The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
214
OFFICE OF PRICE ADMINISTRATION
WASHINGTON, D.C.
LEON HENDERSON
ADMINISTRATOR
April 22, 1942
Hon. Henry A. Morgenthau, Jr.
Secretary of the Treasury
Washington, D. C.
Dear Mr. Secretary:
Undoubtedly you have been reading in the
newspapers and hearing on the radio that there
are extensive changes being contemplated in connection with price control and have been wondering
as to the extent of such changes and when they may
be expected. We are now waiting for the greenlight
from the President so we can go ahead with a definite program for price control at the wholesale and
retail level. As soon as we get the clear signal I
will call a meeting of the Price Administration
Committee and discuss the entire matter with you.
With kindest regards, I am
Sincerely yours,
bean Hunderson
Leon Henderson
Administrator
215
APR 22 1942
Ky dear Mr. Secretary:
I wish to thank you for your letter of April 15. 1943,
regarding the testimony before the Ways and Means Committee
given by Mr. Rebert B. Allen. You state that the Office of
Petroleum Coordinator has taken as position with respect to
this matter and has no opinion to express either for or
against a notification of the existing depletion allowance.
I should like to advise you that a copy of your letter
was inserted in the record of the Ways and Neans Committee
hearings on April 16, 1942.
Year courtesy in the submission of this letter is appreciated.
Sincerely yours,
(Signed) H. Morgentbew. the
Secretary of the Treasury
Henorable Harold L. Takes,
Petroleum Coordinator for
National Defense,
Washington, D. C.
n. m c. Photofile
By Messenger Sturgia 5:10
MRM
4/17/42
215
APR 22 1942
My dear Mr. Secretary:
I wish to thank you for your letter of April 15, 1943,
regarding the testimony before the Ways and Neane Committee
given by Mr. Robert E. Allen. You state that the Office of
Petroleum Goordinator has takes as position with respect to
this matter and has no opinion to express either for or
against a notification of the existing depletion allowance.
I should like to advise you that a copy of your letter
was inserted in the record of the Ways and Neans Committee
hearings on April 16, 1942.
Your courtesy in the submission of this letter is appreciated.
Sincerely yours,
(Signed) H. Morgenthen. the
Secretary of the Treasury
Henorable Harold L. lakes,
Petreleum Coordinator for
National Defense,
Washington, D.C.
n. m c. Phatofils
First Champson
By Messenger Sturgin 5:10
MRM
4/17/42
UNITED STATES
DEPARTMENT OF THE INTÉRIOR
OFFICE OF PETROLEUM COORDINATOR
FOR NATIONAL DEFENSE
WASHINGTON
APR 5 1942
My dear Mr. Secretary:
It has been suggested to me that certain portions of the testimony before the Ways and Means Committee given by Mr. Robert E. Allen
may possibly be interpreted as implying that the Office of Petroleum
Coordinator for National Defense is opposed to any modification of
the present twenty seven and one-half percent depletion allowance
as applied to the production of oil and gas.
While I believe Mr. Allen made it quite clear that my Office
has taken no position with respect to this matter, I wish you to
understand that this Office has no opinion to express either for or
against a modification of the existing depletion allowance. Any change
in the national tax structure as applied to any particular industry
must necessarily have some economic effect upon the operations of
that industry. Obviously, however, that effect in any particular
instance must be weighed against the effect of other changes for
other industries. It involves a balancing of the economic effects
of the many different methods of raising revenue which are before
you as well as a judgment of the equities of the whole tax structure
as between many classes of taxpayers.
It is for these reasons that my Office prefers not to render
more difficult your task of weighing these troublesome questions of
national fiscal policy by placing itself in the position of either
advocating or not advocating one method of raising necessary revenues
as against a multitude of other methods which may be pursued. For
me to take other than a neutral position would require a detailed
study of the many tax suggestions which your Department has submitted
to the Ways and Means Committee. Neither I nor my Office has made
such a study.
Sincerely yours,
Petroleum Coordinator
for National Defense.
Hon. Henry Morgenthau, Jr.,
Secretary of the Treasury.
217
APR 22 1942
Dear Henry:
Reference is made to your letter of
April 16, 1942, outlining an interim pro-
cedure for obtaining background material
with a view toward discharging the respon-
sibilities centralized in the Board of
economic Warfare by Executive Order 9128.
You can be assured that the Treasury
Department will cooperate with the Board
to the fullest extent, and will facilitate
as much as it can the carrying cut of the
procedure outlined in your letter and in
Mr. Perkins' directive.
Sincerely yours,
Secretary of the Treasury
The Honorable Henry A. Wallace,
The Vice President,
Washington, D. C.
n.m.c.
copy ciycom Mack
By Messeng -Bways
WLU:as
4/17/42
Fierz Thompson
218
ECONOMIC DEFENSE BOARD
WASHINGTON D.C.
APR 16 1942
The Honorable Henry Morgenthau, Jr.
The Secretary of the Treasury,
Dear Henry:
Pursuant to Executive Order 9128, I have issued an Administration Order and Rules and Regulations, copies of which I
am enclosing herewith and which I believe are self-explanatory.
As you can readily appreciate, the first step that the Board
must take in discharging the responsibilities which have now
been centralised in it is to obtain as quickly as possible
full information as to the present status of our foreign
production and procurement program. For this purpose, we
will have to call upon the good offices of the Mar Production
Board, but also of your Department, the Commerce Department
and the Department of Agriculture.
To enable us to obtain this background information, we are
adopting the following interim procedure for the agencies
involved, which I believe will involve a minimum of inconvenience in their day to day operations:
I have directed the staff of the Board to make, within the
next two weeks, a thorough analytical review of all outstanding
contracts, arrangements, and pending negotiations relating to
the production or procurement of raw materials from abread.
In order that this work may be done in an orderly and expeditions manner, Mr. Perkins is designating several members of
his staff to serve as review officers. The review officers
will also be authorised to participate in the discussion of
contracts that are now in the negotiation stage and to effort
rapid clearance of such contracts on the part of the Board.
I realise that the time limit for the preparation of the above
mentioned analyses is an early one. However, I feel that intensive effort now will pay heavy dividends in the future by
219
2 Mr. Henry Margenthen, Jr.
emabling all of - to take a fresh look to see precisely where
we are in our production and presurement programs, so that
future directives will land to seximum results. Your staff,
of course, will be of particular help to us in this work, and
I know that all of our people will stare my appreciation for
the assistance I know - can count upon you to give us.
In order that this initial review work should not unduly
inconvenience the routine work of your staff, Mr. Perkins is
directing the review officers or their representatives to be
available for consultation evenings and week-ends wherever
this will be helpful to your people.
In the interest of orderly precadure, and to avoid possible
nisunderstandings, 18 is, of course, necessary to adopt a
system of formal directives. Accordingly, I an enclosing the
directive which implements the general procedure outlined above.
There is also enclosed a copy of Mr. Perkins' designation of
interim review officers.
Sincerely yours,
Is/ II. A.Wellace
H. A. Vallace
inclosures
DIRECTIVE NO.
To: Treasury Department
Reconstruction Finance Corporation
Metals Reserve Company
Corporation
Corporation
U. S. Commercial Company
Defense Defense Rubber Reserve Plant Supplies Company
Export-Import Bank of Washington
Department of Agriculture
This Directive is issued to each of the above-named
agencies, pursuant to the published Rules and Regulations
of the Board of Economic Warfare. The meaning of terms used
herein shall be that defined in said Rules and Regulations.
(1) No imported materials contract shall hereafter
be negotiated, concluded or amended without the prior approval
of this office.
(2) Copies of outstanding materials contracts together
with coping of memoranda and correspondence necessary to a com-
plete understanding of such contracts and terms thereof should
be made immodiately available for examination by this office.
In order to expedite our examination of these contracts, those
members of your staff who are familiar with the contracts and
the circumstances attending their negotiation should be assigned
to confer with the review officers designated by this office.
.2.
(3) In order to avoid delay in the conclusion of
contracts which are now under consideration, this office will w
sign personal to participate in these nagotiations and to afford
maild alearance - the part of the Board of Egonomic Nerfare,
(A) To familitate the orderly carrying out of this
Directive, one official should be designated by each agency
I harein to serve as a alexance office. The - room
and telephone members of clearance officers should be forwarded
to this office involiably.
Milo Production
Effective April 20,1992
APR 16 1942
DESIGNATION OF REVIEW OFFICERS
In order to COTTY out the torms of Board of Economic
Varfare Directive No. 1, the following persons shall serve as
review officers with respect to imported materials contracts
entered into by the agencies designated:
Treasury Department
Douglase Potest
Reconstruction Finance
Corporation
Oreswell ML.com
Metals Reserve Company
Philip W. Awran
Defense Plant Corporation)
Willard wirts
Rubber Reserve Company
Paul Haya
Defense Supplies Corporation)
J. Willard Theret
B. J. Deinard
U.S. Commercial Company
"xport-Import Bank of
Washington
Department of Agriculture
-
Creswell Mi.com
-
John Ritchie
Milo Peridins
Executive Director
BOARD OF ECONOMIC WARFARE
-2-
RULES AND REGULATIONS
The Department of Commerce
The Reconstruction Finance Corporation
Metals Reserve Company
Rubber Reserve Company
1. These Rules and Regulations, promulgated by virtue
Defense Supplies Corporation
Defense Plant Corporation
United States Commercial Corporation
Export-Inport Bank of Washington
of the authority vested in the Board of Economic Warfare by
Executive Order of the President of the United States dated
The Treasury Department
April 13, 1942 (E. O. No. 9128), are issued by the Executive
The Department of Agriculture
The Department of State
The Office of Lend-Lease Administration
Director pursuant to authority vested in him by Board of Economic
Warfare Order No. 2. They shall be considered to be in full
force and effect as of April 20, 1942.
2. As used in these Regulations and in all directives
which may be issued hereunder:
and such other agencies as may from time to time be
specified by the Executive Director.
(b) The term "Chairman" shall mean the Chairman of the Board
of Economic Warfare.
(a) The term "imported materials contract* shall,
unless otherwise specified, mean any contract, commit
(a) The term Executive Director" shall mean the Executive
ment, understanding, or arrangement for
Director of the Board of Economic Farfare.
(1) the procurement of any materials or
commodities (other than arms, munitions, or
weapons of war as defined in the President's
(d) The term "Administrative Officer" shall mean the Chief of
the Administrative Management Division of the Board of Economic
Warfare,
Proclamation of May 1, 1937, as exended) to
be imported from foreign countries for
3. The Executive Director is authorised to issue directives
the war production effort and the civilian
to any agency included within the emumeration not out in Article 2
economy
of these Rules and Regulations, or any amendment thereof, deter-
(11) the production in any foreign country of such
materials or commodities; or
(111) the financing of such procurement or production,
mining the policies, plans, procedures, and methods of such agencies
with respect to the negotiation, conclusion, performance, managebent and assendment of imported materials contracts, to implement
entered into or arrived at, OT proposed to be
directives received from the Chairman of the Tar Production Board
entered into or arrived at by
pursuant to Section 1a of the aforesaid Executive Order No. 9128.
-3-
The Executive Director may also initiate proposals for such
contracts which shall be carried out in accordance with the
directives issued by him. Any directive issued by the Executive Director shall, unless otherwise specified therein, become
effective upon the date of its receipt by the agency or agencies
to which it is addressed.
4. After negotiation by the appropriate Assistant Director,
the Administrative Officer is authorized to conclude, from time
to time, arrangements with the Department of State relating to
the sending of technical, engineering and economic representatives abroad, and the methods of communicating with such representatives.
5. The authority to issue directives pursuant to these
Rules and Regulations may be exercised by the Assistant Director
in charge of the Office of Imports of the Board of Economic
Warfare or, in his absence, by the person designated to act for
him by the Executive Director, subject to the supervision and
direction of the Executive Director.
6. These Rules and Regulations may be amended from tire to
time by the Executive Director with the approval of the Chairman.
7. Any authority conferred upon any other official by these
Rules and Regulations or any amendments thereof may none the
less be exercised by the Chairman.
Milo Particina
APPROVED:
ISI It. A Wallaw
Chairman
April 16 , 1942
Executive Director
Certified to be a true copy of
original
BOARD OF ECONOMIC WARFARE
ORDER N. 2
Pursuant to the provisions of Executive Order No. 9128,
dated April 13, 1942, amending Executive Ordere No. 8839, of
July 30, 1941, No. 8900, of September 15, 1941, and No. 8982,
of December 12, 1941, the Executive Director of the Board of
Economic Warfare is hereby authorised and directed to exercise
the powers and functions therein conferred, subject to my
general supervision and direction. In exercising such powers
and functions, the Executive Director shall be authorised to
issue such rules, regulations and directives, and to delegate
and provide for the redelegation of such of said powers and
functions, as he may from time to time deer advisable.
Is/ Yd.A.Wallace
Chairman
lateds April 14 , 1942
Certified to be a true copy of original
227
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 22, 1942
Secretary Mergenthau
TO
FROM
Mr. Haas
Subject: Export Freight Situation.
Lighterage freight in storage and on hand for unloading
at New York at the end of last week remained practically unchanged from the previous week's figure, showing an increase
of only 54 cars to a level of 20,585 cars. (See Chart 1.)
Rail storage space occupied at the end of the week amounted
to 12,121 cars, while additional space was available for
7,979 cars.
Exports from New York last week increased by 168 cars to
7,462 cars, exceeding the previous week's figure, which had
been the highest since last July. (See Chart 2, upper
section.) Receipts for export at New York also showed an
increase, reaching 7, .511 cars as compared with .984 cars in
the previous week. (See Chart 2, lower section.) Thus exports from New York practically equalled receipts for export,
resulting in practically no change in the amount of freight
on hand at the end of the week.
Receipts of freight for export at 9 other North Atlantic
ports and at 6 Pacific ports showed diverging trends. The
former decreased by 380 cars to 4,004 cars; the latter increased by 186 cars to a new high of 3,150 cars. (See
Chart 2, lower section. )
LIGHTERAGE FREIGHT IN STORAGE
AND ON HAND FOR UNLOADING IN NEW YORK HARBOR*
1942
1941
CARLOADS
CARLOADS
Thousands
Thousands
24
24
22
22
20
20
18
18
16
16
14
14
12
12
10
10
8
8
J AN
MAR
MAY
JULY
SEPT
NOV.
JAN
MAR
MAY
JULY
SEPT.
NOV
1942
1941
* Largely export freight but about 10% represents freight for local
I of - - -
and coastal shipment. Figures exclude grain.
Office of the Secretary of the Treasury
C-303-0
EXPORT FREIGHT MOVEMENT
1942
1941
CARLOADS
Thousands
CARLOADS
Thousands
Exports
10
10
9
9
A
8
From New York .
7
7
6
6
5
5
mmm
4
3
....
III
2
JAN
MAY
MAR
SEPT.
JULY
NOV.
JAN
3
4
HILL
1111
MAR
2
MAY
JULY
SEPT.
NOV.
1942
19 41
CARLOADS
CARLOADS
Thousands
Thousands
Receipts for Export
10
10
9
9
8
8
At New York
7
7
6
6
mm
5
5
4
4
At 9 other North
Atlantic Ports ..
3
3
2
2
I
I
At 6 Pacific Ports
O
1111
0
JAN
MAR.
MAY
JULY
SEPT.
NOV
JAN.
MAR.
1941
MAY
JULY
SEPT
NOV
1942
229
As estimated from date of general managers' association of New York.
Association of American Reitroods
Office of the Secretary of the Treasury
- - Indication
C-382-1
Chart 2
230
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE April 22, 1942
TO
Secretary Morgenthau
FROM
E. H. Foley, Jr.
I am attaching for your information a copy
of the brief which we filed today with the New York
Court of Appeals.
This is a comprehensive document and pre-
sents to a court for the first time the purposes,
objectives, and methods of Foreign Funds Control.
There is already a demand for this brief
among lawyers and bankers.
in 7h. .
Attachment
231
Court of Appeals of the State of New York
COMMISSION FOR POLISH RELIEF, LTD., PLAINTIFF-RESPONDENT
against
BANCA NATIONALA A RUMANIEI (NATIONAL BANK OF
RUMANIA), DEFENDANT-APPELLANT
JOHN J. McCLOSKEY, JR., AS CITY SHERIFF OF THE CITY OF
NEW YORK, RESPONDENT
BRIEF OF UNITED STATES OF AMERICA AS AMICUS CURIAE
INDEX
Page
Preliminary Statement
1
Statement of History, Scope, and Purposes of Freezing Control
2
A. History and scope of freezing control
B. Purposes of freezing control
1. Protecting property of persons in occupied coun-
3
4
tries
5
2. Preventing the Axis, now our enemy. from acquiring any benefit from these blocked assets
6
8. Facilitating the use of blocked assets in the United
Nations war effort and protecting American
banks and business Institutions
and settlements
9
4. Protecting American creditors
5. Foreign relations, including post-war negotiations
11
13
Government's practice in Attachment Cases Arising In Conneetion with Freezing Control
Legal Basis for Executive Order No. 8389. as Amended
Statement of Facts
14
15
21
Argument:
L Title to the Funds of the National Bank of Rumania Held
in Blocked Accounts in the State of New York Cannot
Be Transferred without the Approval of the Secretary of
the Treasury under Executive Order No. 8389. as
Amended
21
II. Unauthorized Transfers of Property in Blocked Accounts
are Invalid under General Ruling No. 12
A. General Ruling No. 12 is a statement of the policy
which has always existed under Executive Order
No. 8389. as amended
30
32
B. General Ruling No. 12 is a valid exercise of power
under Executive Order No. 8389, as amended. and
section 5 (b) of the Trading with the Enemy Act.
as amended
32
III. There Has Been a Valid Attachment in This Case AuthorIzed by the Secretary of the Treasury Pursuant to Executive Order No. 8389, as Amended
38
A. The Secretary of the Treasury has authorized the
attachment in this case, subject to the continued
exercise of the freezing control powers
B. So far as foreign funds control is concerned there
can be an attachable interest under New York law
with respect to the blocked assets of the Bank of
Rumania under the Treasury authorization
455946-42-
(1)
39
42
C
II
Page
53
Conclusion
55
Appendix. Part 1-Foreign Decrees
Appendix Part II:
A Pertinent portions of legislative history of joint resolution
of May 7. 1940.
Court of Appeals of the State of New York
65
B. Report of the Senate Committee on the Judiciary, on Title
III of 8. 2129 (the First War Powers Act, 1941). Sen
Rep No 911. 77th Cong., 1st Sess. pp. 2-3
60
COMMISSION FOR POLISH RELIEF. LTD., PLAINTIFF-RESPONDENT
Appendix, Part III-Excerpt from brief of Federal Reserve Bank
of New York in British-American Tobacco Company Limited v.
Federal Reserve Bank of New York, United States Court of Ap
peals for the Second Circuit, pp. 11-15
Appendix. Part IV-General Reling No. 12 under Executive Order
No. 8389. as amended Sections 3 (a) and 5 (b) of the Trading
with the Enemy Act. as amended by the First War Powers Act,
1941 relating to foreign funds control
against
BANCA NATIONALA A RUMANIEI (NATIONAL BANK OF
71
RUMANIA), DEPENDANT-APPELLANT
JOHN J. McCLOSKEY JR., A8 CITY SHERIFF OF THE CITY OF
NEW YORK, RESPONDENT
75
BRIEF OF UNITED STATES OF AMERICA AS AMICUS CURIAE
PRELIMINARY STATEMENT
This Brief is filed by the United States pursuant to leave
granted by the Court on April 14, 1942.
)
The immediate issue in this case is whether the bank accounts of the Banca Nationals a Rumaniei (National Bank
of Rumania) which are "blocked" under Executive Order No.
8389, as amended, have been properly attached so as to give
jurisdiction to the New York courts to determine the issues
raised by the complaint. The more fundamental issue which
has been raised by the opinions of the courts below and by
the briefs and arguments of counsel is whether, in spite of the
system of freezing control established by the United States
Government over more than seven billion dollars of foreign-
owned property located in the United States, title to such
blocked property may be transferred without obtaining a
license from the Treasury Department. The mere statement
of this fundamental issue suggests the great national importance of the problem. Both the Congress and the Executive have faced the basic problem and met it squarely by declaring that the Axis shall not overrun the face of Europe and
(1)
2
8
Asia and by force and violence gain title to these billions of
amended, popularly referred to as "Foreign Funds Control"
assets in order to turn them against us in this War of Survival-
or "freezing control."
yet this position would be substantially jeopardized by a de-
termination that the system set up for its accomplishment
A. History and scope of freezing control
permits to any extent the unlicensed transfer of title to blocked
Freezing control was first instituted on April 10. 1940, when
the Germans invaded Norway and Denmark On that day the
President by Executive Order No. 8389. prohibited transactions
property
Unfortunately, the language of the courts below in this case
has suggested that the Government's program has failed in
involving Norwegian and Danish property within the United
achievement The court at Special Term said (fol. 712)
States except as authorized by the Secretary of the Treasury.
Thereafter as other countries were invaded or subjected to the
domination of the Axis powers, freezing control was made applicable to them by amending Executive Order No. 8389.
As I read the so-called freezing orders, there is noth-
ing that prevents the assignment of the defendant's
claims against the banks that would carry the title, the
prohibition being against the payment or transfer of
the funds. [Italies supplied.
In a like vein the Appellate Division said as to the effect of
On June 14. 1941. the scope of freezing control was extended
so as to include the remaining countries of continental Europe.
including Germany and Italy. On July 26. 1941. when Japan
overran Indo-China the control was invoked against Japan.
the Executive Order (fols. 761-763)
At the same time, freezing control was extended to China at the
Thereunder the funds of the defendant
have not been seized The Order merely restrains their
payment or transfer by the banks It does not prevent
the assignment of the defendant's claim against such a
bank in a way conveying effectually to the assignee the
specific request of Generalissimo Chiang Kai-shek in order to
assist China in the control of its economy and in order to prevent
Japan from using the occupied areas in China as a loophole for
)
title to the claim. The prohibition, as indicated, extends only to the payment or transfer of the funds.
It is more than clear that neither the government nor its Executive intended to do away with a
creditor's right to attach "frozen" or "blocked" funds,
or with the debtor's right to assign to another his claim
to such funds [Italies supplied.
This is the first occasion in which a court of last resort in
this country has been called upon to meet this issue and accordingly, the Government submits the following considera-
evading freezing control
On July 17. 1941. the President, by Proclamation No. 2497
authorized the issuance of "The Proclaimed List of Certain
Blocked Nationals." This List. better known as the "black
Executive Order No 8389 which blocked the assets of Norway and Des
mark and their nationals effective April 8 1940 was originally issued on
April 10. 1940 Subsequent amendments added to the list of blocked countries
the following: (May 10. 1940) The Netherlands Belgium and Larembourg:
(June 17. 1940) France: (July 10. 1940) Latria. Extents and Lithosnia:
October R 1940) RUMANIA (March 4. 1941 Bulgaria: (March 18. 1941)
Hungary March 24. 1941 Yugoslavia: (April 28. 1941) Greece: (June 14.
1941) Albania Andorra Austria Carchaslorakia Danzig Finland
Germany Italy. Liechtenstein POLAND Portugal San Marino Spain. Sweden
Switzerland and the Union of Soviet Socialist Republica The attendments
tions as amicus curiae.
of July 26. 1941. December 9. 1941 and December 26 1941. blocked respect
tively. China and Japan Thailand and Hong Kong The amendment of
December 26 1941 provided for the automatic freezing of the amets of
any other territory which is controlled or occupied by the military. naval
STATEMENT OF HISTORY SCOPE. AND PURPOSES OF
FREEZING CONTROL
or police forces or other authority of . foreign country designated to
In order to appreciate fully the ramifications any decision
in this case may have. it is necessary to outline briefly the
history, scope and purposes of Executive Order No. 8389, as
the Order Under this amendment the assets of the Philippine Islands and
British Malays (Including Singapore) have been blocked as well as those
of occupied Barms
b)
5
4
list," contains the names of several thousand persons and firms
transferred without a Treasury license, whether that result
cooperating with or serving the Axis in the American republies and other neutral countries The Proclamation extended
freezing control to the listed persons and firms and accords
them the status of enemy nationals of Germany and Italy.
be reached by voluntary assignment or judicial process.
1. Protecting property of persons in occupied countries
When the control was first invoked on April 10, 1940, it
was regarded as a means of insuring that the Danish and
According to census reports filed with the United States
Norwegian-owned property in this country would not fall
into the hands of Germany. While we could not immediately
prevent the conquest of these countries, it was within our
Treasury Department, pursuant to Executive Order No. 8389,
as amended the total volume of property now frozen and sub-
jeet to regulation by Foreign Funds Control is about $7,000.000,000. By principal type this property is divided as follows:
power to prevent the Axis from seizing title to, or control over,
assets in the United States belonging to these overrun countries
Short-term funds, including earmarked gold $4,000,000,000
Securities
Direct Investments and miscellaneous
The Governments of overrun countries and their nationals ex-
2,000,000,000
1,000,000,000
pected us and appealed to us to do whatever was necessary to
protect their property here and to prevent such property from
The distribution of property of blocked nationals by country
falling into the hands of the Axis This responsibility we
is as follows:
unhesitatingly recognized and accepted, and thereby we have
the duty not only of holding the physical assets here, but also
of preventing the transfer of any right, title, and interest in or
Netherlands, including Netherland East Indies $1,800,000,000
Switzerland
France and Monaco
1,500,000,000
1,300,000,000
500,000,000
400,000,000
200,000,000
200,000,000
150,000,000
100,000,000
50,000,000
800,000,000
Belgium
Sweden
China
Norway
Japan
Germany
Italy
All others
to blocked property that was not in accordance with our national policy and the interests of the overrun peoples. We
conceived our responsibility and trusteeship to be such that
we would not permit the title of the true owners of the property
located here to be wrested from them by fraud, duress. or as a
"spoil of war." We were not interested in being the mere technical custodian of property, title to which the Axis had acquired
7,000,000,000
Total
as a result of aggression. Surely we were not interested in
being a mere bookkeeper. holding the accounts of property,
title to which had been seized by the Axis from those who
brought their property here out of confidence in our strength
B. Purposes of freezing control
Freezing control is a major instrument in this country's program of economic defense and economic warfare It subjects
to regulation and scrutiny all transactions in which blocked
countries or their nationals have an interest. The control embodies those elements of speed and flexibility so essential in
integrity, and sense of fairness.
As was pointed out in April, 1940, at the time that section
5 (b) of the Trading with the enemy Act was amended and the
Executive Order No. 8389 was ratified, one of the aims of freez-
anticipating and successfully countering operations of the
ing control was to protect those who had faith in the United
States and invested their capital here. At that time Senator
enemy on the economic and financial fronts.
A brief consideration of the purposes of the control will disclose its relationship to total war and the reasons the United
States must view with grave apprehension the view indicated
Connally said:
We owe a duty to foreign countries; and
when the nationals of those countries invest in our se-
by the courts below that title to blocked property may be
curities, we owe them at least the duty, if we can exercise
9)
I
C
7
6
2 Preventing the Axia, now our enemy. from acquiring any benefit from
it, of seeing that they are not defrauded, that they are
not robbed, that they are not "highjacked" out of their
these blocked assets
Not only was freezing control intended to protect the inter-
property.
est of the occupied countries in blocked assets, but of equal
How many foreigners would send their money over
significance was the fact that it was and is intended to prevent
the Axis from acquiring any benefit from these assets. We did
not and do not propose to allow these assets-or any interest in
them-to be used against us and the United Nations in this War
of Survival
here if they knew in advance that we would be indifferent
to its sanctity? Why are they now sending gold and
securities to the United States? Because there is an
international belief and an international faith in the in-
tegrity of the United States Government, that it will
In an address on freezing control, delivered by John W.
protect and safeguard and secure the property even of
Pehle, Assistant to the Secretary of the Treasury and Director
aliens, that is legally and lawfully in the United States
I do not want to surrender anything of that kind. I do
not want the United States to lose anything in the estimation of the world in regard to our willingness to treat
aliens and foreigners in a fair and just and equitable
manner. I think the enactment of this legislation will
go a long way toward maintaining and sustaining that
estimation of our attitude, and that its failure will sub-
of Foreign Funds Control, before the Export Managers Club
of New York on March 25. 1941, the purposes underlying the
administration of the freezing control were authoritatively
stated:
In a world disrupted by the ruthless and
complete exploitation of the vanquished, even the
nations at peace must marshal their economic powers
tract from that estimation which the world has
to protect their economies from becoming a part of
the weapons of the aggressor, and consequently an im-
((1940) 86 Cong. Rec. 5178).
