THE SECRETARY
INTERGOVERNMENTAL FISCAL RELATIONS
DURING THE DEFENSE PERIOD
*****
The staff in charge of the study of Federal-State-
local fiscal relations submits herewith a preliminary
report concerning the special problems in its field
arising during the defense period and because of the
defense program. The staff has not had sufficient time
to arrive at final conclusions respecting all of the
intergovernmental fiscal problems here considered. Moreover, the rapidly moving events may invalidate certain
of the observations and recommendations. The report is
submitted now because of the timeliness of some of the
problems involved. The subject will be treated again
along with the more traditional problems of inter-
governmental fiscal relations in the final report.
January 1, 1942.
Harold M Graves.
31
- 11 Table of Contents
Title
Chapter
I.
II.
Impact of the Defense Program
on State and Local Finances
V.
VI.
Appendix A
14
Federal Payments in Lieu of
Local Taxes on Federallyowned Properties
IV.
1
The Division of Financial
Responsibility for Defense-
created Governmental Services
III.
Page
22
State and Local Taxation of
Government Contracts
29
Federal and State Use of the
Same Tax Bases in War-Time
41
Other Defense-created Inter-
governmental Fiscal Problems
60
Further Analysis of the Effects
of Deductibility for Taxes in
Federal and State Income Tax
Laws
56
32
- 111 INTERGOVERNMENTAL FISCAL RELATIONS
DURING THE DEFENSE PERIOD
Summary of Findings
This report deals with problems in intergovernmental
fiscal relations created by the defense program. Its
principal findings are here summarized.
I. The impact of the defense program on State and
local finances
1. The finances of State and local governments,
and especially those of State governments, have improved
as a result of the national defense program. State tax
collections for 1941 are estimated to be 7 percent above
those for 1940. Income tax collections rose 17 percent.
Practically every revenue category showed some increase.
2. Although welfare loads are declining, wage and
material costs are increasing and some States are required to provide additional services. Some increases in
State expenditures may be expected but are not yet
reflected in the State financial statistics.
3. The fiscal situation of the local governments
also appears to be improving, but three qualifications
must be noted:
(a) The situation 18 spotty and some
cities have been adversely affected by the
defense program; (b) the local units have
not as yet experienced the full effect (in
effect) of the defense taxes upon their
revenues; and (c) the possible effects of
inflation and post-defense readjustments on
local finance are matters of considerable
fact have hardly begun to experience the
and warranted apprehension.
- iv -
33
4. The effect of the war upon automobile traffic
may involve a very important loss of revenues from motor
vehicle taxes (particularly gasoline taxes) to state and
local governments. These taxes are the single most
important source of revenue for states and of considerable
importance for local governments. On the other hand,
highway expenditures by states and to a lesser extent
their subdivisions, (except where such expenditure is for
servicing debt), can be and to some degree must be ourtailed.
States diverting motor taxes to general governmental expenditures cannot thus escape the impact.
5. State and local interest-bearing debt is estimated
to have declined $31 million during fiscal year 1941. In
the near future the volume of State and local borrowing may
be expected to decline more rapidly as improved tax collections reduce the need for short-term borrowing, as Federal
loans and grants are supplied to defense areas for public
improvements and as labor and material shortages and price
increases result in the postponement of capital expenditures.
II. The division of financial responsibility for
defense-created governmental services
1. The growth of industrial, military and naval
activity incident to the defense program is making it
necessary for some local governments in the defense
areas to provide added public works facilities and to
meet added costs of operation and maintenance. The
resultant financial problems have been especially difficult in the communities which have been newly-created as
the result of the defense program.
2. The governmental services required as a result
of the defense program are largely those which traditionally have been locally financed. However, local
governments are frequently unable to meet these defense
created needs promptly because their financial resources
are limited. State governments in turn are of little
assistance because many of the functions involved are
traditionally considered to be outside the sphere of
State activity. Moreover, State aids to local units are
both inflexible and slow to reflect sudden changes in
local requirements.
34
3. Much of the financial responsibility for
defense-created activities must of necessity fall
to the Federal Government because the extensive
interstate migrations of population and the concentra-
tion of defense activity in some areas is the result of
Federal decisions and because the availability of
adequate local public facilities and services is essential to the effective prosecution of the war. Congress
has recognized a large measure of Federal responsibility
by appropriating $150 million to be apportioned among
local units to meet these needs.
4. From present indication further Federal appro-
priations will be required for this purpose. The precise amount required can not now be estimated.
III. Federal payments in lieu of local taxes on
Federally-owned properties
1. Federal payments in lieu of taxes on Federal
properties located within the boundaries of local governments presents one of the more difficult and less satisfactorily handled problems in intergovernmental fiscal
relations. The problem is not new. It, however, has been
aggravated by the defense program and the acquisitions of
large tracts of land for reservations, cantonments, airfields, arsenals, ammunition depots, and other defense
facilities. In addition the Reconstruction Finance Corporation has acquired defense plants and other Federal
agencies have developed extensive defense housing projects.
2. Acquisitions of properties by the Federal Government affect local finances because they deplete the local
tax base and because in many instances Federal properties
make it necessary for local governments to expand govern-
mental services. On the other hand, in some cases, the
location of Federal property has probably added indirectly
to the tax base more than enough to compensate for the
additional services involved.
3. The Federal Government has adopted the practice
of making payments in lieu of taxes to local units. However, the practice has been opportunistic and unsystematized. The arrangements have varied with different
Federal projects.
- vi -
35
4. Local dissatisfaction with payments in lieu of
taxes was already in evidence in the pre-defense period.
It has been enhanced by recent developments. Local units
maintain that Federal payments are insufficient to compensate for the cost of locally provided services and
necessitate large increases in local taxes. The resulting irritation in Federal-local fiscal relations encourages resistance to the Government's efforts to improve
the tax system.
5. Those opposing the discontinuance of the issue
of tax-exempt securities have made a major point of the
quantity of tax-exempt Federal property. They maintain
that the cost of local functions and debt service is
increased at the same time that Federal property purchases reduce the local tax base.
6. This matter 16 now under study by the Federal
Real Estate Board and other agencies. Until the findings
of these studies are available (in the near future) and
in the absence of more research, a definite recommendation
on 'the subject would be premature. However, a solution
along the following lines merits consideration:
(a) Where services are sold by governmental agencies to private individuals, as
in the T.V.A. and housing projects, the
commercial element of the property involved
could be valued by the Federal Government
through a capitalization of the rental or
other income. The Federal Government could
then pay local taxes on such a valuation
corresponding to the taxes that would be paid
if the property were privately owned; and
(b) where property held by the Federal Government
does not result in the sale of services to private individuals, the Federal Government might
be charged only for the cost of those local
services which benefit property as distinct
from those which benefit persons. Such procedure would reimburse local units for the
cost of fire protection, for instance, but
not for the cost of health, education, or
welfare services.
vii -
36
IV. State and local taxation of Government contracts
1. The controversy involved in the taxability of
Government contracts under State and local sales and
use taxes has been aggravated by the defense program.
While the controversy pre-dates the defense program,
it was then of relatively minor quantitative importance.
2. The United States Supreme Court recently held
that in the absence of Congressional declaration to
the contrary, the purchases of cost-plus-fixed-fee contractors engaged on Government contracts are subject
to State and local sales taxes. The matter will probably
be the subject of Congressional consideration in the
near future.
3. Several factors suggest the desirability of
permitting the States to tax these purchases. States
are entitled to some compensation for services rendered
to defense industries. Federal consent to State taxation
of defense contracts is a comparatively desirable form of
Federal aid to States. Moreover, a liberal Federal policy
in this respect would strengthen the Government's case
against the continued issuance of tax-exempt securities.
V. Federal and State use of the same tax base in time
of war
1. The need of financing the war has raised the
question whether States should be eliminated from the
taxation of incomes, in order to leave the Federal
Government a freer hand in this field. Federal-State
income tax duplication is said to deprive the Federal
Government of the most effective use of an important
instrument of public policy. The financing of the war,
it is said, will require a maximum fiscal effort,
including the fullest possible exploitation of the
Federal income tax but the existence of State income
taxes with widely varying rates interferes with this
objective.
2. The present provision which permits income taxes
paid to States to be deducted in computing net income for
Federal tax purposes and the corresponding practice in
more than two-thirds of the income tax States which allows
Federal tax payments to be deducted in computing net income
for State tax purposes, exclude the possibility of the
- vili -
37
combined Federal and State tax rates becoming confiscatory.
These practices have the further effect of reducing substantially the differentials in burdens among taxpayers
living in different States. For example, if both governments allow the deduction of taxes paid the other, the
combined load of an eighty percent Federal and a fifteen
percent State rate 16 only 80.7 percent (11.3 percent of
Federal and 3.4 percent State). Even in the absence of
State provisions for the deductibility of Federal tax payments, the existing Federal provision allowing the deductibility of State taxes substantially reduces the variation
in income taxes paid by taxpayers in income tax States and
in non-income tax States. While at the lower levels of
income the effect of deductibility is not so conspicuous,
the same general relationships apply. At the $5000 income
level, the differential in total income taxes between a
New York and non-income tax State taxpayer is 1.1 percent
of net income and 14.7 percent of the total tax of the
latter taxpayer.
Because of the deductibility feature of Federal and
State income tax laws, the Federal Government can and
should feel free to order its war-time income tax schedules
without much regard to the present State levies or possible
changes in the latter.
3. The deductibility provision in the Federal law not
only protects the taxpayer but also gives a substantial
advantage to income tax States in that the Federal Government collects substantially less from the taxpayers of such
States than from those with equal incomes (before taxes)
in other States. The advisability of this "subsidy" may
be questioned but the deductibility feature applies equally
to nearly all taxes and may be supported in addition on the
ground that it encourages the States to maintain a progressive
element in their tax systems.
4. Since the adequacy of State revenues and a measure
of State financial independence is a concern of the Federal
Government, it would be undesirable at least now for the
Federal Government to pursue a course which would result
in the abandonment of income taxation by the States. The
requirements now in evidence do not appear to warrant such
drastic curtailment of State financial independence. Moreover, the States can be expected to take some account of
the Federal Government's revenue requirements for the
38
- 1x prosecution of war and not press their income tax programs
further than absolutely necessary. In the interest of maximum Federal revenues, State deductibility for Federal
taxes might be encouraged. To be sure, developments not
now foreseen may necessitate an alteration in these tentative conclusions.
VI. Other defense-created intergovernmental fiscal
problems
1. The task of financing the war would be facili-
tated by a more active Federal-State cooperation in tax
administration. States already make extensive use of
Federal facilities. However, thus far, corresponding
Federal use of State facilities has been negligible.
Since some States, as a result of the effective integration of diverse local industrial and governmental informational sources, are now successfully collecting income
taxes from the low income groups, they facilitate the
Treasury's efforts in the same field. The Treasury should
attempt to tap the stores of information and experience
now available in the States.
The cooperation of the States would also be helpful
in the administration of the newly imposed automobile
use tax. The new automobile use tax seemed to furnish
the ideal opportunity for Federal-State collaboration in
administration. However, the very impressive difficulties
encountered by the Bureau of Internal Revenue when such
program was contemplated serve principally to demonstrate
the fact that such collaboration cannot be improvised
successfully and would require long planning and careful
arrangements as to detail. More study is being given to
this as a type case of possible Federal-State administra-
tive collaboration. But since the tax 18 highly inequitable, since it will be costly to administer, and since it
aggravates Federal-State fiscal relations, it would be
preferable if this tax were repealed.
2. As a result of improved economic and fiscal
conditions, some State and local governments are accumulating surplus revenues. The disposition of these surpluses
has an important bearing on the Government's efforts to
prevent an inflationary price rise. These efforts would
be facilitated if State and local governments converted
their surpluses into reserves and more particularly if
they used these reserves to purchase United States Defense
39
Bonds. The development of a non-negotiable bond subject
to ready liquidation and otherwise adapted to the needs
of State and local reserve funds would stimulate the use
of such funds and their investment in Federal securities.
The use of surpluses to reduce indebtedness would also
be helpful. Conversely, if improved State and local
financial conditions resulted either in tax reductions or
expenditure increases, the Federal Government's antiinflation program would be handicapped. State governments
can facilitate the war effort also by extending financial
assistance to the defense-affected cities, which are required to provide essential governmental services to defense
industries and their workers.
3. The Government's effort to prevent inflation is
of vital importance to State and local governments. Experience during the last war indicated that an inflation can
seriously disturb the equilibrium of State and local finances.
Today these governments have even more to fear from inflation than they had in 1917. Their tax resources are more
fully utilized and they have less scope for tax increases,
especially in the field of property taxation. A severe
inflation at the present time might render it extremely
difficult to sustain State and local governmental services.
4. While some planning of post-war public works and
some effort to build a "public works reserve" are already
in process, a further investment in these directions is
needed. It is particularly important to have the details
of the post-war public works program so completely worked
out that its execution can be launched, on a large scale,
at any time on short notice. Legislation now before Congress
would contribute to this objective.
-1-
40
I. Impact of the Defense Program
on State and Local Finances
It was expected that the first impact of the defense
program on State and local finances would be favorable.
This was reported to have been the case in Canada and
seemed a logical result of heavy Federal defense spending.
On balance and on the average, especially in the case of
State governments, this expectation has been realized.
A. State governments
Tax collections in the 48 States for the fiscal year
1941 are estimated to be 7 percent higher than for 1940.1
These in turn were 7 percent above 1939. Total tax collections in 1941 amounted to $4,451 million, compared with
$4,171 million for 1940. Exclusive of unemployment compen-
sation taxes, the corresponding totals were $3,570 million
and $3,327 million.
Some increases were registered in virtually every
revenue category. The greatest relative increase occurred
in income taxes, which rose 17 percent, composed in turn
of a 27 percent rise in corporation and an 11 percent rise
in individual levies. Total income tax collections rose
from $358 million in 1940 to $420 million in 1941, an alltime high. In both years, taxes on individuals represented
approximately three-fifths of total income tax collections.
1 U. S. Bureau of the Census, "State tax collections, 1941",
October 6, 1941, p. 9.
41
-2The other tax sources registered varying increases.
Severance taxes, including levies on lumber, oil and
mineral products, rose 13 percent; general sales taxes,
13 percent; gasoline taxes and liquor taxes, each
8 percent; and tobacco taxes, 6 percent. Motor vehicle
license receipts rose 7 percent; and unemployment compen-
sation taxes 4 percent; and inheritance taxes 3 percent.
Miscellaneous sales taxes, business licenses, and other
license receipts rose only slightly.
42
3-
Table 1. Estimated State Tax Collections, 1940 and 1941
(Amounte in millions)
Collections
Type of tax
:
General and selective
property taxes
Severance taxes
Sales taxes:
1941
: % Change
1940
254
$ 263
59
52
+13
552
910
215
103
490
845
200
+8
+8
97
+6
16
14
+14
1,796
1,647
+9
416
452
388
444
+7
+2
157
208
123
188
55
46
420
358
+27
+11
+19
+17
gift taxes
Poll, hunting and fishing,
122
118
51
58
Unemployment compensation 1
881
844
4,451
4,171
+7
3,570
3,327
+7
General sales
Gasoline sales
Alcoholic beverages
Tobacco products
All other sales
Total
Motor vehicle licenses
Taxes on specific businesses
Net income taxes:
On corporations
On individuals
Undistributable
Total
Inheritance, estate, and
documentary and miscellaneous
$
- 3%
+13
3
-12
Total collections:
Including unemployment
compensation taxes
Excluding unemployment
compensation taxes
1
Contributions to State clearing accounts, obtained
from the Social Security Board.
43
-4Detailed tax collection data are available for
31 States. These indicate annual increases in two
States as high as 18 percent. Eleven out of the 31
States whose fiscal years ended on June 30, 1941,
reported increases of 10 percent or more in their
collections. The States with conspicuous increases
appear to be scattered throughout the country.
Table 2. Percentage Change in the Tax Collections
of 31 States, Between Fiscal Year 1940
and Fiscal Year 1941
Delaware
New Hampshire
Oklahoma
Iowa
Minnesota
Indiana
Connecticut
Nevada
Illinois
Over 12%
6 - 12%
Less than 6%
-0.7 Idaho
6.1 Oregon
6.2 South Carolina 13.2
13.3
6.5 Georgia
13.4
6.7 Kentucky
2.7 Tennessee
2.9 Mississippi 7.1 North Dakota 14.5
7.3 North Carolina 15.4
3.0 Utah
17.8
9.0 Virginia
3.5 Montana
18.1
3.9 Washington 9.7 Michigan
9.8
4.0 Wisconsin
0.7 New Jersey
1.6 Vermont
Kansas
4.1 California 11.4
New York
New Mexico
4.6
5.4
Colorado
5.9
13 States
13.0
10 States
8 States
Information on State expenditures is less complete.
At all events, such data would not be indicative of the
effects of the defense program on State finances, because
-5-
44
requirements for additional services, reduced welfare
loads, rising wage and material costs, and other defense
created factors would not have exerted their full
effects by June 30, 1941.
New York has a $7 million surplus and Illinois
reported a surplus of $6 million in June, with the balance
rising to $23 million by September 1941. Some reduction
of taxes and indebtedness is reported.
B. Local governments
The available data on local revenues and expenditures
are inconclusive regarding the effect of the defense
program on local finances. Distortions in expendi tures
of communities located in defense areas are known to be
currently developing but are not yet adequately reflected
in the financial statistics. Some cities, particularly
in non-defense areas are reducing tax rates; others are
accelerating debt reduction. Receipts and expenditures
in 1941 were relatively stable. Property tax revenues
are not sensitive to changes in economic activity and the
general decline in assessed values is only beginning to
reverse itself. The tax delinquency situation continues
to improve. Defaults, never relatively large, are becoming
even less frequent. Small increases in local receipts of
-6-
45
shared State taxes were noted but grants-in-aid did not
increase materially as compared with 1940. Utility and
other revenues showed increases in most cases.
Local expenditures for capital outlays on public
works are beginning to decline as a result of defense
priorities and the movement to conserve materials.
Welfare expenditures, particularly for relief and W.P.A.,
are also being reduced. In this case, the picture is
spotty and somewhat disappointing because large numbers
of the unemployed are unfitted by age, training, physique,
or location to participate (at least directly) in the
defense program. Some categories of expenditures, partic-
ularly in cities, are showing a general increase, as a
result of defense requirements, such as an extension of
fire and police service to protect property against sabotage.
Outlays for vocational education have increased in many
areas. "Of the 900 cities with vocational, trade, or
industrial schools, 300 now have their school systems
operating on a 24-hour basis with the objective of training
the 2 million defense workers requested by OPM". 1 Some
adverse effects from the increase in wages and prices have
already been felt.
On the whole the defense-area increases in expenditures
will be more apparent in 1942 operations, as facilities and
1
Albert Lepawsky, "Impact of National Defense on State
and Local Finances".
-7-
46
services expand to care for large population influxes.
In these areas, property tax revenues will be adjusted
slowly to rising expenditures because of the lag in
placing new values on tax rolls, the lag in assessed
values behind economic activity and the existence of
tax limitation and tax exemption problems.
Although the fiscal trend in local areas 18 generally
one of improvement, three qualifications must be noted:
1. The situation is spotty and some cities
have been adversely affected by the defense
program;
2. The local units have not as yet experienced
the full effect (in fact have hardly begun to experience the effect) of the defense taxes upon their
revenues;
3. The possible effects of inflation and postdefense readjustments on local finance are matters
of considerable and warranted apprehension.
With respect to the impact of the defense program
on governmental costs, cities appear to fall into three
broad categories: (a) so-called defense-affected cities
or boom towns; (b) cities struck by priorities unemployment; and (c) cities in neither of the above classes,
-8-
47
The defense-affected cities are confronted with the
problems of transitional readjustment. The defense progran is estimated to have caused the migration of at least
750,000 persons (by June 30, 1942), resulting in radical
changes in the population of some communities. The City of
Radford, Virginia, for example, because of the location of two
new ordnance works 5 and 7 miles distant, is estimated to
"enjoy" an increase in population from 6,898 in 1940 to 13,000
in 1942. Charlestown, Indiana, 15 miles north of Louisville,
with 936 people "suddenly found itself the site of a powder
and bag loading plant to cost $25 million, but which as a
result of the added Axis victories and our own skyrocketing
defense program, was boosted to a $75 million project before
its completion. Twenty-six thousand construction workers
have moved into the general area of Charlestown beside a good
crew of managers, consultants and planners."1/ Cities such
as these are facing problems of rapid expansion in municipal
outlays for education, sanitation, recreation and other
services.
The problems of priorities-unemployment cities are
more recent. The plight of these cities arises mainly from
inability to secure materials and, to a lesser degree tools
and skilled labor, with which to manufacture durable goods
1
Albert Lepawsky, "Impact of National Defense on State
and Local Finances", address before National Tax
Conference, 1941 and monograph submitted to the Treasury.
48
-9not useful for national defense. For example, one Ohio
city with a peak factory employment of 13,123 in July,
1941 and a population of 37,000, anticipated in October
a displacement of 1,360 workers in 60 days and 2,452 by
early 1942. Factory employment had risen from 9,582 in
July 1940, and relief cases had fallen from 511 in July,
1940 to 268 in July 1941. The displacement might tempor-
arily rise to 4,600 as a result of a shortage of raw
materials and orders to curtail output. The production
affected W&S consumers' electrical appliances, tires and
rubber goods, stoves, plumbing supplies and other metal
products. A substantial number of other communities
faced similar prospects. In these cases, as distinguished
from the defense-affected cities, no provision has been
made for Federal financial assistance. However, efforts
are being made to facilitate a transition which will adapt
these resources to defense production.
Many local government areas, including some urban
centers, fall in neither of the above classes. Their
industries have not been affected directly by the defense
program. They are reaping the benefits of a general improvement in economic conditions.
49
- 10 Substantial reductions in State and local motor vehicle
taxes are the most important and imminent threat to State
and local revenues growing out of the war. Unless the
supply routes for rubber imports are reestablished or
substitutes are quickly developed, it is almost certain
that civilian use of automobiles will necessarily be
restricted. As this situation continues, the effect may
be expected to bear down more and more on civilian consump-
tion of gasoline. There is also a remote possibility that
increased war needs for petroleum either by ourselves
or by our Allies may necessitate reduction in civilian
consumption of gasoline, unless refinery capacity can
be enlarged. A recent report indicates that refineries
are operating close to 94 percent of capacity. 1
Furthermore, transportation and distribution difficulties
may necessitate rationing of civilian consumption in areas
where, for various reasons, gasoline supplies are limited.
Finally, in a long war priorities on automobiles themselves
may cut civilian consumption of gasoline on highways.
1
Wall Street Journal, Friday, Dec. 26, 1941. p. 2
- 11 -
50
There are also some possibilities of reduction in
motor vehicle license tax revenue. In some States, nonuse of automobiles on highways permits owners to completely
avoid payment of the license fee. Many State license laws
provide for fees graduated downward with increasing age
of the automobile. Oklahoma's license tax 18 of this
nature. Moreover, in many States, automobiles are subject
to State or local property taxation, or both. These taxes
are based on value of the automobile and severe cuts in
new automobile production will tend to cut this tax base,
the amount depending on the severity of restriction in
production, and the length of time of such restriction.
In 1940, for all States combined, the two most important
motor taxes provided over 1-1/4 billion dollars of revenue,
or 39 percent of State tax collections. Gasoline taxes
amounted to over one-fourth (26 percent) and motor vehicle
license fees to one-eighth of State taxes. These figures
conceal significant variations in importance of these
revenues in particular States. In Massachusetts, these two
sources accounted for one-fourth (24 percent) of State taxes
as contrasted to two-thirds (67 percent) in Florida. In
one-fourth of the States, these taxes amounted to over
50 percent of State taxes. (See Chart I). In Nebraska
and Florida, gasoline taxes alone accounted for over one-half
- 12 -
51
of State taxes. In New York, however, it accounted for
only one-sixth (16 percent). There was even more variation in the fiscal importance of motor license fees with
Mississippi obtaining only 1 percent from this source as
compared with 26 percent in Vermont. Our economy and fiscal
system have been geared to the automobile more than many
have realized.
States can partially offset reductions in motor tax
yields by reduction and postponement of highway construction and by outs in maintenance expenditures on the present
road plant. With regard to the first, States are already
faced with priority problems resulting from the war. New
highway materials can be obtained only when projects are
considered essential to the war effort. With regard to
the second, less motor travel on highways will permit some
economies in maintenance.
But not all the effects of declining revenues from
motor taxes can be offset 80 easily. Almost three fourths
of the States have pledged motor taxes for servicing indebtedness - mostly State and local highway bonds. One extreme
illustration is the case of Arkansas which in 1940 used
two-thirds (68 percent) of its gasoline taxes to service
bonded indebtedness. It 18 also well to recall that in
1940 the States distributed $202,956,000 in gasoline taxes
and $118,115,000 in motor vehicle license fees to local
governments.
SOUTH DAKOTA
IOWA
MISSOURI
TEXAS
LOUISIANA
to
over 50
100 100 400 500 MILES
MINNESOTA
WISCONSIN
SOUTH DAKOTA
IOWA
UTAH
NEBRASKA
Custom
ILLINOIS
OHIO
COLORADO
MISSOURI
KANSAS
MEXICO
OKLAHOMA
TEXAL
ARKANSAS
SOUTH
MISSISSIPPI
LOUISLAMA
Case
10
to
over 50
.
$0 100 100 100 400 500 MILES
53
- 13 Motor taxes are also used for non-highway purposes.
When this is true the curtailment of the former would affect
Governmental functions other than highways. In 1940 the
Public Roads Administration reported $192,000,000 of motor
tax revenues used for non-highway purposes. State and local
general funds received 72 percent and education 15 percent
of this "diverted" revenues. In 1940 Florida used $8,677,000
of motor revenues for support of education.
C. State and local borrowing
With regard to borrowing, the Treasury Department's
annual estimate of the volume of tax-exempt securities
place the June 30, 1941, volume of State and local interestbearing debt at $19,860 million, only $31 million below
the corresponding figure for June 30, 1940. In recent
months, the volume of State and local financing is showing
a more appreciable drop. This trend can be expected to
continue as (1) improved tax collections obviate the need
for short-term borrowing, (2) Federal loans and grants are
supplied to defense areas for public improvements, and (3) as
labor and material shortages and price increases lead to the
postponement of State and local capital expenditures. All
these factors, however, will have a relatively little and
slow effect on the total volume of State and local debt,
because of the magnitude of the total outstanding debt com-
pared with the size of current operations.
- 14 -
54
II. The Division of Financial Responsibility
for Defense-created Governmental Services
The division of financial responsibility among
governmental units for defense-created public expendi-
tures has created difficult and delicate problems in
Federal-State-local fiscal relations. The growth of
industrial, military and naval activity incident to the
defense program has exerted heavy pressure on some local
governments in the defense areas to provide added public
works facilities and to meet added costs of operation and
maintenance. Increases in population and in property to
be served have been general in such areas. The resultant
financial problems have been especially difficult in the
communities which have been newly-created as a result of
the defense program. Naval yards, shipbuilding centers
and army reservations are examples. Increases in govern-
mental costs have appeared also in established industrial
centers where activities have increased.
School, sanitary, fire, police, road and health
services are those most drastically affected by the defense
development. The cost of providing these services has
frequently expanded beyond the ability of limited local
revenue sources to meet it promptly and adequately.
55
- 15 The governmental services required as a result of
the defense program are largely those which traditionally
have been the responsibility of local governments. In
the interest of orderly public administration it would
be desirable that they continue to be locally-financed
as far as possible.
The responsibility of State governments must of
necessity be limited. State grants-in-aid to local units
for capital outlays have always been restricted and such
meager funds as have been made available were mainly for
school buildings. State grants-in-aid for the operation
and maintenance of strictly municipal services such as
police and fire protection, sewer, water and other sanitary services have also been exceptions. These functions
are traditionally considered to be outside the sphere of
State activity.
Through grants-in-aid, States have transferred substantial amounts to local units for roads, schools and
welfare. However, State grants have not met the extraordinary current operating requirements of the defense
communities, even for schools. This is due partly to
limitations on the amount of State funds, but more particularly to the fact that grant-in-aid formulae are commonly
fixed by statute and that the adjustments in grants lag
56
- 16 behind changes in needs such as those generated by the
defense program. The amount of State disbursements for
grants-in-aid is usually fixed for the year, and for the
current fiscal year, budgets were adopted some time ago,
many under biennial appropriation. Moreover, the statistics employed in the formulae designed to measure local
needs will not reflect for some time needs arising from
defense developments. In the distribution of school
aids, for example, attendance or enrollment figures for
the preceding year are used to allocate funds in the
current year.
In the case of those local functions which States
have previously recognized as partially their responsibility,
special State assistance toward meeting defense-created
needs would be desirable. There appears to be a strong
measure of State responsibility in adapting State support
to rapid changes in local problems.
Congress has recognized a measure of Federal responsibility
toward the local communities seriously affected by the
influx of defense workers and military and naval personnel,
by the passage of the Defense Public Works Act. 1 Federal
responsibility stems not only from the fact that Federal
decisions have produced extensive interstate and intrastate
1
Public Law 137, 77th Congress, June 18, 1941.
- 17 -
57
migrations of population and the concentration of defense
activity in some areas, but also because many local units
have limited financial capacity to meet distorted capital
outlay expenditures and because States lack funds and
machinery for providing immediate assistance.
The Defense Public Works Act authorizes an appropria-
tion of $150 million for grants, loans, or both, to public
or private non-profit agencies for public works and equipment. Such public works may also be constructed directly
by the Government and contributions may be made to local
agencies for operation and maintenance of any public works
essential to defense. Quelified public works include
primarily schools, waterworks, sanitary and health facilities, recreational facilities and streets and access roads.
The Federal Works Administrator is given virtually full
discretion, subject to Presidential approval, to meet the
shortage of public works necessary to health, safety or
welfare in defense areas when such works cannot or will not
be provided locally, or could be provided only by excessive
local taxation or by exceeding local debt and tax limits.
Existing facilities are to be used or extended as far as
possible, and works are to be Federally-operated only if
local agencies are unwilling or unable to do so with their
own personnel and under the grants and loans provided.
- 18 -
58
The 2,824 project applications filed by October 13,
1941, represent a total cost of $815,665,850. Proposed
local sponsor-funds on these applications amounted to
only $138,862,062. The entire $150 million appropriation was tentatively allocated in November and a second
appropriation of a similar amount 18 now under discussion.
The 432 projects which had received actual allotments as
of October 13 included 175 for Army and Navy recreational
facilities; 116 for schools; 100 for water and sewers;
30 for hospitals and clinics; 5 for roads and streets; 4
for fire stations and equipment; and 1 each for incinerator
and power plant. These allotments involved a total cost
of $84,953,390, to be covered $24,691,233 or 29 percent
from local sponsors' contributions; $2,902,425 or 2 percent
from Federal loans; and $57,359,732 or 68 percent from
Federal grants.