This protection for the property of persons in occupied coun-
tries has been a basic part of the policy of the Government of
the United States since it froze the assets of Norway and Den-
mark. This policy has been consistently pursued each time a
country has fallen before the armed aggression, or succumbed
to the domination, of our enemy. This policy can not have its
proper effect and our efforts will prove to a large extent illusory
if the lower courts' construction of the freezing orders were to
be sustained So construed, our freezing orders would not
have adequately prevented the Axis from depriving the lawful
owners of their property. So to construe our freezing orders
would be a blow to the morale of these overrun governments
and people, many of whom are now our active allies."
(
portant instrument in the ultimate disintegration of
free and independent countries
Freezing control orders now cover more
than four billion in dollar assets. Not to have prevented this four billion dollars from falling into the
hands of the aggressor nations would have neutralized
the billions appropriated under the Lease-Lend Act.
The extent to which this nation's economy would have
been made the direct but unwilling tool of the powers
able to control these huge assets thus becomes clear.
Some people are fooled into thinking that "as long as the
dollars stay in a blocked account, the dollars cannot help the
Axis and, therefore, the Government is only concerned in hold-
by the enemy. Can It be contended that a construction of our freezing
ing the dollars in a blocked account and has no interest in
regulating the assignment or transfer of title of blocked assets." This reasoning is shallow and is based on a complete
control powers was intended which would render them inadequate to enable
us to assume our responsibilities In this field toward the Philippine people
which must include preventing the enemy from wresting title to the Philip
plae assets in the United States from their true owners?
misconception of international finance. In construing the
Act of Congress and the orders and regulations pursuant
thereto, there should not be attributed to the Congress, the
Moreover, It must not be overlooked that the freezing control is ap
plicable to the Philippine Islands as well as to the foreign countries overrun
455946-42-3
0
8
President, and the Secretary of the Treasury a failure to appreciate the economics of the Nazi "New Order" and the devices
employed by the Axis to despoil its enemies, fill its own coffers,
9
Since there are billions of dollars of blocked assets, the Nazis
would not be troubled at selling title to such assets at large
discounts in order to obtain much needed escudos and other
and line the pockets of its gangster leaders and Quisling
foreign currencies The escudos thus acquired will pay for
deliveries to the Axis of food. cork, oil, wolframite (tungsten
adherents.
"Blocked dollars' are still valuable dollars With a license
and manganese ore) from Portugal and from Spain. The
they are "free dollars." More than eighty general licenses and
400,000 special licenses have been issued under the freezing
foreign exchange thus acquired by the Axis can pay for oil and
other bunker supplies for submarines operating out of neutral
control, authorizing the use of blocked dollars for stated pur-
ports. Escudos and other foreign currencies could be ex-
poses. Moreover, "hope springs eternal in the human breast."
There are always those who are willing to wait for the day when
changed for Argentine pesos or other Latin American currencies
the war is over with the expectation that the freezing control
espionage sabotage, propaganda, and similar fifth column
and even for free dollars. The Axis could thereby finance
will be lifted
These being the realities, there are many who would be will-
activities throughout Latin America and elsewhere among the
United Nations
ing to furnish goods or services now and take title to blocked
dollars to be realized upon later. There are many who would
ing orders, these are the things which the Axis could do by
offer foreign exchange to the Axis for such blocked dollars and
thereby enable the Axis to acquire goods and services through-
"remained" in this country. These are among the evils which
out the world. Realistic construction of the freezing control
freezing control was designed to prevent.
must take into account that there are many Quislings and other
traitors to our cause who would be happy to be paid or bribed
Actually the black market in assets of this type is practically
non-existent because all the world knows that it was never the
with assignments in blocked dollars-still far more valuable
than the managed currencies of the "New Order." Realism
must envisage also that there are many leaders of the Axis
who would be happy to secure themselves against eventual
defeat in this war with nest eggs of millions of blocked dollars.
The Axis could acquire "title" to blocked dollars at no greater
If title to blocked assets were left uncontrolled by our freez-
transferring title to blocked funds even though the funds
)
(
intention of Congress or the Executive to allow good title to
be passed to blocked assets without a license, and all the world
knows that this country will never recognize the validity of
title to blocked assets thus acquired.
Any decision by this court that unlicensed transfers of
blocked property are valid will defeat this aspect of our national
cost than the pointing of a gun, either literally or figuratively,
policy and will enable the Axis to reap huge benefits from
at the head of the true owner or, through the device of exacting
blocked assets, even though the blocked assets remain within
"occupation costs," and with such costs "legally buy" the title
the four walls of the banks and security houses of New York
to blocked assets The Axis by further transfer of title to
City.
such blocked assets could support its war effort and undermine
the financial blockade which the United Nations are maintain-
3. Facilitating the use of blocked assets in the United Nations war effort
ing against the Axis. It can sell blocked dollars in the black
markets in the neutral countries and use the exchange so acquired to buy goods and services throughout the world. For
example, title to a Norwegian dollar balance at the Chase National Bank could be assigned to a Portuguese national with
payment to the Nazis in free escudos at, let us say, fifty cents
Freezing control in protecting blocked assets of overrun
countries and their nationals had as a further purpose the
desire to make such assets available, at least in part, in the
war effort against the Axis. Needless to say, if there can be
on the dollar.
and protecting American banks and business institutions
unlicensed transfers of title to blocked property, the true own-
10
11
ers of such blocked property may be prevented from using the
To accomplish this purpose protection must be given to
property in the war effort For example: the account of the
American business and banking institutions when engaging in
transactions of this character Unless unlicensed transfers are
null and void, American business and banking institutions will
be exposed to the possibility of double liability and may be un-
Norwegian Central Bank was held by an American bank. The
office in occupied Norway instructed that payment of the balance of the account be made to a German account in a bank
of Argentina. Application for a license to effect a transfer
was denied by the Treasury for policy reasons, although the
payment order clearly complied with all the requirements of
willing to make payment of blocked assets on the lawful instructions received from the real owner of the blocked assets
even though a Treasury license permitting such payment has
the American bank necessary to effect the transfer if licensed
been issued
This payment order has never been rescinded The day after
the denial of the license a London branch of the Norwegian
Central Bank having authority over the account, ordered
transfer of the balance to the Federal Reserve Bank of New
York Application for license to effect this latter pay order
was made. and it appearing from the facts that the payment
would further the war efforts of the recognized Norwegian
Government in London. the application was approved. The
American bank thereupon made the transfer to the Federal
Reserve Bank of New York This it could have done only
on the theory that the instruction to transfer the funds to the
German account in Argentina was null and void in view of
the denial of the application for a license by the Treasury
Department
The names in the particular case are of necessity hypothetical
but there have been such real cases and there is increasing
evidence that blocked assets in this country belonging to the
Governments Central Banks and other persons in blocked
countries will be used voluntarily by the true owners thereof
to further the war effort of the United Nations.
Obviously, it is in the interest of this country that such use
of blocked funds by those rightfully entitled thereto be not interfered with or otherwise interrupted by virtue of unlicensed
assignments transfers, powers of attorney and other purported
claims, some of which may even be asserted in litigation It
is of paramount interest to the Government that the enemy
must not only be prevented from gaining use of blocked assets
during the war but must also be frustrated regardless of the
stratagem it may seek to employ, from interfering with such
use of blocked assets by the rightful owners as will further the
war effort of the United Nations
Furthermore, unless unlicensed transfers of blocked assets
are treated by the courts as well as by the Government as being
null and void. there may be a very large volume of litigation
involving such transfers after the war and after the lifting of
freezing control
4. Protecting American creditors
Freezing control is a protection to Americans having claims
against foreign governments and foreign nationals. This purpose was clearly in mind from the inception of the control and
was referred to by Senator Barkley in April 1940, in connection
(
with the amendment of section 5 (b) of the Trading with the
enemy Act, when he stated:
It should also be stated-and I am sure the Sen-
ator [Wagner] omitted it by oversight-that the
joint resolution is intended not only to protect the nationals of Norway and Denmark who have interest in
stocks, securities and other property in the United
States but it is also intended to protect American citizens in the event they have claims of any sort growing
out of these transactions and therefore we preserve the
property not only for its owners but for the benefit of
Americans who may have claims. ((1940) 86 Cong.
Rec. 5006).
It must not be overlooked that while blocked assets in this
country represent claims by foreign countries and their nationals against us, this country and its nationals already have
very substantial claims, and may come to have even greater
claims, against blocked countries and their nationals which, in
12
some instances, are far greater than the blocked assets available
at this time. Freezing control intended to protect American
creditors and any validation by the courts of unlicensed assign-
)
13
5. Foreign relations, including post-war negotiations and settlements
The fact that freezing control is an integral part of this Gov-
ments and transfers of blocked assets will go far toward prevent-
ernment's foreign policy and has a direct bearing on our foreign
ing any future settlement on a equitable basis
This is one of the many problems that the Government faces
and must weigh in passing finally on transfers of blocked prop-
and it is neither necessary nor appropriate to labor the point
erty, whether arising from voluntary act or by involuntary act
such as pursuant to attachment and any judgment that may
does require mention. It may be trite but nevertheless true
be rendered in the pending case. Should the claim of the Polish
Central Bank (plaintiff's assignor in this case) be given a preferred status with reference to the very limited Rumanian assets
in this country over the claims against Rumania and Rumanian
nationals of American citizens and the United States Govern-
relations seems fully apparent from the foregoing discussion
in detail.
However, one further aspect of this phase of freezing control
that care must be taken that we do not "win the war and lose
the peace."
From the very inception of freezing control, one year and
eight months before Pearl Harbor. this Government has been
concerned with blocked assets from the point of view of any
ment? Should it make a difference to the Government that
post-war settlement This country even then was interested in
the claim of the Polish Central Bank arose by virtue of an
alleged conversion of property in Europe rather than a con-
entered the war. One of the issues that may have to be decided
version of property in the United States or failure to discharge
a contractual obligation with regard to property situated in
the United States?
The judicial procedure is generally geared to deal only with
the rights and liabilities of the parties to the proceeding. The
judicial procedure is not the most appropriate field to determine
the great political questions of national and international mag-
nitude that will inhere in the ultimate disposition of foreignowned property in this country and in the determination of the
rights of groups of American and foreign creditors. These
great problems of national policy can be handled adequately
only by the Federal Government. The determination of such
national policies should not be forced by judicial decisions in
particular cases determining the rights and liabilities of the
parties to the proceedings. The questions are political and
for the executive, not the judiciary. They are federal, not
state. They call for uniform treatment with reference to large
national policies, not for disparate local treatment to accord
with local policies. Moreover Congress and the executive
have set up machinery to deal with the problems, a machinery
designed to relate the solution to the whole war effort and the
inevitable postwar problems
having a voice at any peace conference-whether or not we
at that conference is what happens to "blocked assets." Obviously, this Government has a vital interest in the disposition
of that problem.
Certainly the position of the United States on this question
will be undermined if the conclusion of the war finds title to
this seven billions of assets already "transferred" or "assigned"
and finds our position that of the merely technical custodian or
bookkeeper. A decision that title to blocked assets may be
assigned without a license may lead to this unfortunate result.
This would be true whether the unlicensed transfers take the
form of individual assignments to holders in neutral countries
or are embodied in any unpublished terms of armistice agreed
to by vanquished countries
Authoritative establishment of the views of the courts below
that freezing control does not prevent the transfer of title to
blocked assets would not only go far toward emasculating the
Government's freezing control program but may be expected
to come as a severe shock to the American public in its well
warranted belief that freezing control is successfully protecting
the true owners of blocked assets and preventing the Axis from
realizing any benefits from such property. All the United
Nations striving to maintain the financial and economic block-
(
14
15
ade of the Axis are dependent on the efficacy of our freezing con-
a determination of the facts by a court of law. On the other
trol. The Government's efforts to have the Latin-American
governments cut off economic, trade, and financial relations
with the Axis and to adopt freezing control measures in Latin
hand, the Treasury did not feel that because a person was com-
America would be embarrassed by that unwarranted construc-
pelled to litigate in order to have his rights determined and as a
result of the litigation obtained a judgment, such person should
have different rights from the point of view of freezing control
tion of our own freezing measures. The full impact of the
than a person whose rights to receive payment were voluntarily
problem doubtless escaped the courts below, and while the point
admitted by the transferor or payor. The Government's interest in both cases was whether the proposed payment or
transfer was consistent with the freezing control policy. Cer-
seems fairly obvious, the stakes are such that we cannot risk
understatement of the enormous effect of sustaining the unfortunately stated views as to the purpose of freezing control which
tainly the use of the judicial process should not permit a plain-
are expressed in the opinions of the Appellate Division and of
tiff to defeat the Government's freezing control policy where
the Supreme Court at Special Term.
the Government would not have licensed the payment to him
Government's practice in attachment cases arising in
connection with freezing control
Almost from the outset of freezing control the Treasury has
had to deal with the problem of litigation, particularly attachment actions, as affecting blocked assets, As will be more fully
developed later in this brief, the Treasury did not want to inter-
fere with the orderly consideration of cases by the courts, in-
cluding attachment actions, and at the same time it was
essential to the Government's program that the results of
court proceedings be subject to the same policy considerations
from the point of view of freezing control as those arising or
recognized through voluntary action of the parties.
Indeed the Treasury regards the courts as the appropriate
place to decide disputed claims and suggested to parties that
they adjudicate such claims before applying for a license to
permit the transfer of funds. The judgment was then regarded
by the Treasury as the equivalent of a voluntary payment order
without the creation or transfer of any vested interest, and a
license was issued or denied on the same principles of policy
as those governing voluntary transfers of blocked assets.
The Treasury Department did not feel that it could finally
pass on an application for a license to transfer blocked assets
where the facts were disputed or liability denied. The Treasury felt that it was not practical to pass on the freezing control
questions involved in such applications until there was at least
voluntarily acknowledged to be due by the owner of the
property.
For example, if prior to the outbreak of the war an assignee
of Adolf Hitler or Hermann Goering had wanted to prove
a claim against a Belgian national in our courts and was successful in obtaining judgment, the Government does not conceive that its policy considerations in determining whether the
blocked assets could be used in paying that judgment are dif-
ferent from those where the Belgium national had admitted
the obligation and voluntarily offered to pay subject to obtaining a Treasury license. Thus in the instant case, the Government regards the freezing control considerations to be substan-
tially the same whether the Bank of Rumania voluntarily
sought to use its assets here to pay the claim of the Polish
Bank or the issue of liability is litigated in court.
Legal basis for Executive Order No. 8389, as amended
Executive Order No. 8389 was originally issued pursuant to
section 5 (b) of the Trading with the enemy Act of October
6, 1917 (40 Stat. 415) as amended by section 2 of the Act of
March 9, 1933 (48 Stat. 1). This section has been held constitutional by the Supreme Court of the United States. Norman v. B. & O. R. Co. (1935) 294 U S. 240; Nortz v. United
States, (1935) 294 U. S. 317; Perry v. United States, (1935)
294 U. S 330. See also United States Campbell, (S.D.N.Y.,
1933) 5 F. Supp. 156, 167-170, 172-174: Uebersee Finanz-Kor-
poration A. G.v. Rosen, 2d, 1936) 83F. (2d) 225. 228,
455946-42-
17
16
certiorari denied, (1936) 298 U. S. 679; British-American
necessary for the Government to be able to affirmatively
compel the use and application of foreign property in a
Tobacco Co. V. Federal Reserve Bank, (C. C. A. 2d, 1939) 104
F. (2d) 652, 105 F. (2d) 935, certiorari denied, (1939) 308
manner consistent with the interests of the United
States.
600. After the issuance of Executive Order No. 8389 on April
10. 1940. some concern was expressed as to whether the Order
Section 301 would remedy this situation It gives the
and section 5 (b) were applicable to securities. The matter
was promptly clarified by Congressional amendment of section 5 (b) by the Act of May 7, 1940 (54 Stat. 179) which expressly brought within the ambit of the statute "any transfer.
withdrawal or exportation of. or dealing in, any evidences of
indebtedness or evidences of ownership of property in which
any foreign state or a national or political subdivision thereof
has any interest
The
same
Act
President flexible powers, operating through such agency
as he might choose, to deal comprehensively with the
many problems that surround alien property or its own-
ership or control in the manner most effective in each
particular case. In this respect, the bill avoids the
rigidity and inflexibility which characterized the Alien
Property Custodian law enacted during the last war.
The necessity for flexibility in legislation on this subject
also
is accentuated by the vastness of the alien-property
problem confronting the Government today. At the
expressly ratified Executive Order No. 8389 and the regulations and general rulings issued thereunder by the Secretary
of the Treasury.
peak of his activity, the Alien Property Custodian of the
Upon our entry into the present war, section 5 (b) of the
Trading with the Enemy Act again was amended by Title III
last war administered property valued at something over
$500,000,000. Today there is over $7,000,000,000 worth
of property already subject to the existing control
of the First War Powers Act, 1941, of December 18, 1941 (Public
This provision of the bill to a considerable extent follows the pattern of existing law and is a logical exten-
No. 354, 77th Congress). This amendment retained the pre-
vious provisions of section 5 (b) and, in addition, gave the
Executive as complete and plenary control over foreign assets
as is within the power of the Congress to confer. This is evidenced by the Senate Report on the bill, particularly the following language:
Section 301 amends and extends section 5 (b) of the
Trading with the Enemy Act which originally became
law on October 6. 1917, during the last World War. The
existing system of foreign property control is based on
section 5 (b), as last amended on May 7. 1940. This
amendment will conform this statute to the exigencies
of this war.
The existing foreign property control regulations
(popularly known as "freezing control") have permitted
the Government to prevent and regulate transactions
relating to foreign property which are prejudicial to the
interests of the United States While existing law permits the Government to prevent transactions, it is now
#
sion of the present foreign property control system,
which has been operating very satisfactorily for almost
2 years. The extension could be put into immediate
operation with a minimum amount of trouble or disloca-
tion of legitimate activities
It is essential that the Government have this power,
a power exercised by every other war-time government
and exercised by this Government during the last war.
((1940) Sen. Rep. No. 911, 77th Congress, 1st Sess., at
2).
The United States in exercising control over blocked assets in
this country is exercising powers with which it is clothed as a
sovereign nation. Those powers are rooted in the constitutional authority to declare war. to formulate policies affecting
foreign affairs and international relations, to "coin money and
regulate the value thereof," and to regulate foreign commerce
The power of the United States to wage war includes, of
18
,
19
course, the power to wage economic war. Hamilton v. Dillin,
(U.S 1874) 21 Wall. 73. The war power of the United States
includes the power to confiscate property, to mobilize man-
States over the fiscal affairs of this country gives it plenary
power to control all aspects of our monetary and fiscal system.*
As has been previously indicated, freezing control is an
integral part of the foreign policy of the United States. The
power and industrial resources, to operate transportation sys-
tems, to control prices, to assume jurisdiction over all enemy
property within the United States and to do all things necessary to the successful prosecution of the war effort.' As was
responsibility and control of foreign relations is entirely within
the responsibility of the President and the Congress; action
in this field should be beyond the scope of further judicial
review. United States V. Curtiss-Wright Corp., (1936) 299
U. S. 304; United States V. Belmont, (1937) 301 U. S. 324;
said in Miller v. United States, (U.S S. 1870) 11 Wall. 268, 305,
"Of course the power to declare war involves the power to
prosecute it by all means and in any manner in which war
United States v. Pink, (U. S. 1942) 62 S. Ct. 552
In formulating and administering a policy of Foreign Funds
Control, the Government is exercising powers similar to those
may be legitimately prosecuted."
Freezing Control is but one phase of the present war effort;
it is but one weapon in the "total" war which is now being
waged on both economic and military fronts. Coupled with
exercised by other sovereigns. For example, Germany for
many years has stringently controlled its currency and fiscal
Freezing Control as a part of this nation's program of economic
affairs as they affected the nationals of other countries Since
the outbreak of the present war, Poland, Norway, the Nether-
warfare are to be found export control, the promulgation
of a Black List, censorship, seizure of enemy-owned property,
lands, Belgium, Luxembourg, and Czechoslovakia have promul-
and financial and lend-lease aid to allied and friendly nations
The United States also derives its power to freeze, control,
and regulate foreign assets in this country from the power
given it "to coin money and regulate the value thereof."
Under this power, the United States has been permitted to
invalidate the obligation to pay in gold or in the monetary
value of gold at the date of the obligation. Norman V. Baltimore & Ohio R. Co., (1935) 294 U. S. 240. The United
States has declared unlawful the possession of gold unless
licensed by the Secretary of the Treasury. Nortz V. United
States, (1935) 294 317. Furthermore, the exportation of
currency from the United States may be prohibited in the
gated decrees declaring invalid transactions consummated in
the occupied territory. These decrees are set forth in Appen-
dix I. These decrees are but a manifestation of the efforts of
@
these exiled Governments to protect their nationals from some
of the consequences of Nazi aggression Certainly it cannot be
argued that this Government as a sovereign does not likewise
have the power to protect itself. its citizens and those who have
put trust in it from the consequence of armed aggression. In
"The power of the Federal Government in the fiscal and monetary field
is unquestionably broad Know v. Lee. (U. 8 1870) 12 Wall 457: Juilliard
v. Greenman, (1884) 110 U. 8. 421: McCellorA v. Maryland, (U. 8. 1819)
218 U. S. 302 Thus, it is clear that the power of the United
4 Wheat 316: Oabora v. U. 8. Bank, (U. 8. 1824) 9 Whent. 738: Veazie Bank
v. Fenno, (U. 8 1869) 8 Wall 533: Norman v. B. 4 a R. Co., (1935) 294 U. 8
240; Norta v. United States, (1935) 294 U. 8 317: Unherece Finant-Korpore
Examples of the war powers exercised by Congress and sustained by the
Supreme Court may be found In Areer v. United States. (1918) 245 U. 8
tion A. G. v. Rosen, (C. c. A. 21 1006) 83 F. (2d) 225 cert. den., (1996)
298 U. 8. 679: British-American Todacco Co. v. Federal Reserve Bank of
N. Y., (C.C.A. 2d. 1989) 104 F. (24) 652 100 F. (2d) 985, cert des. (1939)
absence of a license. Cf. Ling Su Fan V. United States, (1910)
366 (draft law): Miller v. United States, (U. 8. 1870) 11 Wall 268 (conds
cation acts): Humilton v. Kentucky Distilleries . W Co. (1919) 251 U. 8
146 (prohibition law) : Northern Pacific Ry. Co. v. North Dakota. (1919)
250 U. 8 135 (Federal operation of railroads): Stochr v. Wallace, (1921)
255 U. 8 239 (The Trading with the enemy Act of 1917).
308 U. 8 600; Holyoke Power Co v. Paper Co. (1937) 300 U.S. 324 Guaranty
Trust Co. v. Henrood (1939) 307 U. 8. 247: Bethichen Steel Co. v. Zurich
Inc Co., (1939) 307 U. 8. 263: Emery Bird Theyer Dry Goods Co. . Williams,
(C. C. A. 8th, 1939) 107 F. (2d) 965 cert den. (1940) 300 U. 8 655
20
such an
the language of the Court in Hamilton V. Dillin, (U.S.1874) 21
Wall. 73, 97:
the power of the government to impose
in time of war as sees a
21
this Government deal comprehensively with foreign-owned
property in the United States. The Government's intention
to deal comprehensively with foreign-owned property in the
United States included the intention to regulate the transfer
of title to blocked assets in the United States It is for these
claims and exercises, and which belongs to the govern-
reasons that the Government believes that the lower courts in
this case have failed properly to construe the nature and pur-
ment of the United States as incident to the power to
poses of Executive Order No. 8389, as amended, and suggests
enemy conditions upon commercial it fit, is intercourse undoubted in the with It is
power
which every other government world
declare war and to carry it on to a successful termination
It belongs to the war powers of the government, just as much so as the power to levy military
contributions, or to perform any other belligerent act.
See also United States v. Curtiss-Wright Corporation, (1936)
299 304, where the Court stated (at p. 318):
It results that the investment of the federal government with the powers of external sovereignty did not
depend upon the affirmative grants of the Constitution
to this Court the imperative necessity of clarifying this
matter.
STATEMENT OF FACTS
The pertinent facts of this case have been fully and accurately set forth in the Briefs of the parties to this proceeding
and need not be repeated
ARGUMENT
POINT I
The powers to declare and wage war, to conclude peace,
TITLE TO THE FUNDS OF THE NATIONAL BANK OF RUMANIA
to make treaties, to maintain diplomatic relations with
other sovereignties, if they had never been mentioned
HELD IN BLOCKED ACCOUNTS IN THE STATE OF NEW YORK
CANNOT BE TRANSFERRED WITHOUT THE APPROVAL OF THE
in the Constitution, would have vested in the federal
government as necessary concomitants of nationality.
Neither the Constitution nor the laws passed in pur-
NO. 8389, AS AMENDED
suance of it have any force in foreign territory unless in
respect of our own citizens (see American Banana Co.
v. United Fruit Co., 213 U.S. 347, 356); and operations
of the nation in such territory must be governed by
treaties, international understandings and compacts,
and the principles of international law. As a member
of the family of nations, the right and power of the
United States in that field are equal to the right and
power of the other members of the international family.
Otherwise, the United States is not completely
sovereign.
The constitutional power to deal with foreign-owned prop-
erty in the United States clearly exists. Our interests as a
nation and our standing as an international power require that
SECRETARY OF THE TREASURY UNDER EXECUTIVE ORDER
Any transfer of title made within or without the United
States of property which has been blocked pursuant to the
requirements of Executive Order No. 8389. as amended, is void
both by reason of the provisions of the Order and because
such transfers are contrary to the policy of the United States,
unless authorized by the Secretary of the Treasury
The language of Executive Order No. 8389, as amended
promulgated by the President pursuant to the provisions of
section 5 (b) of the Trading with the enemy Act, as amended
clearly requires unlicensed transfers of blocked property to be
treated as void and without legal effect. The pertinent provisions of Executive Order No. 8389. as amended, are as
follows:
SECTION 1. All of the following transactions are prohibited, except as specifically authorized by the Secre-
22
23
245 App. Div. 357, 282 N. Y. Supp. 433; Barton v. Port Jackson
tary of the Treasury by means of regulations, rulings,
(ii)
instructions, licenses, or otherwise, if
Road Co., (N. Y. Sup. Ct. 1854) 17 Barb. 397; Miller v. Ammon, (1892) 145 U. S. 421; Central R. Co. of N. J. v. U. S.
such transactions involve property in which any
foreign country designated in this Order, or any na-
Pipe Line Co., A. 3d. 1924) F. (2d) 866; Restatement
tional thereof, has at any time on or since the effective
Contracts, (1932) sec. 580; 6 Williston, Contracts, (Rev. Ed.
date of this Order had any interest of any nature whatsoever, direct or indirect:
1938) sec. 1763.
A. All transfers of credit between any banking institutions within the United States; and all transfers
of credit between any banking institution within the
United States and any banking institution outside the
United States (including any principal, agent, home
office, branch, or correspondent outside the United
States, of a banking institution within the United
1940, 54 Stat. 179. which ratified Executive Order No. 8389
as amended, and amended section 5 (b) of the Trading with
The legislative history of the Joint Resolution of May 7.
the enemy Act, indicates unequivocally that Congress intended
that any transfer of blocked property within or without the
United States, unless licensed by the Secretary of the Treasury
should be invalid. In reporting the Joint Resolution to the
Senate, Senator Wagner, the Chairman of the Banking and
Currency Committee which sponsored the Joint Resolution,
States);
B. All payments by or to any banking institution
said:
within the United States:
The purpose of the joint resolution of course. is
very clear. We want to protect property within the
C. All transactions in foreign exchange by any person within the United States:
jurisdiction of the United States which is owned by these
D. The export or withdrawal from the United States,
or the earmarking of gold or silver coin or bullion or curreney by any person within the United States;
E. All transfers, withdrawals or exportations of, or
dealings in, any evidences of indebtedness or evidences
of ownership of property by any person within the
United States: and
F. Any transaction for the purpose or which has the
effect of evading or avoiding the foregoing prohibitions.
As a general rule it may be stated that any transaction entered into in violation of the express prohibition of a statute is
void. The purpose of the statute cannot be permitted to be
circumvented by the technical argument that although the
transaction may subject the actors to criminal penalties never-
theless its result is valid. As was said by Mr. Justice Holmes,
the purpose of a statute's prohibiting any act is "to stop the
whole business." Grogan v. Walker & Sons, (1922) 259 U.S
80, 89. This proposition of law is sustained by many authorities: See. c. g., Sturm v. Truby, (App. Div. 4th Dept., 1935)
[invaded] governments or their nationals ((1940) 86
Cong. Rec. 5006).
@
The following discussion between Senator Wagner and Sens-
tor Connally illustrates that this Resolution was intended to
prevent the transfer of title to blocked property in the United
States:
Mr. CONNALLY And is not this measure for the purpose of preventing change of title of the property here in
the United States by conquest, or by any other forcible
or violent means?
Mr. WAGNER That is exactly the purpose. ((1940)
86 Cong. Rec. 5007). [Italies supplied.)
Senator Wagner subsequently stated:
I will tell the Senator what is proposed to be done by
the joint resolution The act of 1917 gave the President
the power to restrict transactions in the war emergency
situation so that no transfers could be made by citizens
of another country owning property here without a
455946-42-
25
24
aids in construction See for example United States V. Dicker-
license from the Government. The purpose of that was
son, (1940) 554, 561-562 where the Court said:
to protect the property of innocent foreigners in this
country from being-to use a very frank word-looted
((1940) 86 Cong. Rec. 5008). [Italies supplied.]
The respondent contends that the words of I 402 are
plain and unambiguous and that other aids to construetion may not be utilized. It is sufficient answer to deny
that such words when used in an appropriation bill are
The following statement was made by Senator Carter Glass of
Virginia (a ranking member of the Senate Banking Committee)
during the course of the discussion of this Resolution:
words of art or have a settled meaning. See United
States v. Perry, 50 F. 743, 748 (C.C.A. 8th). The very
The plain intent of the joint resolution, as
legislative materials which respondent would exclude
the Senator knows perfectly well, is to prevent Germany
refute his assumption. It would be anomalous to close
from appropriating the property now in the United
our minds to persuasive evidence of intention on the
ground that reasonable men could not differ as to the
meaning of the words. Legislative materials may be
States belonging to the two nations she is now overwhelming
((1940) 86 Cong. Rec. 5176).
[Italies supplied.]
without probative value, or contradictory, or ambiguous,
it is true, and in such cases will not be permitted to control the customary meaning of words or overcome rules
That it was the purpose of freezing control to withhold from
the Axis the economie benefits of their aggression is indicated
by the following statement made by Senator Danaher of Connecticut, a Republican member of the Senate Banking Commit-
of syntax or construction found by experience to be workable; they can scarcely be deemed to be incompetent or
tee:
irrelevant. See Boston Sand & Gravel Co. V. United
States, supra, at 48. The meaning to be ascribed to an
Act of Congress can only be derived from a considered
on Thursday last, when Senate Joint Resolution 252 was submitted, it was explained that its gen-
eral as well as immediate purpose was to prevent any
possible gain to Germany by virtue of her invasion of
Norway and Denmark
(1940) 86 Cong. Rec.
5169).
It is obvious from the excerpts quoted above and from the
other pertinent excerpts from the legislative history of the
Joint Resolution of May 7. 1940. set forth in Appendix II, that
the purpose and intent of the Resolution was to prevent the
Axis Powers from appropriating property in the United States
belonging to nationals of the countries which they conquered.
In other words, its purpose was to keep from them, so far as
we were able, the fruits of conquest.
It is an established canon of statutory construction that a
statute is to be construed so as to accomplish the avowed pur-
poses of the legislation. Cf. Emery Bird Thayer Dry Goods v.
Williams, 1939) 107 F. (2d) 965. cert. den. (1940)
309 U. S. 655. Legislative materials are, of course, important
6
weighing of every relevant aid to construction [Italies
supplied.]
See also United States v. American Trucking Associations, Inc.,
(1940) 310 U. S. 534.
As applied to blocked assets, the language of Executive Order
No. 8389, as amended, is in all respects as broad and all in-
clusive as the language of section 5 (b) of the Trading with
the enemy Act prior to its amendment on December 18, 1941.
In fact, the operative language of the Order is the same language as the operative language of the Act and accordingly
must be interpreted as having the meaning intended by Con-
gress. Moreover, the relevant language of the Order was
expressly approved by Congress in the May 7, 1940, and
December 18, 1941, amendments of section 5 (b).
Only by interpreting Executive Order No. 8389, as amended,
to invalidate all transfers of blocked property which have not
26
27
been licensed by the Secretary of the Treasury, can full and
complete recognition be given to the legislative intent. It
seems apparent from the legislative history of the Joint Reso-
tion of May 7. 1940. that Congress expected the language of
section 5 (b) of the Trading with the enemy Act, as amended,
and Executive Order No. 8389, as amended, which it ratified,
to be construed in the light of their intended purpose and in
such a way as to make most effective the control which had
been created.
It has already been indicated in a general way that the language of Executive Order No. 8389. as amended, is such as to
make invalid any transfer of title unless licensed by the Secre-
tary of the Treasury. The argument as applied to the prohibition in the Order against "all payments by or to any banking institution within the United States" has already been
outlined in the brief of the defendant-appellant in this case.
or dealings
The Order also prohibits "all transfers
in, any evidences of indebtedness or evidences of ownership of
property by any person within the United States." An assignment of blocked property is clearly a "transfer" or a "dealing
in an evidence of ownership of property" within the meaning
of the language of the Executive Order.
In considering the term "evidence of ownership of property,"
Senator Wagner stated as follows:
I think everybody knows what "evidence of property" is. It is evidence one has that he owns certain
property. If a person has common stock or a deed, he
owns an interest in a certain enterprise or certain prop-
erty. That is what the "evidence of ownership means
(1940) 86 Cong. Rec. 5176).
Moreover, the phrase "evidences of indebtedness or evidences
of ownership of property" has generally been defined elsewhere
as any legal evidence sufficient to establish indebtedness or
transferable chose in action appear in all cases to be based upon
application of the rule of ejusdem generis to statutes using the
phrase "evidence of indebtedness" as the last term in an enumeration of various types of choses in action. See Littlefield
Clary, (1881) 66 Ga. 322: Rowell v. H. L. Harrell Realty Co.,
(1920) 25 Ga. App. 585, 103 S. E. 717; Bryan v. Menefee,
(1908) 21 Okla. 1. 95 Pac. 471, 475; Hiller V. Olmstead, (C.C.
A. 6th, 1931) 54 F. (2d) 5.
The phrase "dealing in" would seem to have the same con-
notation as "any transaction with respect to." Clearly any
assignment is evidence of ownership of property in the most
significant of all senses, since the assignment itself is the opera-
tive fact giving rise to ownership of property.
Moreover, the phrase "by any person within the United
States" clearly imposes no limitation upon the voidness of
transfers effected outside the United States. From (1940) Sen.
Rep. No. 1496, 76th Congress 3d Sess at 2. it appears that
the purpose of the Joint Resolution was to confer upon the
President the powers which President Wilson had under section
5 (b) of the Trading with the enemy Act as in effect during the
First World War. At that time the relevant portion of section
5 (b) stated as follows:
That the President may investigate regulate, or prohibit
transfers of evidences of indebtedness
or of the ownership of property between the United
States and any foreign country, whether enemy, ally of
enemy or otherwise, or between residents of one or more
foreign countries, by any person within the United States
[Italies supplied.]
It is evident that the words "any person within the United
States" are intended only to indicate that procedurally the
powers of the President would be directed against persons sub-
jeet to the jurisdiction of the United States That this is the
ownership of property. Cf. Commonwealth V. Imperial Woolen
Co., (1927) 290 Pa. 526. 139 Atl. 199; Bruner V. State, (1924)
settled interpretation of the phrase "by any person within the
United States," employed in section 5 (b) of the Trading with
26 Okla. Crim. 448. 224 Pac. 555; Hill Bloom, (1886) 41 N. J.
Eq. 276, 7 Atl. 438. 440. Cases deciding that an instrument
does not constitute an evidence of indebtedness unless it is a
Finanz-Korporation A. G. v. Rosen, (C. C. A. 2d. 1936) 83 F.
the enemy Act, as amended, appears from the case of Uebersee
(2d) 225, cert. den., (1936) 298 U. S. 679. In that case, the
28
29
9)
As stated by Mr. Justice Holmes in Bullen V. Wisconsin,
Circuit Court of Appeals for the Second Circuit held that the
(1916) 240 U. S. 625, 630-631:
presidential power to prohibit the "export" of gold "by any per-
son within the United States" justified the denial of an export
We do not speak of evasion, because, when
the law draws a line, a case is on one side of it or the
other, and if on the safe side is none the worse legally
that a party has availed himself to the full of what the
law permits. When an act is condemned as an evasion
what is meant is that it is on the wrong side of the line
license to Swiss corporation having no place of business in the
United States, inasmuch as such "foreign owner
would be obliged either to some here in order to obtain delivery
of his gold or to act through an agent 'within' the United
States." Accord: ritish-American Tobacco Co. V. Federal
Reserve Bank, (C.C.A. 1939) 104 F. (2d) 652, 105 F. (2d)
935, cert. den., (1939) 308 600. Similarly, any transfer of
indicated by the policy if not by the mere letter of the
law.
blocked property made outside the United States could be effec-
Executive Order No. 8389, as amended, has been interpreted
tual only when implemented by action of a person "within the
administratively as invalidating unlicensed transfers of
jurisdiction of the United States."
blocked property. For example, the following quotation from
In any event, the phrase "by any person within the United
States," is no limitation upon section 1F of the Order, which
was approved by Congress in ratifying Executive Order No.
an address made on March 25, 1941, by John W. Pehle, Assist-
ant to the Secretary of the Treasury, illustrates the administrative interpretation given to the Executive Order:
8389 on May 7, 1940. Clearly, a transfer of title abroad of
Through the medium of freezing control this country
blocked property is a transaction having the purpose or effect
serves notice to the world that persons who placed their
of evading the prohibitions of the Order in the United States.
assets in this country out of confidence in our free in-
stitutions and our integrity will not have that confi-
The plaintiff respondent appears to attach a great deal of significance to
the decision of Judge Woolsey in United States v. Campbell (8. D. N Y.
1933) 5 F. Supp. 156, construing the meaning of section 5 (b) of the Trading
with the enemy Act. as amended The tiff-respondent correctly points
out that Judge Woolsey stated in that opinion that the powers granted to
the President under Section 5 (b) "are powers to act in personal as to those
who possess the property. and not to act in rem on the property Itself." No.
where in the four pages of Its brief In which the plaintiff-respondent discusses
the Campbell case, does It Indicate that that case was overruled sub ellentio
by the declaion of the Federal District Court for the Southern District of New
York in British-American Tobacco Company v. Federal Reserve Bank of New
York (July 1938: unpublished) Judge Leibell In his conclusion of law No.
3 in that case stated. "The provisions of the Executive Order of April 5. 1933.
were valid: but even if said order was not within the power of the President.
the enactment of the Gold Reserve Act of 1934 has foreclosed any claim
against this defendant based upon the alleged Invalidity of said order or any
[Italics supplied.]
@
dence violated by our permitting such assets to be
wrested from their true owners. It serves notice to
aggressors that any attempt to secure control of such
assets by duress will fail. Duress-whatever success
it may have had elsewhere-receives no recognition
here.
It is, of course, well settled that the administrative construction placed upon a statute or Executive Order should
be given great if not controlling weight in its interpretation
Norwegian Nitrogen Products Co. V. United States, (1933)
288 U. S. 294, 315; Securities & Exchange Commission V. As-
recognised the validity of the Executive Order of April 5. 1983 (104 F. (2d)
sociated Gas & Electric Company (C. C. A. 2d., 1938) 99 F.
(2d) 795. In Skeen V. Lynch, (C.C.A. 10th, 1931) 48 F. (2d)
652 654). There is reproduced in Appendix, Part III, that portion of the
1044, 1047, the Court stated:
provision thereof." The U. 8. Circuit Court of Appeals in that case also
brief of the Federal Reserve Bank of New York filed in the Circuit Court of
Appeals in the British-American Tobacco case which relates to the Executive
Order of April 1983. That portion of the brief quoted also represented the
views of the Government on the Executive Order of April 5, 1933. relating to
gold.
of
The weight to be given to the construction
legislation by administrative officers who are charged
with its application, where its provisions are at all in
doubt or uncertain, is settled. Their construction of
30
the statute is said to be in the highest degree persuasive
9)
31
whether such property was in a blocked account at the
if not controlling
Accordingly, it must be concluded not only that the language of Executive Order No. 8389 voids all unauthorized
time of such transfer).
transfers but, incaddition, that the legislative history and the
administrative interpretations of the Executive Order have
since the date of its issuance give it such an interpretation
Furthermore, it is equally clear that both the war effort and
cense or other authorization issued by the Secretary of
same extent as it would be valid or enforceable but for
the public policy of the United States demand that all transfers
of blocked property be invalid and void unless licensed by the
Secretary of the Treasury.
enemy Act, as amended and Order, regulations, instruetions, and rulings issued thereunder.
POINT II
(3) Unless otherwise provided, an appropriate lithe Treasury before, during or after a transfer shall
validate such transfer or render it enforceable to the
the provisions of section 5 (b) of the Trading with the
(4) Any transfer affected by the Order and/or this
general ruling and involved in, or arising out of, any ac-
UNAUTHORIZED TRANSFERS OF PROPERTY IN BLOCKED
tion or proceeding in any Court within the United
ACCOUNTS ARE INVALID UNDER GENERAL RULING NO. 12"
States shall, so far as affected by the Order and/or this
general ruling, be valid and enforceable for the purpose
The provisions of General Ruling No. 12. which appear in
the Appendix, Part IV, effectively refute the contention that
there may be an assignment or transfer of blocked funds without authorization from the Secretary of the Treasury.
The operative provisions of General Ruling No. 12, so far as
relevant to this case provide as follows:
(1) Unless licensed or otherwise authorized by the
Secretary of the Treasury, (a) any transfer after the
effective date of the Order is null and void to the extent
that it is (or was) a transfer of any property in a blocked
account at the time of such transfer: and (b) no transfer
after the effective date of the Order shall be the basis
for the assertion or recognition of any right, remedy,
power, or privilege with respect to, or interest in, any
property while in a blocked account (irrespective of
Attention is directed to the fact that General Ruling No. 12 was just
of determining for the parties to the action or proceeding
the rights and liabilities therein litigated; provided,
however, that no attachment, judgment, decree, lien,
execution, garnishment, or other judicial process shall
confer or create a greater right, power, or privilege with
respect to, or interest in, any property in a blocked socount than the owner of such property could create or
confer by voluntary act prior to the issuance of an
appropriate license.
It will be noted that the General Ruling declares null and
void any transfer from a "blocked" account unless such transfer
is licensed or otherwise authorized by the Secretary of the
Treasury Similarly no transfer after the effective date of the
Order can be the basis for the assertion or recognition of any
right, remedy, power, or privilege with respect to, or interest
in, any property while in a blocked account (irrespective of
Issued on April 21. 1942 While this formal ruling comes during the
whether such property was in a blocked account at the time of
pendency of this case. It must be apparent that the Interests of the Government are such that It cannot postpone because of any particular case the
such transfer).
The General Ruling declares that the Secretary of the Treas-
public clarification of Issues which are important not only in the particular
case but more particularly in the whole administration of freening control
Moreover. since this litigation seems to have precipitated some uncertainty
concerning policies embodied in the ruling. which policies have always been
a fundamental part of freezing control, the Government must dispel that
uncertainty now. before such uncertainty becomes more widespread
ury may validate any transfer, by issuing an appropriate license
before or after a transfer has occurred. The various terms
employed in the Ruling are defined in paragraph (5) thereof.
The term "transfer," as defined, includes, inter alia, assign455946-42-3
32
1)
33
ments and attachments; it does not include certain transfers
9 to 11, inclusive, of this Order, and except as so modified
occurring by operation of law. However, it should be noted
that the General Ruling itself contains an authorization for the
bringing of attachment actions, with the express proviso that
no greater rights may be conferred thereby than the owner of
the account could voluntarily confer. The effect of the latter
provision will be considered in Point III of this brief. We will
be concerned in Point II with those provisions of the General
are hereby continued in full force and effect. The Seeretary of the Treasury is authorized and empowered to
prescribe from time to time regulations to carry out
the purposes of sections 9 to 11, inclusive, of this Order
as amended, and to provide in such regulations or by
rulings made pursuant thereto, the conditions under
which licenses may be granted by such agencies as the
Ruling which invalidate transfers which have not been author-
Secretary of the Treasury may designate. [Italies
ized by the Secretary of the Treasury.
supplied.]
A. General Ruling No. 12 is a statement of the policy which
This provision was ratified by the Congress by the Joint Reso-
has always existed under Executive Order No. 8389, as
lution of May 7. 1940, and continues to be in effect in section 7
amended
of Executive Order No. 8389, as amended.
Unquestionably the power to "investigate, regulate, and pro-
The discussion in the first part of this brief has shown that
one of the primary purposes of Executive Order No. 8389 and
hibit" includes the implied power to take such steps as may
be necessary or appropriate to make such prohibition effective.
In British-American Tobacco Corporation v. Federal Reserve
Bank of New York, (C. C. A. 2d, 1939) 104 F. (2d) 652, cert.
den., (1939) 308 U. S. 600, the Circuit Court of Appeals for the
Second Circuit recognized that the President's power, under
of the Joint Resolution of May 7. 1940. was to invalidate assign-
ments or other transfers of blocked funds. No further elaboration of that discussion is here required to show that such policy
and purpose is carried out in General Ruling No. 12 and that
the Ruling merely represents a formal statement of a continuing
policy dating back to the inception of freezing control.
B. General Ruling No. 12 is a valid exercise of power under
Executive Order No. 8389, as amended, and section 5 (b)
0
(
the statute here involved "to investigate, regulate, and prohibit" hoarding of gold, authorized the President to issue a
regulation which would prevent hoarding by requiring gold in
the possession of the hoarder to be delivered to a Federal
of the Trading with the enemy Act, as amended
Reserve Bank. It follows equally that the statutory power
Even though it might be contended arguendo that the pro-
here involved to prohibit transactions includes the power to
visions of the Executive Order do not, per se, invalidate assign-
declare void that which is prohibited. At the time of the
ments or transfers within or without the United States of
enactment of the First War Powers Act (Dee. 1941), the Senate
blocked property, there can be no doubt but that the Secretary
of the Treasury has the full power to rule that such assignments
Committee on the Judiciary stated that:
or transfers are void, except as licensed.
Since May 7, 1940. the Secretary of the Treasury has unques-
The existing foreign property control regulations
(popularly known as "freezing control") have permitted
the Government to prevent and regulate transactions
relating to foreign property which are prejudicial to the
tionably had power to void assignments and transfers, within
or without the United States, of blocked property. Section 12
interests of the United States. (1940) Sen. Rep. No.
of Executive Order No. 8389 of April 10, 1940, provided as
911, 77th Cong. 1st Sess., at 2). [Italies supplied.]
follows:
SECTION 12 Additional Regulations.-The Regulations of November 12, 1934, are hereby modified insofar
as they are inconsistent with the provisions of sections
Congressional construction of a previously enacted statute made in debates on supplemental legislation is admissible in construing such statute
United States v. Cooper Corporation, (1941) 312 U. 8 600
34
A reasonable, efficacious, and, indeed, indispensable way of
preventing and prohibiting transactions related to foreign prop-
erty which are prejudicial to the United States is to void all
assignments and transfers of such property which have not been
licensed by the Secretary of the Treasury.
In acting under Executive Order No. 8389, as amended, by
declaring void unlicensed assignments of blocked property pro-
hibited by the Order, the Treasury Department is merely following the common law principle that contracts in violation of
the policy of a prohibitive statute are void (see Gellhorn, Con-
0)
35
It is clear that any acquisition, transfer, etc., of blocked property may be nullified or made void by the President under the
authority of that section. Indeed, the only substantial difference between the General Ruling and the statute is that the
former does not cover as broad a field as the latter. That the
Congress intended that the exercise of the President's power
under that section would have retrospective effect cannot be
doubted The President is given authority not only to prevent
future transactions but to nullify and make void transactions
already entered into. If the words "nullify" and "void" are not
tracts and Public Policy, (1935) 35 Col. L Rev. 679, 691, 692,
given that meaning. they are without meaning at all in the
694), and that provisions of contracts and conveyances executed
context in which they are used. The President's power to deal
with future situations was adequately dealt with by the words
"investigate," "regulate," "direct and compel,' "prevent," "pro-
in a foreign jurisdiction which are contrary to the public policy
of the United States will not be given effect. Koninklijke
Lederfabriek Oisterwijk N. V. v. Chase National Bank, (Sup.
Ct.N.Y. 1941) 177 Misc. 186, N. Y. (2d) 518, off'd (App.
Div. 1st Dep't. 1941) 32N. Y.S. (2d) 109: Amstelbank N.
Guaranty Trust Co., (Sup. Ct. N. Y. 1941) 177 Misc. 548, 31
N.Y.S. (2d) 194 (denial of recognition to German decrees appointing administrators of Dutch property): Oscanyan v. Arms
Co., (1880) 103 U. S. 261; The Kensington, (1902) 183 U. S.
263. 269; ef. Alaska Packers Ass'n V. Industrial Accident Commission of California, (1935) 294 U. S. 532.
Even if the General Ruling were not authorized by Executive Order No. 8389. as amended, nevertheless, the power to
promulgate the General Ruling is to be found in section 5 (b)
of the Trading with the enemy Act, as amended by Title III
of the First War Powers Act, 1941. The pertinent provisions
of section 5 (b), as so amended, clearly establish the authority
for the issuance of the General Ruling.
Section 5 (b), as amended by the First War Powers Act.
provides that the President, through any agency that he may
designate, and under such rules and regulations as he may
nullify, void, prevent or prohibit,
prescribe, may are
transfer, withdrawal
any acquisition,
or dealing in, or exercising any right, power, or privilege with
respect to, or transactions involving, any property in which
any foreign country or a national thereof has any interest, by
any person, or with respect to any property, subject to the
jurisdiction of the United States;
hibit." To enable the President to deal with past transactions
the words "nullify" and "void" were used in the statute
Since the Secretary of the Treasury is the repository of this
aspect of the President's authority, there can be no question
but that the Secretary of the Treasury may declare null and
void certain transfers made with respect to blocked property in
the United States. This authority has been exercised in General
Ruling No. 12.
Transfers which are null and void under the terms of the
Executive Order and the General Ruling may, of course, be
completely validated if an appropriate license is obtained
In the language of paragraph (3) of the General Ruling:
Unless otherwise provided, an appropriate license or
other authorization issued by the Secretary of the
Treasury before, during or after a transfer shall validate such transfer or render it enforceable to the same
extent as it would be valid or enforceable but for the
provisions of section 5 (b) of the Trading with the
enemy Act, as amended, and Order, regulations, instructions and rulings issued thereunder.
Thus, there is ample room for administrative relief in meritorious cases or classes of cases where the transactions involved
will not be harmful or frustrate the nation's war effort.
It should be noted that the transfers which are voided by
General Ruling No. 12 concern only property in accounts
0)
36
37
which have actually been blocked. The transfers which are
within the scope of the General Ruling are, necessarily, of an
247, 258-259; Bethlehem Steel Co. v. Zurich Ins. Co., (1939)
307 U. S. 265, 287; Knoz v. Lee, (U. S. 1870) 12 Wall. 457.
executory nature; that is. payments of funds from such ac-
It is, moreover, well settled that the mere fact that legislation is retroactive in whole or in part does not invalidate it.
counts cannot have been made and the transfers cannot have
See Blount v. Windley, (1887) 95 U. S. 173, 180; Funkhouser
v. Preston Co., (1933) 290 U. 163; Carpenter v. Wabash Ry.
resulted in executed transactions unless a license has been
granted by the Treasury Department. Thus, the perfection
Co., (1940) 309 S. 23; Neild V. District of Columbia, (D.
App. 1940) 110 F. (2d) 246. In Blount v. Windley, supra,
of all such transfers has always been subject to the obtaining
of an appropriate license.
the Court said (at p. 180):
Accordingly, it cannot be argued that any person derives an
It may be said that this legislation is retroactive; and
absolute right to blocked property by reason of an unlicensed
as applied to the case before us, it is so. But there is
assignment. All that an assignee may hope to derive from
no constitutional inhibition against retrospective laws.
Though generally distrusted, they are often beneficial,
and sometimes necessary. Where they violate no provi-
such a transaction is to obtain delivery of the property from
tive in some aspects, nevertheless, its retroactivity is not such
as will render the Ruling invalid. The United States may
interfere with preexisting contract rights and such interference does not, of itself, where federal power is supreme, con-
stitute a violation of the rights secured by the Constitution
Norman v. Baltimore & Ohio R. Co., (1935) 294 U. S. 240,
at 305-311. There the Court stated, (at p. 307-308):
Contracts, however express, cannot fetter the
constitutional authority of the Congress. Contracts
may create rights of property, but when contracts deal
with a subject matter which lies within the control of
the Congress they have a congenital infirmity. Parties
cannot remove their transactions from the reach of
dominant constitutional power by making contracts
about them.
Accord: Holyoke Power Co. V. Paper Co., (1937) 300 U.S.
324, 341; Guaranty Trust Co. V. Henwood, (1939) 307 U.S.
sion of the Constitution of the United States, there exists
no power in this court to declare them void.
In any consideration of retroactivity, it should be pointed
out that General Ruling No. 12 has been drafted to render all
unlicensed transfers, whether made before its issuance or before
a
the blocked account if and when a license is issued by the
Treasury Department. It is submitted, therefore, that since
the transfers voided by the General Ruling are executory in
nature, it cannot be contended that the General Ruling is
retrospective in its effect: rather the General Ruling may be
said to frustrate the execution of unlicensed transfers which
cannot, in any event, be accomplished by payment from
blocked account without a license for such payment.
Even if it is assumed that General Ruling No. 12 is retroac-
the effective date of Executive Order No. 8389, either void or
unenforceable The policy behind this is understandable. If
0
the General Ruling had been merely prospective in operation,
it would be easy for Axis agents to validate transfers obtained
under duress by the subterfuge of dating them prior to the
effective date of the Executive Order or of the General Ruling.
It may be observed that in those cases where notice of the trans-
fer was given to the person maintaining the account in this
country and where the transfer had been accepted by that per-
son as valid, the restrictions of the General Ruling are inapplicable, since, under those circumstances, the notice is an ade-
quate precaution to guarantee that the transfer was made prior
to the effective date of Executive Order No. 8389, as amended.
Accordingly, the provisions of General Ruling No. 12 are
determinative of the issues in this case both as an interpretation of the Government's position under Executive Order No.
8389, as amended, and as an exercise of the powers conferred
upon the Government under section 5 (b) of the Trading with
the enemy Act, as amended by Title III of the First War Powers
Act, 1941.
39
38
POINT III
Of course, it should be observed that neither the United
States nor its officers are parties to this litigation. Accord-
THERE HAS BEEN A VALID ATTACHMENT IN THIS CASE AUTHOR.
IZED BY THE SECRETARY OF THE TREASURY PURSUANT TO
ingly, any disposition of this or like litigation should be treated
as without prejudice to the control of the United States and
EXECUTIVE ORDER NO. 8389, AS AMENDED
its officers over the blocked assets involved, and without prejudice to the administration of the foreign funds laws.
The following portion of the Brief is offered as a suggestion
that the courts of the State of New York do have jurisdiction
to litigate by attachment of blocked properties the rights and
Introductory
It is respectfully submitted that in this case Federal law
marks the outer boundaries within which the law of the State
of New York relating to attachments can operate. Our con-
liabilities of litigants, consistent with the administration by
cern is with those limits, and provided they are recognized, the
the Federal Government of the freezing control laws.
nature and operation of the state law within those limits is not
primarily of Federal interest.