From present indications another Federal appropria-
tion will be required in the near future. The volume of
valid applications is large, while a part of the present
appropriation was allocated to strictly Federal activities,
such as service recreational projects, and only the most
urgent projects connected directly with camps, housing
projects, etc., could be provided for from the available
59
- 19 -
funds. The actual extent of further requirements will
depend on the further development of encampments and yards,
the continued decentralization of industrial activity
and the expansion of existing industrial facilities.
The Defense Public Works Act provides that the
$150 million appropriation be apportioned among the several
purposes and governmental units by the Administrator of
Public Works in a discretionary manner. The discretionary basis of apportionment of loans and grants leaves
much to be desired, but under the circumstances was un-
avoidable. The need to facilitate the functioning of
defense areas was urgent and no satisfactory apportionment formula was available. Small rural communities
suddenly transformed into sizable industrial areas lack
the tax base, the borrowing capacity and the personnel
necessary to provide needed public works. Even the more
mature industrial areas may be operating at, or in excess
of, their legal tax and debt limitations. All of these
factors, as well as local willingness to serve housing
projects and strictly Federal properties, such as
reservations and yards, have to be recognized in the
allocation of Federal aids. The varying interpretations
possible as to the degree of local benefit and the
- 20 -
60
proportionate allocation of cost between local and Federal
funds seem to justify the apportionment on a discretionary
basis.
Preferring to trust the discretion of an administrator, the Federal Government for several years distributed
emergency relief funds without prescribing specific formulae.
A formula could hardly be expected to operate in the present
more complex situation. From the standpoint of public
administration, discretionary distribution of funds is
admittedly very difficult. Such discretionary power requires the administrator to weigh the numerous factors
involved, resist the pressures, and make decisions destined
to have important repercussion on local communities. The
urgency for performance of the work may not permit adequate
time for either investigation or bargaining and frequently
direct Federal construction must be undertaken without
delay, leaving the determination of ultimate financial
responsibility to a later date.
The question of financial responsibility for local
services is especially difficult in cases where the local
communities have sought the location of defense industries
within their boundaries. 1/ Some have gone further and
"Thousands of business men looking for contracts and
sub-contracts went to Washington. Hundreds of representatives of local business associations accompanied
I
- 21 -
61
offered inducements, such as exemption from property taxes.
This occurred in a number of communities in Mississippi
and Louisiana. Further, difficulties are presented when
the local communities involved are operating under ex-
tremely severe property tax and debt limitations provisions.
An examination of city applications for aid revealed
a number of communities whose difficulties were in part
due to the fact that they had frozen their tax systems
with legal restrictions. There is some indication that
this was the case with Pascagoula and Tullahoma in
Tennessee and with Leesville and De Ridder in Louisiana. 1
The difficulty seemed to be in the exemption of both
industries and new homes, which greatly increased the
helplessness of the towns in handling a large influx of
new industries and population. 2
(cont'd from previous page
them to explain the advantages of their communities
from the standpoint of industrial production. Hundreds
of city officials likewise visited Washington for the
1
2
same purpose". (Owsley & Miles, Cities and the National Defense, May, 1941, p. 30)
Defense Public Works, Docket No. Miss. 22-106, Tenn.
40-104, La. 16-101, La. 16-102.
The case of Pascagoula is particularly interesting. The
Ingalls' Ship Building Corporation was established at
Pascagoula under the Mississippi Industrial Act.
Jackson County furnished all land upon which the yard
is located and floated a $100,000 bond issue to carry
out all necessary dredging and other work. The firm
was exempted from taxes for five years. War orders
have greatly expanded activities at the yard and increased the communities' population by almost fifty
percent.
- 22 -
62
III. Federal Payments in Lieu of Local Taxes
on Federally-owned Preperties
Federal fiscal responsibility to local governments
because of the ownership of Federal properties within the
boundaries of such local governments presents one of the
more difficult and less satisfactorily handled problems in
Federal-State-local fiscal relations. It is not a new
problem but one that has been aggravated by the defense
program. The Federal Government has acquired large amounts
of property for reservations and cantonments, artillery
ranges, airfields, arsenals, ammunition depots and the
like. In addition, the R. F. C. has acquired defense
plants and other Federal agencies have developed extensive
defense housing projects. Local finances are affected by
these developments both because of the depletion of the
local tax base and because the Federal property in most
instances requires varying amounts of local servicing.
On the other hand in some cases the location of Federal
property has probably added indirectly to the tax base
more than enough to compensate for the additional services
involved.
Federal payments in lieu of taxes have been on a more
or less opportunistic basis for several years and arrange-
ments have differed with different Federal projects. It
appears to have been difficult to find a consistent
principle to apply. The matter is now under investigation
- 23 -
63
by the Federal Real Estate Board, created by Executive
Order in 1939, 1/ and other agencies.
In the case of pre-defense housing projects, the usual
practice was to require local contributions in the form
of exemption from property taxes. Payments-in-lieu of-taxes
were generally nominal, usually not in excess of 5 percent
of rentals. Defense housing projects, affected with a
larger Federal interest, have usually carried contracts
(for the emergency only) including contributions up to 15
percent of rentals and in no case in excess of taxes. The
15 percent is distributed among functions according to a
study of the service costs for the average city. It contains
no provision for flexibility among municipalities or with
changed conditions. Situations among municipalities differ
very substantially and are especially difficult where a
new housing project is developed in one community while
the factory employing the men housed on the project is
located in another.
Local dissatisfaction with "payments in lieu of
taxes" was already in evidence even before the defense
era. It was alleged that the arrangements concentrated
an undue burden on taxable real estate. The dissatis-
faction has continued into the defense period. The objection is now raised that Federal payments are insufficient
I
House Doc. No. 111, 76th Congress, 1st session. Wash. 1939.
- 24 -
64
to compensate for the cost of services provided by the
local units and result in undue additions to the local
tax rates.
In Clark Township, Union County, New Jersey, where
certain defense public housing projects were being
constructed, attempts were made to exclude the Federal
project from the township proper and render it a reservation or separately incorporated municipality. A measure
to this effect passed the Legislature, but was vetoed by
the Governor. This local resistance was in part traceable
to the fact that the jurisdiction was small, chiefly residential, and the housing project would not add sufficiently
to the tax base to cover the costs of the added local
services. The industrial property is located outside the
township in large urban centers. The excessive subdivision
of local units long noted in the New Jersey area and
unusually high tax rates added further to the problem. 1/
A similar incident in the same State occurred in
Caldwell Township, a rural community of 6,000 acres with
a population of 1,383. Opposition was raised to a proposal for centering a 250-house housing project in this
locality, although an aircraft propeller plant employing
some 1,600 persons had also been located there. The local
1
Hearings Before the Committee on Public Buildings
and Grounds, 77th Congress, 1st Session, on H.R. 5211,
July 9-23, 1941, pp. 169-170.
- 25 -
65
group cited the alleged fact that complete sewer, water,
gas and school facilities would be needed, and even if
all were provided by Federal funds, operation and maintenance would "probably double the tax rate of the present
inhabitants". 1
In a recent report to the House on a bill to increase
the appropriation for defense housing by $300,000,000,
the Committee on Public Buildings and Grounds has suggested
the following change in policy: 2/ Since defense housing
is designed to serve government personnel and industrial
workers who must be considered to be self-sufficient in
character, there is no reason for payments measurably below
local taxes. Payment of annual sums in lieu of taxes
should be mandatory and should approximate what would have
been paid if the property had not been tax exempt; allowance should be made for capital expenditures by the Govern-
ment for streets, and other utilities to serve the houses
in question.
In the case of R.F.C. defense plants, the rule
stemming from the statute creating the Corporation and 1941
legislation is that real estate owned by the agency and its
subsidiaries is subject to local property taxation. Personal
1 Ibid. p. 212.
2 November 28, 1941: Report to Accompany H.R. 6128.
66
- 26 property and other attributes of these Federal undertakings are exempt from local taxes. Reservation
property is exempt from local taxation and this is also
true of most Army and Navy acquisitions, including
housing developments for personnel. In the latter case,
some services are provided directly, others by contract.
Particularly in the case of school services for the
children of Army personnel, a great variety of arrangements
have been made. 1
Both pre-defense and defense experience justify the
conclusion that techniques for Federal payments in lieu
of taxes are subject to much improvement. Local intelli-
gibility, flexibility and adequacy are objectives to be
sought. No easy solution is available but improvement
seems quite possible. Certainly the field is worth an
investment for it is one which occasions great irritation
in Federal-local relationships. These irritations, bad in
themselves, encourage resistance to the Government's efforts
1
No uniform Congressional provision is made for payment
for school tuition of service personnel. This matter
has been handled in the past by combinations of
direct service provision and maintenance of post
schools; voluntary support of post schools; tuition
payments by parents or post exchange and recreation
funds to public schools; provision of free tuition
by State law or by local units; Army transportation;
contracts with local units for operation of post
schools or adjacent schools. State and local units
have frequently extended educational services to
children residing on reservation property, although
Federal jurisdiction is exclusive and there is no
legal obligation to provide services.
67
- 27 to improve the Federal tax system. Those opposing the
discontinuance of the issue of tax-exempt securities by
State and local governments have made a major point of
the extent of tax-exempt Federal property, holding that
costs of local functions and debt service would be in-
creased at the same time that Federal activity is reducing
tax bases. 1
Pending the forthcoming report of the Real Estate
Board on this subject and further study of the matter,
a definite recommendation would be premature. It seems
possible, however, that a solution can be reached along
the following lines:
1. Where services are sold by Governmental agencies
to private individuals, as in the T.V.A. and housing
projects, the commercial element of the property involved
should be valued by the Federal Government through a
capitalization of the rental or other income. The Federal
Government could then pay local taxes on such value corres-
ponding to the taxes which would be paid if the property
were privately owned.
2. Where property held by the Government does not
result in the sale of services to private individuals, the
1
C. H. Chatters, "The Case Against Taxation of Governmental Securities" in Annals of American Academy,
March 1941, p. 77.
68
- 28 Federal Government might be charged only for the cost of
those local services benefiting property as distinct from
those which benefit persons. Such procedure would
reimburse local units for the cost of fire protection,
for instance but not for health, education, or welfare
services.
69
- 29 IV. State and Local Taxation
of Government Contracts 1
The taxability of government contracts under State
and local sales and use taxes is one of the defense created
problems in intergovernmental fiscal relations. Pending
the Supreme Court's determination of the taxability of
defense contracts, the Justice Department endeavored to
obtain suspension of State tax collections. A number of
States complied. Objection was raised to such State taxation on the ground that the latter would add to the cost
of the defense program and that the legal status of operations of many defense contractors as private individuals
or agents of the Government was unclear. of particular
significance was the status of cost-plus-fixed-fee
contractors. This type of contract is used extensively
by the War Department, Navy Department, Public
Buildings Administration, and the Maritime Commission
1
In October 1940 the Buck Act (Pub. No. 819, 76th
Congress) was passed to authorize States to extend
sales, use, and income taxes to persons residing on
or carrying on business in Federal areas and to
transactions occurring in such areas. The provisions
did not apply to "authorized purchasers' (military,
naval and civilian employees) from Federal instrumentalities. Some attempt has been made to amend the act
to further clarify Army and Navy authority over reservations and to extend to Army and Navy personnel
exemption from State income taxes, but no legislation
has been passed to date.
- 30 -
70
It is used also by the Reconstruction Finance Corporation.
Some one billion dollars in cost-plus contracts was
awarded by the Quartermaster's Division alone in 38
States, involving building construction as well as
munitions and supplies.
Several States ruled that the cost-plus contractors
working on defense contracts are subject to sales, use,
gross receipts and similar taxes in the same manner as
private contractors.
The Department of Justice took the position that the
cost-plus contractor is an agent of the United States and
the assessment of State sales and use taxes on the materials
would be direct taxation of the Federal Government, 1 because:
1. The cost-plus contractor is reimbursed by the
Government for all expenses and costs of equipment,
materials and labor and then receives a fixed fee for the
use of his organization, services and overhead;
2. The Government supervises all procurement, may
itself supply the materials, may specify the kinds of
materials, and the Quartermaster approves virtually all
purchases and receives delivery, and many of the invoices
are on Federal forms, and because
3. Title vests in the United States at the site
of the work.
1 S. 0. Clark "State Tax Affairs and the Defense Program
Paper before Municipal Law Section of American Association,
Sept. 30, 1941 (mimeographed).
- 31 -
71
The Justice Department did not contest State and
local taxation when the tax is actually on the seller
but did so when the "legal incidence" is on the buyer.
Taxes on sales within a State are usually collected from
the seller but occasionally are levied on the purchaser
and more often there is a requirement that the tax be
passed on to purchasers. In such cases, the Department
argued, the buyer carries the legal incidence of the
tax. Use taxes and gross receipt taxes measured by payments received by the contractor from the Government for
his expenditures on materials and labor were held to
involve the same principle as sales taxes. State net
income taxes and gross receipts taxes on the contractor's
fee were not challenged.
of some 91 separate sales taxes, including motor fuel
taxes, a large number offer express exemption to the United
States, and some States have extended exemption by adminis-
trative ruling. "In 7 States the administrative construction has exempted the cost-plus-a-fixed fee contractor
from excise taxes; in 6 States a qualified exemption has
been granted; in 16 States exemption has been denied; and
in 8 States there has been no clear administrative construc-
tion." 1 The classification submitted in an appendix to
the Government's Brief in the Boozer case is found below:
1
Brief for the United States in State of Alabama V. King
& Boozer, 1941, pp. 108-9.
72
- 32 -
Status of State Transaction Taxes with Regard to
the Taxability of Purchases by Cost-Plus-Fixed-Fee-Contractors
Motor
Gross
Sales 18
33
16
34
-
1
2
1
2
3
18
41
6
72
-
-
-
4
22
6
6
8
1
Total
5
23
7
without exemption
4
9
Total
-
Taxes on vendors
with exemption
Taxes on vendors
1
3
Fuel 21
-
without exemption
Taxes unclassified
with exemption
Taxes unclassified
without exemption
Total 22
6
License 20
1
Taxes on vendees
with exemption
Taxes on vendees
Receipts 19
6
8
55
13
91
18 Includes taxes measured by gross receipts from sales of tangible personal
property at retail. Use taxes at same rates were not considered separately.
Includes taxes measured by gross receipts on account of labor or by
entire gross receipts less gross receipts on account of tangible personal property on which retail sales tex is imposed. Taxes measured
by gross receipts on account of payroll reimbursements to cost-plusa-fixed-fee contractors are not. strictly speaking, "vendor" or "vendee"
taxes. They are classified as "vendee" taxes since they are taxes
levied upon the contractor directly.
Includes taxes levied directly on contractors, in a fixed sum or greduated according to the total amount of the contract. Again the "vendor"
and "vendee" terminology is descriptively inexact. but license taxes
are placed in the "vendee" category. since they are levied directly
unon the contractor.
Includes taxes levied specifically upon gasoline and other motor fuels.
The insignificance in rate and number of taxes on lubricating oil and
kerosene, together with the relatively low total value of purchases of
these products, made omission thereof appear advisable. For identical
reasons gasoline inspection texes were omitted.
22 The total of vendees and unclassified taxes is taken as the possible
number of the taxes not applicable to cost-plus-a-fixed-fee contractors.
19
20
21
- 33 -
73
The confusion concerning cost-plus contractors was
due to lack of legal precedent and the fact that Congress
took no specific action, other than to refuse to include
express immunity in the appropriation act. Two test
cases have recently come before the United States Supreme
Court: U. S. and Dunn Construction Co. V. Curry and
Alabama V. King and Boozer. 1, The first case tested an
Alabama use tax on property purchased for construction
of a camp. The second involved an Alabama sales tax on
lumber for the same camp. The Supreme Court of Alabama
had upheld the Federal Government in these cases. The
U. S. Court held that the Alabama taxes were applicable.
Justice Stone for the Court in the Boozer case stated
that the contractors "were not relieved of the liability to
pay the tax either because the contractors in a loose and
general sense were acting for the Government in purchasing
the lumber or, as the Alabama Supreme Court seems to have
thought, because the economic burden of the tax imposed
upon the purchaser would be shifted to the Government by
reason of the contract to reimburse the contractors."
Concerning this latter point the Chief Justice added: "The
Government, rightly we think, disclaims any contention that
the constitution, unaided by congressional legislation,
1
Decided, November 10, 1941.
74
- 34 prohibits a tax exacted from the contractors merely because
it is passed on economically, by terms of the contract or
otherwise, as a part of the construction cost to the Government. So far as such a nondiscriminatory state tax upon
the contractors enters into the cost of the materials to
the Government, there is but a normal incident of the organization within the same territory of two independent taxing
sovereignties.
Estimates of Additional Federal Cost Involved in Allowing
the States to Tax Defense Contracts
The brief presented by the Government included an estimate of additional costs which would result from the free
taxability of sales. 1 This involved some elaborate analysis
and calculations performed with the assistance of the Bureau
of Labor Statistics, Department of Labor. The calculations
assumed that States now exempting defense contracts would
discontinue the practice. In this respect the figures
must be taken to represent a maximum though it is stated
that otherwise the calculations were conservative estimates.
Expenditures by lump-sum contractors, not at issue, were
80 far as possible excluded. In the case of construction
contracts the Bureau of Labor Statistics estimated that
the margin of error in its estimates was probably less than
10 percent.
1
Brief for the United States, Alabama V. King and
Boozer, Appendix B.
- 35 -
75
The estimated sales, gross receipts, and license
taxes in connection with the activities of cost-plusfixed-fee contractors and cost-plus-fixed-fee sub-contractors
on 405 construction contracts in effect on June 15, 1941
and including both actual expenditures and estimated ex-
penditures to the completion of the projects were
$15,333,490. Motor fuel taxes on the same contractors
similarly computed were $7,358,290. 1/ On the basis of a
sample study, sales and gross receipts taxes on 143 costplus-fixed-fee supply and equipment contracts executed
prior to September 15, 1941 were calculated at $17,155,684.
This makes a total of $39,847,464. These figures include
548 contracts and an estimated cost of $6,720,929,777.
The figures are cumulative and not confined to one fiscal
year. Projecting the estimates into the future it was
found that the total outlay for fiscal 1942, might be
about $54,000,000. A figure was also ventured to cover
the possibility that the Government might be held not
immune from taxes on any of its purchases. The figure
ventured for fiscal 1942 to cover this eventuality was
$137,000,000.
Questions of Policy and Principle Involved
To attempt to draw lines as to what should and should
not be taxed in the field of governmental instrumentalities
This figure, however, as stated in the report, makes
no allowance for special state exemption for gasoline used
1
off the highways, which might cover about 80 percent of
the purchases in 39 states (however, in some cases the
lower general sales taxes would cover such purchases where
the motor fuel tax would not.)
- 36 -
76
as a matter of principle and public policy is exceedingly
difficult. There is first of all the line to be drawn
between the taxation of property and that of sales. Few,
if any, have seriously contended that the property owned
by the Federal Government should be subject to State tax-
ation at the will of the States. of course, this is not
to say that no payments should be made on Federal property
in lieu of taxes. No one has contended that Federal purchases
should be taxed at the will of the States, either. Congress
should retain power to accept or waive direct taxes on its
instrumentalities as it sees fit. Of course, after the
Boozer decision it 18 doubtful if Congress even has the
power to immunize contractors on their purchases for Federal
contracts. But at least it has power to immunize 80 far 8.8
its direct purchases are concerned and perhaps it has this
power in the case of cost-plus and independent contractors.
Assuming it has all the power it needs what should be its
policy?
A stronger case can be made for leaving the States
free to impose transaction taxes on Government purchases
than for following a similar course in the case of property.
A transactions tax always involves three parties, one almost
always private. The economic incidence of the tax as between
the vendor and vendee is usually somewhat obscure. A
property tax on Government property involves no third parties.
- 37 -
77
The sales tax is ordinarily nondiscriminatory in admin-
istration; this 18 often not true of the property tax.
If the Federal Government were to allow all of its
purchases to be subject to nondiscriminatory State sales
taxes, could it adopt a similar policy with regard to
Federal excises on State and municipal purchases? Would
such a program require the consent or be subject to the
discretion of the States? This is a question which remains
to be answered by the Court. On the basis of the present
trend in the Court's decisions it seems quite possible
that the application of a nondiscriminatory excise even
on direct State purchases with or without the consent of
the States or even against legislation to the contrary in
the States might be sustained.
On principle it seems that the Federal Government
might well go considerable distance toward waiving immunity
of its purchases from State transaction taxes. In support
of this position the following considerations are offered:
1. All transactions of purchase, particularly those
through a contractor, represent economic activity
carried on in some State and local environment.
They all require the usual amount of State and
local governmental services. Taxes under such
circumstances are, to repeat the words of the
Court, "but a normal incident of the organization
- 38 -
78
within the same territory of two independent taxing
sovereignties". In the defense era this economic
activity often represents a substitution for other
economic activity which would otherwise be fully
taxable. To be sure, State and local territories
get compensatory benefits from the location of
defense industries within their borders. They get
similar benefits from the location of private
industries within their borders. It may be "good
business" for these areas to hold out tax inducements to new industries or to retain old ones. Some
communities have thought so. But somebody has to
bear the costs of government, including the overhead
left out of account in such decisions. It seems better
that full cost be divided among all of the economic
activity. Indirect subsidies are always confusing
and usually bad policy.
2. It is true that the imposition of sales taxes on Government business will increase the cost of defense. But
this is not in any sense a dead loss. The extra cost
to the Federal Government appears again as extra
receipts for State and local governments. The same
public is involved in supplying the treasuries of both.
The Federal Government has much more adequate fiscal
79
- 39 powers than the State and local governments. In
recognition of this fact it distributes annually
millions and in recent years billions of dollars of
Federal aid. In fact, it is urged by many to collect
all of the taxes now jointly used by it and the States.
Much of the present distribution involves difficult
formulae to determine the portion which should go to
each unit. No formulae are involved in the payment
of nondiscriminatory State and local taxes. To be
sure, the State and local governments are showing an
improvement in tax collections during the defense era.
But many of them have also been subject to a long
period of financial strain resulting in some cases in
prolonged deficits and a heavy floating debt. If
these governments can improve their credit standing
during the war period they will be in better condition to meet the stresses of the post-defense era and
to cooperate with any public works program the Federal
Government may then see fit to inaugurate.
3. The policy of waiving immunity for State and local
taxes on Federal transactions would strengthen the
Treasury's position concerning the elimination of the
tax-exemption privilege in the application of the
Federal income tax to the interest on State and local
bonds. One of the objections commonly urged to such
- 40 -
80
action is that the Federal Government is constantly
encroaching upon the fiscal resources of the State
and local governments. Moreover, in defending its
case for the elimination of tax-exempt securities
the Federal Government makes much of the argument
that the income tax is a nondiscriminatory tax and
its application to the interest on Government bonds
would be "but a normal incident of the organization
within the same territory of two independent taxing
sovereignties." The position of the Federal Government in this issue would be stronger 1f it showed a
greater willingness to apply these arguments against
as well as for itself.
These arguments do not finally answer the question
as to just what policy Congress should follow and the
Treasury should indorse concerning the taxability of
Federal purchases. Some immediate action by Congress
to clear away the confusion seems likely and advisable.
In the light of the above analysis, it is concluded
that such action should (and perhaps in any event must)
concede the taxability of independent and cost-plus-
fixed-fee contractors. Going further it might allow
taxes on all defense purchases. It is perhaps too
much to expect that it will go the whole way, attempting
to eliminate all immunity on all Government purchases.
But even this would, in our opinion, be well within the
bounds of sound public policy.
81
- 41 V. Federal and State Use of the
Same Tax Bases in War-Time
Several problems arise during the defense period
from the use of the same tax sources by both the Federal
Government and the States. These problems are not new.
They are aggravated, however, by the Federal Government's
fiscal needs and the probability that the Federal Government must embark upon an "all-out" tax program. The
principal problems are:
1. Will a combination of Federal and State taxes
prove excessive for the taxpayer?
2. Will the combination unduly embarrass the Federal
Government or the States and result in the impairment of
maximum war-time fiscal effort?
3. In the event the answer to these questions 18 in
the affirmative, should an attempt be made to persuade the
States to abandon certain revenue sources for the duration
of the emergency?
In view of the extensive and intensive development of
the Federal income tax and its probable further development, the question of excessive burdens on the taxpayer
is especially directed to the possibility of a confiscatory
or near-confiscatory incidence of a combination of Federal
and State income tax rates. The present maximum Federal
- 42 -
82
Table I
Deductibility of Federal Income Taxes from Gross Income in
Computing Net Income for State Net Income Tax Purposes 1
:
Income Tax
Corporation
:
:
State
Individual
Income Tax
Alabama
Yes
Yes
Arizona
Yes
Yes
Arkansas
Yes
Yes
California
No
No
Colorado
Yes
Yes
Connecticut
Delaware
District of Col.
None imposed
No
None imposed
Yes
No
No
Georgia
Yes
Yes
Idaho
Iowa
Kansas
Yes
Yes
Yes
Yes
Yes
Yes
Kentucky
No
Yes
Louisiana
Yes
Yes
No
No
Maryland
Massachusetts
Interest
No
Dividends
No
Capital Gains
Partnerships
Business income
No
No
Yes
Yes
Wages and salaries Yes
Minnesota
Yes
Yes
Mississippi
No
No
Missouri
Yes
Yes
Yes
Yes
Montana
New Mexico
New York
Yes
Yes
No
No
North Carolina
No
No
North Dakota
Yes
Yes
Oklahoma
Oregon
Yes
Yes
Yes
No
Pennsylvania
South Carolina
South Dakota
None imposed
Yes
No
No
Yes
Yes
Utah
Vermont
Yes
Yes
Yes
No
Virginia
West Virginia
No
No
Wisconsin 2
1
2
Yes
Yes
None imposed
Yes
In general, each State which permits the deduction of Federal income
taxes limits such deduction to taxes paid on that part of income
subject to its own income tax.
Applicable to income of 1941 and subsequent years, the deduction is
limited to 10% in the case of corporations and 3% in the case of
noncorporate taxpayers.
83
- 43 -
rate of 80 percent and the maximum State rate of 15 percent
(North Dakota and California) appear to approach within
a narrow margin of confiscation. But the appearances are
deceiving. The deductibility of the State tax in caloulating the base of the Federal tax, together with the
deductibility of the Federal tax in calculating the base
of the State tax in more than 2/3 of the income tax States,
make the effective rates considerably less than the nominal
rates.
Deductibility of the Federal tax is allowed by 21
States. (See Table I.) Eight States, including California
and New York, and the District of Columbia, deny deduct-
ibility. Wisconsin now grants a limited deduction and
Massachusetts in its classified income tax allows a deduction on some types of income. The combination of Federal
and State tax rates under various assumptions produces
the following results:
Table II
Effective Rate of a Combination of an 80 Percent
Federal and a 15 Percent State Tax on that part
of Income Subject to the Maximum Rate
Assumption
1. That neither tax is deductible in
the calculation of the other
Effective Rate
95 percent
State
Federal
2. That the State tax is deductible in 83 percent
State
the calculation of the Federal (as
presently provided in the Federal
law)
Federal
15 percent
80 percent
15 percent
68 percent
84
- 44 -
3. That the Federal tax is also
deductible in the calculation
of the State tax (as presently
provided in the laws of about
two-thirds of the States having
80.7 percent
State
3.4 percent
Federal 77.3 percent
an income tax).
4. That the State has no income tax. 80 percent
Federal 80 percent
From the above table it can be seen that the combina-
tion of Federal and State taxes results in an effective
rate only slightly higher under the third assumption than
under the fourth, and not conspicuously higher under the
second assumption than under the fourth. (However, the
differentials are greater than they seem for they should
be compared with what the taxpayer has left after taxes as
well as with his net income.) Thus, the deductibility
feature is an insurance against a confiscatory combination.
A Federal rate of 90 percent and a State rate of 15 percent
under the second assumption above would result in a combined
maximum effective rate of 91.5 percent; under the third
assumption 90.2 percent.
Although reciprocal deductibility results in the avoidance of confiscation in the application of the income tax
to the high brackets and also means the reduction to relatively small margins of differential tax burdens among
taxpayers residing in different States who enjoy the same
level of income, the latter aspect appears not to be true
- 45 -
85
for taxpayers with low incomes and relatively low taxes.
Thus, with an effective rate of 4 percent in both State
and Federal laws, mutual deductibility would leave a total
tax burden of 7.68 percent in an income tax State as compared with 4 percent in a non-income tax State.
However, the appearances are deceiving once again.
The relatively low prevailing State rates and the operation
of a progressive scale, which causes the deduction to be
applied at a higher rate than the effective one, lead in
actual practice to very much smaller differentials than
the above illustration suggests. The difference in tax
actually payable by a married taxpayer, without dependents,
with a $5,000 income in New York as compared with Pennsyl-
vania (a non-income tax State) 18 only 1.1 percent of the
net income even though New York allows no deduction for
the Federal tax. However, in this case 1.1 percent of net
income 18 14.7 per cent of the total income tax in a nonincome tax State.
As to the second question, that of fiscal embarrassment, the answer seems to be that the present arrangements
are fairly flexible. The third and fourth assumptions
(Table II), either reciprocal deductibility or State withdrawal from the income tax field, give the Federal Government a fairly free hand in the development of an income
tax rate structure. The second alternative, while less
favorable to the taxpayer, leaves more revenue to the States.
- 46 -
86
Further tables presented below and in Appendix A
indicate that the benefits of reciprocal deductibility
extend to taxpayers in all brackets of income and become
quite sizable at the $100,000 level. The benefits have
risen considerably in value as a result of the 1941
increases in Federal rates. The benefits of the deductibility provisions in State laws vary from State to State
according to the schedule of rates in each State. The
more severe the rate schedule, the more substantial the
savings to the taxpayer.
The Federal deductibility feature is tantamount in one
sense to a subsidization of the State income tax by the Federal
Government. A portion of the State tax can be said to
be offset by a reduction in Federal tax resulting from
the deduction of the State tax in the calculation of
Federal tax. The "subsidy" still holds true, but to a lesser
extent, where reciprocal deductibility is extended by the
State to the Federal levy; the Federal Government collects
less revenue on the same income in a State with an income
tax than in a non-income tax State. Thus the deductibility
provision in the Federal law not only protects the taxpayer
but also gives a substantial advantage to the income tax
States. The advisability of this concession may be
questioned but the deductibility feature applies equally
to nearly all taxes and may be supported in addition on the
ground that it encourages the States to maintain a progressive
87
- 47 -
Table III-a
Percent of Net Income*Required to Pay Federal and State
Income Tax in California, Minnesota, New York and Pennsylvania at selected net income levels on assumption of
reciprocal deductibility.