A. The Secretary of the Treasury has authorized the attachment in this case, subject to the continued exercise of the
freezing control powers
It is the Government's position that by reason of paramount
Federal law, the usual incidents of an attachment cannot all be
given legal effect. While the Federal restriction may leave some
scope for the operation of state attachment laws, e. g., insofar
as the attachment provides a jurisdictional basis for judgment,
the attachment under state laws must fall short of creating any
From the very inception of freezing control litigants, prior
to commencing attachment actions against funds belonging
legal interest or relation that collides with the Federal regulation of foreign-owned property. The creation of any legal interest or relation by attachment beyond what could be created
0
by unlicensed voluntary assignment conflicts with the appli-
to blocked nationals, have requested the Secretary of the
Treasury to license a transfer to the sheriff by attachment
In all those cases, running into the hundreds, the Treasury
Department has taken a consistent position. The Treasury
Department has authorized the bringing of an attachment
action. However, the Treasury Department has not licensed
a transfer of the blocked funds to the sheriff prior to judgment.
cable Federal law. It is clear that any interest arising out of
the permitted attachments must be as thoroughly defeasible
In response to requests that a license be issued to transfer the
or voidable as one created by voluntary unlicensed assignment
of blocked property. Whether such an interest is one for which
attached funds prior to judgment, the Treasury Department
has, in practice, made a statement of the following nature:
Under Executive Order No 8389, as amended, and the
New York attachment law makes provision is a question with
which the Federal Government is not primarily concerned; but
Regulations issued thereunder, no attempt is made to
unless New York law permits the attachment of such an inter-
one to
limit the bringing of suits in the courts of the United
est, it is our contention that there is no other interest in the
blocked property which may lawfully be attached under exist-
of the States. However, should you
in which is a country Order,
ing freezing control orders and regulations.
States secure your a or letter, judgment of any against of the covered parties by referred the
The Federal concern is that the effect, if any of the attach-
a license would secured
ment be in complete subordination to the Federal control
over the assets involved If that paramount control be unimpaired, any useful effect of the attachment which the Court
before could be made from accounts banking
or
a national payment
thereof,
in have
the toname
in be ofsuch
institutions
within the
United
States
country or national.
finds permissible under New York statutes, whether as a basis
From the terms of the statement, it may be clearly seen that
for jurisdiction or otherwise, is outside the scope of the limitations of the Federal foreign funds legislation.
the Secretary of the Treasury authorized the bringing of an
attachment action. However, the Treasury Department did
0)
40
41
not authorize the creation thereby of any interest with respect
to blocked assets which the blocked national could not have
applied for by the plaintiff after the commencement of the
voluntarily conferred without Treasury license. That is, the
attachment suit because it was an application to permit funds
The Treasury Department had previously denied & license
Treasury Department has preserved for future consideration
the question whether a license would be given to perfect the
to be paid to the sheriff out of the blocked accounts which
had been attached. The refusal of the Treasury Department
plaintiff's claims with respect to the blocked assets.
to grant such a license was, of course, in accordance with its
Moreover, it may be seen that the attachment action in the
policy in all cases of this nature. The Treasury Department
reserved for future consideration the question whether pay-
instant case was fully authorized by the Treasury Department.
On June 14, 1941, the following letter was sent by Mr. D. W.
ment should be made from the defendant's blocked account
By the letter of June 14, however, the Treasury Department
clearly dissipated any erroneous impression that might have
been created by the denial of the application for a license to
make payment to the sheriff, and clearly authorized the bring.
ing of the attachment action as such. so long as no payments
were made from the blocked accounts and so long as no in-
Bell, Acting Secretary of the Treasury:
TREASURY DEPARTMENT
Washington, June 14, 1941.
Re: Commission for Polish Relief, Ltd. v. Banca Nationale A Romaniei.
DEAR SIR: Reference is made to your conference on
terests were created or transferred in conflict with Section
5 (b) of the Trading with the enemy Act. as amended, and
June 6, 1941, with representatives of this Department
relative to the above case and Executive Order No. 8389,
the Order, regulations, rulings, etc., issued thereunder.
Section 4 of General Ruling No. 12 provides as follows:
amended.
This will confirm the advice furnished to you at such
conference that in administering Executive Order No.
8389, as amended, and the regulations issued thereunder,
the Treasury Department does not attempt to limit the
(4) Any transfer affected by the Order and/or
this general ruling and involved in, or arising out of,
0
any action or proceeding in any Court within the
United States shall, so far as affected by the Order
and/or this general ruling. be valid and enforceable
for the purpose of determining for the parties to the
action or proceeding the rights and liabilities therein
litigated; provided, however, that no attachment,
bringing of suits in the courts of the United States, or of
any of the states. However, in no event may any payment be made from any blocked account affected by
such Executive Order except pursuant to a license authorizing such action.
Very truly yours,
judgment, decree, lien, execution, garnishment, or other
D. W. BELL,
judicial process shall confer or create a greater right,
Acting Secretary of the Treasury.
power, or privilege with respect to. or interest in, any
Mr. JANUSS ZOLTOWSKI,
property in a blocked account than the owner of such
Financial Counsellor to the Polish Embassy,
property could create or confer by voluntary act prior
14 Wall Street, New York, N. Y.
to the issuance of an appropriate license.
It will be seen that the above-quoted provisions of section 4
'The plaintiff-respondent unfortunately did not bring this letter to the
attention of the lower courts and failed to make the argument that the
Treasury Department had authorized attachment Accordingly, the lower
courts believed that they were required either to declare the attachment
Invalid for lack of a license from the Treasury Department or to declare
that the attachment was valid because the freeting control orders did not
of General Ruling No. 12 are but a formal statement of the
position which the Treasury Department has consistently
taken in attachment actions. The Treasury Department has
had no desire to limit the bringing of suits in the courts of the
limit the assignability of title to blocked property.
)
"
43
42
time to time considerable right itself in such an account for
United States or of the several states provided that no greater
interest was created by virtue of any attachment proceeding or
outstanding letters of credit, loans, and various charges, and
other persons might have rights against the account. Such a
judgment obtained pursuant thereto than the owner of such
blocked account could have voluntarily conferred pursuant to
type of property may in fact be composed of a bundle of
rights of different persons, some of whom may, as a matter
of law, have greater though different rights than the person
designated by law as the "owner." The courts and legislatures have frequently been called upon to determine how
the freezing control. In this way the Treasury Department was
in a position to postpone until after judgment was obtained the
determination to grant or deny a license to transfer the blocked
assets or any interest therein. The adjudicated facts and the
much of the full right of ownership is required to be vested in
judgment rendered in the case may well be relevant to the
and exercisable by the defendant that he may be said, as a
matter of law, to have or not to have an attachable interest
Treasury's consideration of the freezing control application.
B. So far as foreign funds control is concerned there can be an
in a certain piece of property in which he retains certain
attributes of ownership. The defendant-appellant has re-
attachable interest under New York law with respect to the
blocked assets of the Bank of Rumania under the Treasury
viewed at least some of the criteria set up and used from time
authorization
to time by the courts to determine what is an attachable
interest.
Implicit in the authorization of the Secretary of the Treasury
and expressly set forth in paragraph 4 of General Ruling No. 12
Tests as to an attachable interest considered
is the provision that "any transfer affected by the Order
and/or
The defendant-appellant cites the case of Fredrick v. Chicago
[the] general ruling and involved in
in any court
any action
Bearing Metal Co., (1st Dept., 1927). 221 App. Div. 588, 224
shall, so far as af-
N. Y. Supp. 629. for the proposition stated on page 20 "the
property or interest to be reached on execution must be the
same as that reached by attachment." At the time the case
feeted by the Order and/or this General Ruling be valid and
enforceable for the purpose of determining
the rights
and liabilities therein litigated; provided. however, that no at-
was decided, the language of Section 912 of the Civil Practice
tachment, judgment or other judicial process shall
confer a greater right with respect to
Act seemed to support such a test or criterion, for the language
then directed the sheriff to execute the warrant "by levying
any property in a blocked account than the owner of such
property could create or confer by voluntary act prior to the
upon so much of the personal and real property of the defendant, within his county, not exempt from levy and sale by virtue
issuance of an appropriate license." The Government believes
of an execution However, neither at that time
that an attachment under these circumstances is valid under
nor now is a chose in action subject to levy and sale by virtue of
the laws of New York.
execution. Castriotis V. Guaranty Trust Co., (1920) 229 Y.
74, 127 N. E. 900. This anomaly long existed in the laws of
New York but was not followed for many years since debts
What is an attachable interest?
In our complex economic system, all possible attributes of
ownership in respect to any piece of property are frequently
not concentrated at one and the same time in one individual.
have long since been recognized as an attachable interest. This language was finally corrected and it will be
noted is omitted from that portion of Section 912 which is
quoted by defendant-appellant on page 21 of its brief. In
Particularly is this true when the property in question, as
here, consisted of a large debt owing by a bank within this
country to another bank, incorporated and doing business in
a foreign country. The depository bank might have from
referring to the attachability of a bank account, on page 20.
the defendant-appellant also observes, "It is fundamental that
a levy of attachment, to be valid, must give the court some
)
45
44
dominion or control over the res levied upon." A debt which
has not been attached is not sufficient to give a court in rem
jurisdiction. Hanna V. Stedman, (1921) 230 N. Y. 326, 130
N. 566. So a bank account is neither a res nor is it property
subject to levy or sale by virtue of execution but it is attachable.
1929) 134 Misc. 275, Bea Y Urquijo's
Estate, (Surr. Ct., 1925) 125 Misc. 357, 211 N. Y. Supp. 535;
Cohalan V. Parker, (1st Dept., 1910) 138 App. Div. 849, 123
Supp. 343.
The defendant-appellant then uses another criterion-that
have sought an answer to the question "What is an attachable
interest?" in the light of all the facts.
of assignability-and labels the defendant's interest unassignable and therefore unattachable (defendant-appellant's brief,
page 30) also page 13, "The defendant's contention is that the
Executive Order has immobilized this title against assignment,
whether voluntary or involuntary"; also page 14 to the same
Another criterion set up by the defendant-appellant is that
the property must be definitely payable. The defendant-appellant's account in the Chase Bank was a demand deposit
account, the obligation of the Chase Bank to the Rumanian
forced to take an even narrower view, for his argument must
inherently be that assignability must be totally untrammeled,
and the requirement that defendant-appellant secure a Treas-
bank remained unchanged-to pay upon due demand. But
ury license to make an assignment so deprives the defendant of
This apparent confusion of language and ideas serves to empha-
size the fact that neither the courts nor legislatures have laid
down any hard and fast rule or definition but rather that they
effect. In making this argument the defendant-appellant is
the meaning of due demand has been changed by the Executive
property, that assignability pursuant to a license is somehow
Order to mean demand when accompanied by a Treasury
license. That the money should be payable on demand, or
property be immediately transferable on demand, for there to
be a valid attachment, is not required either under the statute
not assignability.
The defendant-appellant can and has adduced cases wherein
or the cases. Subdivision 5 of Section 916 of the Civil Practice
Act provides that "a right or interest, present or future, to or in
any of the property or estate of a deceased person, which may
belong to the defendant and which could be legally assigned by
him' is attachable and by subdivision 6. the same is true of
such interest which could be legally assigned, released, or
alienated in any other property or fund held or controlled by
any fiduciary by whatever name described It will be observed
that in Section 916, to avoid the use of any one criterion, the
statute provides, as indicated, more than one. This is an obvious indication that any right which the defendant-appellant
had. valuable to it, could be attached, whether or not such
property or interest was presently payable. Thus, it has been
held that expectant or future contingent interests in realty or
personalty are subject to the claims of creditors and are attach-
able. National Park Bank V. Billings, (1st Dept., 1911) 144
App. Div. 536. 129 N. Y. Supp. 846, aff'd without opinion,
(1911) 203 N. Y. 556, 96 N. E. 1122; Farlee v. Farlee, (Sup. Ct.
the courts have based their decisions upon the ability of a
defendant to assign. This, it is admitted, is a criterion which
has been frequently used. It seems clear, however, that it is
not a universal one and other courts in seeking to define what
property rights may be attached have decided that an attachable interest existed even where the property could be assigned
only with a license from someone or perhaps not assigned at all.
Higgins V. McConnell, (1892) 1301 Y. 482, 29 N. E 978; In re
Trent's Estate, (Surr. Ct.; 1936) 159 Misc. 822, 288 N. Y. Supp.
928.
In Higgins V. McConnell, the issue was presented whether
the interest of a conditional vendee in a contract for the purchase of land was attachable. The vendee had made partial
payments, was entitled to possession and to obtain full title
upon completion of the payments The provisions of the contract forbade the vendee from assigning the contract without
the consent of the vendor.
The court held that the interest of the vendee was an "inter-
est in real property" and was attachable and that his right to
possession and his right to acquire title were valuable rights
capable of being attached. The court further ruled that, al-
46
47
though his interest was not assignable without the consent of
the vendors, it was, nevertheless, attachable The court said:
There are valid reasons why an attachment
should reach the interest of a holder of a contract for
the purchase of land. He may be a nonresident, and
never come within the state so that personal service
can be made upon him. In such case the personal
judgment which must precede a judgment creditors'
action cannot be obtained. But, if his interest can be
seized upon attachment, jurisdiction of that interest
can be obtained, and it can be disposed of to satisfy
the domestic creditor. Code Civil Proc. I 707. The
reasons which withdraw the interest in question from
the binding force of a judgment and execution are
technical, and the relaxation of the rule in the case of
attachments seems to be in the interest of substantial
justice. The letter of section 645 permits this attachment. Other provisions show the policy of the law
to be to extend the scope of this remedy, It can scarce-
ly be doubted that when the framers of section 645
employed the words, "any interest in real property," to
indicate what was attachable, this peculiar interest
which had engaged the attention of the courts and legislature was considered; and, if we concede that it was
not, it would still remain to be held that, if it had
been considered, the language of the section would have
been different
This provision [the prohibition against assignment
without the consent of the vendors] concedes the alienable quality of the interest, and provides by the personal
covenant of the vendee against it.
Rights more nebulous than those involved in this case have
been before the courts in many cases and there has been no
difficulty in saying that the attachment could in fact be levied
whatever may be the ultimate result. Thus, in Hamilton V.
Drogo, (1926) 241 N. Y. 404, 150 N. E. 496, 497, the court had
before it a question involving principles analogous to those
of attachment The court said:
There is no requirement that the income be
due at the time the order is made and the execution
served. It is enough either that it will become due in
the future from the trustee to the cestui que trust. or
that it may become so due. If ever the day of payment
arrives, the lien of the execution attaches. The intention of the Legislature was to extend the scope and effect
of an execution as it had theretofore existed.
In analogous cases, the court has found or stated that an
interest is attachable even though the value of that interest
depended upon subsequent events not then foreseeable; for
example, see: Warner V. Fourth National Bank, (1889) 115
N. Y. 251, 22 N. E. 172 (pledgor's interest in pledged property
is attachable); Clements V. Doblin, (1st Dept., 1924) 209 App.
Div. 208, 204 N. Y. Supp. 413, off'd without opinion, (1924)
239 N. Y. 526. 147 N. E. 180 (equity of redemption held attach-
able): Dunlop V. Patterson Fire Ins. Co., (1878) 74 N. Y. 145
(holding property in custodia legis attachable).
Faced with these various and not wholly consistent tests in
answer to the question of what is an attachable interest, the
defendant-appellant has coined a new phrase. This he calls
dispositive dominion, and contends that unless the Court can
secure dispositive dominion over something, there is nothing
to attach It is difficult, however, to see in what manner a
court has a dispositive dominion over contingent, conditional
or future interests which, as pointed out in the cases above
cited, may, by extraneous circumstances, become less valuable
or disappear altogether; may ultimately inure to the benefit of some person other than the defendant The court has
dispositive dominion over what the defendant could do, or
might be able to do, depending upon unforeseen future events
Dispositive dominion is thus but another touchstone; another
definition or test for what is attachable." These tests are all
"The defendant-appellar derives the concept of "dispositive dominion"
from certain language In the case of Pennoyer v. Net. (1877) 96 8. T14
It is true that in the Pennoyer case the court does Indicate that effective
seizure of property by a court is test of acquisition of in FOR jurisdiction
49
48
useful and can each be applied in its proper sphere to situations
like, or similar to, those which have been previously before
the courts
Courts, however, are ever meeting new and peculiar types
of property rights and no one test which has been used in the
past can be relied upon as an "open sesame *to the problems
of the future. Mere words should not be permitted to confuse the concept, for in all of these concepts courts and litigants have sought an answer as to whether or not a particular
interest presently before the court is attachable in the light
of all the facts and public policy. The concept of attachable
interests has steadily widened since the attachment law be-
came incorporated in the Code of New York State. This
is illustrated by many additions permitting types of property to be attached which were not previously attachable
and by decisions of the courts which have continually liberalized the meaning of the provisions already written. In
the recent revisions of 1940 and 1941. this tendency is obvi-
ous. In Section 910 of the Civil Practice Act. the sheriff is
now directed not only to keep safely so much of the property,
as was formerly the case, but also to keep any "interest
It should be noted however, that the facts of the Pennoyer case bear no rela-
tionship to those in the present case. In the Pennoyer case the necessity of
seizure of property as a condition precedent to the acquisition of in rem
Jurisdiction was emphasized because under the facts of that case the defend-
ant would not have had that notice required by the due process clause as a
condition precedent to adjudication of his rights in the res unless the minimal procedural requirement of seizure of the res had been respected Cf. id.
at T26 In the present case no such reason exists for holding that there is
no in rem juriediction Precisely the same notice was given that would have
been given had the property of the National Bank of Rumania not been
blocked
The defendant-appellant's theory that there can be no acquisition of
jurisdiction in FOR unless the court has power to dispose of the res would
also appear unsound under the New York statutes. New York Civil Practice
Act. Section 473 provides:
The supreme court shall have power in any action or proceeding to declare
rights and other legal relations on request for such declaration whether or
not further relief is or could be claimed, and such declaration shall have
the force of . final judgment . - (Italies supplied.]
C1. Old Colony Trust Co. v. Commissioner of Internal Recease (1929)
279 8. 716,725 Dunlop v. Patterson Fire Inc. Co. (1878) N. 145.
therein within his county, subject to attachment." Within
the same section a paragraph was added to indicate that an
attachment could be against particular property, or "property
in which the defendant has an interest subject to attachment.'
The privilege was granted in Section 915-a to levy an attach-
ment upon the interest of the defendant in a partnership,
which heretofore probably was not an attachable interest.
The partnership rights in specific partnership property are
not attachable but subject to a charging order. (N. Y. Partnership Law, sees 51, subd. 2 (c); 54).
The plaintiff is thus forced to analogize the relationship of
the Rumanian bank and its bank accounts to a spendthrift
trust, one of the few property interests still protected by the
courts against attachment on the ground that the person entitled to the benefit never had and never will have any "property" and that the trust was set up in order that that situation
could exist-in other words-public policy.
Reviewing the history, the decided cases, and the obvious
tendencies in both, one may sum up the attitude in regard to
what is an attachable interest in property as it has been expressed in statutes, by the legislatures, and decisions by the
courts, that any property interest is attachable unless there
appear to be overwhelming and controlling reasons why it
should not be so. No such overwhelming or controlling reaThere are of course Interests other than Interests under spendthrift
trusts which have been held nonattachable because of the dominant public
policy In favor of permitting such property to reach the intended beneficiaries
thereof. Thus It has frequently been held that alimony is not attachable
until it reaches the wife. the person for whose support It was intended
And the salaries of public officers may not be attachable until paid to them
when any other result might impair their ability to exercise their public
functions
In many of the Instances in which attempted attachment of a contingent
interest was held to confer no jurisdiction the court was moved by the
consideration that execution upon contingent Interest is execution upon
an Interest of such speculative value that there must inevitably be hardship
to the person whose property is attached No such consideration can how
ever, be of Influence in the present case In the first place the warrant of
attachment reaches a - certain to the credit of the defendant. In the
second place there can be no disposition of the defendant's Interest, pursuant to the warrant of attachment except with the license of the Secretary
of the Treasury which It must be presumed will adequately safeguard the
defendant's interests
51
50
sons here appear. The National Bank of Rumania has prop-
erty within the jurisdiction. It has not been divested of all
its property rights. In fact, its interests today in the blocked
assets are perhaps by far the most valuable of all the interests
in such assets. This property has not been confiscated by the
Government. The National Bank of Rumania is prohibited
from exercising powers and privileges which prior to the Execu-
tive Order it could exercise. With a Treasury license it can
exercise every right it formerly exercised To meet this point
the defendant-appellant is forced to contend that the right
of the owner of the blocked assets to make an application for a
license is not a legal right but is nothing more than a privilege,
and (defendant-appellant's brief, page 19) eastigates as a
"meaningless aggregation of words" plaintiff-respondent's con-
tention that it could attach the defendant-appellant's interest
in the deposit accounts subject to the Executive Order. This
characterization however. does not overcome the fact that the
right of the owner of a blocked account to apply for a license
to make payment out of such an account is a most substantial
one. and that lawful payment can be made if a license is granted
It must not be overlooked that even in peacetime, many
articles when properly used add to the welfare of mankind,
but improperly used are to its disadvantage The police power
has long extended a prohibition against transfer of such artieles except by a person licensed to hold and to transfer them,
and then only to a person licensed to receive them. All narcoties come in such a classification, and so do liquor licenses.
Yet a liquor license which cannot be transferred except under
most stringent conditions supervised by the government, appears to be an attachable interest in this State. See McNeeley
V. Welz, (1901) 166 N. Y. 124. 128. 59 N. E. 697, 698.
Precise nature of attachable interest
As already indicated, the Government's position is that an
attachment action against a national's blocked account cannot
give the attaching creditor any more than the national has
the power voluntarily to give the attaching creditor.
On the premise, then, that an attachment action cannot be
used as a means of attacking freezing control, but only as a
means of obtaining that which freezing control would have
allowed to be obtained by voluntary act without an attach-
ment action, it becomes important, in order to ascertain
whether there is an attachable interest with respect to the
blocked assets involved, clearly to visualize the nature of a
national's interest in a blocked account.
Prior to freezing control, the national having "title" to the
account blocked had certain rights, powers, and privileges with
respect to such account. This included the power to draw on
such account to his own order, the power to transfer any or all
of his interest in such account to A. the power to transfer any
or all of his interest to B, etc. After blocking the national can
exercise such rights, powers, and privileges only if authorized
by the Secretary of the Treasury. He can draw on such account to his own order, can transfer any or all of his interest
in such account to A, etc., only if authorized by the Secretary.
Thus in a real sense, the freezing control order has cut into
the national's normal attributes of ownership of his account
Whereas prior to freezing control the national might have by
payment order or otherwise assigned any or all of his interest
in the account to A. after freezing control any such purported
assignment is ineffective, unless authorized by the Secretary
of the Treasury. After freezing control any such purported
assignment results merely in the following-A gets a contingent
interest in the account contingent upon a condition precedent,
namely, the authorization of the Secretary of the Treasury.
An assignment by a national to A of the national's interest
in a blocked account does not divest the national of any interest in the account and does not vest any interest in the
account in A, unless and until such assignment is authorized
by the Treasury Department. This is because the freezing
control order has deprived the national of the power (without
Treasury authorization) to vest any interest in the account in
A (or anyone else) or to divest himself of any interest in the
account.
53
52
An attachment action against a national's blocked account
is an attempt to obtain an unlicensed assignment of the na-
tional's interest in the blocked account-nothing more and
nothing less.
In this sense, the attachment action might be regarded as a
levy upon the nationals contingent power (i. e. contingent
upon Treasury authorization) to transfer all his interest in the
blocked account to A; any judgment in the attachment action
resulting in giving A a contingent interest in the account equiv-
alent to what he would have obtained by voluntary assignment.
The value of such an interest is of course problematical.
Whether it is worthless or worth full value will depend upon
whether the transfer sought is in accordance with the Government's policies in administering freezing control.
Under this analysis of what the nature of any attachment
action against a blocked account must be, in the light of the
purposes of freezing control, it is suggested that an attachment
action of this nature might well be allowed in the New York
courts.
The fact that the contingent interest involved in an attachment action such as that in question is null and void unless
authorized by the Secretary of the Treasury should not be regarded as preventing such contingent interest from being the
is in accordance with the policies of the Federal Government,
is not too unreal a condition
The Federal Government is anxious to keep to a minimum
interference with the normal rights of litigants and the jurisdiction of courts to hear and determine cases, consistent with
the most effective prosecution by the Government of total
war. Applied to the instant case, this means that the Federal
Government must have its hands unfettered in using freezing
control, recognizing that it is desirable that private litigants
be able to attach some interest with respect to blocked assets
in order to clarify their rights and liabilities
This has been suggested in this Brief. The Government be-
lieves that the interests of private litigants in state courts
can be served without interference with the freezing control
program. However, the interest of the Government is paramount to the rights of private litigants in this field and should
this Court be of the view that under the New York law there
cannot be a valid attachment of the limited interests herein
suggested, then the Government must reluctantly take the
position that in the absence of further authorization under
the freezing control, there can be no attachable interest under
New York law with respect to blocked assets."
CONCLUSION
basis for an attachment action. An interest which is null and
void unless authorized by the Secretary is not the same as an
interest which is null and void unconditionally. Many of the
interests which have already been the subject of attachment
in the New York courts were also, from a realistic point of
view, conditionally null and void. The fundamental issue, as
indicated by the decisions in the New York courts, is whether
the interest involved may, upon the happening of a certain
condition ripen into a vested interest. If this is possible, and
the condition is not too unreal, the courts will allow the attach-
ment action. It is believed that the condition that the Secretary of the Treasury may authorize a transfer, if such transfer
The Government respectfully requests that in adjudicating
the rights of the parties in this case, the Court take occasion
"See United States Y. Belmont, (1937) 301 U 8 324. 330, 331: United
States v. Pink. (1942) 02 Sap. Ct. 552. 562 Hines F. Devidowitz (1941)
312 U. 8. 552: People v. Compagnie Ocerrair Translantique, (1882) 107 U.
59.63: Reid v. Colorado, (1902) 187 8. 137. 146-147: Raston v. love. (1903)
188 U. 8. 220 231. 238: Oregon Washington R d Nor Co. v. Washington
(1926) 270 U. 8 87. 00-101: Eric R Co v. New York (1914) 233 U. 6,671:
Idams Express Co. v. Crosinger (1913) 226 U. 8. 491, 505-506; Northern
Pacific Ry. Co v. Washington, (1012) 222 U. 8. 370: New York Central R
Co. v. Winfield, (1917) 244 U. 8 147: Second Employers' Liability Cases,
(1912) 223 U. 8 1. 55: Lindgres v. United States (1930) 281 U 8. 38.
45-46: New York Central d Hudson River R v. Hedros County (1913)
227 U. 8 248 263-264 Southern Ry Co. v. Railroad Commission (1915)
236 U. 8. 439: International Shoe Co v. Pinkus, (1929) 278 U. 8. 261, 265-266
54
to eliminate the doubts created by the opinions of the lower
courts on principles essential to the effective administration
of the foreign funds control,
Respectfully submitted.
APRIL 22. 1942
APPENDIX
PART I
FRANCIS M. SHEA
Assistant Attorney General.
FOREIGN DECREES
Poland
MATHIAS F. CORREA,
Polish decree of 30th November 1939
United States Attorney.
SIDNEY J. KAPLAN,
(English translation)
Special Assistant to the Attorney General,
Decree of the President of the Republic of November 30th, 1939,
EDWARD H. FOLEY, JR,
relative to the invalidity of legal acts of the occupying au-
General Counsel, Treasury Department.
thorities (published in No. 102 of the Journal of Laws.
BERNARD BERNSTEIN
Angers, December 2nd, 1939)
Assistant General Counsel, Treasury Department.
On the strength of Article 79, paragraph 2 of the Law of the
Constitution I hereby decree as follows:
ANSEL F. LUXFORD,
JOSIAH E. DuBois, JR.,
ARTICLE 1.
Attorneys, Treasury Department,
all legal acts and measures of the au-
thorities occupying the territory of the Polish State are null
Of Counsel
r
and void in accordance with the provisions of the Fourth Hague
Conference of 1907 relative to the laws and customs of land
warfare if they exceed the bounds of the temporary administra-
tion of the occupied territory.
Article 2.
(1) all legal acts and measures of the
authorities occupying the territory of the Polish State concerning transferences, burdenings, reductions or limitations under
any other name whatsoever of the right or ownership of: the
State Exchequer, communal unions, State or communal enter-
prises, public institutions and physical or juridical persons
for the benefit of foreign States, foreign nationals or foreign
juridical persons, and also the establishment in real property
of nationals of foreign States under any legal title whatsoever
are null and void.