California
Minnesota
New York
Pennsylvania
Net Income
$
3,000
5,000
20,000
100,000
1,000,000
5,000,000
4.7
7.8
23.7
53.2
74.0
79.1
4.9
8.4
25.2
54.0
73.9
78.9
4.8
4.6
8.4
7.5
25.0
53.7
73.7
78.8
23.1
52.7
73.3
78.4
Table III-b
Percent of net income*actually required to pay Federal
and State Income Tax in California, Minnesota, New York
and Pennsylvania, at selected net income levels.
California
Minnesota
New York
Pennsylvania
Net Income
3,000
5,000
20,000
100,000
S
1,000,000
5,000,000
4.8
7.9
4.9
8.4
24.2
55.2
76.3
81.3
25.2
54.0
73.9
78.9
4.9
8.6
26.0
54.8
74.8
79.8
The taxpayer is a married man without dependents;
community property law in California disregarded.
4.6
7.5
23.1
52.7
73.3
78.4
.
UNDER
INCOME TAX LIABILITY FOR A MARRIED MAN WITHOUT DEPENDENTS
1941 FEDERAL AND NEW YORK STATE RATES UNDER VARIOUS ASSUMPTIONS
29
C
R
E
E
P
40
N
30
T
20
10
50
60
70
90
80
100
0
Income
Neither the State nor the Federal Tax
IS deductable in calculating the other
$5,000
X
State tax is deductable in calculating Federal tax. but not conversely
X
X
State and Federal taxes
are reciprocally deductable
State has no income tax
STATE
TAX
FEDERAL
TAX
XXXX
20,000
XXXXXXX
100,000
XX
XXXXXX
1,000,000
XXXXXX
5,000,000
10
20
30
PERCENT
40
50
60
70
80
90
100
0
89
- 48 element in their tax systems.
of the State tax collected on the $20,000 income of
a married man, without dependents, in Minnesota, a portion
will come from the Federal Government in the sense that
the Federal Government will collect less from this individual
than it would if he lived in a non-income tax State; a
portion will come from the taxpayer in that his total
income tax bill will be greater in an income tax than in
a non-income tax State. Under the 1941 law, the Federal
share of the Minnesota State income tax on the $20,000
income 18 calculated to be 42 percent and the taxpayer's
share 58 percent (Table IV). This means that the Federal
Government has in effect reduced the burden of the State
income tax to the taxpayer by nearly half and that the
State in effect has received this as a differential subsidy from the Federal Government.
The tables also indicate that the encroachment of
the new Federal tax upon the State income tax base will
be quite substantial in those States which allow the
Federal tax as a deduction. It will not affect the other
States (Table V). Whether or not, in the case of the
former, the upward trend of State income tax receipts will
persist, 18 a question which cannot now be answered.
89
- 48 element in their tax systems.
Of the State tax collected on the $20,000 income of
a married man, without dependents, in Minnesota, a portion
will come from the Federal Government in the sense that
the Federal Government will collect less from this individual
than it would if he lived in a non-income tax State; a
portion will come from the taxpayer in that his total
income tax bill will be greater in an income tax than in
a non-income tax State. Under the 1941 law, the Federal
share of the Minnesota State income tax on the $20,000
income 18 calculated to be 42 percent and the taxpayer's
share 58 percent (Table IV). This means that the Federal
Government has in effect reduced the burden of the State
income tax to the taxpayer by nearly half and that the
State in effect has received this 88 a differential subsidy from the Federal Government.
The tables also indicate that the encroachment of
the new Federal tax upon the State income tax base will
be quite substantial in those States which allow the
Federal tax as a deduction. It will not affect the other
States (Table V). Whether or not, in the case of the
former, the upward trend of State income tax receipts will
persist, 18 a question which cannot now be answered.
90
49
Table IV
BREAKDOWN OF STATE INCOME TAX* THAT WOULD BE PAYABLE IN CALIFORNIA,
MINNESOTA AND NEW YORK UNDER 1941 AND 1940 FEDERAL RATES INTO PORTIONS PAID BY TAXPAYER AND BY FEDERAL GOVERNMENT, UNDER ASSUMPTION
OF RECIPROCAL DEDUCTIBILITY
Total Federal Tax-
CALIFORNIA
NEW YORK
MINNESOTA
CALIFORNIA
TaxTotal Federal
share payer's
share payer's
Total Federal
share payer's
Tax-
share
share
share
MINNESOTA
Federal Taxshare
of
payer's
share
Federal Taxshare
%
141 rates
0.0
0.3
0.2
0.0
0.2
0.0
100.0
0.0
100.0
0.0
100.0
0.2
0.0
0.2
0.3
0.0
0.3
0.3
0.0
0.3
0.0
100.0
0.0
100.0
0.0
100.0
0.4
0.1
0.3
1.0
0.1
0.9
1.1
0.2
0.9
25.0
75.0
10.0
90.0
18.0
82.0
0.5
0.0
0.5
1.1
0.0
1.1
1.2
0.0
1.2
0.0
100.0
0.0
100.0
0.0
100.0
1.1
0.5
0.6
3.6
1.5
2.1
3.3
1.3
2.0
45.0
55.0
42.0
58.0
39.0
61.0
1.6
0.3
1.3
4.7
1.0
3.7
4.2
0.9
3.3
19.0
81.0
21.0
79.0
21.0
79.0
1.4
0.9
0.5
4.1
2.8
1.3
3.0
2.0
1.0
64.0
36.0
68.0
32.0
67.0
33.0
1.8
1.3
5.5
3.4
2.1
4.0
2.3
1.7
58.0
42.0
62.0
38.0
58.0
42.0
3.1
2.8
0.7
2.8
2.2
0.6
1.9
1.5
0.4
80.0
20.0
79.0
21.0
79.0
21.0
3.5
2.8
0.6
2.3
1.8
0.5
1.6
1.2
0.4
82.0
18.0
78.0
22.0
75.0
25.0
3.4
0.000
40 rates
$100,000
141 rates
$100,000
140 rates
$1,000,000
#41 rates
5,000,000
#41 rates
%
0.3
20,000
41 rates
share
0.1
$5,000
140 rates
%
0.0
$5,000
141 rates
share
0.1
$3.000
140 rates
payer's
Federal Taxshare payer's
%
%
$3,000
NEW YORK
Table IV breaks down the percentage of the individual taxpayer's income payable to the state as income tax into two portions:
the part "paid" by the individual taxpayer and the part "paid" by the Federal Treasury. Literally speaking, all of the state income
tax is paid by the taxpayer. However, in this context "payment" is used in the sense of additional burden to the taxpayer. The latter
pays that portion of the State tax which equals the excess of his total income tax bill (State plus Federal) over what his income tax
bill would be in a non-income tax state. The Federal Government "pays" the remainder.
The taxpayer is a married man without dependents: community property law
in California disregarded.
50 -
native Assumptions of Tax Deductibility.
Calif.
N. Y.
Minn.
2.0
2.0
5.7
5.7
4.9
4.9
lity
7.7
7.7
9.1
9.1
2.0
2.0
5.7
5.7
4.9
4.9
ble
7.7
7.7
9.1
9.1
6.6
1.1
1.6
3.6
4.7
3.3
4.2
ducti-
bility
6.6
State Tax
Deducti-
tibility
The taxpayer is a married man without dependents:
community property law in California disregarded.
$5,000,000
Calif. Min. N.Y.
lity
14.0
9.9
6.9
14.8 10.0 7.0
ble
14.0
9.9
6.9
14.8 10.0 7.0
3.5
2.8
1.9
State Tax
Deducti-
6.6
Reciprocal Deduc-
Reciprocal Deduc-
Deduc-
$1,000,000
Calif. Minn. N.Y.
ductibi-
6.6
Tax
on Three Alternative Assumptions of
Tax Deductibility.
No De-
ductibi-
tv
and New York under 1941 Federal Rates
N. Y.
Minn.
No de-
actibi-
Tax to States of California, Minnesota
Rates Rates Rates Rates Rates Rates
Rates Rates Rates Rates Rates Rates
De-
Per Cent of $1,000,000 and $5,000,000
Incomes "that would be payable as Income
1941 1940 1941 1940 1941 1940
1941 1940 1941 1940 1941 1940
ste
Table V-c
Per Cent of $100,000 Income*that would
be payable as Income Tax to State of
California, Minnesota and New York under
1941 and 1940 Federal Rates on Three Alternative Assumptions of Tax Deductibility.
Per Cent of $20,000 Income*that would
be payable as Income Tax to States of
California, Minnesota and New York under
1941 and 1940 Federal Rates on Three Alter-
Calif.
91
Table 7-b
Table V-a
1.4
3.1
4.1
5.5
3.0
4.0
tibility
3.4
2.3
1.6
.
- 51 -
92
Other considerations supporting the mutual deducti-
bility of income taxes paid are:
1. Since most jurisdictions allow most taxes as
deductions in income tax laws, it would be difficult
to justify an exception for net income taxes. To be
sure, the net income tax deduction provided by the Federal
law amounts in effect to a subsidy to the States. But
in so far as other taxes are allowed as deductions to the
person who bears their final incidence, the same argument
can be made regarding the other taxes.
2. Net income after taxes is the true surplus out
of which income taxes must be paid. The former is also
the fairest base to use in comparing the ability to pay
of one individual with that of another. For example,
let us assume that A and B both have $10,000 incomes
before income taxes but that A, by some provision of State
law, has to pay a $1,000 State income tax while B does not.
It is submitted that B has more ability to pay Federal
income taxes than A and that most people when confronted
with these facts would agree with this conclusion.
In so far as a consumer is able to deduct the excise
taxes levied on the tobacco he smokes, the law in effect
allows him an addition to his personal exemption for
93
- -52- -
living expenses. The income tax may be regarded as
(1) an outlay (like any other professional or business
expense) involved in the creation of income; (2) a utilization of income; (3) a transfer to provide a better
distribution. Whichever of these views is taken, and
they all have some validity, it is difficult to see how
anything is gained by disallowing the deduction. It can
be argued, of course, that income before all taxes should
be the basis of income taxation. But this contention would
make no adequate allowance for genuine differences among
taxpayers and it would reduce the equity of the income tax.
3. It can be maintained that deductibility of income
taxes is unnecessarily deceiving to the public; that the
latter looks only at nominal rates and does not see the
considerably lower effective rates which result from deduct-
ibility. This argument supposes that the public is intent
on having the current nominal rates prevail as effective
rates. Viewing the Federal and State tax systems separately,
as the public 18 inclined to do, this may be true. But it
is not at all clear that if the public were made to see
the tax structure as one whole that it would not prefer
the present combination of Federal and State nominal rates,
with deductibility, over the same nominal rates minus
deductibility.
94
- 53 4. The argument is likewise advanced that deductibility of Federal income taxes in State income tax laws
tends to make the effective rates of the State laws re-
gressive. This is equivalent to saying that State and
Federal laws should be viewed and developed without
regard for each other. It is such disregard which creates
the problems of an uncoordinated revenue system.
5. Alternatives to the recommendation of mutual
deductibility are not attractive. Disallowance of deductibility, particularly by the Federal Government, would
create the two major difficulties mentioned above:
a. It would leave grave dangers of confiscatory
taxes;
b. It would leave very large differentials in the
total net income taxes paid by citizens located
in different States.
Both of these major difficulties were featured by
the recent Canadian Report 1 as reasons for the elimination of Provincial income taxes in Canada. Both difficulties might be mitigated by agreement with the States
to reduce the top rates of their schedules but this would
involve complicated and uncertain arrangements and the
degree of mitigation would probably be slight.
Report of the Royal Commission on Dominion-Provincial
Relations, 3 Volumes.
1
95
- 54 It can, of course, be argued that the States should
retire from the income tax fields for the emergency.
However, since the adequacy of State revenue is a
concern of the Federal Government, and since there is
also an interest in allowing as much fiscal independence
to the States as possible, there is strong ground for
avoiding a course which would call for the abandonment
of the income tax by the States. Moreover, it may
reasonably be expected that the States will take due
account of the revenue requirements of the Federal Government and press their income tax programs no more than
necessary. In the interest of maximum Federal revenues,
State deductibility for Federal taxes might be encouraged.
To be sure, developments not now foreseen may necessitate
an alteration in these tentative conclusions.
Because of the deductibility features of Federal and
State income tax laws, the Federal Government can and should
feel free to order its war-time income tax schedules without
much regard to present State levies or possible changes in
the latter.
The above discussion relates to the personal rather
than the corporate income tax but the relationships found
in the case of the former apply also in the case of the
latter.
96
- 55 A somewhat similar situation in Canada has resulted
in a program under which the Dominion proposes to pay the
provinces to stay out of the income tax field for the emergency. However, the Canadian laws in several conspieuous cases provided no deductibility of taxes and resulted
in possible confiscation or near-confiscation of income for
some taxpayers. While the Canadian program does achieve
maximum freedom for the national development of the tax
in all brackets of income, the gains are quite dearly
purchased.
It is possible that the Federal Government during the
defense period may wish to tax tobacco or liquor so severely
that the combination of Federal and State levies will prove
embarrassing either to the industry involved or the consumer.
But this prospect does not appear to be an immediately
serious problem.
97
- 56 APPENDIX A
Further Analysis of the Effects of Deductibility
for Taxes in Federal and State Income Tax Laws
Table VI shows the percentage of a given income that
is paid out as income tax under different circumstances.
Four principles of classification are applied simultaneously:
1. Income bracket
2. State residence
3. Tax deductibility
4. Government jurisdiction
1. The incomes chosen for study are: $3,000, $5,000,
$20,000, $100,000, $1,000,000, $5,000,000. The first
four are considered under both the 1941 and 1940 Federal
rates. Since the 1940 and 1941 rates are about equal at
the million dollar leval and above, only one calculation
16 made in these brackets. Throughout, we have assumed
the income recipient to be married, with no other dependents.
2. The States studied are California, Minnesota, New York
and Pennsylvania.
a. California has the highest maximum State rate
of 15 percent. The progression is gradual,
reaching the top rate at the $250,000 mark.
The exemption for a married head of a family
is $2,500.
98
- 57 b. Minnesota has a top rate of 10%, which is reached
at $20,000. The exemption used is $2,000.
C. New York has a top rate of 7%, reached at $9,000.
The exemption is $2,500.
d. Pennsylvania is a non-income tax State.
3. Three conditions of "tax deductibility" are considered.
a. No deductibility. Under this assumption, neither
the Federal Government nor the State allows the
income tax paid to the other jurisdiction to be
deducted from its own tax base.
b. Only the State tax is deductible. While the
Federal Government permits in every instance the
deduction of State income taxes from the Federal
tax base, some States do not accord like treatment to Federal taxes. California and New York
are examples of such States.
C. Reciprocal deductibility. The Federal Government
allows State income taxes to be deducted from the
Federal tax base and the State allows Federal
income taxes to be deducted from the State income
tax base. Minnesota is an example.
Statutory provisions are as stated. However, it is
expedient to study the three States under identical conditions of tax deductibility, given their respective rate
structures and exemptions.
- 58 -
99
4. The percentage of income payable as income tax to the
State and Federal Government and the total of the two
levies are calculated.
The computations are derived from the substitution
of prevailing Federal and State tax rates in a pair of
simultaneous equations: 1
F - S, + /I - (PF + S + I,)7r, + /I - (PF + EF + s)7.04
S = S,, When I = Total Income less allowable deductions other than
Federal and State income taxes paid.
PF = Federal personal exemption
PS - State personal exemption
EF = Federal earned income credit
I, = Federal surtax net income below top bracket
I,, = State tax base below top bracket
S, = Federal surtax on I,
S,, - State tax on I,,
r, = Federal surtax rate on top bracket
r,, = State rate on top bracket
F = Federal tax
S = State tax
Formulae taken from Division of Tax Research Memoranda.
1
59
100
TABLE VI
(
PARCUIT 07 FIRSONAL LACOUD THAT WOULD BE TURN at INCOLCE TAXIS, FEDICAL AND STATE,
IN CALIFORNIA AND 100 YORK, 1941 AND 1940 FADHRAL RATES,
ASSURING THE ALTERNATIVE CONDITIONS TAX DEDUCTIBILITY
$3,000
$3,000
1941 Federal Rates 1940 Federal Rates
Cal. N.T. Cel. Kinn. N.Y.
.
45,000
45,000
1941 Federal Rates
Cal.
Hinn.
N.Y.
$20,000
1940 Federal Rates
1941
Federal
Cel.
Cal.
Kinn,
25.1
26.6
Kimm,
N.Y.
120,000
Anter
$100,000
4.6
4.9
4.9
1.1
1.2
1.2
int etibility
8.0
8.7
8.8
2.5
3.2
3.3
Col.
Kim
N.Y.
27.9
12.6
16.4
15.5
60.4
61.8
59.3
47.2
4.6
4.6
0.9
0.9
0.9
7.5
7.5
7.5
2.0
2.0
2.0
Total
date
Tax
0.2
4.8
0.3
4.9
0.3
4.9
0.2
1.1
0.3
39.5 39.5 39.3 73.3 73.3 73.3 78.5 78.4 78.4
1.2
0.3
1.2
0.5
7.9
1.2
6.5
1.3
8.6
Tax
0.5
2.5
1.2
3.2
1.3
3.2
45.9
57.3
83.2
80.2
93.3
56.4
23.1
23.1
23.0
10.6
10.6
10.6
52.7
52.7
52.7
2.0
5.7
4.9
2.0
5.8
4.9
7.7
9.1
6.6
7.7
9.1
26.5
26.0
12.2
15.1
14.4
55.2
55.6
54.8
42.6
43.2
34.9 34.1 35.5 62.3 65.5 67.9 66.5 70.4 72.8
State
Tax
48.6
24.2
85.4
.
4.6
$5,000,000
N.T.
1941 Federal Rates 1940 Federal Rates 1941 Fedz Rates 1941 Feds Rates
Cal.
Cal. Mian. N.Y.
Minn.
I.Y.
Cal. Hinn. N.Y.
Cal. Kinn.
Rates
Federal
Tax
$1,000,000
Federal
Total
Tax
$100,000
1940
6.6 14.0 9.9 6.9 14.8 10.0 7.0
42.1
76.3
75.4
74.8
81.3
80.4
79.8
Federal
Tax
4.6
4.6
4.6
0.9
0.9
Selectible
0.9
7.4
7.3
7.3
2.0
2.0
1.9
22.2 20.8
21.1
10.2
9.4
9.5
47.5
46.5
48.2
4.9
2.0
5.8
4.9
7.7
9.1
6.6
State
Tax
0.2
0.3
0.3
0.2
0.3
0.3
0.5
1.2
1.3
0.5
1.2
1.3
2.0
5.7
7.7
9.1
6.6 14.0 9.9 6.9 14.8 10.0 7.0
.
Total
Tax
4.7
4.9
4.6
1.1
1.2
1.2
7.8
6.4
64
2.5
3.1
3.2
23.7
25.2
25.0
11.9
14.3
13.9
53.2
54.0
53.7
40.8 41.6 41.0 74.0 73.9 73.7 79.1 78.9 78.8
2.0
2.0
22.6
21.6
21.7
10.3
9.6
9.7
51.7
49.9
50.7
37.6 36.1 37.0 70.5 71.1 71.8 75.7 76.6 77.2
1.1
3.6
3.3
1.6
4.7
4.2
1.4
Federal
Tax
4.6
4.6
4.6
directibility
0.9
0.9
0.9
7.4
7.4
7.3
2.0
State
Tax
0.1
0.3
0.2
0.2
0.3
0.3
0.4
1.0
1.1
0.5
1.1
1.2
4.1 3.0
3.1
5.5 4.0 3.5 2.8 1.9 3.4 2.3 1.6
101
- 60 VI. Other Defense-created Intergovernmental Fiscal Problems
A. Cooperation in tax administration
Intergovernmental cooperation in the administration
of overlapping taxes is an important field for future
development about which more will be said in subsequent
reports. Suffice it here to observe that some experimentation with intergovernmental cooperation is highly desirable
as a war measure. Informal arrangements by which the States
make use of Federal income tax facilities and income tax
information are now extensive. The Federal Government might
well make some use of the accumulated experience of the
States in the administration of the income tax in the very
low income brackets. A number of States have succeeded in
80 integrating diverse local industrial and governmental
sources of information as to enable a comparatively effective collection of the income tax from the low income
groups. This, admittedly, cannot be said of the Federal tax.
More effective income tax collection at the low income
levels 16 vitally important in the interest of public
morale, especially at this time and the States are in position
to facilitate the Treasury's efforts in that direction.
The new automobile use tax seemed to furnish the ideal
opportunity for Federal-State collaboration in administration. However, the very impressive difficulties encountered
102
- 61 by the Bureau of Internal Revenue when such program was
contemplated serve principally to demonstrate the fact that
such collaboration cannot be improvised successfully and
would require long planning and careful arrangements as to
detail. Among the difficulties encountered were different
State collection dates, possible unwillingness of States
to cooperate, absence of State and Federal authority for
such arrangement without specific action by Congress and by
the respective State legislatures, decentralized State
administration, (in some cases), problem of bonding State
officials, State political opposition. It seems probable
that the Federal Government cannot rely on State administra-
tion in a case of this sort without more adequate means of
holding the States accountable and without being in a position
to administer the tax directly if the States fail to observe
standards. More study will be given this experience as an
excellent type case of possible Federal-State administrative
collaboration.
with regard to the automobile use tax, an additional
observation may be in order. Although the Federal Govern-
ment has prior claim to the right-of-way in taxation during
the defense period, it is exceedingly doubtful whether
Federal invasion of a field long occupied by the States
and their subdivisions and one well adapted to administra-
103
- 62 tion at the State and local level -- namely the automobile
use tax -- accomplishes any useful purpose. This tax
will be very difficult and costly to administer at the
Federal level. Moreover, the Federal Government already
imposes manufacturers' excises on motor vehicles and
motor fuel.
The motor vehicle use tax leaves much to be desired
from the point of view of equity as well. Available
information on the estimated distribution of ownership
of family automobiles by family income groups in 1935-6
indicates that almost 52 percent of the passenger cars
were then owned by families with annual incomes of not
more than $1,500. A comparison of the $5 automobile
use tax with average 1940 automobile registration fees
in the States reveals that the $5 Federal use tax 1s
equal to 27 percent of the average State registration
fee in one State and 195 percent in another.
104
- 63 Available information on the estimated market value
of passenger cars in use on December 31, 1939, indicates
that the average value of the cars was then $238 and that
the $5 use tax is equivalent to 2.1 percent of the average
value of all passenger cars. More than half of the cars
in use on December 31, 1939, had a value of less than
$173.
Data on the distribution of motor vehicles by community
size classes indicates that more than half of the burden
of the $5 use tax will fall on communities with 10,000
persons or less and that 31 percent of the burden will
fall on those living on farms and in unincorporated areas.
These equity considerations, together with the importance
of the issue to wholesome Federal-State relations, indicates
the desirability of immediately repealing the Federal automobile use tax.
B. Utilization of State and local surplus revenues during
the defense period
As a result of improved economic conditions, lower
welfare and capital expenditures, and reduced tax delinquency, some State and local governments will receive
surplus revenues during the defense period. The disposition of these surplus revenues has an important bearing
on the Government's efforts to prevent an inflationary
rise in prices.
- 64 -
105
To the extent that the States and local units convert their surpluses into reserves, and more particularly
to the extent they use these reserves to purchase United
States Defense Bonds, a volume of purchasing power will
be impounded and the inflationary pressure on prices
correspondingly eased.
1
In part, similar results will
follow from the use of current revenues to reduce indebtedness. Although such action would return purchasing power
to bondholders, the expenditures of the latter are not
likely to be substantially increased thereby. While many
municipalities are limited in their power to retire debt,
they have substantial scope of such action with reference
to short-term and floating obligations. Under some conditions, State and local governments may also find it possible
and advisable to accumulate additional sinking funds for
future bond payments. Such use of surpluses, in addition
to casing the inflationary pressure on prices, would result
in a general strengthening of the credit position of State
and local governments, a factor which may be of great importance
in the post-defense era.
The development of a non-negotiable bond subject to ready
liquidation and otherwise adapted to the needs of state and
1
The State of Washington has invested $325,000 in Federal
bonds, circumventing the $50,000 maximum, it is said,
by making the investment cover several independent State
funds. It 18 suggested that "how Texas is going to
handle its $11,000,000 cash reserve which it is hoping
to invest in the same patriotic manner is a mystery.
Perhaps it will have to content itself as did rich
Belleville, New Jersey, the first city to buy Defense
Bonds, with a paltry $50,000 purchase of so-called
Series F." (Albert Lepawsky, "Impact of National Defense
on State and Local Finances")
- 65 -
106
local reserve funds would stimulate the use of such funds
and their investment in Federal securities.
If the improved financial condition of State and local
governments resulted either in the reduction of taxes or in
the increase of expenditures, consumer expenditures would
be increased and the problems confronting the Government
in the prevention of an inflationary price rise would be
enhanced. A deliberate policy of recucing local expenditures
to create a surplus is to be encouraged where the serving
can be made through the improvement of administration and
the elimination of waste. A reduction in public works
expenditure by releasing labor and materials will facilitate defense. Themaintenance of most local services at
their present level, however, is essential in the interest
of morale and productive efficiency.
During the defense period it will be necessary for
the Treasury to borrow on a wide scale. In this connection,
with a view to maximizing borrowing from individuals, the
Treasury has promoted the sale of Defense Savings Bonds and
Stamps. Many local governments have cooperated generously
in this program. Such cooperation is very helpful and
its continuation and expansion is desirable.
State governments can facilitate the defense effort also
by assuming some further responsibility for special or general
aid to the defense-affected cities, many of which have
appealed to the Federal Government for assistance in providing
the necessary services for new defense workers and their
families.
107
- 66 -
C. State and local interest in an anti-inflation program
Although the present danger of inflation and the
measures necessary to prevent it are subjects not directly
within the mandate of the coordination study, they are
indirectly very much involved. This is true because
inflation would greatly upset the equilibrium of State
and local finances and because the new taxes which have
been and may be inaugurated to cope with inflation have
an important bearing on the present and the future distri-
bution of the over-all tax load.
Regarding the effect of inflation on State and local
finances, the experience during the last war 18 illuminating. Because of rapidly rising prices, State and local
governments found that the materials required for operation and construction had become much more expensive.
Employees presented well-supported demends for increases
in pay. Due to these facts (and also to the increase in
the volume of services) total gross State and local
governmental expenditures increased 186 percent from
1913 to 1923. The average increase per year was 18.6
percent. By way of comparison, the increase during the
expansionary period of the middle and late twenties
(1923-1929) averaged 8.2 percent per year.
108
- 67 State and Local Expenditures, 1913 and 1923
Reported expenditures
Per capita
$
Total
:
State
Local
383
1,844
$2,227
1923
1913
$1,244
5,136
$6,380
$ 3.97
1923
:
1913
:
Amount, in millions
$11.14
45.98
$57.12
19.10
$23.07
Source: National Industrial Conference Board, Cost of
Government in the U.S. 1926-27, New York
1928, p. 2.
A large part of the war-period increases in State and
local costs were borne by those paying general property
taxes. Between 1912 and 1922, assessed values, property
tax levies and tax rates recorded the following increases:
1912
% Increase
1922
Assessed values
subject to State
and local general
property taxes
(000 omitted)
$69,452,936 $124,616,675
79.4
All general property
tax levies
(000 omitted)
1,349,841
3,503,725
159.6
1.94
2.81
44.8
13.91
32.23
131.7
Average tax rate
per $100 assessed
value
Per capita general
property tax levies
109
- 68 -
Choosing a few States for which date are conveniently
available, the increases in property taxation were as
follows:
Percentage Increases in State and Local Property
Tax Levies, Assessments and Average Rates for
Selected States, 1916 - 1921.
States
Levies
Assessments
Wisconsin
104.77%
40.73%
New York
Iowa
West Virginia
Ohio
65.52
94.28
137.9
-
Rates
28.74
14.5
30.6
-
82%
54.18%
Sources:
Report of the Wisconsin Tax Commission to the Governor
and Legislature - Madison, Wisconsin, 1930, D. 44.
Annual Report of the State Tax Commission, New York,
1923, J. B. Lyon, Albany, New York, 1924, p. 126.
State Board of Assessment and Review - Annual Report,
State of Iowa, Des Moines, 1938, pp. 272-4.
9th Biennial Report of the State Tax Commissioner of
West Virginia, Charleston, W. Va., 1922, p. 458.
11th Annual Report - The Tax Commission of Ohio,
Springfield, 1921, p. 15.
Springfield, 1930, p. 16.
Thus, in two of the above States property tax levies
more than doubled in the brief space of six years, and in
a third the amount nearly doubled. Since assessments did
20th Annual Report - The Tax Commission of Ohio,
not rise nearly as rapidly as levies, very substantial
increases in rates were necessary, involving in one case
a more than 80 percent increase. The new rates and levies
110
- 69 -
did not drop to their former level at the close of
the War. With some exceptions during the depression of
the thirties they continued to increase, although the
increases have been more moderate than in the inflation-
ary period of World War I. 1
1
Available data on average farm real estate taxes
for the entire period also serve to illustrate the
rising trend of general property taxes in the War
period and the failure of these taxes to decline in
the post-war period.
Farm Real Estate Taxes Per Acre and Per $100 of Full Value
Farm Real Estate
Taxes Per
Farm Real Estate
Taxes Per
$100 of Full Value
Year
Acre
1909-13 Average
$ .21
$ .50
.24
.24
.26
.28
.31
.33
.41
.51
.54
.54
.55
.56
.58
.55
.56
.57
.57
.58
.57
.59
.79
.94
.96
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1925
1929
Source:
1.01
1.07
1.19
U. S. Dept. of Agriculture - Year Book of
Agriculture 1935, pp. 688-691 and U.S.D.A.
Agricultural Statistics, 1940, pp. 587-88.
-
111
- 70 -
In 1916, the property tax was a relatively elastic
source of revenue and could stand this increased burden
without undue strain. Pre-war rates were much higher at
the beginning of this war emergency than in 1913.
Tax delinquencies were a negligible problem at the
earlier date since there had been a period of relative
prosperity, generally rising land values and real estate
development. In 1941, although current collection ratios
are vastly improved, many cities and rural units of govern-
ment still have substantial delinquent tax arrears left
over from the serious delinquency cycle of the Thirties.
Many rates are at very high levels and close to legal
limits. Other local units have reduced property tax rates
in the course of depression campaigns for property tax
relief and State replacement revenues, but lowered tax
limits will restrict flexibility in their use of the
property tax. In other cases, the local base of taxable
property is seriously narrowed by homestead exemptions and
other exemptions, and rates on remaining taxable property
are already high. Real estate values have not increased
greatly after a long period of depression. Assessed values
were slowly reduced in this period and are still relatively
high in many areas. Adjustments to any increase in market
values will be made slowly.
112
- 71 The property tax increases of the last war period
and post-war period were due to a combination of the
following causes:
1. continuing upward trend in Governmental services;
2. lags in values, assessments, and collection during
the inflation period;
3. inertia of rates and levies during the post-war
deflation.
Thus the States and their local units have more to
fear from inflation in 1941 than they had in 1917; their
tax resources are more fully utilized and there is less
leeway for increases in taxation, particularly property
taxation. A severe inflation at the present time might
render it extremely difficult to sustain State and local
governmental services. The experience under the inflation
of the World War period was such as to recommend a preven-
tion of a repetition of the experience, if possible.
D. Preparation of a Public Works Program for the
Post-Defenee Era
Although this report is devoted exclusively to the
problem of Federal-State-local fiscal relations during
the present emergency, it seems proper to include a problem
of the post-war period in so far as the latter requires
action before the emergency expires. While the nature
of the post-defense era is difficult to predict, it seems
113
- 72 -
highly probable that it will involve grave problems of
unemployment attending the transition from a war to a
peace economy. The problem may be augmented both as to
time and degree by the reappearance of those tendencies
toward under-investment and under-consumption which proved
80 troublesome during the Thirties. These problems will
be discussed in greater detail in later reports but here
it may be observed that it is of the greatest importance
to do some advance planning of ways and means to combat
post-defense unemployment. This advance planning should
include not only such general studies of the problem as
are now going on but also the accumulation of very specific
blue prints of projects. The latter is exceedingly important
for the reason that it takes time to put public works
projects into operation and time may be an exceedingly
important factor in reducing post-defense confusion and
demoralization. Legislation now before Congress calls for
an agency and an appropriation "to prepare, develop, and
to be ready for
maintain a reservoir of projects
prosecution when the need arises." 1/ While some efforts
toward a works reserve have already been made, they are
far from adequate. Some legislation of this sort should
be enacted soon. The more complete and definite the plans
which can be developed, the greater will be our security
in the post-war period.
S - 1833 A Bill to promote the general welfare of the Nation
by providing work on public projects to persons in
S
-
1617
need of employment, and for other purposes.
To Amend the Employment Stabilization Act of 1931.
115
4
Office of the Attorney General
Washington D.C.
January 1, 1942
Dear Henry:
With reference to Lauchlin Currie's letter of
December 11 with the attached memorandum to the President
with respect to Louis Johnson's statement in New York, I
am enclosing you a confidential memorandum from the Federal
Bureau of Investigation. It seems to me unnecessary to
make any further investigation.
I return the letter and the memorandum.
Sincerely yours,
The Honorable
The Secretary of the Treasury
Copy to Mr. Currie
COPY
116
FEDERAL BUREAU OF INVESTIGATION
United States Department of Justice
Washington, D. C.
PERSONAL AND
CONFIDENTIAL
December 30, 1941
MEMORANDUM FOR THE ATTORNEY GENERAL
With reference to the note addressed to the Secretary of the
Treasury under date of December 11, 1941, by Mr. Lauchlin Currie which
concerned an off-the-record address made in New York by Louis Johnson,
and in accord with your request, I have had a most discreet investigation
conducted for the purpose of determining the source from which Louis
Johnson obtained the material which he used in this address.
When Louis Johnson was interviewed, under appropriate pretext,
concerning this publication he indicated that the material which he
utilized had not been obtained by him directly from either the War or
Navy Departments but represented the "consensus" of the best thought
which was current in Washington about the Pearl Harbor attack. For your
confidential information Mr. Johnson was approached through an outside
party in such a manner as to encourage Johnson to disclose completely
and fully any and all information in his possession, with particular
reference to the sources of his information. Johnson talked freely concerning the material which he utilized in his talk in New York and indicated that out of the conflicting rumors and reports which were prev-
alent in Washington generally, he had pieced together certain fundamental
facts which appeared sound and had utilized these facts in his address.
Johnson was encouraged to contribute material to the person
who interviewed him in order to carry out certain objectives which Johnson indicated were controlling his public addresses and operations. Johnson indicated that he was particularly anxious to do everything possible
to speed up production and in the course of the interview conducted with
him, it was indicated that the interviewer's fundamental purpose was to
assist Johnson in his efforts in behalf of speeding up production. Johnson indicated to the interviewer, however, that he had absolutely no
source of information within the War or Navy Departments and had as a
matter of fact refrained from making any contacts in those departments
since he had left the War Department. Johnson indicated that any information which he might furnish to the interviewer would be predicated upon
discussions, rumors and gossip which reached Johnson and that consequently
the interviewer would have to evaluate the information furnished by
Johnson very carefully in order to determine its accuracy and reliability.
Johnson indicated further to the interviewer that he would
participate only in any program which was definitely on the constructive
117
Memorandum for the Attorney General
2.
side and that he would not have anything to do with any publication or
utterance which was critical of the President or ranking officers of the
Army and Navy.
Unless you desire further inquiries in this case, I do not
anticipate any further action.
I am returning herewith the letter of December 11, 1941,
addressed to Mr. Morgenthau by Mr. Currie, together with the enclosure
referred to therein.
Respectfully,
s/s J. Edgar Hoover
John Edgar Hoover
Director
Attachment
118
THE WHITE HOUSE
WASHINGTON
December 11, 1941.
Dear Mr. Secretary:
You may be interested in the attached
report on a meeting I attended last night.
What I perhaps should have added is
that too many of the business men present
are still fighting the wrong enemy -- the
New Deal, labor, and, obliquely, the President.
Sincerely yours,
Lauchlin Currie
Honorable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D. C.
V
119
December 11, 1941.
MEMORANDUM FOR THE PRESIDENT:
Res Dissomination of war information by Louis Johnson.
Stacy May and I flew up to New York last evening to attend a
dinner meeting of some eighty or ninety important industrialists.
Louis Johnson was there. He told me he was going to give the
low-down on Hawaii. I advised him strongly not to. When it came
to his turn to spenk he anid that since it was an off-the-record
meeting he would communicate to them what he had learned in
Washingt on the day before. He made the following allegationst
1. Our losses were three battleships and seven cruisers.
2. The fleet was bottled up by mines and the West Virginia was
lost by hitting a mine.
3. Out of sixty PHY's, only two were left.
4. The Japs came in after the completion of the dawn patrol.
5. Two German battleships were with the Japs.
6. American bombers flying to Hawaii were shot down over the field,
since they had grease in their guns instead of ammunition.
7. Naval supremacy had passed to the Japs.
He was followed immediately by & Dr. Stolper, former Budget
Director of the German Reichstag, who gave a completely defeatist
speech, predicting that both China and Russis would come to an
agreement with their Axis foes. He even suggested that we had backed
the wrong horse in the Far East and that we should have strung along
with Japan.
I got very hot under the coller and went After them both hard
for their defeatism, and reminded Johnson in particular of what
you had said about the dissemination of stories giving assistance
to the enemy. He retorted that this was a closed meeting and that
people had a right to know, and went on to intimate that an important portion of the German air fleet was now operating in Japan.
In view of this performance I feel that something should be
done to prevent Johnson's continued access to information at the
War Department.
Lauchlin Currie
LC1 em
TREASURY DEPARTMENT
120
INTER OFFICE COMMUNICATION
DATE January 1, 1942
TO
Mr. Graves
FROM
Mr. Callahan
you
In response to your two questions, there are
approximately fifteen more citations coming along
for participation in the "Treasury Hour". When
these are signed it will clear up all citations in
connection with this program.
There will be a continuance of citations for
the two programs "For America We Sing" and "America
Preferred". These run three or four a week.
The citations are awarded (1) to artists who
volunteer their services to the "Treasury Hour"
or other Treasury programs, and (2) to persons
performing unusual service for the Treasury in
connection with radio. In each case there is a
definite contribution on the part of the person
receiving the citation.
COPY
New Years Day, 1942.
UNITED STATES SENATE
Washington, D.C.
Dear Secretary Morgenthau:
Yes I will cooperate as you request.
Any time that Mr. Julian Street Jr. finds
convenient will suit me. A telephone call
before he starts might expedite our meeting.
Pardon this holiday mode of writing and
accept my best wishes.
Sincerely,
/s/ Warren R. Austin
121
CONFIDENTIAL
122
UNITED STATES SAVINGS BONDS
Sales Since May 1, 1941, by Months
On Basis of Issue Price
(In thousands of dollars)
Series E
Series G
Total
Total
:
:
:
:
:
:
Offices
Banks
Series F
:
:
Post
:
Month
May
42,836
$ 57,745
$ 100,581
$ 37,817
$ 211,420
$ 349,318
June
40,788
61,729
102,517
28,876
183,134
314,527
July
50,558
94,717
145,274
27,359
169,498
342,132
August
40,725
76,878
117,603
20,318
127,685
265,606
September
38,117
67,123
105,241
18,099
108,987
232,327
October
41,634
81,250
122,884
22,963
124,366
270,713
November
37,997
71,478
109,475
18,978
105,035
233,487
December
103,154
237,930
341,085
33,272
154,242
528,599
Total
$395,811
$748,850
$1,144,660
$207,682
$1,184,867
$2,537,210
Office of the Secretary of the Treasury,
Division of Research and Statistics.
January 1, 1942.
Source: All figures are deposits with the Treasurer of the United States on account
of proceeds of sales of United States savings bonds.
Note: Figures have been rounded to nearest thousand and will not necessarily
add to totals.
UNITED STATES SAVINGS BONDS
Comparative Statement of Sales During
October, November and December, 1941
On Basis of Issue Price
(Amounts in thousands of dollars)
:
:
:
:
:
:
:
Total
:
Series G - Banks
- $ 3,637
:
Series E - Total
Series F - Banks
October
December
over
November
:
Series E - Banks
: November
November
over
Percentage of Increase
or Decrease (-)
:
:
:
Series E - Post Offices
December : November : October
December
over
:
Item
Amount of Increase
or Decrease (-)
:
Sales
November
over
October
- 8.7%
- 12.0
$103,154
237,930
$ 37,997
$ 41,634
$ 65,157
71,478
81,250
166,452
- 9.772
232.9
341,085
33,272
154,242
109,475
18,978
105,035
122,884
22,963
124,866
231,610
14,294
49,207
- 13,409
211.6
- 19,831
75.3
46.8
- 10.9
- 17.4
- 15.9
$528,599
$233,487
$270,713
$295,112
-$37,226
126.4%
- 13.8%
- 3,985
171.5%
Office of the Secretary of the Treasury, Division of Research and Statistics.
January 1, 1942.
Source: All figures are deposits with the Treasurer of the United States on account of proceeds
of sales of United States savings bonds.
Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.
UNITED STATES SAVINGS BONDS
Daily Sales - December 1941
On Basis of Issue Price
(In thousands of dollars)
Post Office
Date
December 1941
1
2
3
4
5
6
8
9
10
11
12
13
15
16
17
18
19
20
22
23
24
26
27
29
30
31
Total
All Bond Sales
Bank Bond Sales
Bond Sales
Series E
Series E
Series F
Series G
Total
Series E
Series F
Series G
Total
$ 2,976
$ 3,904
$ 1,333
$ 7,220
$ 12,458
$ 6,880
$ 1,333
$ 7,220
$ 15,434
1,229
1,510
2,592
2,734
4,036
4,805
2,293
623
5.750
5,289
7,530
12,357
2,776
8,964
8,893
12,292
18,314
5,725
3,821
4,244
6,447
6,820
3,294
623
5.750
5,289
7,530
12,357
2,776
10,193
10,403
14,703
20,329
6,726
3,810
4.996
2,612
3,423
3.768
2,120
9,585
9,475
6,668
8,905
9,437
7.734
8,046
5.706
5,217
6,672
7.785
7.798
1,011
3,810
4,996
2,612
3,423
3,768
2,120
12,866
11,304
8,320
10,814
12,211
10,501
4,462
1,901
6,327
6,826
5,214
5,921
17,162
6,750
17,257
19,793
16,591
19,081
18,864
6,069
13,914
17,012
16,201
15,981
1,022
1,180
1,337
1,172
1,270
4,462
1,901
6,327
6,826
5,214
5,921
24,347
8,863
21,421
25,175
22,586
23,172
8,067
6,831
8,900
33,826
19,445
23,613
34,185
15,035
16,698
2,490
1,972
1,629
8,067
6,831
8,900
44,742
23,838
27,226
43,547
10,197
39,527
9,915
3,536
530
10,076
3,255
53,140
13,700
37,661
14,115
27.956
$425,444
33,100
10,743
21,112
3,060
1,450
2,307
10,353
5,382
9,077
46,513
17.575
32,496
$341,085
$ 33,272
$154,242
$528,599
2,411
2,015
1,001
870
726
1,152
656
3,282
1,828
1,651
1,909
2,773
2,767
4,764
3,877
1,011
3,566
4,763
5,012
5,030
491
7,185
2,113
11,679
3,956
9.750
11,630
10,205
11,890
4,164
5,382
5,995
4,091
601
719
658
584
1,022
893
1,180
1,337
1,172
1,270
2,490
9.593
3.503
23,269
10,642
13,085
29,934
6,412
530
10,076
3,255
8,852
3,460
4,540
24,247
7,283
16,571
3,060
1,450
2,307
10,353
5,382
9.077
$103,154
$237,930
$ 33,272
$154,242
10,916
4,393
3,613
1,972
1,629
3.536
870
726
1,152
656
601
491
719
658
584
893
January 1, 1942.
Office of the Secretary of the Treasury, Division of Research and Statistics.
Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales
of United States savings bonds.
Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.
125
UNITED STATES SAVINGS BONDS
Comparative Statement of Sales During
Last Twenty-three Business Days of December, November and October 1941
(October 6-31, November 1-29, December 4-31)
On Basis of Issue Price
(Amounts in thousands of dollars)
:
:
:
:
:
:
:
:
:
:
:
Total
October
December
over
November
:
:
Series F - Banks
Series G - Banks
:
:
Series E - Total
over
November
November
over
:
:
Series E - Banks
October
: December
Percentage of Increase
or Decrease (-)
:
:
Series E - Post Offices
: November
: December
or Decrease (-)
:
:
Item
Amount of Increase
:
Sales
November
over
October
$ 97,439
228,701
$ 37,997
$ 34,894
$ 59,442
$ 3,103
71,478
70,441
157,223
1,037
220.0
8.9%
1.5
326,140
30,446
135,983
109,475
18,978
105,035
105,335
19,133
99,548
216,665
11,468
30,948
4,140
197.9
60.4
29.5
3.9
0.8
5.5
$492,568
$233,487
$224,016
$259,081
111.0%
4.2%
155
-
5,487
$ 9,471
156.4%
Office of the Secretary of the Treasury, Division of Research and Statistics.
January 1, 1942.
Source: All figures are deposits with the Treasurer of the United States on account of proceeds
of sales of United States savings bonds.
Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.
TREASURY DEPARTMENT
CONFIDENTIAL
126
INTER OFFICE COMMUNICATION
DATE January 1, 1942
TO
FROM
Subject:
Secretary Morrenthau
for
Mr. Haas
Supply of Series E Savings Bonds in the Field
1. Attached to this memorandum are (1) a chart
and table showing the number of days' supply of
Series E savings bonds in the field, (2) a table
summarizing telegrams received this morning showing
the number of bonds requisitioned by sales agents
that the Federal Reserve Banks and the Post Office
Department's central office and were unable to fill
last night, and (3) a table showing the number of
bonds delivered each day since December 1 by the
Bureau of Engraving and Printing.
2. Some progress in liquidating local shortages
of bonds in the field was made yesterday. A comparison of the tables attached with the tables submitted
to you yesterday shows that unfilled requests for
savings bonds declined 90,000 pieces of all series.
3. The situation should improve further tomorrow
and Saturday due to the fact that the Bureau of
Engraving and Printing expects to turn out approximately
400,000 pieces today and tomorrow, while sales reported
on New Year's Day are likely to require a relatively
small number of pieces.
Attachments
Number of days supply of Series E Sav
8
Bonds on hand, December 1 to date
(Based on sales of $300 millions per month)
Denomination
$25
$50
$100
$500
:
Date
$1,000
:
December 1
2
3
4
6
LNO
7
8
9
10
11
12
13
14
15
16.
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
23.0
23.6
23.9
24.0
24.0
23.8
23.8
23.7
23.4
23.3
23.2
23.6
24.4
24.9
24.3
24.1
24.1
23.7
23.8
24.3
26.5
25.6
26.5
27.8
30.6
29.4
31.6
34.1
33.8
35.3
36.5
44.1
44.1
44.1
43.8
43.6
43.3
43.3
42.9
42.7
43.2
43.3
42.6
42.0
42.0
40.3
39.8
38.6
37.1
35.7
36.0
29.5
29.8
30.4
31.2
31.9
31.6
31.6
32.2
33.0
33.9
34.6
35.2
34.8
36.6
35.0
37.6
36.4
45.7
Office of the Secretary of the Treasury,
Division of Research and Statistics.
101.5
101.0
99.8
96.9
32.1
37.9
39.3
40.5
45.6
66.2
71.1
33.5
30.1
40.4
43.0
43.2
76.8
76.1
78.3
87.9
98.3
32.4
43.1
64.0
65.5
67.0
34.9
38.4
41.3
74.5
76.0
77.6
78.9
78.3
78.1
78.1
77.4
76.9
76.4
29.7
28.9
29.8
27.4
27.8
29.3
27.8
28.3
27.9
95.5
95.5
92.6
91.3
89.8
89.$
86.4
87.4
89.4
88.4
89.4
89.5
68.3
67.7
67.5
67.5
66.8
66.3
65.8
73.2
73.2
71.5
79.4
106.9
105.5
104.1
102.7
102.7
99.7
98.4
97.0
97.0
93.5
94.5
96.4
95.4
96.3
96.3
Agents' requests for savings boards unfilled at the close
of business, December 31, 1941
(In thousands)
Denomination
$25
$50
$100
48
17
32
38
53
4
$500
$1,000
Total
Federal Reserve Banks
Boston
-
Philadelphia
-
-
Cleveland
-
6
Richmond
6
6
10
Atlanta
6
2
3
Chicago
135
60
60
Minneapolis
Kansas City
Dallas
San Francisco
Post offices
4
6
-
103
2
-
New York
St. Louis
Total
4
94
3
9
-
-
4
-
16
-
24
1
2
-
-
13
-
268
-
-
17
-
-
-
18
4
-
-
7
5
5
27
2
19
-
-
1
-
-
95
-
-
292
25
3
22
11
1
-
92
250
262
6
Office of the Secretary of the Treasury, Division of Research and Statistics.
68
3
34
187
829
S. Savings Bonds - Series
Number of pieces produce December 1, 1941 to date
(In thousands)
Total
Denomination
Day
December
1
2
3
4
5
NO
7
8
9
10
$100
$500
$25
$50
75
25
10
25
10
50
10
10
10
10
50
10
-
-
-
denominations
130
130
130
130
110
40
10
50
10
10
10
10
10
50
-
-
-
-
-
-
-
-
-
-
50
10
50
-
-
110
15
30
10
30
50
-
-
75
50
-
-
75
60
11
40
20
50
5
5
12
so
121
44
80
-
50
-
30
-
10
15
15
-
70
50
-
-
-
80
-
28
-
120
-
45
17
18
92
92
-
-
-
155
-
-
-
-
19
120
150
175
160
180
220
225
180
240
200
205
200
240
13
14
15
16
20
21
22
23
24
25
26
27
28
29
30
31
all
$1,000
-
-
-
-
50
-
-
-
75
10
-
-
75
85
25
-
-
-
-
35
so
-
-
80
-
-
UNTIL
25
-
-
-
50
10
10
so
55
10
95
55
10
10
10
10
10
50
100
60
Office of the Secretary of the Treasury,
Division of Research and Statistics.
25
55
10
10
-
110
120
160
161
164
160
193
247
92
120
200
260
260
300
325
340
270
310
355
375
375
375
AT THE WHITE HOUSE
WASHINGTON
January 1st, 1942.
Mysen Mr. Morganthan,
Thank you so much for your Christmas
greetings, and for sending me such an
interesting collection of records which
I look forwarl to playing when 1 get back
to my gramophone at home.
June your
humbers
The Honourable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D.C.
TREASURY DEPARTMENT
131
INTER OFFICE COMMUNICATION
DATE January 1, 1942.
TO
Secretary Morgenthau
FROM
H. D. White
Sir Frederick Phillips called at three o'clock
on December 31 at his request. He submitted to
Mr. White a copy of a letter which he had received
from Under Secretary of War Patterson informing
him that the War Department was going to pay the
British Government cash for the planes it had taken
from the British. No sum was mentioned in the letter and Sir Frederick did not know but thought it
would be somewhere between $120 million and $200
million.
Sir Frederick also submitted a memorandum
dealing with the possible sale of ship-building
plant facilities for consideration by the Treasury.
Both memoranda are appended. see etc martime
can 113 to which memo is att
Mr. White stated that he would take both the
matters up with the Secretary and was sure the
Secretary would be pleased with the letter Sir
Frederick received from Mr. Patterson.
There is also appended a letter from Sir
Frederick to Secretary Morgenthau, expressing Sir
Frederick's appreciation of Secretary Morgenthau's
efforts in the matter.
Attachments
132
Willard Hotel,
Washington, D.C.
December 31, 1941.
Dear Mr. Secretary,
With reference to our conversation
last week, I enclose copy of a letter from
Mr. Patterson, and wish to express my hearty
thanks for your invaluable help.
Yours sincerely,
Hillips
The Honourable
Henry Morgenthau Jr.,
Secretary of the Treasury,
Washington, D. C.
133
C
0
P
Y
WAR DEPARTMENT
OFFICE OF THE UNDER SECRETARY
WASHINGTON, D.C.
December 27, 1941.
Sir Frederick Phillips,
British Supply Council,
Willard Hotel,
Washington, D.C.
My dear Sir Frederick:
I refer to our recent telephone
conversation relative to remunerating the United
Kingdom for aircraft contracted for by it and which
were recently taken over by the United States.
At the moment it seems impossible to
reach a definite conclusion as to the actual money
value of the articles taken. This reaction was
subscribed to by personnel in the Air Corps and in
the British Purchasing Commission.
This is to inform you that it is the
definite intention of the War Department to make
payment at the earliest practicable date in United
States dollars for the amount found to be due.
Sincerely yours,
(SGD) ROBERT P PATTERSON,
Under Secretary of War
134
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATEJanuary 1, 1942
TO
Secretary Morgenthau
FROM
H. D. White
Mr. Gromyko of the Russian Embassy called on me
yesterday afternoon at his request. He stated that
possible with the U. S. Treasury for a sale of $20
million of gold for future delivery. The terms to
be similar to the previous sale, 1.e., gold to be
delivered within 180 days. Mr. Gromyko stated that
the dollars resulting from the sale of gold were to
his Government had instructed him to arrange 1f
be used by the Russian Government for purchases in
the United States.
I told Mr. Gromyko that I would take up the
matter with the Secretary at the first opportunity
and would let Mr. Gromyko know.
The Russian Government still has to deliver
$9,800,000 of gold against the previous advance of
$30 million. The last delivery was on December 10.
Final delivery against that advance has to be made
by April 8, 1942.
Mr. Gromyko stated that all their dollar payments
which were due up to a few days ago have been met or
provided for, largely with the aid of a receipt of
$21 million from the Army and Navy which repurchased
some of their old dollar purchases.
At the close of business December 31, the cash
balances of various Soviet Government agencies in the
Chase Bank, the Federal Reserve Bank, and the Manu-
facturers Trust Company, amounted to $34.3 million.
Of this amount, more than $30.7 million were committed
against orders placed in the past, leaving an unobligated balance of less than $3.6 million.
They need $20 million to pay for goods which they
are purchasing outside of the Protocol. He says, for
example, they are about to purchase 4,000 tractors;
and other items are constantly coming up. He did not
know how long the $20 million would last, but he said
they need some dollars very soon.
O.K.
im h
135
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
m Cochram
n° luminous
report returned
to or white for files his
DATE January 1, 1942
Secretary Morgenthau
TO
FROM
1.
Mr. White
All
There is appended a summary (prepared by Mr. Friedman of
my Division) of Mr. Cochran's report on his trip to China.
Though many portions of the report are either of little
importance or out of date because of the war, I think that
you ought to read the whole summary.
2. The points made in Mr. Cochran's report which I believe will
be of special interest to you are:
(a)
(b)
Mr. Cochran promised the Chinese Government officials,
including the Generalissimo and Dr. Kung, that the
Treasury would gladly send out further personnel, if
additional American assistance was required.
K. P. Chen in his conversation with Mr. Cochran indicated his desire to withdraw from the Stabilization
Board. Mr. Cochran says that he is sure that Mr. Chen
would really like an invitation to the United States
in connection with financial transactions which would
give him a nice way off the Board and a nice leavetaking from you.
(c) Mr. Cochran, in Hong Kong and Chungking, emphasized
that he believed it was vital for National China to
maintain at least existing contacts with Shanghai
and that the initiative for severing such relations
should not come from Chungking.
(d)
Dr. Kung made certain specific proposals on which he
requested United States cooperation. These included:
1. The setting up by the United States Treasury
of a new and separate fund in United States
dollars to constitute a reserve backing for
Chinese currency.
2. The consolidation of the last three, or perhaps
four, of the American Export-Import bank loans
to China, extending the term and increasing the
amount.
136
-2-
Division of Monetary
Research
3. Providing China with a few airplanes capable of
transporting valuable ores from the interior to
the coast.
(e) The Generalissimo in one of his talks with Mr. Cochran
stressed the need of a definite plan for economic
assistance to China and said that the assistance should
come within three months.
3. The various proposals referred to in Mr. Cochran's report
are being studied here and the necessary memoranda are being
prepared. After these proposals have been adequately ana-
lyzed and discussed within the Treasury they will be brought
to your attention.
4.
Mr. Cochran has recommended that copies be given to Messrs.
Bell, Foley, White, Livesey, Knoke and Mr. Pehle, when your
approval is obtained.
137
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE December 31, 1941
TO
Mr. White
FROM
Mr. Friedman
Subject: Summary of Mr. Cochran's report on his trip to China.
1. Trip to Hong Konz, September 26 - October 9
Mr. Cochran left Washington on September 26, 1941. On September 27,
he arrived at San Francisco, where he discussed problems of the Far East
with Mr. Ira S. Clerk, Vice President temporarily in charge of the Federal
Reserve Benk at San Francisco. In company with Sir Ctto Miemeyer,
12. Cochran left San Francisco on September 28 and arrived in Honolulu the
next day. In Honolulu, Lr. Cochran discussed current problems with the
Foreign Funds Control staff.
Mr. Cochran left Honolulu on October 4 and errived at Manila on
October 8. There, Mr. Cochran discussed technical problems arising under
freezing control and operations of the Stabilization Board with the
Foreim Funds Control staff and with the High Commissioner and members of
his staff. Mr. Cochran recommended a weekly report of the Control's
activities.
2. First stay in Hon Kony, October 9 - 15
On October 9, Mr. Cochran went to Hong Kong. In addition to meeting
many people, including Consul General Southard; Treasury representative
Micholson; Mr. Cyril Rogers, Financial Adviser to the Government of Hong
Kong; the members of the Stabilization Board; Mr. Baxter, Financial
Adviser to Government of Burme, and Sir Mark Young, the Governor-General,
Mr. Cochran discussed with Mr. Fox and the other members of the Board,
and with the British visitors, Mr. Baxter and Sir Otto Niemayer, the new
plan of cooperation between the United States Foreign Funds Control and
the Stabilization Board. The result of these discussions was a joint
comunication from Mr. Fox and Mr. Cochran to the Treasury dated October 15,
1941. The current Shanghai crisis was also discussed and Mr. Cochran
recommended that the Board show a "generous and gracious" attitude rather
than permit the necessity continually to develop for importers to go into
the black market for their exchange. It was decided that no exceptional
steps would be taken at this time.
138
-2-
Division of Monetary Research
3. First visit to Chungking, October 16 - 21
At Chungking, Mr. Cochran met a number of important officials including
Dr. Y. C. Koo and Mr. 0. K. Yui, Vice Ministers of Finance; Hollington Tung,
Vice Minister of Information and Dr. H. H. Kung. The Finance Minister asked
Mr. Cochran to thank the officials of the United States Government and
particularly Mr. Morgenthau, for the assistance being given to China.
Mr. Cochran told Dr. Kung that the Treasury would gladly send out further
personnel, if additional American assistance was required. Dr. Kung then
specifically outlined the assistance which he said would be most appreciated,
if it could be provided. He referred to the request for an expert on the
Federal Reserve system to be sent to China to study and improve the Central
Bank of China. Dr. Kung hoped that someone would come out who could remain
as long as three years. He hoped that we would approve the idea of his
sending three apprentices to the United States who could spend some time
studying the Federal Reserve Bank, the Board of Governors in Washington and
the Treasury system of Foreign Funds Control. Mr. Cochran assured him that
this could be arranged. Dr. Kung mentioned that he had asked Mr. Fox to
serve as Honorary Adviser on Taxation. Mr. Cochran pointed out to Dr. Kung
that Mr. Fox had been the American nominee to the Stabilization Board and
also was looked on to conduct any economic research which might be required.
Dr. Kung was asked by Mr. Cochran whether in addition to these two tasks
he thought Mr. Fox would be in a position to serve also as Honorary Adviser
on Taxation. Dr. Kung replied in the affirmative.
Mr. Cochran says that Dr. Kung definitely stood out head and shoulders
above the other Government officials whom he met at Chungking.
4. Second stay at Hong Kong, October 21 - 22
On his return from Chungking to Hong Kong, Mr. Cochran had a talk with
K. P. Chen in which the latter indicated his desire to withdraw from the
Board. Mr. Cochran reminded him that the only condition which Secretary
Morgenthau interposed when the Stabilization Agreement in China was
contemplated was that he, K. P. Chen, should be Chairman of the Board,
and that the Secretary would be greviously disappointed if the Board should
lose his services. Mr. Cochran told Mr. Chen that he realized that there
was need for greater harmony and strength within the Board's organization
and that upon his return to the United States he would endeavor to arrange
for the sending out of such additional American experts and assistants as
might be required to improve the functioning of the Board. Shortly after
this talk Mr. Cochran left for Shanghai.
139
-3-
Division of Monetary Research
5. Visit to Shanghai, October 25 - November 2
In Shanghai, Mr. Cochran interviewed many representatives, official
and unofficial, of the foreign community and discussed with them the current
problems facing Shanghai. He also spoke a few words at a meeting of the
American Chamber of Commerce at Shanghai on October 27, where he said that
he urged that no one should expect profits in Shanghai in these times. He
did express the hope that the American concerns would be able to maintain
their foothold. Mr. Cochran pointed out to them that there was no probability
of the Board being discontinued during the life of the Stabilization Agreement
and said that he admitted that the Board needed improved technical personnel
and management, as well as more space. He told them that it was his definite
plan to send out two or more Americans from the United States shortly after
he returned to assist in the technical and office management end.