(2) null and void are also legal acts and measures of the
authorities occupying the territory of the Polish State mentioned in paragraph 1 if they result from the application of a
policy of national extermination
(55)
56
57
(1) null and void are all legal acts of
ARTICLE 3.
the authorities occupying the territory of the Polish State concerning sequestrations, enforced administration or the introduction under any other name of changes in the method of
declared null.
administering and making use of the property of persons,
physical or juridical under Polish law, and also all legal acts
will helps the occupying authorities to carry out the acts indicated in articles 1 to 5 will be liable to imprisonment up to ten
of those authorities concerning changes in the composition of
the authorities of companies and of the staff engaged in administering the interests of physical and juridical persons.
(2) if such acts have been performed on the free proposal
of Polish citizens and in their interest, the conferring on such
acts of legal force will take place through their recognition by
the Polish authorities
null and void are all legal acts and
measures carried out by authorities occupying the territory of
the Polish State relative to the rights and property of Polish
ARTICLE 4.
citizens and Polish juridical persons who are outside the fron-
tivated restrictions of the injured parties. Every injured
party has the right to appeal to the court to have such acts
ARTICLE 8.
any Polish citizen who of his own free
years and to a fine or to the confiscation of all his property.
ARTICLE 9.
The provisions of this decree apply to
legal acts and measures already done or taken by the occupying
authorities and also to all legal acts and measures of those au-
thorities conflicting with the provisions of this decree which
may be done or taken after the coming into force of this decree.
ARTICLE 10.
This decree becomes binding from
the day on which it is published
ARTICLE 11.
The execution of the decree is entrusted to the President of the Council of Ministers and to the
appropriate Ministers
tiers of Poland.
WLADYSLAW RACZKIEWICZ
null and void are all legal titles acquired by any physical or juridical person whatsoever to any
SIKORSKI,
ARTICLE 5.
President of the Republic.
property or rights whatsoever on the strength of measures and
legal acts of the occupying authorities which have been declared null by this decree. Equally null and void are all legal
titles acquired by any physical or juridical person whatsoever
to any property or rights whatsoever by means of agreements
or profiting by enforced regulations so far as they affect objects
and rights indicated in the preceding articles
ARTICLE 6.
Acts of normal administration of the
property of another person, ordered by the occupying authori-
ties in war time and within the limits of absolute necessity
and normal exploitation, conducted on the principles of honesty and good faith, will require recognition by the Polish
authorities after examination of the method in which the
administration of the property of the other person has been
carried out.
ARTICLE 7.
null and void are all legal acts per-
formed by Polish citizens under the direct or indirect pressure
of the occupying authorities These acts may be reported to
the Polish authorities for registration together with the mo-
President of the Council of Ministers.
(By a supplementary decree of March 6th, 1940, published in
No. 6, of the Journal of Laws, Angers, March 23rd, 1940, the
words "and Minister of Justice" were added between the words
"President of the Council of Ministers" and General Sikorski's
name.)
Netherlands
NEDERLANDSCHE STAATSCOURANT
Thursday, 30th May
Official Publication of the Kingdom of the Netherlands Royal
Decree
We, WILHELMINA, by the Grace of God. Queen of the Netherlands, Princess of Orange-Nassau, etc., etc., etc.
At the recommendation of Our Ministers of Justice, for the
Colonies and for Foreign Affairs dated the 24th May 1940 No.
Whereas it is expedient to take measures to prevent that
property of/or debts, obligations and other choses in action
59
58
due to persons residing in the Kingdom of the Netherlands,
especially to persons in the Realm in Europe, shall be used in
a way which is incompatible with the interests of the State and
of the inhabitants and in particular of those who reside in the
territory occupied by the enemy, and whereas it is therefore
necessary to commit these properties and debts, obligations or
other choses in action to the charge of the State of the Netherlands,
Have approved and decreed:
ARTICLE 1
(1) Rights arising out of debts, obligations and other choses
in action against persons, partnerships, companies, firms, in-
stitutions and corporations belonging to natural and legal
persons residing or domiciled in the Kingdom of the Netherlands, including all claims for the delivery up of any gold
deposited, in so far as they are in any way capable of being
in the State of the Netherlands as provided in article 1. where
it is proved in the manner as prescribed by article 3 that on the
15th day of May, 1940, they did belong to:
(a) Netherlands' subjects or persons residing in the Nether-
lands, or subjects of Powers which are not at war with the
Kingdom,
(b) Partnerships, companies, firms, institutions and corporations established in the territory of Powers which are not at
war with the Kingdom,
provided always that the aforesaid persons, partnerships, com-
panies, firms, institutions, or corporations were before or at
that date resident and domiciled or established outside the territory of the Kingdom now occupied by the enemy.
(2) Persons who after the 9th day of May 1940 and before
the 15th day of May 1940 have left the territory of the Realm
in Europe otherwise than for enemy territory, and partnerships
mortgaged or offered by way of security, transferred or disposed
companies, firms, institutions and corporations which in ac-
of or dealt with in any other way outside the Realm in Europe,
cordance with the provisions of the Act of the 26th of April 1940
No. 200 have transferred their seat, registered office or principal
place of business, as the case may be, to other territory within
the Kingdom, shall for the application of this article be deemed
to have been resident and domiciled or established on the 15th
are hereby vested in the State of the Netherlands as represented by the Royal Netherlands' Government, temporarily
residing and exercising their functions in London, subject
always to the provisions of article 5.
(2) The provisions of the first paragraph of this article shall
also be applicable to all claims resulting from confirmed credits
and from participation in the capital of/or loans to partner-
day of May 1940 outside the territory of the Kingdom occupied
by the enemy, provided, that in the case of partnerships, companies, firms, institutions or corporations to which article 2 sub.
ships, companies or firms (whether or not such claims are regis-
(b) applies the transfer of seat, registered office, or principal
tered or expressed in stock or share certificates, bonds or other
documents) in so far as these claims belong to natural or legal
place of business as the case may be. has been previously approved by our Minister of Justice, or afterwards been sanctioned
persons in the Kingdom of the Netherlands and in so far as
by the Governor-General of the Netherlands-Indies, the Gov-
these claims are capable of being mortgaged or offered by way
of security, transferred or disposed of or dealt with in any other
ernor of Surinam or the Governor of Curacao
ARTICLE 3
way outside the Realm in Europe.
(3) The rights of ownership accruing to the State of the
Netherlands by virtue of the provisions of the first and second
paragraph of this article shall be exercised only for the purpose
of safeguarding the rights of the former owners.
ARTICLE 2
(1) The Governor-General of the Netherlands Indies, the
Governor of Surinam and the Governor of Curacao are empow-
ered in so far as it concerns the territory under their general
administration to make regulations with regards to the manner
in which proof as intended in the last foregoing article shall
be given.
(1) Rights arising out of debts, obligations and other choses
in action as described in article 1 shall be exempt from vesting
60
61
Belgium
(2) Insofar as it is not provided for by the first paragraph of
this article, such regulations shall be made by Our Minister
Belgian decrees of January 10, 1941
of Justice.
ARTICLE 4
Decree-law
This Decree also applies to the Netherlands Indies, Suring
In the name of the Belgian People,
and Curacao.
We, the Ministers in Council,
In view of articles 26 and 28 of the Constitution
ARTICLE 5
In view of the decree of May 28, 1940.
(1) Three months after the present emergency circumstances
In view of the impossibility of convening the Legislative
shall, in Our judgment, have ceased to exist restitution shall
be made to the former owners of the rights arising out of the
Chambers,
In review of the decree-law of May 31, 1917. have decreed
debts, obligations and other choses in action referred to in
and do decree:
Article 1.
ART. 1. All acts of disposition or pledging of real or personal
property belonging to the State and whose seizure has been
(2) Notwithstanding the provision of paragraph (1) of this
article, the Minister of Justice and the Minister for the Colonies
made or ordered by the enemy after May 10, 1940, are null
and void in so far as they do not relate to normal adminis-
are hereby empowered jointly to effect the restitution to the
former owners before the date set out in the first paragraph
tration.
of this article, where it is proved to their satisfaction, that
such rights shall not be exercised directly or indirectly for the
ART. 2. All acts of disposition or pledging of real or personal
property made, on the part of the enemy after May 10, 1940,
benefit of the enemy.
the object of confiscations, seizures, forced sales or of all other
ARTICLE 6
0
This Decree will come into force on the day of its publication in "het Staatsblad."
This Decree which shall be published in "het Staatsblad"
shall be carried into effect by Our Minister of Justice, for the
Colonies and for Foreign Affairs, in so far as each of them is
concerned
WILHELMINA
London, May 24, 1940.
e
measures harming private property, are likewise null and void.
The property of communes, provinces and public establishments shall be considered as private property.
ART. 3. The reclamation of property mentioned in articles
1 and 2 is open against every holder, unless the proprietor is
found, in any case, to have been reimbursed for the price which
it cost him, the holder retaining only his recourse against the
person selling him the property.
No demand for reclamation shall be introduced after the
The Minister of Justice,
expiration of three years after the conclusion of peace.
ART. 4. All persons who after the date of publication of this
law, shall voluntarily lend their assistance to the execution of
irregular measures taken by the enemy in regard to said prop-
P.S. GERBRANDY.
The Minister for the Colonies,
CH. WELTER
The Minister for Foreign Affairs,
erty, or sell, acquire, give or accept in pledge any property which
E. N. VAN KLEFFENS
has been the object of these measures, shall be punished by
Promulgated May 24, 1940.
The Minister of Justice,
P. S. GERBRANDY.
imprisonment for from one to five years and a fine of from 5,000
to 200,000 francs or of only one of these penalties.
62
63
The courts and tribunals shall also have the power to interdiet those convicted from the exercise of electoral rights and
the rights enumerated in article 31 of the Penal Code, for a
have voluntarily lent their assistance to the accomplishment of
illegal acts:
Whereas after May 10, 1940 the enemy occupying the territory of the Grand Duchy has issued a number of laws which
period of from five to ten years.
All the provisions of the first book of the Penal Code are
demonstrate the necessity of safeguarding the rights of the
State, of Communes, and of public and private establishments
applicable to these infractions
These infractions, even though committed in a foreign coun-
against the acts of dispossession and spoliation by the enemy;
try, shall be prosecuted in Belgium, even in the absence of
the defendant Any Belgian correctional tribunal can, in this
Upon the report of and after the deliberation of the Government in Council;
We have and do decree:
case, take charge of the prosecution.
This decree-law shall become effective from the date of its
ART. 1. All acts of disposition or pledging of property, real
or intangible, belonging to the State, to the Communes and to
publication in the Monitor.
We promulgate this decree-law and order that it be im-
the public establishments and whose seizure has been effected
or ordered by the enemy after May 10. 1940, are null and void,
pressed with the seal of the State and published by the Monitor
London, January 10. 1940.
in so far as they do not relate to normal administration
The Members of the Council of Ministers,
ART. 2. All acts of disposition or pledging of real or intangible
H. PIERLOT
property made by the enemy after May 10. 1940 with the pur-
P. H. SPAAK
pose of confiscations seizures, forced sales or all other measures
GUTT
causing harm to private property are likewise null and void.
ART. 3. The reclamation of property mentioned in articles 1
Luxembourg
and 2 is open against every holder, unless the proprietor is found
in any case to have been reimbursed for the price which it cost
him, the holder retaining only his recourse against the one who
Luxembourg decree of April 22. 1941
Grand Ducal decree of April 22, 1941 relative to the measures
of dispossession taken by the enemy
sold him the property.
No demand for reclamation shall be introduced after the ex-
In view of the laws of September 28, 1938 and of August 29,
1939 concerning the extension of the executive power;
In view of article 27 of the law of January 16. 1866 regarding
ART. 4. All persons who, after the date of publication of this
decree, shall lend their assistance to the execution of irregular
the organization of the Council of State, and considering the
measures taken by the enemy in regard to said property, or sell,
matter of urgency;
acquire, give or accept in pledge any property which has been
piration of three years after the conclusion of peace.
Whereas the Grand Dueal decree of April 22, 1941 proclaims
the object of these measures, shall be punished by an imprison-
ment of from three months to three years and a fine of from
the nullity of all measures taken by the invader:
2,000 to 20,000 franes or only one of these penalties.
Whereas in the body of this general measure it is necessary
These infractions shall be prosecuted before the tribunals of
nevertheless to specify certain consequences of the nullity
and sanction. to safeguard the interests of persons dispossessed
the Grand Duchy, regardless of where they may have been com-
or injured by the acts which are made illegal by virtue of the
mitted and even though the culprit is not found within the
aforesaid decree and to set forth penalties against persons who
Grand Duchy.
1
64
65
ART. 5. Our Minister of State. President of the Government,
is and will be considered invalid and the Government reserve
and our Minister of Justice are charged with the execution of
to themselves the right to direct the manner and more detailed
this decree which becomes effective on the day of publication in
conditions under which rectification will be carried out and
the Memorial.
legal claims settled Furthermore, the Government reserve to
themselves the right to take criminal proceedings against all
Montreal, April 22, 1941.
CHARLOTTE
who have acted against the spirit of this declaration
The Minister of State,
President of the Government,
Norway
PIERRE DUPONG
Translation of Article 11 of Provisional decree of April 22nd 1940 concern.
The Minister of Foreign Affairs,
ing the monetary system, the Bank of Norway etc. during the present
war situation
JOSEPH BECH.
The Minister of Labor,
ARTICLE 11.
PIERRE KRIER.
For the time being the activities of the Commercial Banks
and the Savings Banks shall be under the supervision of the
Bank of Norway All dealings in foreign exchange are subject
The Minister of Justice,
VICTOR BODSON.
to control by the Bank of Norway, The Bank of Norway will
Czechoslovakia
on behalf of the State, take possession of all foreign assets be-
Declaration of Czechoslovak Government. broadcast on December 19th, 1941
longing to Banks or private parties in the territories occupied
by the Germans provided the said assets have not prior. to
The Government of the Czechoslovak Republic declare that
they have not recognised, do not, and will never. recognise
April 9th 1940, been pledged as security for and are required in
any transference or disposal of property, either movable or
immovable, which, up to the 17th September, 1938, was the
order to cover obligations already entered into, running office
legal property of the Czechoslovak State. lands, districts, communes and all public institutions on the territory of the Czechoslovak Republic, in as far as such transference or disposal has
owners of the said assets shall be entitled to compensation in
Norwegian currency within three months after the re-capture
expenses, crew allotments, insurance premiums, etc. The
of the territories in question. Foreign assets belonging to Banks
or individuals in the free territories shall, without delay, be
been carried out since that date under pressure of enemy occupation or in exceptional political circumstances. In this respect it is irrelevant whether such transference or disposal is
ostensibly voluntary, or whether this has taken place or will
registered at the Bank of Norway and can be redeemed in Norwegian currency by the Bank of Norway on behalf of the State,
take place for the benefit of the members of the Czechoslovak
as security are covered
provided that the obligations for which the said assets serve
State or members of foreign States. Furthermore, any transference or disposal of private property carried out since 27th
PART II
September 1938, under the aforementioned circumstances, has
not been, and will not be recognised This declaration likewise
particularly concerns any Czechoslovak securities, the com-
A. Pertinent portions of legislative history of joint resolution
pulsory or ostensibly voluntary transfer of which has been carried out since the 27th September, 1938, in the aforementioned
Mr. WAGNER The Senate will remember that on April 10,
1940, the President issued an Executive order and the Secre-
of May 7. 1940
circumstances. All transference or disposal herein referred to
tary of the Treasury issued regulations, under authority of
0
0
66
section 5 (b) of the Trading With the Enemy Act of 1917. as
amended by the act of March 9. 1933. The Executive order
imposed certain restrictions upon any transactions in foreign
exchange: and upon the transfer of credits from one bank to
67
sent to this country at a time when the countries concerned
were in fact at peace, if not now at peace?
Mr. WAGNER Yes.
Mr. CONNALLY And is not this measure for the purpose of
another within the United States or from a bank of the
preventing change of title of the property here in the United
United States to a foreign bank, and any transactions in evi-
States by conquest, or by any other forcible or violent means!
Mr. WAGNER That is exactly the purpose
Mr. CONNALLY For instance, in Norway today the invaders
the newspapers say, are in charge of the city of Oslo, the capital, having taken over the local government, but it is entirely
conceivable that under those circumstances banking institu-
dences of indebtedness. or evidences of the ownership of
property, in which a national of the Governments of Norway
or Denmark or the Governments of Norway or Denmark
themselves, had any interest by any person within the United
States, or subject to the jurisdiction thereof.
tions, or any individual would be forced, through fear or
The purpose of the joint resolution of course, is very clear.
otherwise, to issue an order transferring securities in the United
We want to protect property within the jurisdiction of the
States which those in control might wish to have transferred
United States which is owned by these governments or their
Is not that true?
nationals
Mr. WAGNER Yes.
Mr. WAGNER
In 1933 Congress amended the act so as to make it applicable during peacetime emergencies, and to authorize the Presi-
of securities or otherwise, and the present Government of
Denmark, under pressure from the invaders made a call on
dent to deal also with the hoarding of gold and the exporta-
tion of gold. In redrafting the act. the words "evidences of
indebtedness" were omitted. It was clearly an inadvertence.
because it was asserted here on the Senate floor, as well as in
Suppose for instance. some of the
citizens of Denmark had very large fortunes here, in the form
such citizens and said, "We would like to have these securities."
s
Suppose such a citizen refused. The Senator and I know ex-
actly what would happen. He would be absolutely helpless
the House, that the amendment was not intended to weaken
in any way the power of the President to deal with these matters, but rather to extend those powers to include the hoard-
Under the proposed law the United States Government would
inquire into the reason for the transfer, the circumstances
under which it was asked If we found that it was the result
ing of gold and the exportation of gold.
of duress, we would refuse to grant a license. It is a protective
measure ((1940) 86 Cong. Ree. 5007). I Italies supplied.
Mr. DANAHER
Mr. President, the pending joint
Mr. BARKLEY. It should also be stated-and I am sure the
Senator omitted it by oversight-that the joint resolution is
intended not only to protect the nationals of Norway and
Denmark who have interests in stocks, securities, and other
property in the United States but it is also intended to protect
American citizens in the event they have claims of any sort
growing out of these transactions, and therefore we preserve
the property not only for its owners but for the benefit of
Americans who may have claims (1940) 86 Cong. Rec. 5006.
Mr. CONNALLY Is it not true that the purpose of the proposed legislation is to respect the fact that this property was
resolution goes further than anything that has ever been
granted by way of power to the President in time of peace in
any such fashion as is here contemplated Not only does the
joint resolution inveigh against transactions involving and
transfers of credit between banks in this country, but, under
the power of regulation which some purport to find in the
existing law, we see that on the 10th of April 1940 the President, by proclamation, actually added section 9 to the regula-
tions issued in 1934, which appear in the committee report,
,
68
69
forbidding such transactions if they involved property in
United States? Because there is an international belief and
which Norway or Denmark had an interest ((1940) 86 Cong
an international faith in the integrity of the United States
Rec. 5169).
Government, that it will protect and safeguard and secure the
Mr. BARKLEY. By coercion, or duress, or some other in-
property even of aliens, that is legally and lawfully in the
United States. I do not want to surrender anything of that
kind. I do not want the United States to lose anything in
fluence, that stock might be delivered up to representatives of
the invading government; and the result would be that by a
sort of coercion or duress the million dollars if the stock
the estimation of the world in regard to our willingness to treat
aliens and foreigners in a fair and just and equitable manner.
brought that amount on the market, could be taken charge of
by the government that undertook to get it in that way.
Mr. CONNALLY Exactly.
I think the enactment of this legislation will go a long way
toward maintaining and sustaining that estimation of our
Mr. BARKLEY What is the difference? All of the stock
attitude, and that its failure will subtract from that estimation
which the world has ((1940) 86 Cong. Ree. 5178). [Italies
represents property in the United States, anyway.
Mr. CONNALLY Certainly, I thoroughly agree with the
supplied.]
Mr. WILEY.
Senator, and thank him for his observation
For instance the stock certificate might apparently be prop-
I wish to refer to one other matter.
By the passage of the joint resolution, which is virtually a
reenactment of existing law, we give notice to the ruthless
erly endorsed It would not show the ecercion It would
marauders and brigands of the world that, so far as America
not show the bayonet sticking in the ribs of the man who
owned it when he signed the transfer. I am talking about
the citizen of Denmark Norway, or any other foreign country The transfer. the endorsement in blank of the certificate
would not reveal the bayonet sticking up right under the fifth
rib of the owner of the certificate It would not reveal the
threat of the jail out yonder. There would be nothing about
it that would enable one to hear the clanking of the owner's
is concerned, we will protect the private property of the citizens
of those nations which are ruthlessly invaded. and that we stand
for international law, according to which the private property
of a citizen in an invaded country may not be confiscated
Under the policy pursued by the invaders, private property
now has no sacredness. It becomes the property of the invaders. ((1940) 86 Cong. Rec. 5180). [Italies supplied.]
chains if he did not sign the transfer.
B. Report of the Senate Committee on the Judiciary, on Title
III of S. 2129 (the First War Powers Act, 1941), Sen. Rep.
No. 911, 77th Cong., 1st Sess., 2-3
But if we permit foreigners to invest their money here, we
owe them some duty. We owe a duty to foreign countries;
and when the nationals of those countries invest in our securities, the owe them at least the duty, if 100 can exercise it.
Title III of the bill has three parts:
(1) Section 301 amends and extends section 5 (b) of the
of seeing that they are not defrauded, that they are not robbed,
Trading with the Enemy Act which originally became law on
October 6. 1917, during the last World War. The existing sys-
that they are not "highjacked" out of their property. We
should do all we can to preserve the sanctity of investments
if we permit foreigners to make them here at all. So it seems
to me this proposed legislation is in the interest of good will
tem of foreign property control is based on section 5 (b), as
last amended on May 7, 1940. This amendment will conform
this statute to the exigencies of this war.
and security.
The existing foreign property control regulations (popularly
known as "freezing control") have permitted the Government
to prevent and regulate transactions relating to foreign property which are prejudicial to the interests of the United States.
How many foreigners would send their money over here if
they knew in advance that we would be indifferent to its
sanctity? Why are they now sending gold and securities to the
,
70
71
While existing law permits the Government to prevent transac-
demanded it during the last World War, to cause to be censored
tions, it is now necessary for the Government to be able to
under such rules and regulations as he might from time to
affirmatively compel the use and application of foreign property
time establish, communications by mail, cable, radio, or any
in a manner consistent with the interests of the United States.
Section 301 would remedy this situation It gives the Presi-
other means of transmission between the United States and any
foreign country. Section 303 of the present bill deals only with
dent flexible powers, operating through such agency as he might
choose, to deal comprehensively with the many problems that
surround alien property or its ownership or control in the man-
domestão censorship.
ner most effective in each particular case. In this respect, the
bill avoids the rigidity and inflexibility which characterized the
may censor all forms of foreign communication direct or in-
censorship of international communications and not with
Section 303 will make it absolutely clear that the President
direct. It will further permit him as a matter of adminis
Alien Property Custodian law enacted during the last war. The
tration, to set up an organization and definite rules under
necessity for flexibility in legislation on this subject is accen-
which the control is to be carried out.
tuated by the vastness of the alien-property problem confrontPART III
ing the Government today. At the peak of his activity, the
Alien Property Custodian of the last war administered property
Excerpt from brief of Federal Reserve Bank of New York
valued at something over $500,000,000. Today there is over
in British-American Tobacco Company, Limited, v. Federal
Reserve Bank of New York, United States Court of Appeals
$7,000,000,000 worth of property already subject to the existing
control
for the Second Circuit, pp. 11-15.
This provision of the bill to a considerable extent follows
the pattern of existing law and is a logical extension of the
(B) The Executive Order of April 5. 1933.
By the Executive Order of April 5. 1933, the President de-
present foreign property control system, which has been oper-
clared that the "national emergency still continues to exist;"
prohibited "the hoarding of gold coin, gold bullion, and gold
ating very satisfactorily for almost 2 years The extension
could be put into immediate operation with a minimum amount
of trouble or dislocation of legitimate activities.
certificates within the continental United States by individuals
and corporations;" and prescribed "regulations for carry-
It is essential that the Government have this power, a power
exercised by every other wartime government and exercised
ing out the purposes of this order."
The regulations contained in the April 5 Order defined
by this Government during the last war.
(2) Section 302 of the bill, with appropriate limitations,
confirms action already taken under the Trading With the
Enemy Act. It is similar in principle to provisions in previous legislation on this subject (sec. 2 of the joint resolution
"hoarding" as "the withdrawal and withholding of gold coin,
gold bullion and gold certificates from the recognized and
customary channels of trade" (See. 1); required "all persons
to deliver to a Federal Reserve bank or a branch
or agency thereof or to any member bank of the Federal
Reserve System all gold coin, gold bullion and gold certificates now owned by them" and not exempted by the Order
(Sec. 2): and provided that the recipient "bank will pay
therefor an equivalent amount of any other form of coin or
of May 7, 1940, Public Res. No. 69, 76th Cong.; and sec. 1
of the act of March 9. 1933, 48 Stat. 1).
(3) Section 303 is identical with the provisions of section
3 (d) of the Trading With the Enemy Act passed in 1917.
except that it also contains provisions identical with section 16.
the penalty provision of such act.
currency" (See. 4). Gold which might continue to be held was
Section 3 (d) of the Trading With the Enemy Act authorized
President Wilson, whenever he deemed that the public safety
Defendant's Exhibit f. p. 14
8
72
73
gold "required for legitimate and customary use in industry,
In arguing that the only power to dislodge gold from hoarding
is found in Section 3 of the March 9 Act, plaintiff must argue
profession or art:" gold coin and gold certificates held in small
amounts; gold held under earmark for foreign governments
and central banks: and, gold "licensed for other proper transactions (not involving hoarding)" or held "pending action on
that there was no such power during the War days: for Section
3 is a new statute added in 1933. while Section 2 is merely
an amendment of Section 5 (b) of the Trading with the
Enemy Act, extending its provisions (40 Stat. 966) to any
applications for export licenses" (Sec. 2).
The Trial Court held that the Executive Order of April 5.
period of national emergency declared by the President The
President's power to prohibit hoarding therefore, comes from
the War-time statute. There is no reason to believe that Con-
1933, was valid (Conclusion 3. fol. 2054).
Plaintiff contends (1) that the President lacked authority
to require surrender of gold bullion by anyone, and (2) that
gress meant the President to temporize with the evil or
intended to grant him limited or ineffectual authority to
the Statute under which the President purported to issue said
Order did not and could not authorize him or anyone else to
require delivery of gold bullion to a Federal Reserve bank or
member bank (Br. 10-11). These arguments are based upon
stop it.
a misconception of the purpose of both Statute and Order, and
of the nature of the offense of hoarding and the power of Con-
When the Trading with the Enemy Act said "prohibit", it
meant what it said-it meant in Mr. Justice Holmes's words.
spoken of another prohibition, "to stop the whole business
Grogan v. Walker & Sons, 259 U. 8. 80, 89. The fact that
gress to put an end to it.
years later the Congress gave another official for a different
(a) The President Was Authorized by Section 2 of the Act of
purpose the power to require surrender of gold to the Treasury,
does not to any degree lessen the President's power in national
March 9 to Require the Surrender of Hoarded Gold
emergency or war to prohibit the hoarder from continuing his
Section 2 of the March 9 Act, it will be recalled, authorized
the President to "prohibit hoarding
silver coin or bullion
of
gold
unlawful and harmful act. As Judge Leibell in the present
case correctly said, Section 3 "does not negative the grant of
or
Plaintiff argues that this does
power to the President under Section 2 of the Act.
It might well be that under certain circumstances either sec-
not authorize the President to require the transfer of gold
out of hoarding because that, plaintiff argues, is practically
a requisition and Section 3 of the March 9 Act authorizes
tion might be resorted to." (fols 2082. 2083.)
the Secretary of the Treasury and not the President to requisi-
President's Order of April 5th, 1933 was a com-
tion gold. In support of this position, plaintiff cites United
prehensive application of the power conferred upon him by
States v. Campbell, supra, 5 F. Supp. 156, 178, in which Judge
the Act of March 9th, 1933." (fol. 2084.)
The Trial Court it is submitted. correctly held that "The
Woolsey, before this Court or the Supreme Court had passed
(b) The President Wa Authorized by Section 2 of the Act of
March 9 to Require Delivery of Gold Bullion to a Federal
upon any of the Statutes or Orders relating to gold, did so
construe Sections 2 and 3.*
Reserve Bank or Member Bank
Plaintiff's argument carries with it the denial that the President had power, even during the World War. to stop hoarding.