In Shanghai Mr. Cochran also discussed the question of the storage of
fapi and in his report he expresses his belief that the Stabilisation Board
of China should arrange with the Minister of Finance to permit the destruction
of the stored fapi notes, such burnings to take place under Government supervision and the Central Bank being given due credit on its books for the notes
so destroyed. While in Shanghai, Mr. Cochran suggested to Mr. Lockhart that
he utilize increasingly the services of Consul Horace Smith in connection
with stabilization and Foreign Funds Control matters.
6. Third stay in Hong Kong, November 5 - 8
On his return to Hong Kong, Mr. Cochran was invited by the Stabilization
Board to give the Board the benefit of the observations made on his Shanghai
trip.
Mr. Cochran, conscious as he says, of the pressure from certain
Governmental circles in China to dimish or even cut off foreign exchange
from Shanghai, spoke directly to this point. He told the Board that he
found the Shanghai people willing to listen to reason and that he thought
that they were genuinely disposed to cooperate in our effort to help China
and to bring economic pressure on Japan. It was his definite impression
that Shanghai considered itself still a part of Old China and that there
was no significant element in Shanghai desiring closer ties with Japan. It
was vital for National China to maintain at least existing contacts with
Shanghai and the initiative for severing such relations should not come
from Chungking. The Board could afford to go along carrying Shanghai for
the present. Vice Minister of Finance, Koo, told Mr. Cochran that he was
particularly happy to have the observations of an outside official who had
visited Shanghai so recently. Mr. Koo informed Mr. Cochran that he endorsed
warmly Mr. Cochran's recommendations with respect to Shanghai.
140
-4 -
Division of Monetary Research
After the account of his travels, there was a discussion of the new
control regulations. Mr. Hall-Patch suggested postponement of license
changes with respect to trade, and Mr. Tsu Yse Pei endorsed this proposal.
Mr. Fox threatened to go home if the Board asked for a delay. Mr. Cochran
made the point that the Board had already agreed to the American plan.
It was decided not to delay.
At lunch on the same day, Mr. Chen said that he hoped that one of the
American credits to China could be completely paid off during the next
few months and that he would like to be in the United States when such
final payment was made. Mr. Chen again urged that Mr. Morgenthau consent
to his retirement from the Board at an early date. Mr. Cochran says that
he is sure that Mr. Chen would really like an invitation to the United
States in connection with financial transactions which would give him a
nice way off the Board and a nice leave-taking from Secretary Morgenthau.
At this time Mr. Cochran and Mr. Chen talked of the necessity of impressing
upon Chungking that receipts from exports handled by the Chinese Government
which are not required for loan services should be thrown into a common
pool and be made available to the Stabilization Board rather than utilized
by independent organizations of a political character.
On another occasion, Mr. Coohran says that Mr. Pei informed him that
he thought Mr. Taylor's ability could better be employed in Hong Kong than
in Chungking but he said that he and his Chinese colleagues on the Board
would not feel free to urge Mr. Taylor's return to Hong Kong, realizing
Mr. Fox's antipathy towards his alternate.
7. Second visit to Chungking, November 8 - 10
At the invitation of the Generalissimo, Mr. Cochran paid a second
visit to Chungking. On November 8, Mr. Cochran had an informal meeting
with the Generalissimo. Generalissimo asked Mr. Cochran his advice as to
that the attitude of the Stabilization Board should be towards Shanghai.
Mr. Cochran briefly summarized to him the story which he had told to the
Board and give him "guardedly and entirely unofficially, my own observations
as to what action the situation warranted on the part of the Board."
Mr. Cochran said that his conversation with the Generalissimo covered
several current topics of interest, but the serious part was with respect
to the operations of the Stabilization Board insofar as Shanghai was concerned and as to specific measures which the Chinese Government desired
to suggest to him for consideration by the American Government. The
Generalissimo stated that he had discussed this latter question with his
Minister of Finance and that Dr. Kung would communicate any proposals to
him at a luncheon the next day.
141
-5-
Division of Monetary Research
In the interview with Dr. Kung, Mr. Cochran repeated the remarks
which he made to the Generalissimo regarding Shanghai. Dr. Kung said that
he was glad to have his views on Shanghai. At this interview Dr. Kung
informed Mr. Cochran that he had learned that the United States Government
had no objection to Mr. Fox's appointment and that Chairman Eccles was
familiar with the Minister's request for the appointment of an expert and
would receive the Chinese Ambassador in Washington for the discussion of
this subject. He spoke highly of the untiring efforts of Mr. Frese and
said that Dr. Taylor had ability and thought that Fox should utilize
Dr. Taylor more directly on political and administrative matters in Hong
Kong rather than at Kunming. Mr. Cochran told Dr. Kung that he hoped after
his return to the United States to make recommendations which would provide
American personnel which could assist in a more orderly organization and
effective administration of the Board and its business. The Minister then
referred to the Generalissimo's statement that the Chinese Government had
certain specific proposals to suggest and proceeded to request United States
cooperation on the following measures. (The exact text of Mr. Cochran's
report regarding this matter are contained in Appendix A.)
1. The United States Treasury should dry up the supply of United
States currency in Shanghai, thus removing this contributing
factor from the black market and also prevent counterfeiting
thereof by the Japanese.
2. United States Government should help control American exports
to Shanghai, calling upon the Chinese Consuls or other Chinese
officials in the United States for assistance if necessary.
3. The United States Treasury should set up in the United States
a new and separate fund in United States dollars to constitute
a reserve backing for Chinese currency. The British Government
would be asked to act similarly if the United States Treasury
approved of such a plan.
4. A consolidation of the last three, or perhaps four, of the
American Export-Import Bank loans to China, extending the term
and increasing the total amount.
5. United States should provide China with a few airplanes
capable of transporting tungsten from the interior to the
coast so that the production and marketing of valuable ores,
especially tungsten, could be speeded up and the foreign
exchange receipts of China correspondingly increased. Planes
of the Condor type would suffice.
6. That the United States increase its economic pressure on Japan.
142
-6-
Division of Monetary Research
Mr. Cochran on this point reiterated to Dr. Kung the new plan for
cooperation between the United States Treasury and the Stabilization Board
and said that his only concern was that repercussions might be felt in
Shanghai. Dr. Kung replied that the Japanese had already taken retalitory
action and that he thought that we should go ahead and take severe measures,
irrespective of possible reprisals, economic or otherwise. During this
conversation Mr. Cochran expressed to Dr. Kung his hope that he would not
let the Board be embarrassed by any intervention by or conflict of duties
on the part of the Foreign Exchange Commission. Dr. Kung assured Mr. Cochran
that he would definitely take care of this situation. Dr. Kung said that he
was lad to have the research work being done by Fox and Adler as well as by
Sir otto Niemeyer and the latter's assistants and he promised to continue to
make available to those gentlemen such data as they might require in their
studies.
on the same day, Mr. Cochran was invited to dinner by the Generalissimo
at which he had another talk with him. The Ceneralissimo stressed the need
of a definite plan for economic assistance to China. He said that the
assistance should come within three months. He hoped for a plan of American
aid in the economic field as definite and precise as that being developed in
the military field. He was especially concerned over the currency and price
problems. Mr. Cochran assured the Generalissimo that we are anxious to do
everything possible for China. He would present to the Secretary of the
Treasury upon his return to the United States his report of conditions as
he found them and it would be his strong recommendation that everything
possible be done on our side to augment and strengthen the American
personnel participating in the Stabilization Board. After this conversation,
Mr. Cochran talked with Mr. Lattimore who told him that his Chinese friends
were very happy over Mr. Cochran's visit and were hopeful that the messages
which he was taking back to Washington would be welcome and given careful
consideration.
on the last day of his visit in Chungking, Mr. Cochran discussed with
Sir Otto Niemeyer the latter's views regarding economic conditions in China.
Sir Ctto said that he thought it was perfectly obvious as to what was eiling
China as all the usual and well-!nown symptoms of currency inflation were
as clear as day-light. He suggested (a) rigid examination of expenditures,
(b) increased in taxation, (c) genuine patriotic drive for more loans raised
from real savings.
S. Fourth and last stay in Hong Kong, November 11 - 12
During Mr. Cochran's last visit to Hono Kong, Dr. Arthur A. Young,
Financial Adviser to the Chinese Government, called on him and left with
him two documents discussing Chinese economic problems.
9. Return trip.
Mr. Cochran arrived in Washington on November 19, 1941.
143
APPENDIX A
Proposals made by Dr. Kung to Mr. Cochran
(1) That the United States Treasury dry up the supply of United States
currency in Shanghai, thus removing this contributing factor from
the black market, and also preventing counterfeiting thereof by
the Japanese. The Minister suggested that we follow the British
example of "calling currency home". I told the Minister that we
had at various times since the outbreak of the present war considered
possible licensing control of exports and imports of our currency,
but had so far taken no general step of the type of which he spoke.
I told him that there were various reasons which had so far weighed
against such action. For example, the dollar is used as a currency
of refuge in many countries, including some of those now invaded.
We should not like to take any action which would cause losses to
individuals who had put their confidence in our currency and would
not now be in a position to follow regulations for the repatriation
within a specified time of their United States currency to this
country. Furthermore, the dollar circulates in Cuba, the Philippines
and certain parts of Latin America. To call home such dollars would
likely interfere with commercial business and might even have an
adverse effect upon certain currencies, particularly the Philippine
peso. I told the Minister, however, that I was sympathetic with the
idea that my country should do what it could to relieve the situation
resulting from dollar currency being so sought after in Shanghai that
the yuan depreciated unduly, as measured against the American dollar
notes.
(2) That the United States Government help control American exports to
China, calling upon the Chinese Consuls or other Chinese officials
in the United States for assistance if necessary. I replied that
the new plan which we were then working on for cooperation between
the American Treasury's Foreign Funds Control and the Stabilization
Board of China would provide material assistance on our part. The
Treasury could utilize various of its agencies, particularly its
Customs Service, for strengthening and implementing regulations of
Foreign Funds Control. We should not desire to complicate this
system by enlisting the assistance of Chinese Consular or other
officials in the United States until we might have an opportunity
to give our own plan a trial and judge its results.
144
2-
(3) That the United States Treasury set up in the United States a new
and separate fund in United States dollars to constitute a reserve
backing for the Chinese currency. The British Government would be
asked to act similarly if the United States Treasury approved of
such a plan. Dr. Kung was not able to give any more specific
suggestions in answer to my request for details of such a plan. He
was simply anxious that we let the world know, and permit him to
strengthen Chinese confidence in the yuan through such knowledge,
that the United States and Great Britain were determined to maintain
the stability of the Chinese yuan, and had set aside certain reserves
to guarantee this undertaking. The Minister did not think it would
be necessary to utilize such sums, feeling that the psychological
effect would be sufficient. It was not his idea that such funds
should be turned over to the Stabilization Board of China and used
in the manner now followed with respect to the current assets of the
Board.
(4) That there be a consolidation of the last three, or perhaps four,
American Export-Import Bank loans to China, extending the term and
increasing the total amount. The Minister observed that the Customs
receipts of China are pledged for some of these loans, but that the
Japanese actually control most of the Customs. While the Secretary
of the Treasury had been responsible for negotiations leading to the
early financial assistance to China, I remarked that such consolidation
as the Minister now suggested would be a matter for the Export-Import
Bank. I was happy, however, to pass this request on through the
Secretary of the Treasury. When the Minister spoke of the need for
more money for imports, I reminded him that the credits had not yet
been drawn on to their full extent; that much material was being
provided China under Lend-Lease; thus reducing the necessity for
direct financial credits; and that shipping and priority problems,
and growing international political difficulties, would also cut
down the amount of goods which could be exported to China.
(5) That the United States provide China with a few airplanes capable of
transporting tungsten from the interior to the coast, particularly
Hongkong, so that the production and marketing of valuable ores,
especially tungsten, could be speeded up and the foreign exchange
receipts of China correspondingly increased. Dr. Kung reminded me
that China had five Condor planes which were being used in service
of this kind. I told him that I had seen some of these in the hangar
at Hongkong and also had seen the bags of tungsten ore which had been
transported by this route. Dr. Kung said that such planes as we
might spare for this commercial purpose need not be the latest model.
Something of the Condor type would suffice.
145
-3(6) That the United States increase its economic pressure on Japan. I
reiterated to Dr. Kung that the new plan for cooperation between
the United States Treasury Department and the Stabilization Board
of China should very materially strengthen the economic encirclement
of Japan. My only concern was that early repercussions might be
felt on Shanghai. Dr. Kung said that the Japanese had already taken
retaliatory action, referring to the embargo which they put upon
export of cotton manufactures from Shanghai, and that he thought we
should go ahead with our severe measures, irrespective of possible
reprisals, economic or otherwise.
146
APPENDIX B
List of Enclosures
Enclosure No. 1
Draft of cable from Treasury to Fox, September 29, 1941,
Enclosure No. 2
Cable of October 2, 1941 from Fox to Treasury, in reply
Enclosure No. 3
Cable of October 6, 1941 from Fox to Treasury regarding
containing proposed China program.
to Treasury's cable of September 29.
proposed new program.
Enclosure No. 4
Cable of October 8, 1941 from Fox to Treasury giving
Chinese reaction to Treasury cable of September 29.
Enclosure No. 5
Memorandum prepared by Mr. Cochran with respect to the
American plan for cooperation by Foreign Funds Control
with Stabilization Board.
(
Enclosure No. 6
Memorandun of October 12, 1941 submitted by Mr. Hsi Te-nou
regarding Central Bank of China.
Enclosure No. 7
Letter from Foreign Exchange Control Commission to
Stabilization Board with respect to the division of
foreign exchange.
Enclosure No. 8
Letter of October 13, 1941 from Board to Vice Minister
Y. C. Koo regarding letter of October 7, 1941 from
the Foreign Exchange Control Commission.
Enclosure No. 9
Cable of October 13, 1941 from Consul General Southard
to State Department regarding hiring of additional
clerk.
Enclosure No. 10
Vemorandum of October 13, 1941 prepared by Mr. Tsu Yu
Pei regarding the American proposals.
Enclosure No. 11
Memorandum of October 14, 1941, prepared by Mr. Co chran
incorporating the views of the Board, together with the
American proposals.
Enclosure No. 12
Memorandum of September 23, 1941 by Mr. A. N. Young
entitled "The Price Situation and Financial Policy."
147
-2Enclosure No. 13
Enclosure No. 14
Revised draft of Pei's memorandum of October 13, 1941.
Cable of October 15, 1941 from Cochran and Fox to
Treasury containing proposals regarding new China
Program.
Enclosure No. 15
Enclosure No. 16
Enclosure No. 17
Newspaper story of October 16, 1941 of press conference
with Mr. Cochran and Sir Otto Niemeyer.
Copy of letter from Mr. A. N. Young to Central Bank
of China regarding the controlling of exports from
the friendly foreign countries to China.
Letter from O. K. Yui to Mr. Cochran enclosing letter
from Dr. Kung to Mr. K. P. Chen regarding new China
Program.
Enclosure No. 18
Cable of October 20, 1941 from Cochran to Treasury
Enclosure No. 19
Chungking news bulletin regarding visit of Mr. Cochran,
Mr. Baxter and Sir Otto Niemeyer.
Enclosure No. 20
There is no reference to enclosure No. 20, nor is there
Enclosure No. 21
Meeting of American Chamber of Commerce on October 27,
Enclosure No. 22
Letter of October 30, 1941 from Mr. A. E. Schumacher,
Resident Manager of the Chase Bank, to Mr. Cochran,
Enclosure No. 23
Memorandum of October 28, 1941 prepared by Consul
containing Dr. Kung's letter to K. P. Chen.
such in the appended enclosures.
1941.
Smith giving high lights of a discussion of an
economic club meeting in the American Club.
Enclosure No. 24
Copy of letter of October 14, 1941 from Mr. Mackay
to Mr. Hart of National City, New York.
Enclosure No. 25
Memorandum to Mr. M. R. Nicholson from Mr. Mackay
dated October 28, 1941.
148
-3Enclosure No. 26
Memorandum to Mr. Cochran from Mr. Mackay dated October 29,
Enclosure No. 27
Memorandum to Mr. Cochran from Mr. Mackay dated October 30,
1941.
1941.
Enclosure No. 28
Letter of November 1, 1941 to Mr. Cochran from Mr. Mackay
Enclosure No. 29
Suggestions for modification of the Foreign Exchange
Application System made by Mr. A. T. H. Shao, sub-manager
of the Bank of China.
Enclosure No. 30
Memorandum on life insurance in connection with the
Stabilization Board and the American Freezing Act
prepared by Mr. P. M. Anderson, General Agent for China
of the Occidental Life Insurance Company.
Enclosure No. 31
Note regarding imports of Tonkin Authracites in Shanghai
submitted by Mr. P. Dupuy, Director of Hongay Sales, Ltd.
Enclosure No. 32
Booklet on Shanghai Power Company. (not with report)
Enclosure No. 33
Letter of November 1, 1941 from Mr. Hutchison, Commercial
Secretary of the British Embassy to Mr. Cochran
Enclosure No. 34
Letter of October 30, 1941 from Mr. Bruce M. Smith, a
motor car dealer, to Mr. Nicholson.
Enclosure No. 35
Cable from National City in Shanghai to Hong Kong and
Shanghai Banking Corporation, Hong Kong, regarding
contemplated issue of a new currency by the Nanking
enclosing copy of letter to Mr. Fox of September 17, 1941.
Bank.
Enclosure No. 36
to 42
Memoranda and letters addressed either directly to
Mr. Cochran from the Chase Bank in Shanghai and Hong Kong,
or addressed to Mr. Nicholson and handed by him to
Mr. Cochran.
Enclosure No. 43
Letter of October 29, 1941 to Mr. Cochran from Mr. N. F.
Allman, an American attorney in Shanghai.
149
-4Enclosure No. 44
Cable from Mr. Cochran to Treasury with respect to
the liaison work of Consul Smith and recommending
employment of Miss Miriam Forbes.
Enclosure No. 45
Cable to Fox and Cochran from Treasury dated October 28,
1941 regarding Cochran's and Fox's proposals.
Enclosure No. 46
Cable of November 5, 1941 from Dr. Kung requesting
Mr. Cochran to visit Chungking.
Enclosures Nos.
Copies of telegrams of November 6, 1941 to Chungking
Enclosure No. 49
Cable of November 6, 1941 from Dr. Kung to Mr. Cochran
again requesting him to Chungking.
Enclosure No. 50
Memorandum submitted to Stabilization Board by
Shanghai Municipal Council regarding foreign exchange
47 48
informing Dr. Kung of Mr. Cochran's coming visit.
needs.
Enclosure No. 51
Memorandum of November 1, 1941 submitted by Mr. Chen
on China's potential exports and on the position of
American credits to China,
Enclosure No. 52
Cable to Treasury from Fox and Cochran dated
November 6, 1941.
Enclosure No. 53
Memorandum submitted to Mr. Cochran by Mr. Tsu Yee-pei
on how the provision of transportation facilities
under the Lease-Lend can contribute towards improving
the position of the national finance.
Enclosure No. 54
Cable from Nicholson to Cochran and Fox giving
Treasury cable on delay.
Enclosure No. 55
Cable to Treasury from Fox and Cochran on delay sent
Enclosure No. 56
Cable from Treasury to Fox on his appointment as
Enclosure No. 57
Memorandum prepared by Mr. Young on the Practicability
of Chinese Government Borrowing from the Public.
Enclosure No. 58
Analysis of policy regarding the Chinese currency
situation dated March 31, 1941 prepared by Mr. Young.
to Nicholson for transmissal.
Advisor to the Ministry of Finance.
150
JAN : 1 342
Dear Mr. Price:
This is in response to your letter or December 27, 1941,
raising the problem of financial aid for Chinese students in
the United States who are deprived of funds from home.
In view of the circumstances you relate, it seems to
as that this is a problem which the Government of China will
want to handle. : to not think that Lend-Lease funds should
be used for this purpose. A decision on the question of aid
through other American channels night well be postponed until
the Chinese authorities have been as reached, and have indicated another or not they can give the required aid.
The Chinese Forei in Minister, T. T. 4. Soonz, or the
Anhassacor, Mr. Nu Shih, when you sention, would seen to me
to be the authorities with whop you would want to discuss the
proclem.
If your discussions with the Chinese authorities do
not yield a satisfactory solution of the problem, I hope
that you will 1st .. know. I think it important that these
Chinese students who are in the United tates should be taken
care of, and I would be surprised if funds appropriate for
this purpose were not available somewhere.
Sincerely,
(signed) A. Margenthau, are
Secretary or the Treasure.
Jr. Ernest 9. Price,
Director,
International House,
Chicago, Illinois
VFC:HDilien
12/30/41.
Photofilione
INTERNATIONAL HOUSE
CHICAGO
1414 EAST FIFTY-WINTHSTREET
TELEPHONE FAIRFAX 8200
December 27, 1941
PERSONAL
Mr. Henry Morgenthau, Jr.
Treasury Department
Washington, D. C.
Dear Mr. Morgenthau:
Here is a matter ontwhich you may be willing to express a personal opinion, without being quoted, or suggest a
method of procedure.
As you doubtless know, we have here at The University
of Chicago and, for the most part, resident at International
House, a considerable number of Chinese students - some twenty-
five or thirty. Their position was difficult enough before
Japan declared war against the United States and Britain, but
now with Hong Kong fallen, they are completely cut off from
any possible source of funds from home. Hitherto we have helped
then from funds raised locally, but now the situation has
reached a point where it seems to me both our Government and
that of China must take official cognizance of it.
What I am writing particularly to inquire is whether,
in your opinion, the Lend-Lease funds made available to China
could be used to meet the basic living expenses of Chinese
students now cut off from any source of funds from home and
physically unable to return home. If, in your opinion, the
terms of the credit to China permit its use in this manner,
how would you suggest that we proceed to bring this matter in-
to official channels? I know Dr. Hu Shih personally very well,
and I also used to know T. V. Soong. I did not want to approach
them, however, until I had ascertained whether or not Lend-Lease
funds could properly be used for this purpose.
I do not know how many Chinese students there are in
America in the same predicament, but I think the problem represented by our group here is a rather large and complicated one.
Unless the situation is handled pretty promptly, I fear we shall
have an embarrassing situation on our hands the country over
as well as locally.
December 27, 1941
Henry Morgenthau, Jr., 2
Our local situation is sufficiently serious that I would
glad to make a personal trip to Washington to talk the matter
with the appropriate people, if it would do any good.
With best personal regards, I remain
1
Yours very sincerely,
Emust B. Price
Ernest B. Price
Director
153
PLAIN
EJ
Chungking via N. R.
Dated January 1, 1942
Rec'd 5:26 a.m.
Secretary of State,
Washington.
1, First.
FOLLOWING FOR TREASURY FROM FOX.
TF-W reference numbers two nine three and
three two five. On Monday, December Eight, bond
of CNAC told ME Eight places were reserved for
the Board if a plane left Hong Kong that night.
I suggested preference be given Chinese and he
added that Loy Chang of Chinese Customs should
be included. Agreed that following should be
given places: Chen and wife, PE1 and Manager of
Bank of China, Hs1 Temou and wife, Chi and Lay
Chang. When Loy Chang declined place little after
nine p.m. I immediately phoned Frese making place
available to him. HE declined saying he preferred
to remain with records. At midnight Hsi phoned
that he and wife would not leave that night. As
there was no transportation between Hong Kong and
Kowloon after ten p.m. and as Frese and Taylor
WERE
154
-2- January 1, 1942, from Chungking via N. R.
were on the Hong Kong side the only way to make
USE of the three vacant places was for Adler,
Hewlett and ME to take them. Before leaving I
gave bond priority list with names Frese and
Taylor first and particularly requested that
place be reserved for Frese on next plane.
Bond subsequently informed ME that he had phoned
Frese on December ninth and that Frese had in-
sisted that priority be given to Miss Howkins,
Secretary to Hall-Patch which Bond refused. HE
said that if Frese and Taylor had been on the
Kowloon side Tuesday Evening they could have
left on what transpired to be the last plane
out of Hong Kong. There has been no further
information on Frese and Taylor since TF-V.
RE your 304 of December 16 and your 328
of December 27 amendments to licenses noted and
approved with one further suggestion. While
the mechanism for Effecting remittances developed
in general licenses seventy-five is highly satisfactory, it should be valid only for remittances
to free China and remittances to occupied China
Effected via free China.
GAUSS
HPD
155
PARAPERASE OF TELEGRAM RECEIVED
FROM: American Embassy, Chungking, China
DATE: January 1, 1942, 9 a.m.
NO.: 2
This massage is for the Secretary of the Treasury
from Mr. A. Manuel Fox.
This is a message (TF-X) from the stabilization
Board to the Federal Reserve Bank or New York:
Concerning telegram no. 33 of yours, the Central
Bank of China Building, in Chungking, is the place of
operations of the Bo rd. The Bo rd's understanding that
207 is the new number effective as of December 20, 1941
is hereby confirmed.
It would be appreciated by the Board if you would
notify it what amount of dollars (United States currency)
disbursed by you on its account up to and including the
6th of December, 1941, and also what amount of disburse-
sent, 11 any, which you since made on its account.
GAUSS
156
NMC
GRAY
Chungking
Dated January 1, 1942
REC'D 5:36 a.m.
Secretary of State
Washington.
3, January 1, 11 a.m.
FOLLOWING FOR SECRETARY OF THE TREASURY
FROM FOX: STROH-Y
OnE. A. returned from Kunming yesterday
after two WEEKS visit.
Greatly impressed by efficiency of factories
in that vicinity but disappointed in EVIDENCE of
deflationary policy recently put into Effect.
Concerned lest it seriously affect production
of all vitally necessary Equipment and products
which othervise will NEED to bE imported.
B. Found concern OVEr VERY high prices
and shortage of goods and OVEr danger to value
of fapi unless SOME basis of support is established
and Especially for meeting inevitable large deficit
for 1942.
C. Having made arrangements in Kunming for
stregthening Board's
157
-2- #3, January 1, 11 a.m., from Chungking
strengthening Board's office and provide as far
as (?) facilities are (?) for maximum movement
of goods into free China from Rangoon. In view
of limitations of Burma Road and military demands
on Road outlook for flow of goods and price
situation not too promising.
Two. (?) (4) of your 304 of DECEMBER 16,
9 p.m., I shall convey your message to Doctor
Kung at the earliest opportunity and I am sure
its spirit will be much apprecisted. HE has been
seriously ill and it may not be possible to SEE
him for a few days yet. To avoid Embarrassment,
I should appreciate it if you could notify ME what
his additional proposals to Mr. Cochran were.
Three. The Board asks ME to transmit the
following message to you: "Owing to the loss of
its records in Hong Kong, the Board is temporarily
unable to fulfill its obligations under paragraph
1 (D) of the Sino-American agreement of April 1941.
The Board is making Every Effort to reconstitute
its records and hopes to be able to resume the sub-
mission of its monthly reports to you at the earliest
opportunity.
GAUSS
PEG
For Miss Chauncey
TREASURY DEPARTMENT
158
INTER-OFFICE COMMUNICATION
DATE January 1, 1942
TO
Secretary Morgenthau
FROM
Mr. Dietrich
STABILIZATION AGREEMENTS
China:
On July 14, 1937. we made an agreement with the Central Bank
of China to purchase yuan up to a total value of 50,000,000. The agreement has
been renewed each six months and now expires June 30, 1942. At present, we hold
about 65,000,000 yurn, with a book dollar value of $19,112,500. and this is collateralized by $19,379,016 in gold held at the New York Federal Reserve Bank.
On April 1, 1941. we made an agreement with the National
Government of the Republic of China and the Central Bank of China wherein we
agreed to purchase yuan up to the equivalent of $50,000,000. no collateral being
recuired. So far, ve have made no yuan purchases under this agreement. which
expires June 30, 1942. The Chinese-ierican-British Stabilization Board began to
operate in mid-August, and the Chinese Government banks have furnished their
contribution of 20,000,000 to the Joint Stabilization Fund. At the end of
December, there was a balance of $6,750,200 in the Chinese Stabilization Fund
account at the New York Federal Reserve Bank.
Brazil:
On July 15, 1937. we made an agreement with the United States
of Brazil, which expires on July 15. 1942. We agreed to purchase milreis up to a
total value of $60,000,000, to be collateralized by gold. At present. we hold
160,000,000 milreis, with a book dollar value of $8,000,000 and collateralized by
18,089,092 in gold. The agreement also provides for the sale to Brazil of up to
$60,000,000 in gold by the United States, such gold to be earmarked for Brazil's
account at the New York Federal Reserve Bank: by a modification of September 2,
1938 Brazil was permitted to ship old here and place it in the earmarked account.
Un to the end of December, we had sold Brazil $29,465,771 in old, and 3razil had
shipped 11,532,765 in gold to New York; except for the amount set aside as col-
lateral. all of this gold is under earmark for Brazil at the Federal.
During December. no change took place under the January 1. 1941
agreement with the Banco Central de la Republica Argentina and the Government of
Argentina, under which we agree to purchase Argentine pesos up to a total value of
Argentina:
50,000,000, for which no collateral is recuired. Since this reement has not yet
been ratified by the Argentine Legislature, it is inoperative at present.
As of November 1, 1941, the Treasury entered into an agreement
with the Government of the Republic of Mexico and the Benco de Mexico, under which
we agree to purchase Mexican pesos un to a total value of $40,000,000, no collateral
Mexico:
being recuired. This agreement, which expires on June 30. 1943. stipulates that
Mexico shall have 180 days' notice and then all additional 180 days in which to re-
purchase. We have not yet received official notification that the action of the
Mexican Government and Bank in entering the agreement has been retified; such
ratification is necessary for the agreement to become operative.
159
-2-
A Stabilization agreement has been discussed with Colombia,
under which we would buy Colombian pesos up to the equivalent of $3,000,000, no
collateral being required.
Colombia:
A Stabilization agreement with Ecuador has been discussed. In
early conversations, $5,000,000 was considered as the limit to such an agreement,
but from an October 24 meeting with the Ecuadorian Ambassador, it was gathered that
Ecuador:
the maximum amount may be reduced to $3,000,000, and $1,000,000 of this would be
provided by Ecuador.
In an October 24 discussion with Treasury officials regarding a
Stabilization agreement, the Bolivian Minister stated that he thought his country
Bolivia:
would need between $5,000,000 and $8,000,000 to stabilize its currency.
Discussion for a $2,000,000 Stabilization agreement with Iceland
began about the end of September. Iceland's approval of the agreement as drafted
Iceland:
has not yet been received.
Cuba:
In the initial report of the American Technical Mission to Cuba,
one of the alternative recommendations was that Cuba might issue pesos against gold
obtained on credit from the U. S. Stabilization Fund.
GOLD PURCHASE AGREEMENT
On October 10, 1941, we agreed to purchase from the Russian
Government approximately $31,605,000 in gold for delivery within 180 days, and
gave Russia an advance of $30,000,000 on October 11. By the end of December, there
remained $11,866,875 in gold still to be delivered by Russia, and the advance had
Russia:
been reduced to $9,803,423.
D
160
BRITISH EMBASSY
WASHINGTON, D.C.