The regulations prescribed in the Order of April 5 defined
hoarding, provided for licensing the holding or acquisition of
Referring to the April 5 Order. Judge Woolsey said, by way of dietum.
gold for purposes which would not constitute hoarding, and
directed the disposition of unlicensed gold to depositaries
"This was clear requisition order made under section 2 of the Act of
March 9, 1933, and invalid because It was not made by the official to whom
Congress had delegated requisitioning power." 5 F. Supp. 156, 178
where its holding would not constitute hoarding.
s
74
75
This was not a requisition of gold by the Treasury of the
in the Constitution Congress might, if it chose, have ordered
United States authorized under Section 3 of the March 9 Act.
the seizure and forfeiture of any gold-no matter how lawful
The regulations under the Order of April 5 went no farther
than to provide that the holding of gold after May 1. 1933,
its original acquisition-held after and in violation of the Presi-
dent's anti-hoarding Order. Compare Samuels V. McCurdy,
otherwise than in accordance with the Order should be a crime.
267 U. S. 188; Section 4 of the Gold Reserve Act of 1934, 31
U.S.C., See. 443; Ueberaee Finanz-Korporation etc. V. Rosen,
and to direct that gold. the continued holding of which would
constitute a crime. should be disposed of to persons whose
supra, 83F. (2d) 225, 229-230 (C.C.A.2). Instead the President offered all holders of gold a lawful opportunity to sell it
holding would not constitute hoarding. Certainly the power
to prohibit hoarding included the power not only to direct
that the hoarders cease and desist from their hoarding but to
without loss before the penalties of the Order would attach
PART IV
designate a method of doing so. The method designated was
to return the gold where it came from and where it would
General Ruling No. 12 under Executive Order No. 8389, as
have remained as a reserve for currency and credit had it not
amended, Sections 3 (a) and 5 (b) of the Trading with the
enemy Act, as amended by the First War Powers Act, 1941.
been for the hoarding. It would have been futile for the
Order to have allowed the transfer of gold to persons whose
acquisition and holding would have itself constituted hoard-
relating to foreign funds control
(1) Unless licensed or otherwise authorized by the Secretary
ing. It would have been administratively impracticable for
the Government to have left to the discretion of the hoarders
the determination of transferees whose acquisition and holding would not constitute hoarding. Accordingly, it was not
of the Treasury, (a) any transfer after the effective date of the
Order is null and void to the extent that it is (or was) a transfer
of any property in a blocked account at the time of such trans-
fer: and (b) no transfer after the effective date of the Order
only reasonable but necessary that the gold which had gone into
shall be the basis for the assertion or recognition of any right,
remedy, power, or privilege with respect to, or interest in. any
property while in a blocked account (irrespective of whether
hoarding should find its way back to the banks which needed
it for a useful purpose. The April 5 Order so provided in
directing its return to the Federal Reserve banks
such property was in a blocked account at the time of such
But this, plaintiff says, neither Congress nor the President
could constitutionally do because, it alleges, the Federal Re-
transfer).
serve banks were private parties and a legal requisition requires
condemnation by the Government But this was no condemna-
of the Treasury. no transfer before the effective date of the
(2) Unless licensed or otherwise authorized by the Secretary
Order shall be the basis for the assertion or recognition of any
right, remedy, power, or privilege with respect to, or interest in,
tion or requisition. It was an alternative offered to what would
otherwise be a crime. In order to stop hoarding the hoarder
must divest himself of his hoard. The Order designated the
any property while in a blocked account unless the person with
whom such blocked account is held or maintained had written
one class of recipients (whether or not they are private parties
notice of the transfer or by any written evidence had recognized
is immaterial) which because of the nature of their functions
such transfer prior to the effective date of the Order.
might receive and hold the gold without hoarding it. What
plaintiff objects to is inherent in the very conception of prohibiting hoarding. The practice cannot stop without a transfer.
(3) Unless otherwise provided, an appropriate license or
other authorization issued by the Secretary of the Treasury
Plantiff would have the Court assume that neither Congress nor
the President can put an end to hoarding without governmental
condemnation proceedings There is no ground for such a belief
or enforceable but for the provisions of section 5 (b) of the
before, during, or after a transfer shall validate such transfer
or render it enforceable to the same extent as it would be valid
8
76
77
Trading with the enemy Act, as amended, and Order, regula-
term "transfer" shall not be deemed to include transfers
by operation of law.
tions, instructions, and rulings issued thereunder.
(4) Any transfer affected by the Order and/or this general
(b) the term "property" includes gold, silver, bullion,
ruling and involved in, or arising out of, any action or proceed-
currency, coin, credit, securities (as that term is defined
ing in any Court within the United States shall, so far as affeeted by the Order and/or this general ruling be valid and
enforceable for the purpose of determining for the parties to
the action or proceeding the rights and liabilities therein litigated; provided, however, that no attachment, judgment, de-
amended), bills of exchange, notes, drafts, acceptances,
checks, letters of credit, book credits, debts, claims, con-
in section 2 (1) of the Securities Act of 1933, as
tracts, negotiable documents of title, mortgages, liens,
annuities, insurance policies, options, and futures in
cree, lien, execution, garnishment, or other judicial process shall
confer or create a greater right, power, or privilege with respect
to, or interest in, any property in a blocked account than the
commodities, and evidences of any of the foregoing. The
term "property" shall not, except to the extent indicated.
bedeemed to include chattels or real property.
owner of such property could create or confer by voluntary act
prior to the issuance of an appropriate license.
(c) the term "blocked account" shall refer to: blocked
account (including safe deposit box) of a party to the
(5) For the purposes of this general ruling:
transfer and shall have the meaning prescribed in Gen-
eral Ruling No. 4 except that it shall not be deemed to
(a) the term "transfer" shall mean any actual or purported act or transaction, whether or not evidenced by
include an account not treated as a blocked account by
writing, and whether or not done or performed within
the person with whom such account is held or main-
the United States, the purpose, intent, or effect of which
is to create, surrender, release, transfer, or alter. directly
tained.
or indirectly, any right, remedy, power, privilege, or
the meaning prescribed in General Ruling No. 4 except
(d) the term "effective date of the Order" shall have
interest with respect to any property and without limita-
that the "effective date of the Order" as applied to any
tion upon the foregoing shall include the making execution, or delivery of any assignment, power, conveyance,
check, declaration deed, deed of trust, power of attorney
person whose name appears on The Proclaimed List of
Certain Blocked Nationals shall be the date upon which
the name of such person first appeared on such list.
power of appointment, bill of sale, mortgage, receipt,
agreement, contract. certificate, gift. sale, affidavit, or
deemed only to mean any transfer of any dower, curtesy,
(e) the term "transfer by operation of law" shall be
community property, or other interest of any nature
statement; the appointment of any agent, trustee, or
other fiduciary; the creation or transfer of any lien: the
issuance, docketing, filing, or the levy of or under any
judgment, decree. attachment, execution, or other judicial or administrative process or order, or the service of
any garnishment; the acquisition of any interest of any
whatsoever, provided that such transfer arises solely
as a consequence of the existence or change of marital
status: any transfer to any person by intestate succession: any transfer to any person as administrator, executor. or other fiduciary by reason of any testamentary dis-
position; any transfer to any person as administrator,
executor or fiduciary by reason of judicial appointment
nature whatsoever by reason of a judgment or decree of
any foreign country; the fulfillment of any condition, or
or approval in connection with any testamentary dis-
the exercise of any power of appointment, power of
attorney, or other power; provided, however, that the
position or intestate succession: any transfer pursuant
8
78
to (i) Netherlands Royal Decree of May 24, 1940, and
(ii) Norwegian Provisional Decree of April 22, 1940,
concerning the monetary system, etc.
(6) Nothing contained in this general ruling shall be deemed
to affect in any way criminal liability for violation of the Order,
or the regulations, rulings, circulars, or instructions issued
thereunder, or in connection therewith or to otherwise modify,
any provision thereof.
By direction of the President.
H. MORGENTHAU, Jr.,
Secretary of the Treasury.
APRIL 21, 1942
s
232
April 22. 1943.
My dear Mr. Ambassadori
Thank you for your letter of April 19th,
with which I received the autographed picture
of the Prime Minister. Needless to say, I was
delighted to have this inceribed photograph,
which will have as honored place among my
souvenirs of the last few years.
I appreciate your courtesy is sending this
to as. May I ask that, in turn, you also convey
my thanks and my compliments to the Prime Minister!
Sincerely,
(Signed) 1. Street her. Joe
The Right Monorable the Viscount Holifex,
Ambassador Extraordinary and Plemipotentiary,
3100 Massachusette Avenue,
Washington, D. C.
file n.m.c.
By
GEF/dba
Sincere
5:25
233
BRITISH EMBASSY,
WASHINGTON, D.C.
19th April, 1942.
Dear Mr. Morgenthau,
I have just received from England the
photograph of Mr. Churchill which you sent me on the
16th February.
The Prime Minister has had great pleasure
in signing it for you, and I send it to you herewith.
I am glad he admits that this is not his habitual
expression!
Yours sincerely,
Helifex
The Honourable Henry Morgenthau, Jr.,
Secretary of the Treasury.
234
April 22. 1942.
My dear Sir Frederiek
I read with a great deal of interest your
letter of April 18th, giving me the facto and
figures is connection with the War Shipe Week
campaign carried on is the United Ringion. It
was most kind of the Chanceller of the Exchequer
to secure this information for me, and I want to
thank you for passing 18 en is such interesting
detail. I as sure that this will be most helpful in connection with our eva studies.
with certified regards and good wishes,
Sincerely,
(Signed) H. Morgentham. Jr.
Sir Frederick Phillips.
The Willand Hotel,
Weshington, D. c.
By
GEF/dbs
firm
Messenger
Simmons 5210
235
The Willard Hotel
Washington, D.C.
April 18, 1942
PERSONAL
Dear Mr. Secretary,
I passed on to the Chancellor of the
Exchequer your enquiry about special campaigns for raising
funds in the United Kingdom, and he has now asked me to give
you the following message.
The War Ships Week campaign was organized by
the National Savings Committee and its Scottish and Ulster
counterparts. These central committees are responsible under
the Treasury for the conduct of the War Savings Campaign and
operate through a network of approximately 1470 voluntary
local committees covering the whole of Great Britain and
Northern Ireland. Well over 95% of these committees organized
a local week during the period of the campaign.
The series is not quite finished, but to
date it has raised 526 million pounds. The similar War Weapons
Week series in 1940-1941 raised 460 million pounds. The appeal
is confined solely to subscribers to War Loans as the Treasury
has avoided making any official appeal for gifts to the Exchequer
on the ground that this form of patriotism should be left to a
individual initiative. The series has, however, stimulated
considerable number of gifts and loans free of interest.
The fundamental idea of the Week was to link
appeal for subscriptions to War Loans with the Royal the Navy
by an "adoption" of H:M. ships by the communities holding
week. Each community chose as a target for its week the of cost this
of building a particular class of vessel and a vessel marked
class was then allocated to it by name. The week was this
by service and civil defence pageantry centering round set
and centers for sale of securites were up
name special the district. If the target figure was reached (as
throughout it was in practically every case) the community then and "adopted" trophies
its warship and a suitable exchange of courtesies
was arranged to mark the occasion.
As regards large and institutional be investors made
be that some money which would normally only the banks
it may the Government on short term loan through
to dated loans and should
of post
such
has been
our problem
The war
mainfinance,
effect ofbut
the
week
availabe has (a type been of diverted to loan which did not count in has the to diversions Warship this extent Week total) eased to
not impress be exaggerated. upon the general public most forcibly the enormous cost
he Honourable
Henry Morgenthau, Jr.
Secretary of the Treasury
Washington, D.C.
236
-of the war and the consequent necessity for the reduction of
civilian consumption to an absolute minimum and for lending
the resulting savings to the State. The results of the War
Weapons Week series show that we can hope for a further gen-
eral increase in the level of personal savings. One further
result of the Week has been to strengthen the machinery of
voluntary local Savings Committees, to introduce new blood
into them and generally to act as a tonic to the War Savings
Campaign.
Yours sincerely,
Hhillips
237
April 22, 1942
My dear Mr. President:
I am sending you herewith a copy of
a very interesting letter which I have received
from Sir Frederick Phillips on how they are
financing the war in England through the
volunteer system.
I think you would be particularly interested in the following excerpt from this letter:
"The main effect of the week has
been to impress upon the general public
most forcibly the enormous cost of the
war and the consequent necessity for
the reduction of civilian consumption
to an absolute minimum and for lending
the resulting savings to the State.
The results of the War Weapons Week
series show that we can hope for a
further general increase in the level
of personal savings."
Sincerely yours,
(Signed)
H.
The President,
The White House.
n.m.c.
By
Messanger
238
April 22, 1942
Dear Eleanor:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Affectionately,
(Signad
Hearty
Mrs. Franklin D. Roosevelt,
The White House.
n.m.c.
5.5
/
ags
:21
239
April 22, 1942
Dear Harry:
I am sending you herewith a copy of a
very interesting letter which I have received
from Sir Frederick Phillips on how they are
financing the war in England through the
volunteer system.
I think you would be particularly interested in the following excerpt from this letter:
"The main effect of the week has
been to impress upon the general public
most forcibly the enormous cost of the
war and the consequent necessity for
the reduction of civilian consumption
to an absolute minimum and for lending
the resulting savings to the State.
The results of the War Weapons Week
series show that we can hope for a
further general increase in the level
of personal savings."
Sincerely yours,
(signed)
Heary
Honorable Harry Hopkins,
The White House.
Age 2:40
By Messenger
n.m.c.
240
April 22, 1942
Dear Henry:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(Signed) Henry
Honorable Henry A. Wallace,
Vice President of the U.S.
By Messenser Givenal
n.m.c.
E
April 22, 1942
Dear Lauch:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(Signed) Heary
Honorable Lauchlin Currie,
Administrative Assistant to the President,
White House,
Washington, D.C.
S.S. agt 1:21 pm
n. mc.
241
2
242
April 22, 1942
Dear Harold:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(Signed) Every
Honorable Harold Smith,
Director of the Budget,
Washington, D.C.
n.m.
Rv Mommer Simmons 1:21pm
243
April 22, 1942
Dear Leon:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(signed)
Honorable Leon Henderson,
Administrator,
Office of Price Administration,
Washington, D.C.
n.m.c.
Rv Givens 1:20
244
April 22, 1942
Dear Marriner:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(Signed) Heary
Honorable Marriner S. Eccles,
Chairman,
Federal Reserve Board,
Washington, D.C.
n. m.c.
By Memenage
Simmons 1:2,
(
245
April 22, 1942
Dear Professor Hansen:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(Signed) N. Morgenthas its.
Professor Alvin Hansen,
Federal Reserve Board Building,
Washington, D.C.
n.m.c.
By
Messange
Simmers 1:21
246
April 22, 1942
Dear Don:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
ENTERS
(signed)
Honorable Donald Nelson,
Chairman,
War Production Board,
Washington, D.C.
n.m.c.
Given
5:00
247
April 22, 1942
Dear Sam:
I am sending you herewith a
copy of a very interesting letter
which I have received from Sir
Frederick Phillips on how they
are financing the war in England
through the volunteer system.
Sincerely yours,
(Signed) Heary
Judge Samuel I. Rosenman,
60 Centre Street,
New York, New York.
n.m.c.
Treasury Department
Division of Monetary Research
Date
To:
Mrs. McHugh
From:
L. Shanahan
248
19
This is cable prepared in response to
Secretary's request (relating to letter
to Secy. from Sir Frederick Phillips,
dated April 18.)
D
249
April 22, 1942.
To:
Mr. L. W. Casaday
American Enbassy
London, England
From:
The Secretary of the Treasury
The Secretary is keenly interested in learning as such as
possible and as quickly as possible about the War Ships Week and
any other special campaigns to increase voluntary savings in
England. He wants detailed information on the actual operations
of the voluntary local Savings Committees. The Secretary directs
that you go out into the field at once, select a number of repre-
sentative communities in cities, rural districts, and industrial
neighborhoods, and get as much information as you can with respect
to the composition of the local committees, the techniques ployed, and the results obtained. Send back comprehensive and
detailed reports by cable. Clear with the Acting Ambassador and
such British authorities as may be necessary before starting out,
but do not delay your departure.
In your investigations, do not begin with the central or top
organisation, but begin with the small local committees who contact
the prospective bond buyer, and later work from the outside toward
the center, sending frequent cable reports as you go along.
Some of the specific questions to which the Secretary would
like to have answers are as follows: What kind of persons constitute
the local committees how are they selected; do they receive oral,
250
-2printed or radio instructions? To what extent is the work of the
committees in the field supplemented by radio, by speeches, by
advertising or other media of reaching the public? Do the commit-
tees call on individuals at their hones? If so, approximately how
much time is usually spent in each home? Do they work singly or
in pairs? Do they work from house to house, or do they obtain in
advance a list of persons to see? Or do they wait for people to
call at the centers established for the sale of securities? Are
quotas used for individuals, or groups, or plants, or small organisations? What kind of social pressure, if any, is employed to get
the people to buy Government bonds? Are appeals made only to indi-
viduals, or also to organised groups such as labor unions and ployers associations? What do the local committees stress in their
appeals?
We are appending for your information part of a letter on
the subject received by the Secretary.
"The War Shipe Week campaign was organised by the National
Savings Committee and its Scottish and Ulster counterparts.
These central committees are responsible under the Treasury for
the conduct of the War Savings Campaign and operate through a
network of approximately 1470 voluntary local committees cover-
ing the whole of Great Britain and Northern Ireland. Well over
95% of these committees organised a local week during the period of the campaign.
251
-"The series is not quite finished, but to date it has
raised 526 million pounds. The similar War Weapons Week ser-
ies in 1940-41 raised 460 million pounds. The appeal is confined solely to subscribers to War Loans as the Tressury has
avoided making any official appeal for gifts to the Exchequer
on the ground that this form of patriotism should be left to
individual initiative. The series has, however, stimulated a
considerable number of gifts and loans free of interest.
"The fundamental idea of the Week was to link an appeal
for subscriptions to War Loans with the Royal Navy by "adoption"
of H.M. ships by the communities holding the week. Each COM-
sunity chose as a target for its week the cost of building a
particular class of vessel and & vessel of this class was then
allocated to it by name. The week was marked by service and
civil defense pageantry centering round this name and special
centers for sale of securities were set up throughout the dis-
trict. If the target figure was reached (as it was in practically
every case) the community then "adopted its warship and a suitable exchange of courtesies and trophies was arranged to mark
the occasion.
"As regards large and institutional investors it may be
that some money which would normally only be made available to
the Government on short term loan through the banks (a type of
252
-4- loan which did not count in the Warship Week total) has been
diverted to dated loans and has to this extent eased our problen of post war finance, but such diversions should not be
exaggerated. The main effect of the week has been to impress
upon the general public most forcibly the enormous cost of
the war and the consequent necessity for the reduction of civilian consumption to an absolute minisum and for lending the
resulting savings to the State. The results of the War Weapons
Week series show that we can hope for a further general increase
in the level of personal savings. One further result of the
Week has been to strengthen the machinery of voluntary local
Savings Committees, to introduce new blood into them and gen-
erally to act as a tonic to the War Savings Campaign."
We received today the budget material requested in our cable
No. 1593 of April 15. Thank you for your prompt response.
HDW1HJH1dmh
4/22/42.
253
TELEGRAM SENT
PLAIN
ELP
April 22, 1942.
AMEMBASSY,
LONDON (ENGLAND)
1730 Twenty-second
FOR CASADAY FROM THE SECRETARY OF THE TREASURY.
QUOTE The Secretary is keenly interested in
learning as much as possible and as quickly as possible
about the War Ships Week and any other special
campaigns to increase voluntary savings in England.
HE wants detailed information on the actual operations
of the voluntary local Savings Compittees. The
Secretary directs that you go out into the field at
once, select a number of representative communities
in cities, rural districts, and industrial neighborhoods, and get as much information as you can with
respect to the composition of the local committees, the
techniques Employed, and the results obtained. Send
back comprehensive and detailed reports by cable.
Clear with the Acting Ambassador and such British
authorities as may be necessary before starting out,
but do not delay your departure.
In your investigations, do not begin with the
central or top organization, but begin with the small
local committees who contact the prospective bond
buyer,
254
-2-#1730, April 22 t London.
buyer, and later work from the outside toward the
center, sending frequent cable reports as you go
along.
Some of the specific questions to which the
Secretary would like to have answers are as follows:
What kind of persons constitute the local committees;
how are they selected; do they receive oral, printed
or radio instructions? To what Extent is the work of
the committees in the field supple cented by radio, by
speeches, by advertising or other media of reaching
the public? Do the committees call on individuals at
their homes? If so, approximately how much time is
usually spent in Each home? Do they work singly or in
pairs? Do they work from house to house, or do they
obtain in advance a list of persons to SEE? Or do
they wait for people to call at the centers established
for the sale of securities? Are quotas used for
individuals, or groups, or plants, or small organizations? What kind of social pressure, if any, is
employed to get the people to buy Government bonds?
ArE appeals made only to individuals, or also to
organized groups such as labor unions and employers
associations? What do the local committees stress in
their appeals?
WE are
255
-3-#1730, April 22, to London.
WE are appending for your information part of a
letter on the subject received by the Secretary.
Single QUOTE The War Ships WEEK Campaign was
organized by the National Savings Committee and its
Scottish and Ulster counterparts. These central com-
mittees are responsible under the Treasury for the
conduct of the War Savings Campaign and operate through
a network of approximately 1470 voluntary local
committees covering the whole of Great Britain and
Northern Ireland. Well OVER 95% of these committees
organized a local WEEK during the period of the
campaign.
The series is not quite finised, but to date it
has raised 526 million pounds. The similar War
weapons WEEK series in 1940-41 raised 460 million
pounds. The appeal is confined solely to subscribers
to Var Loans as the Treasury has avoided making any
official anneal for gifts to the Exchaquer on the
ground that this form of patriotism should be left to
indiviual initiative. The series has, however,
stimulated a considerable number of gifts and loans
free of interest.
The fundamental idea of the WEEK was to link an
appeal for subscriptions to Var Loans with the Royal
Navy
256
-4-#1730, April 22 to London.
Navy be double QUOTE adoption END double QUOTE
of P.M. ships by the communities holding the WEEK.
Each community chose as a target for its WEEK the
cost of building a particular class of VESSEL and a
VESSEL of this class was then allocated to it by
name. The WEEK was marked by service and civil de-
fense pageantry centering round this name and special
centers for sale of securities were set up throughout
the district. If the target figure was reached (as
it was in practically EVERY case) the community then
double QUOTE adopted END double QUOTE its warship ar 1
a suitable Exchange of courtesies and trophics was
arranged to mark the occasion.
As regards large and institutional investors it
may be that SOME money which would normally only be
made available to the Government on short term loan
through the banks (a type n° loan which did not count
in the Warship WEEK total) has been diverted to dated
loans and has tn this extent Eased our problem of
post war finance, but such diversions should not be
exaggerated. The main Effect of the WEEK has been to
impress upon the general public most forcibly the
Enormous cost of the war and the consequent necessity
for the reduction of civilian consumption to an
absolute minimum and for lending the resulting savings
to the
257
-5-#1730, April 22 to London.
to the State. The results of the War Weapons WEEK
series show that WE can hope for a further general
increase in the lEVEl of personal savings. One
further result of the EEK has been to strengthen the
machinery of voluntary local Savings Committees, to
introduce new blood into them and generally to act as
a tonic to the War Savings Cannaign. END single
QUOTE.
WE received today the budget material requested
in our cable No. 1593 of ..pril 15. Thank you for
your prempt response. END QUOTE.
HULL
(FL)
FD:FL:ME
E
258
American Technical Mission to Cuba
THE CENTRAL BANK AND STABILIZATION FUND
Second Report to the Cuban Government
April 22, 1942
Personnel of Mission
G. h. Eddy, Treasury Department
1. T. Esgate, Farm Credit Administration
W. R. Gardner, Board of Governors of the
Federal Reserve System
F. ... Southard, Jr., Treasury Department
H. R. Spiegel, Treasury Department
G. B. Vest, Board of Governors of the
Federal Reserve System
II. D. White, Chief of Mission,
Trensury Department
259
AMERICAN TECHNICAL MISSION TO CUBA
April 22, 1942
Dear Mr. Minister:
The American Technical Mission to Cuba was organized
by the United States Government at the request of the
Cuban Government in September 1941 to study Cuban mone-
tary and credit problems and to make such recommendations
as seemed appropriate. The Mission, as you know, spent
a number of weeks in Cuba studying material made avail-
able to it and interviewing Government officials, bankers,
businessmen, representatives of trade associations and
other persons familiar with Cuban banking and credit needs.
The Mission submitted its first report in November 1941.
I an herewith submitting to you for the consideration
of your Government the second report of the Mission, dealing with the establishment of a Central Bank and the reconstitution of the Cuban Stabilization Fund. The completion
of this report has been delayed owing to the fact that the
outbreak of war has made it impossible for the members of
the Mission to devote as much time to the report as they
had expected. The Mission prepared its report in analytical
form because it felt that this form would be more helpful
to the Cuban Government than would a draft law.
The Mission would like to call attention to the contribution which many Cubans have made to this report.
Many organizations and individuals generously contributed
information and advice while the Mission was in Cuba. The
Mission has also had at its disposal studies which officials
of the Cuban Government have made on monetary and credit
problems which were found to be very helpful.
Sincerely yours,
HDWhite
H. D. White, Chief,
American Technical Mission to Cuba.
Honorable Oscar Garcia Montes,
Minister of Finance,
Habana, Cuba.
260
TABLE OF CONTENTS
Page
Introduction
1
Recommendations
11
I. Capital
II.
Management
III. Loans and Investments
13
23
28
IV. Note Issue and the Reserve
Requirements of the
Central Bank
41
V. Reserve Requirements of
Commercial Banks
50
VI. Status of the Dollar in
Cuba
52
VII. The Stabilization Fund and
its Relation to the
Central Bank
VIII. Miscellaneous Provisions
Summary of Principal Recommendations
Appendix
56
74
76
80
--
-
261
INTRODUCTION
The Mission began its work with the realization that Cuban
nonetary and credit problems differ materially from those in the
United States and that it is essential to devise and recommend a
program suited to Cuba's special conditions. The Mission therefore
has studied the existing Cuban monotary and credit organization
and practice in order to provide a facturl background against which
to formulate its rocommondations What scom to be among Cuba's
principal problems in the fields of money, foreign exchange, and
bank credit are summarized briefly below so that the recommendations
contained in the body of the report may appear in their proper
setting.
CUBA'S DEPENDENCE
For over 40 years the United States dollar has been
UPON DOLLAR
CURRENCY ..ND
legal tender in Cuba. Until recently dollar currency
FOREIGN BANKS
and dollar deposits have been the principal medium of
exchange. Since the closing of throo large Cuban banks
in the depression following the last war, branch
offices of United States and Canadian banks have handled
most of Cuba's banking business. Cuba has been to a
large extent an appendage of the United States dollar
monetary system.
This status had some undoubted advantages. The
money of Cuba, being dollars, could not deprecinte
in terms of the money of the United States, with which
--
262
most of Cuba's trade took place. The branches of the
United States and Candian banks were exceptionally
strong. Moreover, additional bank credit could be made
available from the head offices whenever the branchos
felt that there was a good opportunity for additional
loans.
DIS.DV.INT.GES OF
N ALL-DOLLAR
SYSTEM
Against these advantages, however, there have been
several disadvantages, the importance of which may have
increased considerably since 1929.
1. Lack of Central
Control Over
Bank Credit
Since a Cuban bank of issue could not have issued
United States dollars, Cuba's retention of dollars as
its chief form of money made the establishment of a
Cuban Central Bank virtually impossible. No Cuban
authority could be charged with responsibility for the
Indequacy of, or given romedial powers over, the volume
of currency and bank credit in Cuba. The total quantity of currency, deposits, and bank loans in Cuba
tended to be the resultant of the balance of intornational payments and the foreign banks' judgmont of the
risks of potential bank loans. These are sometimes
(though not always) undesirable regulators of a nation's
supply of money and credit and could hardly prove a
satisfactory arrangement for a nature country. Many of
the bankers themselves have regretted the situation,
since, while they were interested primarily in certain
262
-2most of Cuba's trade took place. The branches of the
United Statos and Candian banks were exceptionally
strong. Moreover, additional bank credit could be made
available from the head offices whenever the branchos
felt that there was a good opportunity for additional
loans.