January 1, 1942
PERSONAL AND
SECRET
Dear Mr. Secretary,
I enclose herein for your personal
and secret information 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.
161
Copy No. 14
BRITISH MOST SECRET
(U.S. SECRET)
OPTEL No. 57
Information received up to 7 a,m., 31st December, 1941.
(I) NAVAL
Home waters 30th. A photographic reconnaissance of BREST during
afternoon subsequent to attack mentioned in paragraph 3 below shoad the SCHARNHORST and PRINZ EUGEN in dry dock and GNEISENAU alongside the torpedo boat
station with no apparent damage.
MEDITERRANEAN. 29th. A convoy escorted by cruisers and destroyers arrived at ALEXANDRIA from HALTA. The force had been several times at-
tacked unsuccessfully by enemy aircraft.
12th. One of H.M. destroyers escorting a convoy to TOBRUK
successfully drove off by gunfire two enemy torpedo bombers which attacked her
Northeast of BARDIA,
One of H.M. gun-boats successfully engaged two enemy coastal
defence guns in the vicinity of BARDIA. One of H.M. submarines has shelled
and sunk 5 enemy schooners at SUDA BAY and at METHONI (Southwest GREECE). She
also torpedoed an Italian destroyer inside NAVARINO HARBOUR on the 23rd.
(II) MILITARY
LIBYA. It is now known that in the tank battle south of JEDABYA
on 28th we destroyed 22 enemy tanks and severely damaged a further 20. Our
losses were 6 tanks knocked out and 8 more left on the battle field and pro-
bably lost. No further battle had developed by 8.30 a,m, 30th. At that time
40 enemy tanks were reported advancing Northwest from EL HASEIAT (30 miles
Southeast of JEDABYA).
MALAYA. The bridge at KUALA DIPANG (7 miles north of KAMPAR)
has been successfully destroyed.
BURNA. BOKPYIN which was unsuccessfully attacked by our forces
on 27th was evacuated by the Japanese during night 28th/29th and was occupied
by our forces on the morning of 30th.
RUSSIA. Main Front. The Russian advance is continuing.
CRIMEA. The Russians have landed on the KERCH Peninsula and
have recaptured KERCH and FEODOSIA,
(III) AIR OPERATIONS
WESTERN FROM: 30th. 9 Squadrons of fighters (From wich 3
Spitfires are missing) escorted 16 Halifax in an attack on the marships at
162
-2 BREST, the results of which were not observed. A.A. fire was intense and
accurate. 3 of our bombers are missing, the crow of one being rescued from
a dinghy 50 miles north of BREST. Four fighters destroyed 6 ME 109's and our
bombers destroyed another, 7 more were probably destroyed. 30th/31st. 6 aircraft of coastal command attacked the docks at LA PALLICE, Hits are claimed
on the mole and a tanker was possibly damaged.
MEDITERRANEAN. LIBYA. 29th. 4 squadrons of Blenheims attacked
enemy positions and the landing ground at JEDABYA, many vehicles and two aircraft were destroyed. Other Blenheims dropped bombs among dispersed motor
transports 20 miles south of JEDABYA, 3 squadrons of Blenheims registered
many hits on enemy positions at BARDIA. Blenheims attacked enemy vehicles in
the areas of MISURATA and ZOUARA, 3 small ships and 3 lighters were sighted
at RAS ELALI (26 miles west of EL AGHEILA). Supplies were apparently being
landed at a temporary jetty there and also at RAS LANUF (43 miles Northwest
of EL AGHEILA). At RAS EL ALI 500 M.T. were seen dispersed around the jetty.
MALTA. 29th, 5 enemy fighters machine gunned naval units.
One ME 109 was probably destroyed by Hurricanes, two of which are missing.
12 bombers attacked LUQA causing some damage to aircraft on the aerodrome.
Night 29th/30th, 3 enemy aircraft dropped bombs on the island
causing a few army casualties, 30th. 3 raids were made during the second (by
6 bombers escorted by 40 fighters) the aerodromes at TAKALI and LUQA and a
dockyard were attacked, two bombers were destroyed and one probably destroyed
by our Hurricanes,
FAR EAST. MALAYA. 29th, KUANTAN aerodrome again attacked
but no damage caused. P.M. Enemy aircraft made 3 attacks on SINGAPORE
Island, details of damage not yet known.
JOHORE. 29th, From army sources it is reported that LUANG
was bombed and machine gunned.
(v)
HOME SECURITY
29th/30th. Casualties at NEWCASTLE and in the NORTHUMBERLAND
area are reported to be 11 killed and 32 seriously injured.
163
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE January 1, ,1942
TO
FROM
Secretary Morgenthau
Mr. Kamarck
Subject: Summary
O.C.I.toBulletins
1 and
No. 2
("Iran - Aof
Threat
Britain":No.
"Axis
Propaganda
in the Moslem World")
Both of these bulletins have the same theme: The
Arab peoples of the Near East want to be independent
of foreign control. They have a long history of hatred
of British imperialism. The Germans have tried and
have been able, to some extent, to turn this hatred of
the British into sympathy for the Axis in its war on
the British. While Iran is now quiet, "it is the forced
quiet of a conquered country. 11
The Axis radio at Zeesen, Germany, plays on the
Arab hatred of the British, the supper-class fears of
Bolshevism, the anti-Jewish feeling resulting from the
political ambitions of the Zionists, and general Moslem
conservatism. American association with England has
led the Arabs to believe that we support the disliked
British policies in the Arab world.
164
RESTRICTED
BULLETIN NO. I
COORDINATOR OF INFORMATION
IRAN - A THREAT
TO BRITAIN
The recent occupation by force of arms has
deepened the long-standing Iranian hatred
of the British to a point where the Iranians
can be depended upon to do everything
possible to impair the British war effort.
Through lack of cooperation, sullen acquies-
cence, and outright sabotage, they could
constitute a threat to the transportation
routes which are of vital importance to the
British even if the Germans do not drive
through the Caucasus to the Iranian borders.
.0
DEPARTMENT
DANNE
DECEMBER 23, 1941
IRAN - A THREAT
TO BRITAIN
Although Iran is occupied and officially "pacified,"
the anti-British feeling of the Iranians is so intense
that they would do no more to help Britain than to
help Germany. A nation whose people gloated over
English soldiers being swept into the sea off Dunkirk
is not likely to prove a willing ally.
This hatred of England is traditional. In 1907 the
first partition of Iran into "spheres of influence"
between Great Britain and Russia reduced Iran to
the equivalent of three vassal states. As a result,
Iranians neglected internal reform and concentrated
their attention on an intense hatred of Russia and
Britain.
Further experience with major powers came to
Iran during the war of 1914-18. Iranian neutrality
was repeatedly violated, and Iran suffered all the
horrors of war with none of the compensations allowed
the victors. After the war, Lord Curzon drew up an
Anglo-Iranian treaty so one-sided in favor of England
that riots took place in Iran and their Assembly
failed to pass the bill.
This event marked the official shift from the Old
Regime in Iran to the Iran of Riza Shah, who rode the
wave of anti-British feeling into the Ministry of War,
then into the position of Prime Minister, and finally
on to the throne itself. It supported him throughout
I
his regime, for people who disliked Riza Shah still
preferred him to the British.
Russia shared less in this bitter feeling, as at that
time she was involved in civil war and had no energies to waste on Iran. It therefore became habitual
for Iranians to blame the British for any and all
misfortunes.
This feeling was heightened by the fact that the
average Englishman greatly irritated the Iranian personally. More than other foreign groups, the British
considered themselves "Sahibs," and the Iranians
"natives." This galled the Iranians so much that
the word "Inglise" came to be an adjective describing
anyone excessively confident and complacent.
Meanwhile, the Germans were improving their
standing with the Iranians as fast as the British were
undermining theirs. The Germans whom the Iranians knew had migrated from Germany during the
dismal days of the Weimar Republic, often arrived
almost penniless, and were willing to accept any kind
of work. Some bought old truck engines, made
dynamos, and set up electrical installations; almost
all lived on an economic level not much above that
of the Iranians. As the new government began its
program of industrialization, these Germans fitted
into the picture admirably.
Until 1933 the Germans in Iran were politically
unorganized, but after that no German had any
chance to survive in business or to retain his German
citizenship unless he became a member of the Nazi
Party. Most of the newcomers were trained in all
the techniques of penetration into vital positions.
In addition, increasing numbers of Iranian youths
were sent to Germany on various pretexts.
Germany gradually became one of Iran's best customers, partly because she needed many things in
her preparations for war. In 1936 Dr. Schacht made
a flying visit to Teheran and negotiated a trade
agreement by which Germany bought heavily of
Iranian agricultural exports. Iranian trade with
other nations almost ceased.
German propaganda agencies were very successful
in exploiting Iranian pride. They accorded Riza
Shah the honors he expected, and the public was
flattered by stories that the Iranians were pure
Aryans and closely related to the Germans. So far
as the war between Britain and Germany was concerned, the Iranians were fervently pro-German.
The average Iranian expectantly awaited the thrill
of a vicarious victory over Britain, rising prosperity
through unlimited trade with Germany, and the
coming of the day when Hitler would recognize
Iran's independence and give it a more important
role to play. This world of dreams began to fade on
June 22, 1941, and ceased to exist on the morning of
August 25.
However, the seizure of Iran by the British and
Russians was not as easy as is generally supposed.
The Iranian Army did much more fighting than it
has been publicly credited with, despite the fact that
resistance was soon crushed. There followed the
forced abdication of Riza Shah, who was taken on a
British warship to the remote island of Mauritius,
where a presumably "diplomatic" illness doubtless will
detain him indefinitely. Many Germans fled by way
of Turkey; others, perhaps 500 in all, were interned.
Riza's son, Mohammed Riza, took his place. The
new Shah has promised to rule constitutionally and
2
3
has a ministry as nearly pro-ally as the country can
provide. The vast system of state monopolies erected
by Riza for governmental-and personal-profit has
disintegrated completely and the expense of the
State is being carried by the confiscated wealth of the
"invalid" of Mauritius. Since this source of income
will hardly prove inexhaustible, "political" loans may
be expected from London.
The country is quiet, but it is the forced quiet of
a conquered country. A military alliance against the
Axis is being urged upon the new government. Since
an alliance with Russia would be almost as universally unpopular as an alliance with Britain, the government is extremely reluctant to undertake it.
One prominent Iranian has summed up the attitude
of the great majority of his countrymen in these
words: "The Germans seized Norway in order to
attack Britain. The British and Russians have
taken Iran to protect their lines of communication.
Great nations think their own independence so
precious that to preserve it they may righteously
destroy the independence of smaller nations."
So it is hardly startling that Iranians are comparing
the situation of today with that of 1907, and are
skeptical of the benefits to Iran of "collaboration"
with
any imperial
or
German.
power, whether British, Russian,
4
U. S. GOVERNMENT PRINTING OFFICE
432702
165
BULLETIN NO. 2
RESTRICTED
COORDINATOR OF INFORMATION
AXIS PROPAGANDA
IN THE
MOSLEM WORLD
German propaganda in the Moslem world
exploits hatred of the British, upper-class
fears of Bolshevism, prevalent anti-Jewish
feeling, and Islamic conservatism and prejudice. The British have not succeeded in
counteracting this propaganda.
The increasing closeness of our relations
with Britain is producing a change for the
worse in the attitude of Near Eastern
peoples to the United States.
.0
DECEMBER 23, 1941
the
I
]
AXIS PROPAGANDA IN
THE MOSLEM WORLD
The Arab is a born dissenter and a lover of intrigue.
In a country as small as Palestine, there have at
times been as many as six different political parties
functioning at once. Under such circumstances,
there will always be found groups who will lend them-
selves to Axis propaganda, if only to spite their
enemies.
The Arabs are, however, united in one general
purpose: To free their world from the domination of
French and British masters. Arabs in Syria, Pales-
tine, Egypt, and Iraq are apparently blinded to
Italian imperialism in Libya and Ethiopia and to
German domination of Europe by their anxiety to
get rid of British control. This arises not only from
a desire to play all European powers off against each
other but from a naiveté which assumes that anyone
who is against Britain is automatically a friend of
the Moslems. They fail to realize that, in case of a
British defeat, there would be a substitution of Axis
for British imperialism.
1 An example seems to be the pro-Axis minority among the predominantly
pro-British Druzes.
I
Arab animosity toward foreigners and nonMoslems may be discriminated as follows:
A. Anti-British sentiment.
Despite the wishful thinking that continues to exist
in Britain,2 dislike and mistrust of Britain are strong
throughout the Arab world, as well as in Iran and
India. There are two reasons for this: One is British support of the Jews in Palestine and of other
minorities for the apparent purpose of dividing and
ruling the Arab states; the other is the reluctance of
Britain to grant independence to mandated territories. The Arabs place little trust in British promises, which have been often broken in the past. Their
distrust of British methods leads them to look for
ulterior motives in every move made by Britain. If
anything adverse happens, they automatically blame
the British, without bothering to look into the facts
of the case. This makes it easy for Axis propaganda
to stir up Arab feeling; how easy is shown by the killing of the British Consul Mason at Mosul after Ger-
man propaganda had accused the British of being
responsible for the death of King Ghazi. The acquisition by Iraq and Egypt of their independence
only after years of rebellion have convinced the Arabs
that force is the only means by which they can
extract
what they regard as their rights from the
British.
The Zeesen radio has lately been giving unusual
attention to the exile and persecution of Arab leaders
by Britain, and this cannot help but have considerable effect upon the Arabs.
The Assyrians who were at one time entirely
pro-British now contain a considerable element
which denounces Britain for having let the Assyrians
down in Iraq.
The Arabs are very sensitive and bitterly resent
the attitude of superiority of many Britons whom
they meet.
B. Anti-American sentiment.
This is of recent growth. It is a result of two
things: (1) The expression by American public
officials of sympathy with political Zionism (which
they usually misjudge as being purely religious and
cultural) in Palestine. This has resulted in a tendency in all parts of the Arab world (strongest in
Palestine and Syria) to suspect the United States of
siding with the Jews against the Arabs in Palestine.
(2) America's increasingly close alliance with Britain
has led the Arabs to believe that we support Britain's
policies in the Arab world. The attitude of India
toward the United States has taken a very definite
turn for the worse as a result of the promulgation of
the Atlantic Charter, from which India was specifi-
cally excluded. All these factors are being fully
, But see the realistic article, Arab Nationalism and the War, in Round Table
(London), September 1941, pp. 698-708
An illustration of the strength of this attitude is the unpopularity of the
Nashashibi faction in Palestine and the support by the Arab population, both
in and out of Palestine, of the Mufti Hajj Amin, who is the apostle of force
against the British What success the Axis powers have had in playing up to
this state of mind can be judged from the fact that the Mufti is now in Berlin.
exploited by the Zeesen radio in broadcasts to the
Near East and India as evidence of the hypocritical
attitude of the United States in preaching independence and self-determination for minorities on the
one hand, while supporting British imperialism on
the other.
2
3
C. Anti-Jewish feeling.
forced to accept. Anti-French feeling is relatively
While Palestine is the focus of the problem, antiSemitism has had an important effect on the Arabs
useless as an Axis propaganda implement as long as
German-controlled Vichy retains holdings in the Arab
East, except under the aspect of anti-de Gaullism in
regions which might come under Free French control.
of Syria and even of Saudi Arabia, within whose
boundaries there is hardly a single Jew. There can
be no doubt that the situation created by the Zionist
program in Palestine has caused the position of the
Jews to deteriorate throughout the Arab world.
Despite what Zionists say abroad for outside consumption, there are too many Jews in Palestine (and
abroad) who adhere to the attitude expressed by
William B. Ziff in The Rape of Palestine: The Jews
are entering Palestine by divine right and intend to
"make the Arabs go back to the desert where they
came from." In North Africa there are grounds for
anti-Jewish feeling which are separate from the
Palestinian problem. Ever since the Arab invasion,
the Jews there have been a despised element of the
population, and this antipathy has been increased
since the nineteenth century by the undoubted part
which the Jews have played in facilitating foreign
control of both French and Spanish Morocco.
Zeesen has recently been reading anti-Jewish passages from the Koran, emphasizing that the Jews are
the "enemies of Islam."
D. Anti-French feeling.
This flourishes in all areas where the French are in
Moreover, the setting up by the Free French of an
"independent" Syrian state has stolen some of the
Axis thunder. Zeesen propaganda blasts concentrate
on denouncing Taj-al-Din, its head, as merely a de
Gaullist-British tool.
E. Anti-Bolshevik feeling.
The educated and propertied classes among the
Arabs, who largely control public opinion, are extremely apprehensive of socialism and more particularly of a Bolshevik socialist revolution. Through
broadcasts and other means of propaganda, the Axis
powers have succeeded in impressing on the Arab
world the belief that they are engaged in saving
capitalist civilization from the menace of Bolshevism.
Propertied Arabs feel that a Nazi regime would not
seriously damage their position, whereas a Bolshevik
regime would exterminate them and the system under
which they are accustomed to live. Ambitious Arab
leaders tend to conceive of themselves as future heads
of states, freed from British or French domination,
each a miniature Reich with its Fuehrer or Duce,
subservient perhaps to the Axis, but each with a
control and existed even before the end of World
War I: Witness the testimony of the King-Crane
report which expressly states that under no circum-
F. Moslem conservatism and prejudice.
stances did either the Syrians or Iraqis want a French
mandate, a mandate which Syria subsequently was
This makes an appeal to conservative Moslems
throughout the entire East, from Morocco to India.
considerable measure of "absolute" power
4
5.
Many approaches can be used to exploit this: Anti-
Christian bias, xenophobia, concern for Moslem
minorities, etc. Recently Zeesen has been playing
up the alleged suppression of the Moslem minorities
in Russia; another curious anti-British blast from
Zeesen accuses the British of being Pagans like the
pre-Islamic Arabs and thus the natural enemies of
Islam. It is doubtful whether such ridiculous appeals to presumed Moslem ignorance are going to
help the Axis cause.
G. Food shortage and economic ruin.
The German radio at Zeesen has repeatedly stated
that the food shortage in Morocco (especially in the
Spanish Zone and Tangier) is being caused by the
British blockade. In German broadcasts to the rest
of the Moslem world, including Palestine, Egypt,
Syria, Iraq, and Iran, it is made out that the British
army is systematically stripping these countries,
leaving the population to starve. At present the
food situation does not appear to be bad except in
Spanish Morocco and Tangier, but if it should become
serious in other Moslem countries, this propaganda
might have serious results. The announcement that
Britain is stripping India of food is often repeated by
Zeesen which adds that Britain means to sacrifice
millions of Indian lives in a vain attempt to resist
the Axis.
6
GOVERNMENT PRINTING OFFICE. 1843
166
INFORMATION BULLETIN
NO. 5
MID 461
MILITARY INTELLIGENCE DIVISION
WAR DEPARTMENT
Washington, January 1, 1942
NOTICE
The information contained in this series of bulletins
will be restricted to items from official sources which are
reasonably confirmed.
This document is being given an approved distribution,
and no additional copies are available in the Military Intelli-
gonce Division. For provisions governing its reproduction, see
Letter TAG 350.05 (9-19-40) M-B-M.
EMPLOYMENT OF
GERMAN ANTFAIRCHAFT ARTILLERY
IN RUSSIA
SOURCE
This bulletin is based on two reports submitted by American
official observers in Berlin. Intended propegandistic effects in the
translated articles, which appeared in Berlin newspapers, should not
be overlooked.
The extract entitled "Combat Scene near Smolensk" is intended
to portray very briefly some aspects of the German methods employed
in river crossings.
CONTENTS
1. INTRODUCTION
2. AHTIAIRCRAFT ARTILLERY AT THE FRONT
3. COMBAT SCENE NEAR SMOLENSE
4. COMENT OF OFFICIAL OBSERVER
167
EMPLOYMENT OF
GERMAN ANTIAIRCRAFT ARTILLERY
IN RUSSIA
1. INTRODUCTION
One of the conclusions reached in the study of the employment
of German antiaircraft artillery during the year 1940 was that this
type of artillery would be used increasingly against ground targets.
Subsequent events in the North African Campaigns, the Balkan Campaign,
and the Russian Campaign have proved the soundness of this deduction.
Antiaircraft fire, with its high muzzle velocity, is very accu-
rate at short ranges. Because of ease of mechanical manipulation and
accurate and rapid methods of fire control, it is very effective against
enemy tanks. With special projectiles, it is deadly against fortifications. German commanders, therefore, are using it to an increasing
extent for direct support.
German antiaircraft artillery is a part of the German Air Force,
although during recent months antiaircraft units have been formed in
the German Army proper and in the SS units. These latter, however, are
only for local protection and are believed to be armed with only light
(20-mm.) and medium caliber (37-mm.) guns.
German antiaircraft artillery is organized into regiments, divisions, and corps. The regiment is a fixed organization, the exact
details of which are unknown at the present time. The division and
corps are task-force organizations whose composition depends on an estimate of the means necessary to accomplish a particular assigned mission.
The largest tactical antiaircraft organizations assigned to the
Berlin defenses are believed to be antiaircraft corps. There are, or
were, four panzer armies operating in the east under the command of
Generals Hoth, Hoepner, Guderian, and Kleist. In an article describing
the command-post operation of one of these armies, it was revealed that
an antiaircraft corps was a part of the command. Considering that much
direct-support artillery has been and is being converted to armored
assault artillery, the defensive fire power thus made available to a
panzer army commander is enormous.
37-mm.
During 1940 the standard antitank caliber in the German Army was
In 1941 the standard antitank caliber has been increased to 50mm., although, of course, the 37-mm. is still being used. According to
reliable information, even the high velocity 50-mm. gun will not stop
all Russian tanks; so the need of larger caliber is obvious. This explains the employment so far forward of major caliber antiaircraft ar-
tillery (88-mm.). All these large pieces have direct fire sights, and
some current pictures show a protecting shield, which is open at the
top
to permit the gun to be elevated to its maximum elevation of 85
degrees.
-1-
168
The German Air Force has controlled the air in all campaigns
to date. There are many indications, however, that a part of the
Russian Air Force still exists, although it is used infrequently. This
means that the German antiaircraft artillery units can be used primarily
for antitank and other ground-support uses, especially when defensive
German Air Force units are supporting the operations.
All German antiaircraft artillery weapons are equipped with at
least two different types of projectiles: H.E. with sensitive fuzes for
antiaircraft work, and H.E. with armor-piercing noses and delay fuzes
for antitank work. It is not known whether a third type of projectile
or the normal antiaircraft projectile is used for direct support, but
it is thought that the regular antiaircraft projectile is used for this
type of action. Because of the changes required in the fire-control
director, it is probable that when the armor-piercing projectile is used
against fortifications and tanks at short ranges, each gun operates independently, without the use of fire-control data, and uses direct fire
only.
It should be noted in the article translated below that antiair-
craft was used to wipe out machine-gun nests. It is reported that when
the advance is halted by a considerable concentration of automatic fire,
assaults are timed to start at dawn or dusk. Small and medium caliber
antiaircraft cannon (automatic fire) are pushed well forward. As the
German infantry attack starts, the hostile machine guns open fire, and
their flashes are plainly visible in the twilight. Automatic cannon
with sensitive fuzes then open fire on these revealing flashes with great
destructive effect.
The tendency to use heavy AT-AA weapons for counterbattery work
should not be overlooked. According to this narrative it is even used
for interdiction fire.
2. ANTIAIRCRAFT ARTILLERY AT THE FRONT
"The German antiaircraft artillery has distinguished itself on
all sectors of the front in the operations against the Russians. Antiaircraft artillerymen have not only helped to clear the air of Russian planes
but have also prepared the way in ground operations for their comrades
of the infantry. The achievements of one antiaircraft corps employed in
the southern sector of the Eastern Front have been unusual. Up to September 8, 1941, the batteries of this corps have shot down a large number
of Russian planes, but they have also executed other missions which are
not ordinarily thought of as belonging to antiaircraft units.
"Since the beginning of operations on June 22, 1941, the words
'Antiaircraft cannon to the front' have often been heard and the result
has been the destruction of many Russian bunkers, tanks, batteries, and
machine-gun nests. Single antiaircraft cannons have repeatedly succeeded
in breaking up Russian forces with direct fire. Numerous attempts by
strong Russian units to launch counterattacks have collapsed under the
concentrated fire of light and heavy antiaircraft cannons. In all these
operations the antiaircraft corps have operated successfully against
-2-
169
varying units of infantry, cavalry, and artillery.
"The rear Russian service units particularly have suffered severe losses as a result of the well-placed fire of the German antiaircraft guns, which have succeeded in destroying transport aircraft, horsedrawn vehicles, an ammunition train, and several locomotives, thereby
causing severe losses to the Russian supply system. During the operations on the Dnieper the gunners carried out daring assaults, sinking
five Russian gun boats and destroying a pontoon bridge. Also, a great
amount of Russian ammunition has been captured by this antiaircraft unit.
3. COMBAT SCENE NEAR SMOLENSK
"In the attack the squads and platoons of the assaulting infantry
regiments, taking advantage of the terrain, fought their way forward
from one storm position to another.
"The artillery and mortars fired at the hostile trenches on the
other side of the river until they were ready to be assaulted, while
heavy machine guns kept the enemy pinned to the ground. In the .neantime,
antitank weapons and accompanying infantry cannon were brought into posi-
tion. Protected by this fire, infantry and pioneer assault troops sprang
into pneumatic rafts, crossed the river, and overwhelmed the positions.
"After we had established a bridgehead, the Russians attempted
a tank-supported counterattack, which collapsed under the fire of our
antitank and antiaircraft weapons and our artillery, all of which were
assisted by a counterattack with our own tanks. At several points along
the front these counterattacks lasted 4 or 5 hours. Some fighting was
at such close ranges that hand grenades could be thrown from one side to
another."
4. COMMENT OF OFFICIAL OBSERVER
a. The basic principle of German combat methods is a clever adapta-
tion of fire and movement, with fire power increasing directly with the
resistance encountered. Movement is normally from one piece of advantageous terrain to another, with maximum fire applied during the movement.
Both fire and movements are applied with one purpose in view, and that
is to attain the unit objective. This principle is applicable to the
offensive combat of all units, from squads to armies.
b. Officers returning from the Eastern Front state that Russian
counterattacks launched in a direction parallel to the German attacks,
instead of against the shoulders of the German penetration, have caused
considerable trouble. The direction of these counterattacks, however,
may have been dictated by the terrain rather than by tactical choice.
The schematic diagram below indicates the German embarrassment caused
by these Russian methods.
-3-
170
Russian counterattack
Russian holding
force
German penetrating column
-
Ve
ill
As the diagram indicates, a successful Ruasian counterattack forces
the German attacking force to defend with its "rear" held against a
swamp or other obstacle and its mechanized elements contained on one
flank, and its relatively unprotected supply columns on the other
flank.
-4-
171
RESTRICTED
0-2/2657-220; No. 587
M.I.D., W.D.
11:00 A.M., January 1, 1942
SITUATION REPORT
I.
Pacific Theater.
Philippines: Following a northward movement throughout the
past few days, our southern Luzon force has made contact with our
northern Luzon force, thus forestalling a separation of the two forces
by enemy infiltration from the east. Manila will be left uncovered
by this movement, but the previous evacuation of the city by our troops
has destroyed Manila's military value. Our forces have the entrance
to Hanila Bay entirely covered. Hawaii: A few rounds of gunfire from
unseen hestile vessels damaged a shed on Hawaii and fired a canefield
on Kauai. No other hostile activities reported. Malaya: Light
activity in the east, but no change in the general situation. Enemy
air raids on Singapore and British lines of communication continue.
West Coast: No further confirmed reports of hostile activity.
II.
Eastern Theater.
Ground: The Russians continue to push their advance west
of Tula and report the capture of Kaluga and Novi Kirishi.
On the Crimea the Gernans are pressing their attacks against
the fortress of Sevastopol.
Air: The German High Corrand reports that German planes in
the Crimea have counterattacked Russian troops which recaptured Kerch
and Feodosiya. It further claims units of the German Air Force attacked
Russian lines on the Hoscow front.
III. Western Theater.
Air: A very heavy British attack was made on Brest during
the day of December 30. According to the Press, two German Messerschmidts machine gunned towns along the Sussex coast yesterday.
IV. Middle Eastern Theater.
Ground: Fighting continues in the Agedabia area, with Axis
forces counterattacking to prevent encirclement.
Air: German High Command reports day and night raids against
Malta. According to the Press, the R.A.F. made low-altitude attacks
upon retreating Axis motor transports and columns.
RESTRICTED
172
TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Friday, January 2, 1942.
The Secretary of the Treasury, by this public notice,
invites tenders for $150,000,000, or thereabouts, of 71-day
Treasury bills, to be issued on a discount basis under competitive
bidding. The bills of this series will be dated January 7, 1942,
and will mature March 19, 1942, when the face amount will be
payable without interest. They will be issued in bearer form
only, and in denominations of $1,000, $5,000, $10,000, $100,000,
$500,000, and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and
Branches up to the closing hour, two o'clock D. m., Eastern Standard time, Monday, January 5, 1942. Tenders will not be received
at the Treasury Department, Washington. Each tender must be for
an even multiple of $1,000, and the price offered must be
expressed on the basis of 100, with not more than three decimals,
e. g., 99.925. Fractions may not be used. It is urged that
tenders be made on the printed forms and forwarded in the special
envelopes which will be supplied by Federal Reserve Banks or
Branches on application therefor.
Tenders will be received without deposit from incorporated
banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must be
accompanied by payment of 10 percent of the face amount of
Treasury bills applied for, unless the tenders are accompanied
by an express guaranty of payment by an incorporated bank or
trust company.
Immediately after the closing hour, tenders will be opened
at the Federal Reserve Banks and Branches, following which public
announcement will be made by the Secretary of the Treasury of the
amount and price range of accepted bids. Those submitting tenders
will be advised of the acceptance or rejection thereof. The
Secretary of the Treasury expressly reserves the right to accept
or reject any or all tenders, in whole or in part, and his action
in any such respect shall be final. Payment of accepted tenders
at the prices offered must be made or completed at the Federal
Reserve Bank in cash or other immediately available funds on
January 7, 1942, provided, however, any qualified depositary will
29-35
173
-2-
be permitted to make payment by credit for Treasury bills allotted
to it for itself and its customers up to any amount for which it
shall be qualified in excess of existing deposits when so
notified by the Federal Reserve Ban't of its District.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, shall not
have any exerption, as such, and loss from the sale or other
disposition of Treasury cills shall not have any special treatment,
as such, under Federel tax ects now or hereafter enacted, The
bills shall be subject to estate, inheritance, gift, or other
excise taxes, whether Feieral or State, but shall be exempt from
all taxation now or harearter imposed on the principal or interest
thereof by any State. or any of the possessions of the United
States, or by any local taxing authority. For purposes of taxation the amount of discount at which Treasury bills are originally
sold by the United States shall be considered to be interest.