DIS.DV.ENT.GES OF
Against these advantages, however, there have been
N ALL-DOLLAR
SYSTEM
several disadvantages, the importance of which may have
increased considerably since 1929.
1. Lack of Central
Control Over
Bank Credit
Since a Cuban bank of issue could not have issued
United States dollars, Cuba's retention of dollars as
its chief form of money made the establishment of a
Cuban Central Bank virtually impossible. No Cuban
authority could be charged with responsibility for the
adequacy of, or given remedial powers over, the volume
of currency and bank credit in Cuba. The total quantity of currency, deposits, and bank loans in Cuba
tended to be the resultant of the balance of international payments and the foreign banks' judgment of the
risks of potential bank loans. These are sometimes
(though not always) undesirable regulators of a nation's
supply of money and credit and could hardly prove a
satisfactory arrangement for a nature country. Many of
the bankers themselves have regretted the situation,
since, while they were interested primarily in certain
--
263
types of banking business, almost all the country's
credit noods devolved upon the foreign banks.
2. absence of
Rodiscount
Facilities
There have likewise been no Control Bank rediscount-
ing facilities in Cuba to which banks could turn when
in need of additional currency or lending capacity after
their own loanable funds were fully utilized. Although
the foreign branch banks could draw upon their home
offices when they wished to, Cuban-owned banks have had
to rely upon their own resources or borrow eithor from
competitors or from banks abroad.
3. Retarded
Development of
Cuban-owned
This lack of rediscounting facilities has doubtless
been one of the factors retarding the development of
Banks
Cuban-onned banks. There are today only four such banks,
of which three are relatively small, and of which the
combined deposits are less than 20 percent of the total
deposits in Cuba.
4. Economic Cost
Uso of any foreign currency as a donostic medium of
of Dollar
Currency
exchange involves a substantial cost to a nation's
economy. For Cuba the uso of dollar currency is fully
as costly as if its entire stock of domestic hand-tohand currency consisted of gold coin purchased abroad
at its full monetary value. In modern monotary systems
it has become accepted practice to use as donestic means
of payment (in addition to bank deposits) notes or coins
the intrinsic value of which is far below their monetary
-value. They may, however, be secured in part by valua-
ble netallic or foreign exchange reserves. If the
dollar currency in Cuban circulation were replaced by
an issue of Cuban currency, the dollars could enter an
official exchange reserve which, to the extent that
they were not required as a reserve for the newly issued
Cuban currency, would be available to the Cuban economy
for financing imports, repaying foreign indebtedness,
and the like. By using dollar currency internally, Cuba
has postponed use of (but not lost) the opportunity to
inport more machinery, other productivo equipment, or
consumption goods, to liquidato foreign debts, or to
make investments abroad.
During cortnin periods, furthermore, a loss to the
Cuban economy may have been involved in some (but by no
means all) of the dollar deposits in banks in Cuba
against which the banks hold dollar balances abroad or
other foreign assets.
It may be remarked, however, that the economic cost
of using dollars in Cuba docs not morn that foreign
nations or foreign banks have been taking unfair advantage of Cuba. The foreign investments nade in Cuba
exceed the total imports of dollars many tincs over.
Cuba on balance hns received from abroad far more than
she has sacrificed by using dollars as donestic money.
264
-TR DISITION TO
PESO CURRENCY
ID DEPOSITS
265
Soveral acts and docreo laws in the years 1932-38
ordered the coinage of specified quantities of silver
posos. This marked the first important breach in the
uso of dollars in Cuba. The purchase of silver at the
market price and its issuance as money (almost entirely
as silver certificates socured puso for pcso by coins)
at the sanc monotary value as the United States silver
dollar gave riso to important seigniorage profits, which
covered part of the Government's expenses during those
troubled years of Cuban history. As carly as 1939 peso
silver certificates had almost entirely replaced dollar
currency in public circulation, and about half of the
bank deposits were donominated in posos.
Banks unintain almost fully covered positions in
both currencios at all tinos. That is, they maintain
their puso assets cqual to their poso liabilities and
their dollar assets equal to their dollar liabilitics.
To do otherwise would expose then to risks of fluctuations
in the rate of exchange between dollars and pesos.
DIS .DV.JITAGES OF
Cuba has made considerable progress away from the
COMBINED PESODOLLAR SYSTEM
dollar system which fornerly prevailed, novertheless,
the present nixed system also contains several pronounced shortconings.
266
-61. Absence of Peso
Rediscounting
and CurrencyIssuing
Mechanism
There being still no Central Bank, there is still no
"lender of last resort" or bank of issue where banks can
obtain additional peso currency or peso lending power
when needed. At times there has been considerable strin-
gency of peso lending power. Since certain types of loans
are now normally made only in pesos (as a result of the
law of July 8, 1939, for which see Section VI), this has
been an added difficulty for certain types of potential
borrowers.
2. Inadequate
Foreign Exchange
Stabilization
of the Peso
The development of peso currency and deposits has
not included the acquisition of an official store of
international monetary reserves by use of which the value
of the peso in foreign exchange markets can be supported.
The principal type of such reserves which the Cuban
Government now holds and could employ for this purpose
is its store of silver, which might be sold abroad at
the market price for silver bullion, far below its
statutory peso value. This silver can be made available
for export, however, only by retiring the peso silver
certificates against which the coined silver is held
as security.
For some time after the appearance of the first
issues of peso currency, the Cuban balance of payments
(supplemented by some export of dollars replaced by
the new pesos) sufficed to keep the peso close to parity
267
7-
with the dollar. In 1938 and still more in 1939, however, the balance turned against the peso. is already
stated, Cuba had no official agency with the resources
to settle any not peso balances by releasing assets
acceptable for payments abroad. Consequently the value
of the peso declined in terms of other currencies until
the lower rate was sufficient to restore balance between
the payments into pesos and payments out of pesos.
Transfers out of pesos were no doubt increased by fears
of still further depreciation.
Since then the balance of inter-currency payments
has carried the peso exchange rate back to par with
the dollar and even above. Only the legal tender
equality of dollars and pcsos in Cuba has prevented the
peso from going to a considerable premium. The right
to import dollars to make peso payments has kept the
rate down. In the process many millions of dollars
have again gone into general Cuban circulation. Were
they acquired instead by an official agency charged
with the responsibility of stabilizing the foreign exchange value of the peso, this agency could give far
more effective support to the peso, when necessary,
than would n subsequent private reexport of these dollars.
268
-
.Acquisition of a stock of imported gold or foreign
exchange represents the same economic cost to Cuba as
the import of dollars described above. To the extent
necessary to build up a stock sufficient to give
reasonable support to the peso during any future periods
of adverse inter-currency payments, this cost is fully
justified. Moreover, during the present war, when
many types of imports are not available and when its
exports promise to be exceptionally largo, Cuba may
inevitably acquire a stock of gold or dollars representing the postponement of a greater amount of poten-
tial imports than has ever been involved in Cuba's usc
of dollar currency. Noverthcless, the fact remains
that Cuba docs not have an effective arrangement for
stabilizing the foreign exchange value of the peso when
the curront balance of inter-currency payments turns
against it.
3. Exportation of
Cuban Savings
There is a strong tendency on the part of Cubans
to keep savings and investments in dollars. Although
in part those dollar savings may be invested in Cuba,
they tend in part to become capital exports to the
United States. This is, under ordinary circumstances,
a severe drain upon the Cuban economy. Cuban prosperity
under normal conditions will require extensive local
investment of pesos annually.
269
-WELKENED DEMAND
The public's willingness to invest in Cuban mort-
FOR MORTGAGES
gages is reported to have been shaken by moratorium
legislation during the 1930's. The Mission was unable
to explore this question extensively but testimony which
it received pointed to the conclusion that this logis-
lation has given rise to fear of similar legislation
in subsequent periods of economic difficulty and in consequence seems to have restricted the supply of funds
seeking investment in Cuban mortgages.
PAUCITY OF
The Government has faced almost insurmountable
FACILITIES FOR
GOVERNMENT
difficulties in borrowing money in Cuba. Inability to
BORROWING
engage in irresponsible or uneconomic borrowing should
not, of course, be regarded as a difficulty. There are,
however, some circumstances under which a national
Government and official credit agencies should be able
to borrow. Moreover, domestic borrowing is frequently
strongly preferable to incurring debts in a foreign
currency. It seems clear that Cuba's potential wellbeing will be hampered unless on the one hand invostors'
confidence in obligations of the Cuban Government is
thoroughly justified and unless on the other the Govern-
ment and its agencies have facilities in Cuba for
floating economically desirable loans.
E
- 10 -
;BSENCE OF
There are almost no lending agencies in Cuba other
SPECIAL
LENDING
than banks, and only a limited market for corporate
INSTITUTIONS
securities. Other nations have developed special insti-
tutions to meet particular types of credit needs, such
as agricultural loans, home loans, industrial loans,
etc. Some of these institutions have required considerablo Government support.
270
- 11 RECOPMENDATIONS
The Anerican Technical Mission to Cuba recommends the establish-
nent of 0 central bank and the reconstitution of the Cuban Exchange
Stabilization Fund. 1. well-managed central bank and I stabilization
fund with more rdequate resources would be able to amelicrate t number
of the conditions now prevailing in Cuba which were cited in the introduction.
The Mission, however, does not wish to encourage expectations
that the central bank and the stabilization fund will accomplish
more than is actually within their powers. The solution of many
economic and financial difficultios for exceeds their especity, no
matter how skillful the management. Such institutions have not
been ablo to shield other countries from severe economic na ladjust-
nents. Cuban conditions present special difficulties, and future
events are sure to croste now ones. Noreover, a poorly administered
control bank or stabilization fund could dd greatly to the difficulties that already exist.
Nevertheless, properly constituted and expertly managed, those
institutions can provide that pooling and utilization of resources
and that strong determination of policy which can furnish essential
help to neet energencies and be of important resistance in fostering
economic development. Moreover, r good control bank is a prerequisite
to many further nersures to pronote oconoric welferé. In the following r.commendations the Mission has endervored to set forth the
271
C
- 12 chrrecteristics of : central bank and stabilization fund which soom
to it best calculated to meet the siturtion in Cuba. Superior managenent rone can assure the successful evolution of these institutions.
The detailed recommundations relating to the esteblishment of a
central bank and reconstitution of the Cuban Stabilization Fund are
presented on the following pagos.
272
273
- 13 -
I. Capital
AMOUNT OF
CAPITALIZATION
The needs of the proposed Central Pank for capital
would appear to be met satisfactorily by an original subscription of 5 million pesos of paid-in cash subscriptions
and 3 million pesos to be credited to capital surplus and
to be paid for by Cuban Government securities. Additional shares should be authorized for subsequent cash
sale to allow for future growth.
ITS ADEQUACY
Eight million pesos of capital funds at the outset
seems well within the means of the Government and the
banks. At the same time it is a sufficient sum to serve
the Central Bank's need for capital. The ratio between
this capital and surplus and the Bank's prospective
liabilities compares favorably with similar ratios found
in other central banks. The ratio between this capital
and surplus and the Bank's prospective assets subject to
possible depreciation is also favorable. This total of
capital funds should give the Cuban public confidence in
the solvency and soundness of their Central Bank while on
the other hand avoiding over-capitalization. It should
be possible for the Bank, under reasonably favorable
circumstances, to earn enough to pay a fair return to its
shareholders.
274
- 14 SOURCES AND RATES
OF SUBSCRIPTIONS
An equitable means of raising this capital appears
to be as follows: Each bank conducting E checking-account
business in the Republic of Cube will be required to sub-
scribe an amount equal to 2 percent of its total deposits
(both demand and savings) in some designated base period
for shares designated as Class A, and the Government of
the Republic will subscribe for enough additional shares
designated as Class B to bring the total paid-in cash
capital to 5 million pesos. In the event of any impairment of capital, Class to shares should be given preference
over the Class B shares. At current deposit levels, the
banks would subscribe about 3 million pesos and the Govern-
ment about 2 million. As set forth in greater detail below,
the Government will provide the capital surplus in its
entirety.
THE BASIS FOR
APPORTIONING PANKS'
SUBSCRIPTIONS
A word of explanation is perhaps necessary on basing
banks' subscriptions on their deposits rather than on
their capital as is the method in many other countries. A
majority of the banks operating in Cuba are branches of
large foreign banks and have in Cube either C token capital
or no separate capital whatever. Required bank sub-
scriptions to stock of the Central Bank cannot appropriately
be determined on the basis of such capitalizations. It
would not appoar to be to Cuba's interest to require that
E.S.
275
- 15 -
separate capital be provided for the Cuban brenches of
well-established, sound foreign banks. This is discussed
further in a later section. There is obviously no need
to require each bank to alter its present cepitalization
merely to provide a basis for compulsory subscriptions to
Central Bank stock.
The deposits of a commercial bank are c. fair mocsure
of its size and importance. The Mission has therefore
recommended that they be used as the basis for determining
the subscription of each bank to shares of the Central
Bank. It is reasonable that a bank's participation in the
Central Bank should be roughly in proportion to its size
and importance in the banking community.
Subscriptions equal to 2 percent of deposits are not
an onerous burden on the banks; 0 lower rate would not
yield E sufficiently substantial sum.
SUBSEQUENT
As their deposits increase banks should periodically--
ADJUSTMENT OF
BANK HOLDINGS
probably once a year-be required to increase their
holdings of the Central Pank's stock to equal 2 percent
of their deposits averaged over the preceding your or some
other practical period. Similarly, should there be C
decrease in the deposits of C. bank, there should be C corresponding reduction in its requirement to hold Central Bank
shares, although it might well be provided that 2 bank
would not be compelled to sell shares back to the Central
276
- 16 Bank under these circumstances in case it wished to retain
them.
Whenever commercial banks are required to purchase
additional shares, it seems appropriate that the Govern-
ment be permitted, at its discretion, to resell to the
Central Bank a like number of its shares, which it had
purchased for cash. In this way the prid-in capital stock
would be maintained at lenst at 5 million posos and the
Government would continuo to furnish all the capital funds
subjected to greatest risk, namely, the capital surplus.
In case the Government did not wish to sell its shares,
or if all the Government's sharos had been redistributed
among the banks, the Central Bank would sell additional,
hitherto unissued, shares as required. An initirl authorization of 10 million pesos of stock should provide adequotely for growth for n number of years.
Purchases of additional shares CS well as redemption
of shares held by commercial banks should be ct per. It
might be provided that transfer of shr.ros should take
place just after dividend dates, in order to avoid adjustments in price for unpaid dividends.
HOLDINGS OF BANKS
IN LIQUIDATION
Provision should be made for the Bank to rodeom upon
reasonable notice any of its shares hold by banks which
desired to liquidate their Cuban business.
in 277
- 17 S. FETY OF BANKS'
SUBSCRIPTIONS
Care should be taken to protect the banks against
loss of principal on their subscriptions, since this
would impair the (ssets covering their deposit liabilities
to the public. It will be noted that no recommend tion
has been mode for double liability of shereholders in the
Central Brnk, and there is no provision for unprid subscriptions which could be celled for payment st times
which night be onborressing. More important still, the
Government is supplying a protective cushion upon which
any losses will fall before inpriring the shares of the
connercial banks. Initially this cushion will be approxinotely 5 million pesos, one and two-thirds times larger
than the aggregate subscription of the banks. In fact,
this initial amount of Government funds is larger than
seems desirable once the Bank has been finally established.
It is nade ns large as it is only in order to furnish the
Central Bank an ample initial amount of cash capital without burdening the commercial banks. .S the deposits of
the latter grow, it soons apprepricte, CS recommended
above, that they should purchase some of the shares which
the Government paid for in cash.
PAID-IN SURPLUS
It soons desirable that there should be a substantial
surplus, in addition to paid-in capital, ct the tine the
Central Bank begins business. This surplus would serve
several uses. First, it would contribute to the confidence
E 278
- 18 -
of the public in the Central Bank in the early period of
the Bank's existence. Second, it would, within the limit
of its amount, permit the absorption of losses without
impairment to the paid-in capital of 5 million pesos.
The Mission is therefore recommonding 0 capital surplus
of 3 million posos.
In viou of the role which the Government should play
in the management of the Bank and in the distribution of
the Bank's earnings, it is felt that the Government,
rathor then the commercial brnks, should contribute the
capital surplus. Further, the Mission recommends that if
the capital surplus is reduced to 1 million posos, the
Government should restore it to 3 million pesos.
METHOD OF PAYMENT
The initirl and any subsequent contribution to
capital surplus should be made by the Government's issuing
special Treasury securities to the Central Pank. This
method of contribution is well designed to moot the special
circumstances in Cuba. It would roduce to n minimum the
actual cash payment that the Government would have to make
to the Control Bank and, ct the some tino, the Central
Bank could have the full advantagos of C capital surplus.
It is not necessary that the surplus be prid in to the
Control Bank in the form of cash.
The securities which the Government would turn over
to the Control Bank as capital surplus could be used by the
- 19 -
279
Central Bank in two ways. First, they would c institute
sound assuts able to make up any possible loss suffered
on the Bank's other assets up to the extent of 3 million
posos without the impairment of the Bank's capital.
Second, the Control Bank could use some of these securities
for open-market operations if necessary.
FORM OF THE
The Mission recommends that these securities be
DELIVERED
SECURITIES
Treasury bills bonring no interest and having no specified
maturity but payable 90 days after sale by the Control
Bank. The Bank would be able to sell those obligations
when necessary ct c. discount which should be less than
1 percent. Upon their sale they would autonstically
become Tronsury bills, payable in 90 days, sold on a dis-
count basis CS are Treasury tills in the United States
and England. In order that the securities contributed
by the Government for the capital surplus of the Bank
may be adequate to produce 3 million pusos when and if
sold on the market ns indicated, it is recommended that
the Government turn over to the Bank initially for this
purpose socurities with a free value of 3,030,000 pesos.
with this amount of such securities on hand, the estimated
discount of 1 percent will be provided for, and the Brnk
my then show C capital surplus on its balance shoot of
3 million posos.
- 20 -
E 280
Formal acknowledgment on the Bank's balance sheet
of the Government's contribution of the capital surplus
sooms desirable.
SAVINGS BANKS
The existence of well-nanaged savings banks might
be of considerable bonefit to Cuba. Should such brnks
develop or should savings banks be specially provided
for in legislation, consideration should be given to mcking membership in the Control Bank available to them.
Their growth and soundness would be enhanced if they were
permitted, when occasion demended, to obtain liquidity
of sound assets at the Central Bank rather than by forced
liquidation.
DIVIDENDS
It seems wise that the first claim upon the earnings
of the Bank after providing for minimum reserves should
be a moderate dividend for the shareholding banks. The
rate might be limited to 3 or 4 percent, cumulative.
Although this rate is lower than the meximum rate on
Federal Reserve Bank stock in the United States, the latter
rate was selected in 1913, when interest rrtes in the
United States generally were much higher than today.
Horeover, the United States Government did not subscribe
to Federal Reserve Bank stock.
FURTHER
DISPOSITION
OF EARNINGS
After dividends to member banks, the Control Bank
should pay residual earnings to the Trensury of the
281
- 21 Republic. Such payments would be an appropria te method
of compensating the Government for giving the Bank the
monopoly of issuing currency notes and cf holding banks'
legal reserves, both of which are properly privileges or
responsibilities of the State, end also for the Governmont's subscription to capital and capital surplus.
Residual earnings should be prid to the Government, how-
over, only after building up some earned surplus out of
which to moot expenses, losses, and dividends during
adverse periods. Statement in the low of C. formula for
the disposition of surplus is therefore suggested, somewhat
C.S follows:
FORMUL FOR
it the discretion of the directors the Brnk my build
BUILDING UP
SURPLUS
up earned surplus and reserves against anticipated losses
without paying dividends, but dividends shall be cumulative
rnd no surplus shall be paid to the Government so long IS
there are any dividend arrears. After payment of full
dividends, the Bank's earnings shall be divided as follows:
50 percent to the Government and 50 percent to surplus
till an earned surplus of 3.5 million pesos hrs been
accumulated; 75 percent to the Government and 25 per-
cont to surplus till on earned surplus of 7.0 million
posos has been cecurulatod; therenfter 100 percent to
the Government.
282
- 22 -
In the event of liquidation of the Central Bank, ny
surplus after retiring stock held by banks at par plus
dividends accrued and errned shell revert to the Government.
PROFITS NOT
The Central Bank should not be opereted primarily to
is MEASURE OF
BUNK'S VALUE
obtain profits nor will its record of profits be on adcquote mocsure either of the Bank's usefulness to Cubo or
of its soundness C.S P financial institution. In its
capacity as 0 bank of issue, ns n regulator of credit,
as r central reserve for banking funds and as C. public
depository, the benefits rendered by the Centrol Bank
will be manifested in many direct and indirect ways
quite apart from its annual distribution of dividends
and profits. For this reason there is in the mind of the
Mission a clear argument in favor of confining the Govern-
mont's participation in the Bank's earnings to that of 0
receiver of those profits which remin after dividends
have been paid to member banks and after adequate provision
hrs been node for surplus and special reserves.
283
- 23 II. Management
BROAD
The Mission has studied with particular care the
OBJECTIVES
IN CHOOSING
problem of the composition and method of selection of
MANAGEMENT
the management. On the one hand, it is the conviction
of the Mission that the responsibility for the country's
monetary and banking system and policics must rest primarily with the Government and that therefore at least
a majority of the management should be selected by or
approved by the Government. On the other hand, it is
equally clear that there must be a satisfactory balance
of representation, that members should have a suffi-
cient tenure of office to provide for some continuity
of experience, and that precautions should be taken to
obtain competent and independent management. Above all,
it is of the utmost importance to ostablish a method
likely to lead to the selection of the best available
persons for management of the Bank.
THE BOARD OF
Accordingly, the Mission recommends that control
DIRECTORS
of the Central Bank should be placed in a board of
directors composed and solected as follows:
The Governor of the Bank, to be selected by the
President of the Ropublic.
The Minister of Finance, ex officio, or, at his
discretion, an alternate designated by the
Minister to serve for so long a time as the
Minister may wish.
in
- 24 -
284
The head of the Agricultural Bank, ox officio, if
such a Bank is created and is designed to have
an officer appropriate to serve as director of
the Central Bank. Until ho shall bc appointed,
the place may be filled by a third Class B
director (see below).
Two Class A directors, to be selected by the Prosi-
dent of the Republic from panels nominated, one
by the Cuban banks and one by the foreign banks in
Cuba, for their competence and experience in the
field of banking.
Two Class B directors, to be selected by the Prosi-
dent, in the light of their business or agricultural experience.
All directors should be choson, not simply as reproscntativos of special groups with which they may have been
associated, but because of their competence and devotion
to the general welfare, and in the light of their training
and experience. The several directors should be selected
with a view to obtain a board with broad experience in
Cuba's various economic pursuits.
The Class A and Class B directors might be given
staggered terms of two years each. Directors should be
eligible for reappointment.
The Governor of the Bank should have a term of three
to fivo years and should bc eligible for reappointment.
It is recommended that the directors be paid only a
modest compensation, per meeting, plus direct expenses.
The salary of the Governor of the Bank should be stipu-
lated by law. The Governor, the Finance Minister, and
the head of the Agricultural Bank should receive no
- 25 -
285
extra compensation for acting as members of the board
except for any direct expenses incurred.
POWERS OF THE
The duties of the board of directors should be
BOARD OF
DIRECTORS
stated in the broadest possible terms since the board is
ultimately responsible for the management of the Bank.
The board should be given responsibility for all major
policy decisions. It should also be given powers to
delegate authority to committues or officers of the Bank.
PLANS FOR ..
In the several studios of Cuban banking noods which
SUPERIOR
BANKING
have been made by the Cuban Government, there has been
COUNCIL
provision for a Superior Banking Council. It was proposed in those studies to provide this Council with
power over the Contral Bank: in all major policy matters
and even in many matters of detail concerning Central
Bank operations.
The Mission has given careful consideration to the
desirability of providing for a Council of this sort
and is in synpathy with the objectives which it is
hoped to reach through the function of a Superior Bank-
ing Council. However, to establish a Council with
powers superior in all important respects to those of
the Central Bank and staffed with full-time officers
and employees, seems both undesirable and unnecessary,
in conjunction with a Control Bank such as is recom-
mended in this report. It is undesirable first because
it would place the Bank's board of directors in such a
[
286
- 26 -
position of inferiority as to make it doubtful that
woll-qualified persons would accept membership on the
board, and second because there would be uneconomical
duplication of function and personnel between the Council
and the Bank. The principal objectives sought through
the Council are believed to be attained in the Mission's
recommendations by other means.
THE ADVISORY
Nevortheless, functions of considerable usefulness
COUNCIL ON
MONETARY POLICY
could be performed by a small advisory council of Govern-
ment officials and others, acting mainly through occa-
sional meeting and with indirect rather than direct
powers over the Central Bank. The Mission therefore
recommends the establishment of an Advisory Council on
Monetary Policy, made up of the Ministers of Finance,
Agriculture, Commerce, and Labor, and three others
appointed by the President. Of the President's appointees,
one might be selected from the faculty of the University
of Habana, and one might be a man, either in Cuba or
from abroad, who is experienced in central banking problems.
FUNCTIONS OF THE
The duties of the Council should primarily be to
ADVISORY COUNCIL
consult and advise with both the Government and the Bank
on major matters of credit policy which particularly
affect the public welfare. Ultimate responsibility for
policies of the Central Bank should be left with the
287
- 27 Bank's board of directors, but the Council would have
the prerogative of making its views on policy known to
the board whenever the Council desired, of requesting
explanations from the Bank on its actions, and of calling
attention to neglected problems, and would have certain
dutics indicated in 2 later section in regard to deficicncies in the Control Bank's required reserves.
it any time the Council should have the right to
request that the Bank make an explanation in writing
of any current policy. In addition, the Bank should be
required to make an annual report to the President, with
1 copy to the Council, explaining all najor policios
carried out during the year and giving the reasons therefor.
MEETINGS OF
In view of the recommondations made above for
STOCKHOLDERS
selecting the management of the Bank, the functions re-
maining for action by the stockholders of the Bank as
such are relatively few. Meetings of the Central Bank's
shareholders may be provided for to receive the annual
report of earnings, discuss matters relating to the
Bank, and attend to other technical requirements of the
Bank's corporate existence. Furthermore, the pancls
for the selection of Class A directors might be selected
by the member banks on the occasion of the annual meet-
ing of shareholders.
in
288
- 28 -
III. Loans and Investments
IMPORTANCE
OF FUNCTION
The making of loans and investments is probably the
most important single function of a central bank. It
includes refusing unsafe, improper, or excessive loans
and investments as well as making positive commitments
with courage and discrimination; influence upon borrowers
to improve the character of obligations which may be
acquired by the bank; skillful timing of operations; and
enlightened management of the total volume of its credit
outstanding. The Cuban Central Bank will survive or
fall, will benefit Cuba or leave it worse off than if
the Bank had never been created, depending on the quality
of the Bank's policies in this vital field.
The Central Bank will normally confine its loans to
(or make its investments in the obligations of) banks,
the Central Government itself, the Stabilization Fund,
and any governmental credit institutions which may be
created. Recommendations concerning these uses of
central bank credit will be discussed in that order.
ACCOMMODATION
TO BANKS
Regarding accommodation to banks, it has been cus-
tomary in central bank laws to define in considerable
detail the credit instruments eligible for rediscount.
Nevertheless, in the opinion of qualified observers the
289
- 29 -
results of such detailed statutory definition in the
United States have not been altogether satisfactory and
have resulted in significant inflexibility of rediscounting operations, with few compensating advantages. The
Mission therefore recommends that a broad and simple
formula be written into the Cuban law to govern the
Bank's selection of the credit instruments which it may
consider for rediscount.
REDISCOUNTS
Until the banks in Cuba shall have obtained some
experience with central bank operations, it seems advis-
able to confine normal rodiscounting to the better
recognized types of self-liquidating, short-term credit
instruments. To this end it should be provided that the
Central Bank may at its discretion rediscount selfliquidating obligations of a quality recognized as sound
by the best banking standards bearing the name of at
least one person or firm of proven responsibility and
endorsed by a stockholding bank, with a maturity of not
more than 120 days from the date of discount, or 180 days
in the case of obligations issued for agricultural
purposes.
ADVANCES
The Bank should also have the power to make advances
to stockholding banks socured by assets eligible for
290
- 30 -
rediscount or purchase by the Central Bank, provided
the advances have a maturity of not more than 90 days.