Under Sections 42 and 117 (a) (1) of the Internal Revenue Code, as
amended by Section 115 of the Revenue Act of 1941, the amount of
discount at which bills issued hereunder are sold shall not be
considered to accrue until such bills shall be sold, redeemed or
otherwise disposed of, and such bills are excluded from consideration as capital assets. Accordingly, the owner of Treasury bills
(other than life insurance companies) issued hereunder need
include in his income tax return only the difference between the
price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either
upon sale or redemption at maturity during the taxable year for
which the return is made, as ordinary gain or loss.
Treasury Department Circular No. 418, as amended, and this
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be
obtained from any Federal Reserve Bank or Branch.
-00o-
6
H
174
T
211 125 DLC
R
E
OGDEN UTAH JAN 1 1942 412P
1942 JAN 2 AM 7 57
S
HOM HENRY MORGENTHAU JR
A
U
SECRETARY OF TREASURY
TODAY FOLLOWING TELEGRAM TO HARRY HOPKINS QUOTE
T
E
UNDERSTAND CONSIDERATION BEING GIVEN TRANSFER OF
LISTRATION OF FOREIGN FUNDS FROM TREASURY TO
E
G
DEPARTMENT OF JUSTICE STOP FOR PURPOSE OF HANDL ING
R
THIS WORK TREASURY HAS BUILT AN EXPERIENCED ORGANIZATION
A
AND THROUGH FEDERAL RESERVE BANKS AS AGENTS HAS
OPED DURING THE PAST YEAR A PRACTICAL PROCEDURE
ATIONS WHICH ARE WORKING EFFICIENTLY STOP BECAUSE
OF THIS AND THE FURTHER FACT THAT THE WORK
IS ARGE Y ONE OF A FINANCIAL NATURE I STRONGLY
A
S
RECOMMENT THERE BE NO TRANSFER STOP THE CLOSE
RELATIONSHIP OF THE ADMINISTRATION OFFOREIGN FUNDS AND
OTHER ALIEN PROPERTY MAKE SAME ADMINISTRATION DESIRABLE I
THEREFORE STRONGLY RECOMMEND THAT THE ALIEN PROPERTY CUSTODIANSHIP
ASO BE PLACED IN TREASURY UNQUOTE WILL BE IN
WASHINGTON MONDAY MORNING BEST REGARDS
ARRIVER ECCLES.
175
January 2, 1942
9:40 a.m.
GROUP MEETING
Present:
Mr. Thompson
Mr. Morris
Mr. Haas
Mr. Paul
Mr. Sullivan
Mr. Kuhn
Mr. Blough
Mr. Schwarz
Mr. Graves
Mr. White
Mrs. Klotz
H.M.JR: I am sorry to keep everybody waiting, but
I got my back to the wall on this alien property transfer to the Treasury, and that is what I have been work-
ing on all morning. I am not going to - I mean, it
looks as though the whole thing was going to be trans-
ferred out of the Treasury, and I have decided to fight
it, so I just had to drop everything. I am not going
to give in so easily. Herbert?
MR. GASTON: At a meeting of the Censorship Policy
Board on Wednesday they asked if we had any suggestion
for the agenda. Have you any ideas?
H.M.JR: Policy Board of Censorship?
MR. GASTON: Yes. That is one that you were sup-
posed to be a member of.
176
-2H.M.JR: The only thing I have got an idea of is when
you (Kuhn) go to the MacLeish board, I want to know
what, if anything, they are prepared to tell the country
in case anything should happen to the Philippines.
MR. KUHN: They talked about it last Monday at
great length.
H.M.JR: What are they doing about it?
MR. KUHN: Well, they have got quite a program
worked out to show the geographical and strategic
realities in the Pacific, for example, to show how
many different things--
H.M.JR: Are they doing anything?
MR. KUHN: I believe so. I can show it to you in
detail on the minutes of last Monday, if you are interested.
H.M.JR: No, I don't want to see their minutes. I
would like to know what is happening. You go there
next Monday, don't you?
MR. KUHN: One thing they are going to do, they
believe in putting these things out through the mouths
of others, but they are getting out a great mass of
stuff on the extent of the Navy's commitments, the fact
that the Navy has to do jobs in the Atlantic and in
Iceland and so on.
out.
H.M.JR: Well, I would like to see what they put
MR. KUHN: I don't - I haven't seen anything.
H.M.JR: You go over there Monday, don't you.
MR. KUHN: Yes.
done.
H.M.JR: When you go Monday, see what they have
177
-3MR. PAUL: They must have persuaded Hanson Baldwin
to write
that.
MR. KUHN: I think they do a lot like that.
MR. SCHWARZ: I have heard a couple of articles
emphasizing
political objectives rather than military,
too.
MR. KUHN: They get different people to go to town
on these things.
H.M.JR: My answer to you (Gaston) is that I have
nothing.
MR. GASTON: Yes. There is a rather important
question as to how large the operating board of censorship should be, and my impression is that it ought
to be a small board. They have asked us to make a
recommendation as to what financial agency should be
represented. Unless it conflicts with something else
you are doing, I would want to recommend that no other
financial agencies except the Treasury be represented
on the operating board of censorship.
H.M.JR: Well, Herbert, you handle it any way that
you think right, will you? It doesn't interfere. I
mean,
it might interest you, but it doesn't interest
me.
MR. GASTON: Right. I am planning to go to a
Defense Communications Board meeting at ten-thirty.
H.M.JR: O.K. Anything else?
MR. GASTON: That is all.
MR. SULLIVAN: We are getting inquiries about the
possibility of extending the date of filing income tax
returns from March 15 to 16, because so many people who
are paid on a two weekly basis get paid on the sixteenth.
For your information, since the fifteenth of March falls
178
-4on Sunday, the people will be permitted to file their
returns at any time on Monday the sixteenth, automatically.
H.M.JR: All right.
MR. SULLIVAN: And in the publicity, the Bureau
is going to stress that.
H.M.JR: All right.
MR. SULLIVAN: That is all, sir.
Incidentally, the fellow who was doing the announcing of the Rose Bowl game yesterday did about the best
job for Defense Bonds and Stamps I have ever heard,
and I think we ought to get - I spoke to Harold and
Herb and Ferdie - I think they ought to get the transcript
of that. It was perfectly swell, what little I heard.
H.M.JR: It is interesting. We were at the White
House on New Year's Eve. The President had the radio
turned on and waiting for the music and the signals.
At just eleven fifty-nine they came on with a very good
announcement on Defense Savings Bonds. He seemed to
like it. It was just the last thing of the year, was
this announcement. It was a very good one and a fitting
one. He looked at me and smiled. He seemed to like
it.
Paul?
MR. PAUL: I have just come back to find about nine
billion dollars, but in the meantime Roy Blough has
been preparing, scraping around at the bottom. We are
going right into sessions as soon as we get through
here.
H.M.JR: When will you want to see me?
MR. PAUL: Well, we can see you--
H.M.JR: Don't hurry, now.
179
-5MR. PAUL: We can see you whenever you want.
H.M.JR: Are you going to be here tomorrow?
MR. PAUL: Oh, yes. I think it will be well to -
for us to spend the day--
H.M.JR: Do you want tentatively ten o'clock
tomorrow?
MR. PAUL: All right. There is a memorandum I
would like to have you read for your information. I
wouldn't bother you about anything that wasn't - that
I didn't think quite important, but I have a fairly
long memorandum which I think you said I was using as
a Bible. I would like to have you look it over, and
I will have a copy made for you.
H.M.JR: Will you have it in decent type? If
you send it in to Mrs. Klotz-MR. PAUL: I will have to send it somewhere,
because I only have the small type.
H.M.JR: Send it to her.
By one Gilbert?
MR. PAUL: It is written by Gilbert, but it is
authorized by Henderson who has been over it.
H.M.JR: What else?
MR. PAUL: That is enough from me.
H.M.JR: All right. You look a little weak this
morning.
MR. PAUL: Well, I don't feel so weak. Of course,
I have been two nights on the train.
H.M.JR: Have you?
180
-6Dave Morris?
MR. MORRIS: Nothing.
H.M.JR: Ferdie, when are you going to be ready
with that speech?
MR. KUHN: Oh, I can show it to you late this
morning or this afternoon.
H.M.JR: No, this afternoon is out.
MR. KUHN: Twelve o'clock?
H.M.JR: No.
MR. KUHN: Eleven-thirty?
H.M.JR: What is this, a Chinese auction? Isn't
it written?
MR. KUHN: It is, but I want to do it over before
I show it to you. It would save your time if I do
that.
H.M.JR: Eleven-thirty?
MR. KUHN: Yes, sir.
to it.
H.M.JR: You are excused now. You had better go
MR. KUHN: All right, fine.
H.M.JR: Just one thing, who is handling that
request for me from the CIO Automobile Workers of
Detroit?
MR. KUHN: I sent them a telegram saying that you
couldn't let them know right away.
H.M.JR: Who has got that?
181
-7MR. KUHN: I have it.
H.M.JR: Would you send it right in to me now,
because I have got to handle the other - there are
two others. Would you send it in here?
MR. KUHN: Yes, sir.
H.M.JR: And then eleven-thirty, Ferdie?
MR. KUHN: All right.
(Mr. Kuhn left the conference.)
H.M.JR: Harold?
Have you got any follow-ups, Mrs. Klotz? We
usually have something for Harold. No, this has been
taken care of.
Roy? How is the old stomach?
MR. BLOUGH: Oh, the stomach is all right.
H.M.JR: I needn't ask how your nerve is. It is
all right.
George?
MR. HAAS: Here is a list on the four issues.
H.M.JR: Oh, yes.
MR. HAAS: The second sheet has the names.
H.M.JR: Well, that is a little bit early for me.
MR. HAAS: I can hold it.
H.M.JR: Yes, I think I would hold it.
MR. HAAS: Here are your Savings Bonds. And I
182
-8brought this organization chart up to date.
H.M.JR: Did you give Irey a copy of this?
MR. HAAS: I am going to do that as soon as I get
back. I have one on my desk.
H.M.JR: Well, Harold, December is the greatest
month. I congratulate you.
MR. SULLIVAN: How much?
H.M.JR: Well, they did five hundred and twentyeight million, of which the E was three hundred fortyone. We are not going to release the figures until
Sunday night.
MR. HAAS: That is all I have.
H.M.JR: Harry?
MR. WHITE: You remember we wrote to the Minister
of South Africa turning down their request on the
gold mines and equipment. They wrote back another
letter in which they are very, very sorry and so on,
but they are going to come back at us with their dollar
exchange position, which is what we wanted, and which
they didn't want to tell us before, and here is a
letter for your signature saying that we will be glad
to consider that as soon as they bring it in. I have
got about eight or ten items here which really can't
wait much longer.
H.M.JR: Good. Eleven o'clock. What did you do
about this Russian protocol thing that the President
wrote about.
MR. WHITE: That is one of the things I have. It
is ready for your signature.
H.M.JR: Well, I will give you half an hour. We
183
-9ought to be able to do a lot of business if you are
ready.
MR. WHITE: We are ready.
H.M.JR: Anything else?
MR. WHITE: All of this can wait.
H.M.JR: Norman?
MR. THOMPSON: I have just a couple of personnel
things.
H.M.JR: We will do it now. O.K.
184
January 2, 1942
9:41 a.m.
HMJr:
Hello.
Operator: The Secretary is on the wire.
Justice
Byrnes:
Hello. Henry.
HMJr:
Good morning.
B:
What proportion of the monies that you have frozen
are enemy funds, as distinguished from alien funds,
not enemy?
HMJr:
Now wait a minute. Let me write this down. What's
this question you're asking me?
B:
I'm asking you this. That Justice order that I
talked with Foley about provides for enemy property
HMJr:
Enemy property.
B:
.....88 distinguished from alien property.
HMJr:
Enemy property as distinguished from alien.
B:
Yeah. Now what I want to know is, how much alien
property you have that's not enemy. You've got some
like that, I understand.
HMJr:
How much alien property we've got and how much enemy
property we've got.
B:
Well, if you just give me the alien property.
HMJr:
Well, I can't do it offhand, but I'11 get it for
you.
B:
All right. Ask them to ring me direct. I thought
you might have some idea. Your boys are under the
impression that all of the property of every nature
and description, but I was reading the thing that
night after they left - night before last - and I
saw that this order made the distinction as between
enemy property and alien.
HMJr:
Right.
185
-2B:
And I understand you've got gold from some - you've
got
HMJr:
3:
HMJr:
We've got about eight billion dollars worth of
property
In all.
.....in all, yes. And I'11 try to have it broken
down.
B:
Well, just tell them not to go to any work, but
just give me the alien - the amount of the aliene
that are not enemies. That will answer 1 t . I can
deduct that from the eight, you know.
HMJr:
Yeah.
Fine. How are you?
HMJr:
I'm all right. I've got - I've asked for some help
on this. I got a fellow by the name of B. M. Edwarde
to come up here to advise me.
8:
Yeah.
HMJr:
Yeah.
8:
Well, he's all right to advise on some things, but
he doesn't know an alien because he's never had
occasion to talk to one.
HMJr:
He's sitting right here now.
3:
Well, he knows enemies - he's had some enemies -
but he hasn't had any eliens.
HMJr:
Well, I just - well, I needed some advice so
3:
It's all right.
HMJr:
.....I just wanted to let you know he's in town.
Give him my regards.
HMJr:
He'll be coming to see you.
-B:
Fine.
HMJr:
Okey.
B:
Good-bye.
186
187
January 2, 1942
Dear Mr. Justice Byrness
Attached is a memorandum giving
the information in regard to the amount
of enemy property in the United States
compared with the total amount of property
under foreign funds control, which you
requested of Secretary Morgenthau over
the telephone this morning.
Yours sincerely,
(Signed) E. H. Foley, Jr.
Mr. Justice James F. Byrnes
The Supreme Court
Enclosure
EHF:8 1-2-42
188
DRAFT (Dictated over the telephone by Miss Dygert - 1/2/42, 3:30 p.m.)
Mr. Foley
Mr. Pehle
Justice Byrnes has inquired as to the amount of enemy property
in the United States compared with the total amount of frozen property.
The total amount of property subjected to the freezing control
is around 7-1/2 billion dollars. This property may be divided into the
following main categories:
Earmarked gold
2.038 billion
Deposits
1.954 billion
Securities
1.993 billion
Direct investments
Miscellaneous
.549 billion
9 hundred million
In determining the amount of "enemy property" in the United States
it is necessary to decide which areas are to be included in the concept of
enemy territory. Under the definitions contained in the Trading with the
enemy Act and in one of the drafts of the Executive Order prepared by the
Department of Justice, the term "enemy territory" would include all territory occupied by the military, naval, or police forces of the enemy.
The only blocked areas which fall outside this group are the unoccupied
portions of China, the Dutch East Indies, Russia, the Free French and
Belgian colonies, and the four neutral countries in Europe: Portugal,
Spain, Sweden, Switzerland. A rough estimate of the amount of frozen funds
held for these non-enemy blocked areas is two billion.
189
-2 The great bulk of this two billion, 1.0., 1.3 billion, is in
Swiss assets. Obviously much of the Swiss assets are actually enemy
assets which have been concealed in Swiss names. The same is true to a
lessor degree of other neutral countries.
The only other substantial amount of frosen assets which are
not clearly enemy assets are the assets of blocked nationals who themselves
are within the United States. The amount of these assets is roughly
estimated at 400 million dollars.
ma - 1/2/42
190
January 2, 1942
10:34 a.m.
HWJr:
How are you?
Herold
Smith:
Pretty good.
HMJr:
How are you coming along with the state of the
S:
Well, I tell you what they did on that.
HNJ
nation?
Yeah.
I began to nose around a little bit, and I found
S:
that much of the thing that the President was
asking me to do had been done and had been done
better than I could do.
I see.
And what I did was to get MacLeish and Stacy May
together
HMJr:
I see.
and they had most of the stuff, and it had
some bugs in it and we got some revision of it
and MacLeish is taking it to - apparently Sherwood
and Roseman are going to work on this draft.
I see.
So I think - and I called Miss Tully about it to
tell the President - so I think we've - et least
I feel I have - discharged my obligation on the
thing as best I can.
Hyrr
S:
I see. Well, he left it so un in the air I
Yeah, didn't he? I wasn't sure whether I had an
assignment or whether you had one.
HMJr:
Well, I didn't either, and that's really why I
was celling you.
I felt sure, too, that he had asked somebody else
191
2
-
to do this and I found that he had asked Nelson
and the Vice President to get some stuff together
on production, and 80 we just improved and added
to what they had done.
HMJr:
Well, I didn't want to get a call from the White
House about midnight tonight and say where was
something?
S:
Yes.
HMJr:
So you think that's
S:
I think it's all taken care of.
HMJr:
Now, how's the Budget message coming?
S:
HMJr:
S:
Well, we haven't even had a chance to talk to the
President about it yet.
Yeah. Well, if and when that part which affects us,
or as much as you'd care to let me see of it, I would
like to see it.
Yeah. All right. I think 1f we can have a chance
to go - we haven't even had a chance to discuss -
he hasn't seen any of it - he hasn't had a chance to
discuss the expenditure side with respect to NYA,
CCC, and so on. We've got some real probleme which
we haven't resolved with him yet.
HMJr:
Well, the philosophical side is what I'm more
interested in.
S:
Yeah, yeah.
HMJr:
So if you felt inclined, why I would appreciate it.
Yeah. All right.
S:
HMJr:
I mean, particularly - well, as much as the - you
know.
S:
Yeah. All right. Well, wait until we get a chance
to go over it with him once and see what his reaction 18 to the whole.
192
-3HMJr:
Right.
S:
He'd probably want it revised.
S:
All right.
Yeah. All right.
HMJr:
And I've got you down for lunch today.
S:
Yeah.
Okay.
HMJr:
Fine.
Thank you.
S:
Good-bye.
HMJr:
193
January 2, 1942
11:13 a.m.
HNJr:
Dr.
It's a little bit late, but I could still undo it.
Jacob
Viner:
Yes.
HMJr:
Do you know Mollie Ray Carroll?
V: Yes.
Jr:
HNJr:
V:
HMJr:
We're thinking of - in fact, we've practically
agreed to take her on under Thompson.
That's 9 terrible.
Hello.
She's terrible.
She's terrible?
V:
Yes. She's high-strung and unstable and gets
HMJr:
Oh, my God. She's terrible, huh?
V:
Oh, yes. And muddle-headed.
HMJr:
Oh, God. No good in personnel work?
V:
Oh, she'd be just impossible.
HMJr:
Oh, really?
V:
That's where she'd be worst of all.
into rows.
HMr
Oh, my God.
She gets into fights and quarrels and sulks and
so on.
HMJr:
Oh, really?
V:
Yes.
MJr:
Oh,
my God. Well, I'll juet have to undo it.
-2-
194
All right. If I could only have gotten you
fifteen minutes earlier - I just saw her. I
tried to, but - but in personnel work she'd
be terrible?
V:
HMJr:
I'm sure of that, because she was - she's had
a record of that sort, of not being able to
hold a job because of personality difficulties.
Oh, gee. Well, I'll try to - I'll have to find
some excuse and undo it. But that's what - it
was in personnel work that I wanted her.
V:
HMJr:
V:
Oh, no. I'd say not at all.
All right.
of course, this is an impression I have. I've
known her a little over the years, for many years.
HMJr:
Yeah.
V:
Yes. And it's been one failure after another.
HMJr:
Oh. Well, I should have called you first. Okay,
Jake. When are you coming down?
V:
Sunday morning.
HMJr:
Righto. Good-bye.
V:
Good-bye.
STRICTLY CONFIDENTIAL
195
Telephone Conversation with Dr. Harry Millis
National Labor Relations Board
January 2, 1942 - 2:25 P. M.
Mr. White: Secretary Morgenthau asked me to get in touch with you.
Jack Viner informed the Secretary that you would know a
Miss Carroll, who is applying for a position here in the
Personnel Division. The Secretary asked me to call on
you and if you would prefer not to discuss the matter
over the telephone, I shall be glad to come to your office but I thought possibly you might feel at liberty to
tell me over the phone.
Mr. Millis: Miss Carroll? She is now in the Department of Labor.
Molly Carroll. - What about her? What kind of a job?
Mr. White: I am not certain but I think the position is for a person
to see what can be done to improve the quality of the personnel and possibly to eliminate friction between various
minority groups and be certain that tolerance, good judgment and complete justice is exercised in the selection of
personnel.
Mr. Millis: This woman I knew before she went into graduate work in
Chicago. She was a Y.W.C.A. worker in Kansas. She took
a Doctors degree - wrote a thesis under me. I know her
history.
I would say she is not at all the woman for any such
place. She does not understand people. She doesn't have
that particular insight into people. I think one reason
is she does not have the interests found in all sorts of
people. She doesn't understand.
Mr. White: That is a quality I believe would be essential for the
position the personnel people have in mind -- an understanding of people.
Mr. Millis: For that particular thing, I should say there must be a
lot of people better than she.
Mr. White: Thank
you very much. I will pass that on to Secretary
Morgenthau.
Mr. Millis: I wouldn't want that repeated.
Mr. White: That will be just for his ears. Thank you very much indeed.
196
January 2, 1942
-
-
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delivered
1/4/42. notes on ideas for his speech
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1130
DRAFT OF SECRETARY MORGENTHAU'S BROADCAST
"THE JOB AHEAD"
January 4th, 1941
194/142
droft
Tonight I can give you proof that we remember Pearl
Harbor. I am happy to report to you that in the month of
December more than five hundred million fighting dollars
for fighting men poured into the Treasury from the sale
of Defense Savings Bonds. Actual cash deposits from
Defense Bond sales reached the record total of $528,598,000 --
a total almost twice as large as the average for the previous
seven months. Let our enemies take notice. This magnificent response is just one sample and one foretaste of
what our people will do, in every field of the war effort,
now that they are awake and aroused to their country's danger.
D-A
--
198
It is especially good news to me, and I think to
you, that $341,000,000 of the December total came from
the sale of the Series E Bonds, the "people's bonds",
that sell for as little as $18.75. The sales of Series E
Bonds are almost three times what they have been in previous
months. I can give you no estimate as yet of the sales
of Savings Stamps in December except that they are far
ahead of any previous monthly figure. All this indicates
that great numbers of people with moderate and small incomes
have already acquired the good habit of saving for their
country.
The rush to buy bonds was so great this month that
there was a period, and there may still be such a period
in some cities, when the supply of bonds ran out. We just
couldn't supply the bonds fast enough after Pearl Harbor.
D-A
-3-
199
In Honolulu, while the smoke from Pearl Harbor still
darkened the sky, the citizens of Hawaii replied to the
bombs by buying bonds ten times as fast as ever before,
and we had to authorize the issuance of receipts in
place of bonds to meet the demand. As a result of that
superb demonstration, and many others like it throughout
the country, we promptly placed the Bureau of Engraving
and Printing on a 24-hour basis. All night, every night,
the presses are at work, and we now have several weeks
advance supply of bonds to meet the demand that has not
yet slackened and I am confident will never slacken until
the war is won.
It is important, however, to keep a sense of proportion
in figures as in grand strategy. In the month of December
your Government spent four times as much on the war effort
D-A
-4-
200
as you subscribed in Defense Savings Bonds. In the months
to come it must spend at a far greater and ever increasing
rate. Next Tuesday you will hear Budget estimates calling
for such huge expenditures in the coming year that even
the half billion record you established in the purchase
of Defense Bonds in December will seem to be small and
almost insignificant. Wars are never cheap, but it's a
million times cheaper to win than to lose. The cost of
our war effort should frighten no one but our enemies. To
us, it is just a measure of the size of the job ahead.
Now that we have embarked on a life and death struggle,
we cannot compromise, we cannot hold back, we cannot delay
in supplying our fighting men with the tools of war they
need. Nothing short of overwhelming preponderance of
planes, of ships, of tanks, of guns will serve to smash
D-A
-5-
201
the combination of enemies that boasts that it will break
our world, our American kind of world, asunder. We cannot
produce those weapons just by waving a magic wand. We
shall have to produce them with sweat and muscle; we shall
have to pay for them.
That is the chief reason why there is a direct
obligation upon every one of us to buy Defense Bonds and
to go on buying them, to win the war. But there is another
secondary reason that is almost as compelling. We have
another war to fight on the home front, the war against
another treacherous and dangerous enemy, inflation. It is
up to us to pay for victory in such a way as to avert a
rising cost of living, with all the evils which that can
I
bring. If we at the Treasury were to rely only on the
banks for our borrowings, or if we were to encourage you
D-A
-6-
202
to buy bonds by taking your savings out of the savings
banks, we should be encouraging the civilians of this
country to spend their incomes on goods which are urgently
needed for the war effort. We should thus be encouraging
a rise in prices, and with that a rise not only in the cost
of living for every citizen, but a wholly unjustified rise
in the cost of war to the Government and to the people of
this country. Therefore, it has seemed essential from
the beginning, and doubly, triply essential now, that we
borrow as much as possible out of the current earnings of
our people. I want the purchase of Defense Bonds to come
out of pay checks rather than out of bank deposits. I want
every pay day to be bond day from now on, for everyone in
this country who receives a regular income.
D-A
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203
You may ask "What is the Treasury's goal? Can't the
Treasury give us some figure to shoot at?" I have had such
questions sent to me repeatedly, and I have answered
repeatedly that I am more interested in the kind of money
we raise than in the amount. But the Treasury does have a
goal, and I should like you to regard it as one of your
solemn obligations to your country to see that we reach
that goal in the shortest possible time. That goal is to
have every one of the 35 million men and women who work
for regular pay put a part of that pay aside systematically
every week, every pay day, for the purchase of Defense
Bonds and Stamps. And when I say "a part" I do not mean
a mere token contribution of a few nickels every week,
or the mere contribution of one percent or two percent
of the weekly pay check. This is not a token war. It
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is not a two percent war. It is not a war that can be
won with spare change. Each of us will have to figure
out the very most that we can set aside, for our own good
and for our country's good, as long as the war may last.
I suggest that each of us sit down this very evening
to study our family budget; that each of us decide this
very evening, not the least but the most that we can afford
every week; that we then translate that amount into a
percentage of our pay, five, ten, or fifteen percent,
whatever we choose, and stick to it by setting that
percentage aside week after week without fail. The more
bonds we buy, the more planes will fly. Remember, every
bond we pledge ourselves to buy will strike a blow at our
enemies. Remember, also, that every dollar we pledge to
set aside now will come back to us with interest on that
brighter, happier day when victory is ours.
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The industrial workers of this country are making
a good start. Voluntary pay roll savings schemes are
now in operation in thousands of factories, and in most
of our largest business concerns. Until now a very small
fraction of employees have taken advantage of these plans.
Since Pearl Harbor the extent of participation has been
much greater, and I am receiving reports already of some
companies in which 90 percent or more of the employees are
setting aside a part of their pay each week and are receiving
Defense Bonds as they accumulate their savings. But the
response from industrial workers so far is only a beginning.
The extent of their participation, and the amounts that they
subscribe, must be increased sharply if we are to reach our
goal.
What I am saying now applies not only to factory workers
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206
but to accountants and teachers, to civic employees of
all kinds, and above all to farmers who are receiving solid
income for the first time in many years and who will be
the first to suffer if inflation is allowed to get out
of hand as it did in the years that followed the first
World War. I should like to see all of America lined up
in a vast army of 130 million, using their dollars to support
and sustain their fighting men in the front line. Those
fighting men are looking to us right now. They are looking
to us from the Philippines and Iceland, from the silent gray
ships that are guarding our shores, from all the posts of
danger in all the seven seas -- they are looking to us to
keep them supplied and do our part as they are doing theirs.
I want those men to be able to look back home and see us
standing shoulder to shoulder, with all sections, all groups,
all the old divisions and dissensions swept away in our
D-A
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207
united resolve to win this war.
I would not pretend that purchase of Defense Bonds
is all we need to do here at home to win the war. We
shall be called upon for all kinds of hardship and sacrifice,
for the complete abandonment of our old standards of luxury
and convenience and ease. But I do say that the buying of
Defense Bonds is the first thing we can do. It is the first
test of our willingness to back up our soldiers and sailors
and airmen. Let us then resolve to be worthy of those men
in uniform. Let us prove that we will lend to defend our
right to be free -- and that we will pledge our lives, our
fortunes and our sacred honor until victory is won.
D-A
208
m Kulu took to
samp house
a pm 1/2/41.
209
DRAFT OF SECRETARY MORGENTHAU'S BROADCAST
"THE JOB AHEAD"
January 4th, 1942
2nd draft
Tonight I can give you proof that the country
remembers Pearl Harbor. I am happy to report to you
that Defense Bond sales in the month of December
produced more than five hundred million fighting dollars
for fighting men. Actual cash deposits from Defense Bond
sales reached the record total of $528,596,000 total
about much
almost twice as large as the average for the previous
seven months.
grand
This magnificent response is just one sample and
one foretaste of what our people will do, in every field
of the war effort, now that they are awake and aroused to
their country's danger. Let the Nazis, the Japanese and
their satellites take notice.
D-B
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210
It is especially good news to me, and I think to
your that $341,000,000 of the December total came from
the sale of the Series E Bonds, the "people's bonds",
that sell for as little as $18.75. The sales of Series E
Bonds are almost three times what they have been in previous
months. I can give you no estimate as yet of the sales
of Savings Stamps in December except that they are far
ahead of any previous monthly figure. All this indicates
that the American giant has stirred from his long sleep,
and that great numbers of people with moderate and small
incomes have already acquired the good habit of saving for
their country.
The rush to buy bonds was so great this month that
there was a period, and there may still be such a period
in some cities, when the supply of bonds ran out. We just
D-B
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211
couldn't supply the bonds fast enough after Pearl Harbor.
In Honolulu, while the smoke from Pearl Harbor still
darkened the sky, the citizens of Hawaii replied to the
bombs by buying bonds ten times as fast as ever before,
and we had to authorize the issuance of receipts in
place of bonds to meet the demand. As a result of that
superb demonstration, and many others like it throughout
the country, we promptly placed the Bureau of Engraving
and Printing on a 24-hour basis. We're glad that the
country is pushing us. We like to be pushed. The presses
are at work all night, every night. We now have several
weeks' advance supply of bonds to meet the demand which
has not yet slackened and which, I am confident, will
never slacken until the war is won.
D-B
--
212
It is important, however, to keep a sense of proportion
in figures just as in grand strategy. In December your
Government spent four times as much on the war effort as
you subscribed in Defense Savings Bonds. In the months to
come it must spend at a far greater and ever increasing rate.
Next Tuesday you will hear Budget estimates calling for such
huge expenditures in the coming year that even the half
billion dollar record you established in the purchase of
Defense Bonds in December will seem to be small and almost
insignificant.
Wars are never cheap, but it's a million times cheaper
to win than to lose. The French, the Czechs, the people
of a dozen conquered and ravaged countries, can tell us
what it costs to lose. We have made up our minds to win.
We have made up our minds to produce and to use such an
D-B
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213
overwhelming preponderance of planes, of ships, of tanks,
of guns and of trained and fully equipped men, that the
Nazis and Japanese and their kind can never again threaten
our freedom. The cost of our war effort should frighten
no one but our enemies. To us, it is just a measure of
the size of the job ahead.
If this were a different kind of war, I should not be
speaking to you in your homes tonight about the job that
faces us. But this is a people's war. Everything that the
people of this and other free countries have won through
centuries is now at stake. You will want me, as Secretary
of the Treasury, to finance this people's war by going to
the people themselves for the sinews of war. I am not
going to finance this war by depending primarily on the
financiers. I am depending on you, on each and every one
D-B
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214
of you who may be listening to my voice this evening.
In particular, I am depending on the 35,000,000 American
men and women who earn regular pay.
You may ask "What is the Treasury's goal? Can't the
Treasury give us some figure to shoot at?" have had
such questions sent to me repeatedly, and I have answered
repeatedly that I am more interested in the kind of money
we raise than in the amount. But the Treasury does have
a goal, and I should like you to regard it as one of your
solemn obligations to your country to see that we reach
The Treasury's
that goal in the shortest possible time. That goal is
to make every pay day Bond day -- for everyone. It is
to have every wage-earner and salary-earner put aside a
part of every pay check, every week, for the purchase of
Defense Bonds and Stamps. And when I say "a part" I do
D-B
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215
not mean a mere token contribution of a few nickels
every week, or the mere contribution of one percent or
two percent of the weekly pay check. This is not a token
war. It is not a two percent war. It is not a war that
can be won with spare change. Each of us will have to
figure out the very most that we can set aside, for our
own good and for our country's good, as long as the war
may last.
The industrial workers of this country are making
a good start. Voluntary payroll saving schemes are now
in operation in thousands of factories, and in most of
our largest business concerns.
Many of you already know about these payroll saving
plans. The most popular of them is a method by which you
or your union can tell your company how much you wish to
D-B
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216
set aside from your pay. Your company accumulates your
savings for you, and when you have enough to buy a bond
your company will deliver the bond to you, registered in
your own name. That is all there is to it. Until now
a very small fraction of employes have taken advantage of
these plans, and a comparatively small proportion of
employers have agreed to provide the facilities. Since
Pearl Harbor the extent of participation has been much
greater, from labor and from management alike. I am
receiving reports already of some companies in which 90
percent or more of the employes are making good use of
this easy road to voluntary saving. We intend to recognize
such participation by giving a flag to every company with
100 or more employes in which 90 percent or more of the
working men and women are saving systematically for their
country.
D-B
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217
But the response from industrial workers so far
is only a beginning. If you haven't heard about voluntary
payroll saving, or if the details haven't been explained
to you, or if your company has refused to install such
a scheme for you, I wish you would write to me at the
Treasury Department in Washington. It's the Treasury's
responsibility to tell you about payroll saving; our State
organizations are ready to tell you all about it, and if
necessary to send someone to your factory to explain it
to you.
I am talking in dead earnest when I say that millions
more must take part in these payroll saving plans, and
must invest hundreds of millions of dollars more, if we
are to reach our goal. Our plans at the Treasury for
financing the war are based upon the assumption that the
D-B
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218
American people will want to pay a big share of the
cost of the war, of their own free will. The response
to payroll saving will tell us whether that assumption
is right or wrong.
It will tell us whether our war financing program
will succeed or fail. I have such faith in the American
people that I believe they will want to do the job in
the voluntary way -- but it is up to you to prove it ,
to
men
And when I say "you" I mean not only factory
workers, but accountants, teachers, salaried employes
of all kinds, and also the farmers who are receiving
substantial income for the first time in many years.
I suggest, then, that each of us sit down this very
evening to study our family budget; that each of us decide
this very evening, not the least but the most that we can
D-B
219
- 11 afford every week; that we then translate that amount
into a percentage of our pay, five, ten, or fifteen
percent, whatever we choose, and stick to it by setting
that percentage aside week after week without fail.
Remember, the more bonds we buy, the more planes will
fly. Remember, every bond we pledge ourselves to buy
will add to the weight of the bombs that will fall on
Tokyo and Berlin. Remember, also, that every dollar we
pledge to set aside now will come back to us with interest
after that brighter, happier day when victory is ours.
I
It is high time Av
should like to see all of America/lined up in
our
a vast army of 130 million, using their dollars to support
our
and sustain their fighting men in the front line. Those
fighting men are looking to us right now. They are looking
to us in our homes and factories, looking from the Philippines
and Iceland, from the silent gray ships that are guarding
D-B
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220
our shores, from all the posts of danger in all the
seven seas -- looking to us to keep them supplied and
to do our part as they are doing theirs. + want those
must
men to be able to look back home and see us standing
shoulder to shoulder, with all sections, all groups,
all the old divisions and dissensions swept away in our
united resolve to win this war.
I would not pretend that purchase of Defense Bonds
is all we need to do here at home to achieve victory.
But I do say that the buying of Defense Bonds is the
first thing we can do. It is the first test of our
willingness to back up our soldiers and sailors and
airmen.
Let us, then, resolve to be worthy of those men
in uniform. Let us prove that we will lend to defend
D-B
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221
our right to be free -- that we will pour out a mighty
torrent of dollars "to defend life, liberty, independence and
religious freedom
against savage and brutal forces
seeking to subjugate the world." At first sight the amount
of money we have to raise through borrowing and taxes may
seem impossible, but we in the Treasury have struck the
word "impossible" out of our dictionary. With your help
we are going to do the job.
D-B
222
January 2, 1942
11:50 a.m.
HMJr:
Hello.
Colonel
Smith:
Mr. Secretary, this is Smith.
HMJr:
Good morning.
S:
You wanted a report on the anti-aircraft situation.
HMJr:
Yes, I do.
S:
It is as follows. The three radio detector sets
HMJr:
S:
HMJr:
S:
HMJr:
S:
belonging to this regiment here are in operation.
Good.
Three additional, giving them a hundred per cent
increase in their normal table of organization,
are also here and are being tuned up now and will
be in operation in about three or four days.
Yeah.
That makes them six. An experienced battery from
Fort Monroe is en route here end will be here at
five o'clock tomorrow night.
Five o'clock Saturday night.
Yes, sir.
HMJr:
Yeah.
S:
Ae soon as it gets in, it will take over for one
of the batteries here, which will then move on
down to Monroe by rail or motor and put in its
little firing period down there.
HMJr:
S:
HMJr:
S:
Would that have happened if you hadn't followed
up for me the other day?
It would not.
I mean, let's be honest with each other.
No, it would not.
223
-2HMJr:
If I hadn't t of called you - when did I call you,
New Year's Day?
S:
That's right, sir; it would not.
HMJr:
I mean, it would not have happened
S:
I don't think it would.
HMJr:
I mean, you got them to do it after I called you
yesterday.
S:
I think that's the answer, Mr. Secretary.
HMJr:
Well, I think it's a.....
S:
I give them the benefit of the doubt; but I did
it by telephone, as a matter of fact, yesterday.
HMJr:
Yeah. Well, now
S:
Of course, you've got to give these people credit.
HMJr:
Well, what is Washington?
S:
You see what they're up against.
HMJr:
Well, what's Washington?
S:
Well, they don't think much of Washington as a
They're looking at definite military objectives.
military objective. They think of the ships and
the lading at Hampton Roade, and the naval dry
dock down there, and things of that sort.
HMJr:
Well, how about our President?
S:
Well,
that's something that probably didn't occur
to them.
HMJr:
Yeah. Well
S:
However, it's done.
HMJr:
Well, you and I are together, and I appreciate your
getting after them. Now, let me ask you this, if
I had time Sunday to run and take a look at these
224
-3Raders and this battery - it wouldn't take more
than an hour, would it?
S:
I think it would be nice.
HMJr:
Would it take more than an hour?
S:
No, it certainly wouldn't. It would take you an
hour to get around to all of them, but you don't
want to see more than one or two of those Redars,
do you?
HMJr:
No, I'd like to see one, and see this new battery.
Would it be in place by - in the morning? Sunday
morning?
S:
I think it will, yes, sir. I'd have to call up Hawes
to verify that; but if it comes in tomorrow night,
I think they would have taken over by Sunday
morning.
HMJr:
Well, I tell you what I'm going to do. Supposing I'll get in touch with you Sunday morning. It
won't be too early, see?
S:
Well, I'll be at my office at eight o'clock.
HMJr:
You will?
S:
Yes, sir.
HMJr:
Well, could you slip\away for an hour or do you
have to prepare in edvance.
S:
HMJr:
Certainly, I'll be glad to, Mr. Secretary. No, sir.
Well, I'll see how I feel Sunday and I'll give you
P ring, and then maybe we can go around for an hour.
S:
HMJr:
All right, Mr. Secretary.
But I'm certainly - now, let me think what else.
Well, that's a good day's work.
S:
I wanted - I have something here I wanted to read
to you.
HMJr:
Yeah.
225
4-
You were interested in the performance of our
S:
airplanes.
HMJr:
Yeah.
This is a report from the American Volunteer Corps
in China, which is now being incorporated into the
Army, on their operations.
S:
HMJr:
Oh, from our friend Colonel Chenault.
S:
Chenault, yes, sir.
HMJr:
S:
I know him well.
They have in the period - I've sent this message
out - but in the period that he mentioned, I think
e period of about four weeks
Yeah.
they had destroyed sixteen Japanese four-engine
bombers and I think it was twenty-one pursuit planes.
HMJr:
They had four planes destroyed, and six damaged but
capable of prompt repair.
That's wonderful.
That's a good record.
HMJr:
That's wonderful. When I see you Sunday, I won't
ask you over the phone, tell me - bring me up to
date on what the anti-aircraft situation is at
Corregidor.
S:
Yes, sir. Well, the anti-aircraft - at Corregidor.
HMJr:
Corregidor.
S:
Oh, yes, sir. I will.
At Corregidor.
Yes, sir. I will.
HMJr:
I think I know, but I'm going to ask you when I
see you.
226
-5-
All right, sir. I'll tell you the whole story
S:
about that.
HMJr:
What?
S:
I can tell you R good deal about Corregidor.
HMJr:
Yeah. Well, I'd like to - if it's still there,
S:
I'd like you to tell me about it.
oh, it's there. It'11 be there for about three
months.
S:
I hope you're right.
Oh, I think we're right. We got a pretty good
HMJr:
Did you?
S:
I'll show you the radio.
HMJr:
Thank you.
S:
All right, Mr. Secretary.
HMJr:
estimate yesterday.
s time 1227
January 2, 1942
Dear Harold:
For your information 1 am enclosing
copy of the proposed Executive Order which
we discussed at luncheon today.
The order embodies an arrangement
which was agreed to at a luncheon held
in my office on December 13, attended by
Attorney General biddle, Leo Crowley,
Ed Foley and myself.
The order which the Department
of Justice has prepared does not follow
the compromise agreed upon, but in effect
turns over the entire administration of
Foreign Funds Control to the Department
of Justice.
I am also enclosing & memorandum
which discusses the administration of
Foreign Funds Control in the Treasury.
Sincerely,
(signed) Henry Morgenthau, Jr.
lion. Harold L. Smith
Director, Bureau of the Budget
State Department Building
Washington, D. C.
Enclosures.
EHF:mp 1/2/42
Sent by Special Messenger at 5:00 p.m.
1/2/42.
12-20-41
12:15 p.m.
228
EXECUTIVE ORDER
VESTING POWER AND AUTHORITY IN DESIGNATED
AGENCIES PURSUANT TO THE TRADING WITH THE
ENEMY ACT, AS AMENDED, AND RELATED MATTERS.
By virtue of and pursuant to the authority
vested in me by the Trading with the enemy Act,
as amended by the First War Powers Act, 1941
(Public No. 354, 77th Congress), by virtue of all
other authority vested in me, and by virtue of the
existence of a period of unlimited national emergency
and a state of war involving the United States of
America, and finding that this Order is in the
public interest and is necessary in the interest
of national defense and security, I, FRANKLIN D.
ROOSEVELT, PRESIDENT of the UNITED STATES OF
AMERICA, do order and prescribe the following:
Section 1. There is hereby established a
Foreign Property Control Board (hereinafter
referred to as the "Board") which shall consist
of the Secretary of State, the Secretary of the
Treasury, and the Attorney General or representatives
229
-2 appointed by each of them. The Secretary of the
Treasury or the representative appointed by him
shall act as Chairman of the Board. The Alien
Property Custodian (hereinafter referred to as the
"Custodian") shall sit with the Board, but shall
not vote except as the representative of the
Attorney General.
Section 2. When directed by the Board, any
property or interest of any business enterprise
doing business within the United States and which
is a national of a foreign country designated in
Executive Order No. 8389, as now or hereafter
amended, and any property or interest in any such
enterprise of a national of any such foreign country,
shall vest in the Custodian, as, and upon the terms
directed by the Custodian; and such property or
interest shall thereafter be held, used, admins-
tered, liquidated, sold or otherwise dealt with by
the Custodian in the interest of and for the benefit
of the United States upon such terms and conditions
as the Custodian may prescribe; and the Custodian
may perform any and all acts incident to the
accomplishment and furtherance of these purposes.
230
-3When directed by the Board, the Custodian 8 hall
also supervise, manage or otherwise direct or control
the activities of any business enterprise doing
business within the United States and which is a
national of a foreign country designated in
Executive Order No. 8389, as now or hereafter amended;
and for this purpose the Custodian shall exercise
such powers and authority as are necessary in
connection with such direction or control. The
Custodian shall have access to all reports and
other information, relating to the activities of
any such business enterprise, which have been
obtained by other agencies referred to in this
Order; and, where deemed by him necessary, he is
authorized and empowered to make investigations
of the activities of any such business enterprises
either before or after any vesting order.
To the extent necessary for the Custodian to
carry out his functions under this section and
section 3 hereof, there are hereby d elegated to the
Custodianall powers and authority conferred upon
me by sections 3(a) and 5(b) of the Trading with
231
4
the enemy Act of October 6, 1917 (40 Stat. 411),
as amended by sections 301 and 302 of Title III
of the First War Powers Act, 1941 (Public No. 354,
77th Congress).
Section 3. Subject to the provisions of
Section 2 hereof, any property or interest of any
foreign country designated in Executive Order No.
8389, as now or hereafter amended, or national
thereof shall vest, when directed by the Board in
such agency or person as may be designated by the
Board; and such property or interest shall thereafter be held, used, administered, liquidated, 8 old
or otherwise dealt with by such agency or person in
the interest of and for the benefit of the United
States upon such terms and conditions as such agency
or person may prescribe; and such agency or person
may perform any and all acts incident to the
accomplishment and furtherance of these purposes.
Section 4. No property shall vest pursuant to
the provisions of this Executive Order unless such
property is owned or controlled, directly or
indirectly by any one or more of the following:
232
-5(1) The Government of any country with which the
United States is or shall be hereafter at war;
(2) The Government of any ally of any country with
which the United States is now, or shall be
hereafter, at war; (3) a person situated in or doing
business in a country falling within either category
(1) or (2) above; (4) Any person situated outside the
United States who is acting for or on behalf of any
one or more of the foregoing; (5) any person who is
now, or hereafter shall be, interned as an alien
enemy pursuant to Section 21 of Title 50 of the
United States Code; provided, however, that any
finding by the Board that any person falls within
any of the foregoing categories shall be final.
Section 5. Subject to the foregoing provisions,
there are hereby delegated to the Secretary of the
Treasury all powers and authority conferred upon me
by sections 3(a) and 5(b) of the Trading with the
enemy Act of October 6, 1917 (40 Stat. 411), as
amended by sections 301 and 302 of Title III of the
First War Powers Act, 1941 (Public No. 354, 77th
Congress); provided, however, that the Secretary of
the Treasury shall not extend the provisions of
233
-6Executive Order No. 8389, as amended, to a ny
additional foreign c countries and nationals thereof.
All such powers and authorities shall be exercised
by the Secretary of the Treasury with the advice
of the Board.
Section 6. Any outstanding order, proclamation,
regulation, ruling, license or instruction issued
pursuant to sections 3(a) or 5(b) of the Trading
with the enemy Act, as amended, S hall I emain in
full force and effect, unless and until amended
or revoked by the Secretary of the Treasury or
rendered inoperative by a vesting order, issued
pursuant to the provisions hereof.
THE WHITE HOUSE,
January , 1942.
234
MEMORANDUM FOR THE PRESIDENT
THE ADMINISTRATION OF FOREIGN FUNDS CONTROL:
APRIL 1940 TO DECEMBER 1941.
1.
Inception and rapid extension of the Control.
The Foreign Funds Control program was initiated in April 1940
by freezing the assets in this country of Denmark and Norway when
Germany invaded these two neutral countries. As other countries
were invaded or dominated by the Axis, the Control was successively
extended during the summer and fall of 1940 to the assets of the
Netherlands, Belgium, France, and the Baltic and Balkan states.
In June 1941, the Control was extended to Germany and Italy and to
the rest of continental Europe. Shortly thereafter Japan and
China were also frozen. At present the Control covers over
$7,000,000,000 of assets and the transactions of 33 countries,
including all of continental Europe (except Turkey), and China
and Japan, and their nationals. The frozen assets in this
country consist not only of bank deposits, gold and securities,
but also a great number of business enterprises as well as
merchandise, patents and other forms of property. The Control
affects all financial, commercial and trade transactions in which
the 33 countries or their nationals have an interest, whether such
transactions are purely domestic transactions or transactions in
foreign exchange or foreign trade.
235
-2-
2.
Purposes and shift in emphasis.
The original purposes of the Foreign Funds Control were primarily
to prevent the assets of the invaded countries from falling into the
hands of the invaders, and to protect American institutions from
possible adverse claims arising out of the invasion. As the International crisis deepened there was a distinct shift in the emphasis
of the Control from a role of benevolent protection to one of active
economic warfare.
The inability of the Axis to use the dollar assets of the
countries covered by the Control and to acquire other dollar assets
has greatly impaired the ability of the Axis powers to finance propaganda, sabotage and other subversive activities in the United States
and other areas of strategic importance to this country. The Control
has prevented the Axis countries and their satellites from using the
American dollar, and American banking and financial facilities for
commercial and other activities in the United States and other parts
of the world. Through the Control, we are taking appropriate steps
to nullify or eliminate vicious and undesirable influences in business enterprisos in this country owned and dominated by the Axis.
The Control safeguards the interests of Amorican creditors of blocked
countries by preventing those concerns which are ablo to nogotiate
special donls with the Axis from receiving preferential payments at
the expense of other American creditors.
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The Control has not boon confined to the regulation of banking
and financial transactions. It also is an instrumont for controlling all exports and imports botwoon the United Statos and C largo
portion of the world. For oxemplo, the Control was instrumental
in effecting c. complete stoppage of all trade, import as roll C.S
export, with Japan.
3. Oporation of the Control.
The offective conduct of modorn economic verfero requires C.
highly floxiblo orgenizction, and C trained, compotent, and imagina-
tivo staff capablo of rapid adjustment to constantly changing
problems. During the courso of the past twonty months the Tronsury
Department hes built up such on orgenizction which is now offec-
tively operating on c nationvido socic. The Control is contered in
and directod from Washington, yot it has succooded in dologeting
to its field offices, the twolvo Fedorel Rosorvo Banks, mcjor sogmonts of the task. Since economic varfare is ossentially the cffectivo application of financial controls which can bc applied only
through the banking systom, the Tronsury selected the Foderal
Roservo Banks to act C.S its field offices in administering the
Control. Through the Federal Rosorvo Banks the Tronsury is ablo
over night to roach the banks of the country and to put into effect
now regulations C.S rapidly changing conditions domend. There has
boon ostablished at oach of the Federal Resorvo Banks C compotent
staff familier with tho intricate probloms food by the Control,
237
-4oxperioneod in the handling of complex financial operations, and in
constant communication with tho financial institutions of its
district. In the Foderal Rosorvo Bank of Now York this staff
consists of approximately 500 persons, wherees in soverel of the
other Fodoral Reservo Banks C. rolatively smell group of porsons
has been ablo to hendlo the daily operations of the Control.
In addition to the field offices mainteined in the Fodoral
Resorvo Banks, Foreign Funds Control maintains porsonnol in Harnii
and in the Philippino Islands, aiding in the administration of the
freezing control in those crons. Foreign Funds Control has also
reprosentatives in Letin America docling with Proclaimed List
probloms.
The Control, in dooling with its many increasing probloms, has
when occasion domanded boon ablo to call upon the personnol and
facilities of other agencios of the Trocsury Department, including
Customs, National Bank Examinors, Coast Guard, Socret Service and
Internel Rovonuo.
4. Organization of the Control.
Foreign Funds Control is orgenized clong the following linos:
(a) Intordoportmontol Committoo.
The basic policios followed in the operation of the Control
have boon formulated by an Interdopartmental Committoo,
consisting of E. H. Folcy, Jr., representing the Trocsury Dopartment, as chairman; Donn Achoson, representing the Stato
238
-5 Department; and Francis Shee, representing the Department of
Justice. This committee meets periodically to consider the
basic problems confronting the Control and the more important
applications for licenses.
(b) Administrative section.
Mr. John W. Pohle, Assistant to the Secretary of the
Treasury, is charged with directing the administration in the
Foreign Funds Control. Approximately 650 persons are employed
in the office of the Control in Washington on work of an admin-
istrativo character. The administrativo staff is divided into
mcjor sections, each of which specinlizes in handling problems
relating to different types of transactions, such as Securitics,
Business Enterprises, Foreign Trade and the Proclaimed List,
Trusts and Estates, Foreign Banks, and Remittances.
(c) Legal section.
Forty lawyers in a special section of the General Counsel's
Office handle the legal aspects of Foreign Funds work, draft
documents, analyze the legal implications in applications, and
actively participate in the policy determination.
(d) Economic section.
The Division of Monctary Research maintains C special sec-
tion of trained economists, who make studies of the many and
complex economic problems confronting the Control for use in
making policy decisions.
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-6(e) Investigative section.
An investigative staff with several field offices is headed
by Er. Ervin May, former Treasury attache in Berlin. This
section employs a large staff of competent investigators fami-
liar with financial problems, who investigate attempted violations and evasions of the freezing control.
5. Integration with the work of other governmental agencies.
The primary medium through which the basic problems of the
Control have been brought to the attention of the Departments of
State and Justice has been the Interdeportmental Committee. The
State Department hr.s been more concerned with and has participated
more actively in the solution of the problems confronting the
Treasury Department in its administration of the Control. Through
cooperation between the State and Treasury Departments, the Control
has been used in an offective way to implement this Government's
foreign policy, as in the cnsc of Japan.
Other examples of the effective linison established between
the Foreign Funds Control and other government agencies are:
(a) Strategic material problems have been resolved in
consultation with the appropriate defense agencies. The Con-
trol has been able to uncover and direct into defense uses
millions of dollars worth of highly strategic materials,
machine tools, and other materials.
240
-7 (b) Cases involving the fueling, chartering, or sale of
ships are cleared with Merchant Ship Control, the Maritime
Commission, and the State and Navy Departments.
(c) Proclaimed List problems are handled by a subcom-
mittce consisting of representatives of the Treasury, the
State Department, and the Economic Defense Board.
(d) Securities problems have been worked out with the SEC.
(c) Valuable information obtained through censorship
has been received by the Control for some time from the British
and Dominion Governments. Confidential information is exchanged
with the FBI, the Office of Naval Intelligence, the Army
Intelligence, and other governmental intelligence offices.
6. Major Areas of Operation.
The far-recching character of the Control can best be seen by
considering some of the mojor types of transections which can be
effected only under freezing control licenses. The Control, in
addition to licensing foreign exchange transactions and a wide
variety of other payments and remittances, has exercised control in
such significant areas of economic activity as:
(a) Business Enterprises.
Approximately 2,500 business enterprises in the United
States have been operating under licenses issued by the Control.
These enterprises engage in all forms of business activity,
241
-8from long-established Axis-ovned chemical nenufacturing plants
to the nowly established American diamond industry. We have
closed down a number of Axis firms whose activities have been
dangerous to the national interests and whose operation was
not important to the national or local economy. Treasury
representatives have been placed in over 50 business enterprises which had strong Axis connections and chose continued
operation was considered essential.
All firms operating under license have been required to
file with the Control affidevits providing detailed information ns to orgenization, officers and directors, capital
structure, relationships with other companies, the nature of
its operations and principal customers. These firms are also
required to file periodic reports which provide significant
information with respect to their operations. As C. result of
the operations of the Control in this field, the Treasury now
has in its files organized information with respect to the
structure, activities, and background of the numerous Axisowned or dominated concerns, as well as concerns controlled
by nationals of other blocked countries.
(b) Foreign banks and insurances companies,
As each new country was frozen, mony foreign banking
agencies and insurance companies vero brought under the Control.
Such entorprises were permitted to operate under the careful
242
-supervision of Treasury representatives placed in such institutions who inspected all transactions to assure that the
restrictions of the Control were being strictly observed.
The Treasury has obtained the full cooperation of state banking and insurance departments in administering this phase of
the Control.
(c) Securities.
Security accounts of nationals were blocked, and purchases and sales of securities for such accounts could be
effected only under liconse. Debt service and sinking fund
operations of blocked countries have been controlled through
a licensing system. In order to prevent the disposal of
looted securities in this market by the Axis countries, the
Foreign Funds Control early in 1940 prohibited the importa-
tion into the United States of securities from any foreign
country except under license. Imported securities are held
by the Federal Reserve Banks until satisfactory evidence as
to origin and ownership is forthcoming.
(d) Foreign Trade.
The Control is one of the most important mensures adopted
by this Government affecting the ,United States import and ex-
port trade with foreign countries. Not only is trade with all
blocked countries subject to the Control, but trade with much
of the rest of the world is affected by it. For example, the
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blacklisting of Axis and Axis-dominated firms in Latin America
by the Proclaimed List is designed to promote healthy homispheric
trade and to eliminate the undesirable activities and influence
of these Axis firms in Latin America.
(e) Proclaimed List.
When the Proclaimed List WCS issued, the Control assumed
a major part of the administrativo work involved. Ropresontativos of the State and Tronsury Departments have recently
visitod the Caribbonn countries where Proclaimed List problems,
particularly those relating to coffee, required immodiate
action. Also, ct the present timc, a group of Trocsury and
State Department personnel is touring South America, consulting with and advising diplometic missions on Proclaimed List
problems.
(f) Census of Foreign Property.
To further the purposos of the froozing control and to
essure more effective administration, the Tronsury has rocontly taken 0 complete and comprehonsive consus of all
foreign-orned property in the Unitod States, irrespective of
whether tho owner of such property has boon blocked under the
froozing control. This consus nokes available for the first
timo precise datr ns to the identity of the foreign interests,
and the nature and location of the property.
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The worlth of information thus obtrined will be of
inostimable value to numerous governmental departments and
agencies, not only in donling with problems of the immodiate
present but also in formulating long-renge prograns for the
future.
7. Tochniquo of large-scale operation.
In view of the wide arons of economic activity which are subjoot to the Control, it has been necessary rapidly to develop methods
of operation which would allow transactions not contrary to our
national interest to be effected with a minimum of interference.
This has been accomplished largely through the use of general li-
conses. These genoral licenses permit well-defined types of trans-
actions to be effected without individurl licenses, provided they
are consuracted strictly in the mannor and within the linits stipulated in such licenses. When nooded, these general liconsos require
reports which are used to polico the activities conducted under the
licenses, to insure compliance with the terms thereof, and as 0
basis for restricting or brondening the scope of the license.
Undor the 75 general licenses which have been issued, millions of
transactions have been effected without the necessity of individual
applications boing filed and individual licenses issued. The roviewing staff of the Control has thus been able to concentrate upon
the more difficult types of transactions for which specific licenses
245
- 12 are recurred, and has been able expeditiously to act upon over
350,000 specific applications. More than 80 percent of these
applications are now being handled directly by the Federal Reserve
Banks in the field,
8. Special comment on Axis and Axis-controlled business
enterprises.
In the twenty year period between 1919 and 1939, Germen interests
have succeeded in organizing within the U nited States another
industrial and commercial network centered in the chemical field,
but extending also to the electrical and heavy goods industrics,
foreign commerce, and financing. It is unnecessary to point out
that these business enterprises constitute a base of operations
to corry out Axis plans to control production, to hold markets
in this homisphere, to support fifth-column movements, and to wold
our post-nor economy to Axis plans.
One of the primary reasons for freezing Axis assets WC.S to
combat this situation. The problem with which TIC arc now food,
is more difficult although somewhat similar to the problem faced
by us in 1917. The background today is vastly different from that
which cristed in 1917.
For almost fifteen years the Axis business interests have been
taking comprohersive stops to irrulate themselves Against an clien
property custodianship with its scizure of legal title As c
result of the ir (fforts only : negligible portion of Axis-influenced
property in this country rould pass into the hands of C. custodian
theer powers are limited to the scizure of "enery" title. The
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"title" concept employed in creating the office of Alien Property
Custodian in the first World War is now outmoded. The title to
some ot the most dangerous of the Axis-influenced enterprises is
Swiss, Dutch, or Panamanian. Other enterprises are 100 percent
American, so far as title is concernod.
Under the broad definition of the word "national" the freezing
ordor has brought under foreign funds control all those organizations
which are actually American and other noutral "fronts" for Axis
activities. Many of those concerns arc related to the Axis powers
only through contractual ties, patont licensing agreements and the
like. In somo casos the tics are informal, based largcly on
personal fealty or family relationships. The flexiblo procedure of
foreign funds control, developed ovo the past twenty months, makes
it possible to doal effectively with this type of situation.
By intensifying our controls over those business enterprises,
within the franowork of the foreign funds control licensing procodurc, WC can, in most cases, safoguard our national intorests more
effectively than could be donc under the soizuro technique.
9. The record of the Control. The Department has more than
¥,7,000,000,000 of frozen assets under its survcillance at the
present time. Only by contrast with the $500,000,000 of assets
administered by the Alion Property Custodian during the last world
var is it possiblo to gain somo conception of the magnitude of the
task the Treasury has boon doing during the last twenty months.
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Moxe than 350,000 applications have boon handled by the Control
and in addition literally millions of other transactions have boon
effected only on terms proscribed by general licenses. In spito of
the highly restrictive charactor of the Control and its ruthless
adherence to the principals of outright oconomic warfaro, not one
decision or ruling of the Control has boon so much as challonged
in the courts.
All of this has been possible only as a result of the confidonce shown by the public in general and the banking and business
community in particular in the reasonabloness and intogrity of
the Control. This confidence has recently boon re-affirmed in a
most striking manner when both Houses of the Congress unanimously
approved H.R. 6233 which greatly expands the powers of the Prosident
over this foreign property. Throughout the consideration of the
bill both in the committoos and on the floor of the House and on
the floor of the Scnato there was not one word of criticism loveled
at the mannor in which the Control has boon administorcd.