EMERGENCY
However, in order to give the Bank scope and
ADVANCES
flexibility to meet special unforseeable conditions,
the Mission recommends that, in addition to the rediscount powers enumorated above, the Central Bank be
authorized to make advances to stockholding banks with
a maturity of not more than 90 days on the security of
any assets satisfactory to the Central Bank (whether
or not eligible for rediscount or purchase) upon the
affirmative vote of fivo directors.
REGULATIONS
The Bank should be authorized to issue regulations
concerning obligations it will accept for rediscount or
as collateral for advances.
SOLVENCY OF
For example, before it acquires any obligations
OBLIGORS
dependent for their value in whole or in part upon the
endorsement of a shareholding bank, the Central Bank
might desiro to have on file'a recent proven statement
of the adequacy and soundness of the bank's assets.
The proof might consist of an audit by public accountants
acceptable to the Control Bank or certification by qualified bank examiners, including, if necessary, examiners
employed by the Central Bank. Concerning the Cuban
branches of foreign banks authoritativo statements as to
in
- 31 the condition of either the Cuban branches alone or the
bank as a whole may be acceptable, provided the full
credit of the entire institution stands as security for
all liabilities of Cuban branches. Further, before
being accepted for rediscount, all obligations bearing
the names of business firms or individuals (in addition
to the endorsement of a bank) should be supported by
authenticated financial statements of the principal
parties to such paper.
SCRUTINY
The Bank should regulate its rediscounts not only
OF CREDITS
by the rediscount rates charged the borrowing banks,
but also by scrutiny of individual documents presented
for rediscount and by direct refusals to rediscount when
this seems desirable or necessary. The right and the
duty of the Bank to discriminate between desirable and
undesirable loans should be clearly stated in the law.
RESPONSIBILITY
During periods of threatened undesirable credit
FOR GENERAL
CREDIT CONDITIONS
contraction the Central Bank should not necessarily
confine itself to rediscounting self-liquidating obligations of prime quality. The Bank should feel
responsibility for the credit structure as a whole, for
the general level of business activity and employment,
and for the market for obligations of the Cuban Government and Government agencies. If measures with respect
291
292
- 32 to normally rodiscountable paper are inadequate, more
aggressive steps should be adopted at the most effective
time, with due recognition of the Bank's limitations.
LOANS TO THE
The Central Bank should be empowered to give
GOVERNMENT
reasonable assistance to the Central Government. Although
there is an inclination in some quarters to regard any
central bank accommodation to governments as dangerous,
it seoms abundantly clear that a moderate amount of such
accommodation is not only desirable under certain con-
ditions but much loss dangerous than a strict prohibition
against it. The Cuban Government should not, of course,
rely upon Central Bank credit as a substitute for taxation or borrowing from the public. Caution and wisdom
should be applied in determining the appropriate amount
of Central Bank credit. Under ordinary circumstances
and especially during unusually prosperous years, it is
questionable whether the Bank should make any advances
to the Government, unless short-torm financing to moot
soasonal fluctuctions in the Government's revenues can-
not be obtained at reasonable rates from other sources.
However, greater Control Bank assistance during periods
of trade depression may be essential to the financial
and economic wolfare of the country. The funds should,
of course, be scrupulously guarded from uses involving
political favoritism or waste.
C 293
- 33 -
LIMITATIONS ON
The Mission recommends that the Bank be authorized
LOANS TO
GOVERNMENT
to make loans to the Government with a maturity of one
year or less, on the affirmative vote of five members
of the board of directors, provided that the net total
of the loans made during any one year (excluding refunding) does not exceed five percent of the Government's
budgeted expenditures during the then-current fiscal
year. An amount in excess of five percent can be advanced only on the affirmativo vote of six numbers of
the board of directors.
It should be clearly understood, however, that any
loans to the Government are at the discretion of the
Bank, and that the Bank may reject the Government's
requests for advances eithor for reasons of general
credit policy or for other considerations of the public
welfare. At the same time, the Bank should always be
mindful of its special responsibilities concerning the
credit of the Government.
When, as the result of such advances made over the
course of two years or more, the total of such direct
loans outstanding on the books of the Bank has reached
an amount equal to 10 percent of the annual average
budgeted expenditures during the current and next
preceding fiscal years, no further advances should be
in 294
- 34 made to the Government except on the affirmative vote
of six directors.
Furthermore, the law should specify that in no
case may an excess over the 10 percent referred to
above continue to be outstanding for more than two
years in any four-year period.
FINANCING OF
STABILIZATION
FUND
The Central Bank should help finance the Stabilization Fund's accumulations of gold or foreign exchange.
This is discussed in detail in Section VII.
ASSISTANCE TO
OFFICIAL CREDIT
AGENCIES
Another important use of central bank credit is
loans to (or investments in the securities of) official
lending agencies. The American Mission is strongly of
the opinion that the Cuban economy is in need of an
official or semi-official agency to extend credit for
agricultural purposes and that consideration should be
given to the advisability of establishing agencies for
industrial, public works and mortgage purposes. The
Mission hopes shortly to submit a report on an agri-
cultural lending institution. The Central Bank in
turn should be authorized to give reasonable assistance to such agencies and should be directed to foster
their sound development so far as is consistent with
its general credit policy.
1
295
- 35 -
It is a distinct possibility, as well as a desirable one, that a good share of future credit expansion
in Cuba will occur through such lending institutions.
More specifically, the Bank should be authorized
at its discretion to acquire obligations of these
agencies subject to some general protective limitations.
The limitations might take the form of a provision that
the obligations must be short-torm and possibly bear
the guarantee of the Government and that not more than
some moderate proportion, perhaps 15 percent, of the
Central Bank's assets may consist of the obligations
of any one of those agencies. It is not possible at
this time to forosoo with accuracy the maximum extent
to which the Central Bank may advisably finance the
agricultural and other Government credit agencies. The
Mission therefore recommends that at the end of two
years the Bank, with the approval of the President of
the Republic, may increase the above proportion to not
more than 20 percent. Any further increase in the percontage should be logislatively determined. Obligations
of such agencies rodiscounted with the endorsement of a
shareholding bank are to be regarded as coming outside of
the percentage limitation just mentioned.
296
- 36 -
EMERGENCY LOANS
With the possible exception of extreme emergencies
TO PUBLIC
the Central Bank should not make loans directly to the
public. Private lending agencies cannot be expected
to stay in business in direct competition with a contral
bank which is given monopolies of note issue and holding
other banks' reserves. The Bank has the further advantages of partial exemption from taxes and sorvices of
management paid in part from other sources. Furthermore,
there are important advantages to a contral bank in
having business loans and most bank investments made by
independent, privatoly-managed banks. The pressure upon
a semi-governmental bank to make particular loans or
investments which may be undesirable can readily become
intolerable.
Only, therefore, in special emergencies of credit
contraction when normal banking facilitios are seriously
disrupted and when banks against their wish are forced
to call in old loans and to refuse new ones, should the
Central Bank be authorized to lond directly to the public.
Such emergencies should be recognized to exist only upon
proclamation by the President of the Republic (possibly
with the consent of the Sonate), and all loans to the
public by the Central Bank night properly require an
affirmative vote of five directors.
- 37 OPEN MARKET
OPERATIONS
297
Quite apart from its direct loans and advances,
the Bank should be given the powers necessary to implement its open-market policy. The Bank should have the
authority to buy and sell securities in the open
market at times when it wishes either to increase or
to decrease the funds available to the banking system.
In this connection the Bank should be authorized to
purchase direct obligations of the Republic of Cuba
which have been outstanding in the open market for one
year or more, short-turn debentures or notes of Govern-
ment credit agencies, and interest-bouring obligations
of the Stabilization Fund (for which see Section VII
below), whenever such purchases are required to carry
out the Bank's open-market policy. Obligations of the
Government issued within the preceding year may also
be purchased in the open market, but all such purchases,
as well as purchases of obligations of official credit
agencies, should como within the respective percentage
limitations recommended above. It should be required
that all securities for the open-market portfolio should
be purchased in the open market at provailing prices.
If the available supply of the obligations named above
is too small to permit effective open-market policy,
the purchase should be permitted of other seasoned,
first-grade bonds which have been outstanding for two
years or more.
- 38 -
E
298
The Bank should, of course, be empowered at its dis-
cretion to sell any assets which it is authorized to
acquire.
When a market for Government securities has developed
to the point where the Central Bank would be justified in
undertaking limited stabilizing operations in the market
for new issues of Cuban Government securities for brief
periods, consideration can be given to adding to the
powers of the Central Bank in this respect. The Mission
recognizes that if and when an agricultural bank is established, its long-term, mortgage-secured bonds will in due
time be offered in the investment market. Consideration
of the relationship of the Central Bank to those securities
may well be poetponed until plans for the agricultural bank
are more fully determined.
LOANS FOR
SPECULATION
The statute might include a provision prohibiting purchase of or lending upon assets issued to finance specu-
lation in stocks, real estato, or commodities.
NECESSARY
LIMITATIONS ON
CENTRAL BANK
It may be desirable at this point to call attention
to the fact that a central bank cannot be regarded as a
CREDIT
source of unlimited financing for all desirable purposes.
Loans and investments made by the central bank incrense
(in the absence of offsetting changes) either the currency
held by the public or the legal reserves of the banks.
(For all increases in the reserves of banks arising from
in
299
- 39 -
an expansion of contral bank credit there are likely
to be corresponding increases in the bank deposits held
by the public.) Increases in their reserves give the
banks the means with which to expand their own loans
and investments. For all commercial banks taken
collectively, additional reserves permit an aggregate
expansion of their loans and investments several times
the amount of the increase in reservos.
CONTROL OF
One of the basic duties of a central bank is to
MEMBER BANK
RESERVES
maintain the volume of the member banks' reserves at a
level consistent with and conducivo to the best interests of Cuba. The volume of reserves must not be permitted to stimulate the banks to expand their loans
and investments to excess. Consequently the Central
Bank must regulate the total of its own loans and investments so as not to cause a damaging over-expension
of momber bank credit.
One aspect of this responsibility is that the
Central Bank must not oxtend an excessive amount of
credit to official lending agencies. Such agencies
must be prepared to obtain much and at times all of
their loanable funds from sources other than the
Central Bank.
- 40 NEED FOR
One of the conditions in Cuba repeatedly described
CONFIDENCE IN
MORTGAGES AND
300
to the Mission during its investigations was the in-
SECURITIES
paired public confidence in mortgages and other secured
obligations. Much of this lack of confidence was
attributed to the mortgage moratorium laws of recont
years.
The effectiveness of a Central Bank will be con-
siderably reduced in Cuba unless it is possible to
develop willingness on the part of investors to purchase
well-secured obligations of official credit agencies
and of the Government. In order to help develop such
confidence, it is essential that the public have faith
in the fair and impartial treatment of creditors by
the Government. Any opportunities utilized to domonstrate the Cuban Government's resolve to treat creditors
with complete fairness should be of distinct benefit to
the long-run development of Cuba's economic welfare.
The Mission urges that careful and prompt consideration
be given to a review of the entire nortgage moratorium
situation in Cuba in order that the Central Bank and
any agricultural bank which may be established may
carry out their operations under reasonably favorable
conditions.
E.
301
- 41 IV. Note Issue and the Reserve Requirements of the Central Bank
RIGHT TO ISSUE
LEGAL TENDER
CURRENCY
The Mission recommends that the Central Bank be
given the exclusive power to issue paper currency in
Cuba and that the Bank's notes be given legal tender
status.
TRANSFER OF
SILVER
CERTIFICATES
The Bank should take over the liability for outstanding issues of silver certificates and the gold and
silver coin held as cover against them.
NOTES AGAINST
WHICH BANK MUST
HOLD RESERVES
It suggests, further, that these issues should be
regarded as a volume of currency to which Cuba has
already become adjusted. Accordingly the Bank should
be required to maintain legal reserves only against
its notes which constitute a net increase in Cuba's
total issues of currency (including one-peso coins but
not fractional coins)outstanding at the time the Central
Bank begins operations. These issues should include
silver certificates and one-peso coins held by the
banks and the public but not coins held as cover for
silver certificates.
The replacement of silver certificates by Central
Bank notes would thus not affect the reserve requirements of the Central Bank in any way. For example, if
silver certificates outstanding are 100 million pesos
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302
- 42 when the Bank starts business (assuming approximately
20 million to have been issued under pending legislation), only the Bank's notes which, when added to
the amount of silver certificates and one-peso coins
still outstanding, are in excess of 100 million, would
be subject to reserve requirements. The Bank's notes
that replace the silver certificates and represent no
net increase in peso currency or coin outstanding would
require no reserve.
DISPOSITION OF
SILVER COIN
RESERVE AGAINST
CERTIFICATES
The silver pesos received by the Bank need be
retained only so long as silver certificates covered
by the coined pesos remain outstanding. As the certificates are replaced by bank notes, either because they
are worn out or because the Bank wishes to retire them,
the silver coin need no longer be held as cover for
silver certificates. Some asset, however, equal to
the monetary value of the silver coins will be needed
to keep the Bank's assets equal to its liabilities.
Therefore, if at some time it should appear opportune
to the Bank to dispose of its silver coin at bullion
value, it would be necessary for the Bank to obtain
some asset equal to the difference between the coin's
monetary and bullion values. The Mission recommends
in
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that in this event the Government turn over to the
Bank special Government certificates with a face value
equal to this difference, bearing no interest and having no maturity.
RESERVE REQUIREMENT AGAINST THE
BANK'S NOTES
The reserve requirement against the Bank's notes
which the Mission recommends is the moderate ratio of
25 percent. This ratio, as stated above, would apply
to all note issues of the Bank in excess of the amount
of Cuban currency (including one-peso coins) outstanding when the Bank begins business.
LEGAL RESERVES
The Mission recommends that the only legal
reserves of the Central Bank be obligations of the
Stabilization Fund socured 100 percent by gold or
foreign exchange. These obligations are described in
full in Section VII.
PROCEDURE DURING
Whenever the legal reserves of the Bank fall below
A DEFICIENCY IN
RESERVES
the required level, the Bank's policies should become
subject to constant review by the Advisory Council.
Unless authorized to the contrary by the Council, the
Bank should immediately undertake measures to restore
the required reserve ratio. If the Council is not
satisfied with the measures adopted by the Bank it
should have the authority to require the Bank to alter
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its program. This authority should continue in force
until the legal reserves are once again at or above
the minimum requirements.
The question of whether the 25 percent reserve
requirement, with a similar flexibility as regards
reserve deficiencies, should apply to Central Bank
deposits has produced two viewpoints within the Mission.
The entire Mission is agroed that dollar deposits of
the Bank should be regarded as outside its peso system
and should be fully covered by dollar assets in accordance with the best practice of the commercial banks.
This is discussed further in Section VI.
MAJORITY'S REASONS
FOR NOMINAL CENTRAL
BANK RESERVE
REQUIREMENTS
Against the Bank's peso deposits, however, the
majority of the Mission recommends that no reserves be
required. The principal reasons for this view are the
belief that the Bank's statutory reserve requirements
should be as low as public opinion will allow and
that as little prestigo as possible should be given
to the desirability of maintaining any fixed percentage
of reserves. The majority regards as fallacious the
view sometimes held that high Central Bank reserve
requirements of gold or foreign exchange are a useful
means of assuring the foreign exchange stability of a
currency. At times large official holdings of gold
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or foreign exchange may be desirable, but at all times
they should be fully available for export. Immobilized
reserves are of no direct utility in maintaining the
value of a currency. Only reserves which may be exported, that is which nay be used to finance payments
abroad, are of value for this purpose. Reserves re-
quired to be held against the Central Bank's liabilities
can be fully mobilized only by elimination of those
liabilities. Such drastic credit contraction may be
so damaging to the national welfare that it becomes a
practical impossibility. As already stated, the
Mission believes that Contral Bank credit policies
should be guided by more discriminating criteria than
rigid reserve fornulas.
The Mission is well aware that it has been custom-
ary for central banks to maintain reserves not only
against their notes but also against their deposits.
In the preceding paragraph is set forth the conviction
of the Mission that Cuba should, so far as possible,
maintain its stock of gold and foreign exchange for
stabilization purposes. Even though the Bank's aggregato reserve requirements would be low on the basis of
immediately prospective liabilities, the majority do
not wish to require large reserves to be held when
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the Bank's liabilities shall have grown substantially.
In order to avoid this, the majority recommends that
every practicable measure be taken to provent the bank-
ing structure of the country from being linked so
closely to gold or foreign exchange as to subject that
structure to shocks of a deflationary sort at a time
of balance of payments maladjustment. Furthermore, it
is desired to avoid popular alarm due to the common
misconception of the significance of Central Bank
reserve requirements.
It probably must be recognized that lay opinion
will not be fully content with a central banking system
in which neither notes nor deposits have some sort of
gold or foreign exchange reserve. For this reason the
Mission recommends a statutory reserve requirement of
gold and foreign exchange against the notes issued by
the Central Bank. As to the deposits of the Central
Bank, however, the Mission believes that there need be
no required reserves of international money.
MINORITY RECOM-
Some members of the Mission, however, believe that
MENDATION OF
RESERVE REQUIREMENTS AGAINST
the Bank should be required to hold reserves against both
DEPOSITS
peso notes and deposits. Thoy consider that deposits,
fully as much as notes, represent Central Bank credit,
the volume of which should be limited in some measure
is
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with relation to the gold and foreign exchange resources
of the country. They are further of the opinion that
Cuba's gold and foreign exchange resources will be
ample to provide the necessary reserves against deposits
without any restriction of the legitimate credit activities of the Contral Bank. On the basis of the general
figures (shown in the appendix at the ond of this report)
25 percent reserves against peso deposits of the Central
Bank would amount to 4 million posos. A doubling of
the peso deposits in the hands of the Cuban public would
raise these required reserves of the Central Bank to
only 8 million pesos. Owing to the large fiduciary
issue of notes for which provision is nade in this report, required reserves of the Central Bank against notes
are likely to be negligible when the Bank begins business.
Virtually the only reserves required would be those
against deposits. Since the Cuban Stabilization Fund
already had $8 million at the end of March, and there
were possibly $30 million of United States currency in
the hands of the Cuban public most of which should, under
the new system, be replaced with pesos and acquired by
the Government; and since the prospects are that the
Cuban balance of international payments during the war
will lead to far greater acquisitions of dollars, these
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308
- 48 members of the Mission believe that Cuba is well able
to adopt what appears to them to be a more rational
system of reserve requirements. In this connection
they are inpressed by the fact that the reserve requirements are not absolute, but allow for a smooth adjust-
nent in the unlikely event that reserves fall below
the legal minimum.
The type of reserve requirement recommended
(whether against notes only or against both notes and
deposits) gives some warning when the volume of Contral
Bank credit is out of line with the resources of the
Fund, and it provides for corrective action; but it
does not rigidly force the Bank into action which may
be inappropriate to the economic situation at the time.
If the Bank's reserves are deficient, for instance,
because a bad sugar crop and an adverse balance of trade
are draining the Fund's resources, the Bank nay well
decide that the internal situation in Cuba requires
support rather than further pressure toward contraction.
In such a case, the Bank might extend credit freely as
the best means of meeting the situation, pending the
adoption of other measures to balance Cuba's international
position. In pursuing this policy the Bank would, howover, have to have the approval of the Advisory Council.
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On the other hand, a policy of restraint may be desirable long before the Bank's reserve becomes deficient.
SIGNIFICANCE OF
INTERNATIONAL
RESERVES FOR
CREDIT POLICY
The entire Mission agrees that the Bank should not
expect to receive from the level of the Fund's holdings
of gold or foreign exchange its principal guidance
either to expand or to contract credit. Developments
of recent years cast serious doubt on the wisdom of
determining donestic credit policy solely on the basis
of a country's holdings of international reserves.
Able and far-sighted central bank management should,
under some conditions, encourage the expansion of bank
loans even when there is only a small reserve of gold
or foreign exchange and, under other conditions, a
discriminating or restrictive credit policy may be
desirable even though a country holds a large amount of
gold or foreign exchange. It seens clearly possible
that both of the hypothetical conditions just stated
may sometime occur in Cuba. These probloms are dis-
cussed further in Section VII.
- 50 -
310
V. Reserve Requirements of Commercial Banks
REQUIREMENTS UNDER
NORMAL CONDITIONS
The Mission believes that the requirement of the
Cuban Commercial Code that banks hold reserves of 25
percent of their deposits should be continued subject
to possible modification by the Central Bank under
special, limited circunstances. The law should require
that at least four-fifths of the 25 percent be held in
deposits at the Central Bank. The law should also
require the same reserve against savings deposits subject
to reduction at the discretion of the Central Bank to a
minimum of 5 percent. Coincident with this power to
reduce these requirements, the Bank should have the
power to define such deposits and issue regulations concerning them. The currency in which these reserves must
be held is discussed in the next section.
EMERGENCY CONTROL
OF RESERVE
REQUIREMENTS
In case of threatened over-extension of bank loans
or investments, the Bank should have the power to require
that commercial banks hold peso reserves higher than
those regularly required.
In the interest of Cuban welfare CS woll as in
justice to the banks, limitations should be written into
the law designed to protect the banks against injury
from application of this power. The higher reserve
requirement ratio should apply only to denand deposits
is
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in excess of those held by each bank at the time the
increase is ordered. Furthermore, it should be required
that the Central Bank make what provisions are necessary
to allow banks to take care of any firm commitments to
lend entered into before the increase is announced. It
should also be clearly understood that banks will be permitted to levy charges on bank depositors sufficient to
cover the costs of maintaining checking services, includ-
ing among the costs a fair profit on the banks' capital
in Cuba. These costs are ordinarily covered by the
income from the banks' earning assets, but if they are
not permitted to increase their earning assets as their
deposits increase, the banks should be compensated
through service charges. The Central Bank should also
be authorized to make adjustments for new banks in order
to permit them some degree of expansion of credit.
The Bank should have the power to cancel any increase
in reserve requirements above 25 percent. In periods of
emergency the Bank should also have the power to reduce
reserve requirements below 25 percent.
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VI. The Status of the Dollar in Cube
PESO SYSTEM
Special problems are raised by the existence in Cuba
DESIRABLE
of a large volume of bank deposits, bank loans, securities,
and currency, all denominated in United States dollars,
side by side with similar instruments denominated in pesos.
An exact statement of the degree to which this duel monetary system is disadvantageous to Cube will not be under-
taken in this report. Nevertheless, the disadvantages
seem clearly to preponderate.
METHOD OF
The Mission believes that Cube should progress from
TRINSITION
2. dual peso-dollar system tc an all-peso system by
gradual, voluntary stages. Legislation to enforce an
abrupt, compulsory conversion seens likely to do more
harm than good. The transition should be brought about
by increasing the prestige of the peso through careful
and wise monetary policies.
LEGAL TENDER
POWER OF THE
DOLLAR
The Mission recommends that the legal tender power
of United States dollars be terminated at once. But it
doubts that other inpediments against their use or
mersures forcing dollers out of Cuba would be in Cubr's
interest at this time. Obligations denominated in
dollars should be payable in dollars with full legal
sanction. The Stabilisation Fund and the Central Bank
should then dev te thonselvos to the task of winning
full public confidence that posos are more desirable
313
A
- 53 -
than dollars for people in Cuba to hold and use.
it some future time, consideration should be given
to imposing additional, mild deterrents to the internal
use of dollars, possibly including texation at a very
low rate on all transfers from pesos into dollars, extre
charges or taxes upon the keeping of dollar bank balances,
and other measures.
LAW OF
JULY 8, 1939
Ending the legal tender power of dollars will probably
render obsolete the provisions of the law of July 8, 1939,
whereby banks are required to meet dollar liabilities in
dollars but certain classes of bank borrowers (as well
as other debtors) may repay dollar loans with E like
number of pesos, regardless of the current exchange rate.
Even though this provision of the law should have become
ineffective, the Mission believes that it would be advis-
able that this provision of the law be specifically
repealed. Obligations should be payable only in the
currency in which they are denominated. With the peso
at parity with the dollar, repeal of this law will cause
no burden upon anyone.
The provision of this law which apparently results
in penalizing any person quoting n foreign exchange
rate for the peso lower than the previous quotation should
also be repealed. It is nov. generally recognized that
it is based upon C misconception of how an untrammeled
:
314
- 54 foreign exchange market should work and prohibits banks,
which are foreign exchange brokers, from responding to
the forces of supply and demand in both directions. The
repeal of this law would be more a matter of principle
than of important effect, since the Stabilization Fund
should succeed in eliminating all but trifling fluctuations in the rate of exchange.
DOLLAR POSITION
So long as dollar bank balances exist in Cuba, banks
OF BANKS
should be required by law to keep their dollar assets and
their peso assets in substantial balance with their
respective dollar and peso liabilities. Such legislation
will only make compulsory what is understood already to
be the firm practice of the banks now in Cuba.
BANK RESERVES
AGAINST DOLLAR
DEPOSITS
The Mission recommends further that banks be per-
mitted to hold their legal reserves against dollar deposits
in dollars for c period of five years. Peso reserves would
have to be held against peso deposits. /ffer five years,
banks should be required to hold all their legal reserves
in pesos. This provision will give ample warning of the
change and should end uncertainty concerning the pro-
portion of dollars and pesos required to be held as
commercial bank reserves. It will also give the commercial
banks ample opportunity to induce their customers to hold
deposits in pesos rather than in dollars.
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- 55 -
Against all its deposit liabilities denominated in
dollars (including the member bank's reserve deposits
referred to just above), the Central Bank should be
required to keep a 100 percent cover of high-grade, liquid
dollar assets.
D
316
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VII. The Stabilization Fund and its Relation to the Central Bank
GENERAL POWERS OF
STABILIZATION FUND
The Mission recommends that the Cuban Stabilization
Fund be empowered to acquire gold and foreign exchange
and to use those holdings to stabilize the foreign exchange value of the peso during periods when the balance
of payments is adverse. In order to build up such
holdings, the Fund should have at its disposal adequate
peso financing, so that it can retain gold or foreign
exchange until needed.
FUND'S PREVIOUS
The Fund as now constituted has usually had to
LACK OF PESO
FINANCING
sell its acquisitions of dollars within a very short
time. The Fund's principal source of foreign exchange
has been the dollars which sugar and molasses exporters
were required to deliver to the Fund at par. They were
entitled to receive prompt payment of a like number of
pesos. While the Fund had access to general Treasury
funds, the Treasury has usually needed all its funds
within brief intervals to must budgetary expenditures.
Some of the Fund's dollars were purchased by the Treasury
at par to neut the Government's expenditures abroad.
The Fund was obliged to soll most of its remaining
dollars in the foreign exchange market in order to obtain pesos with which to reinburse the exporters
delivering dollars. The Fund could retain only whatever
is 317
- 57 promium there was on the dollar. When the dollar was
at par or at a small discount, as in the first quarter
of 1942, there was no profit in such operations and
there may have been a loss.
WEAKNESS IN
BALANCE OF
INTER-CURRENCY
PAYMENTS
Lack of adequate peso financing has not been the
only factor preventing the Fund from building up a
stock of gold or foreign exchange in the period prior
to the last quarter of 1941. While the peso was at a
discount, any attempt by the Fund to accumulate foreign
exchange would have tunded to depress it further.
CURRENT STRENGTH
In recent months, however, the poso has gono to a
prenium. More the dollar not used directly as money
in Cuba, the Fund would currently be engaged in acquir-
ing dollars in exchange for pesos on a substantial
scale. The Mission is recommending a peso system for
Cuba with Fund operations on whatever scale is needed
to maintain parity between the poso and the dollar.
POSSIBLE
LOCATION OF
THE FUND
is good case exists either for placing a country's
foreign exchange stabilization operations in the contral
bank or for establishing an independent fund. The
difference between the two methods is perhaps more
apparent than real.
If the contral bank buys the gold or foreign
exchange, each peso's worth that is acquired will
ordinarily be financed by an increase of one peso
--
318
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in the central bank's outstanding banknote or deposit
liabilities. If the stabilization fund is independent
or is a part of the Treasury, the acquisition of monutary gold or foreign exchange may be financed by
issuing against the gold and foreign exchange acquired
sone obligation such as gold or foreign exchange
certificates. These could be designed to Serve either
as circulating currency or as the neans of obtaining
a deposit in the contral bank.
If, however, the nonetary authoritics desire to
finance the increase in the stock of gold or dollars
without issuing new money, it is possible to do so,
whether the fund is part of the bank or suparate from
it, by means which are discussed below.
REASONS FOR
The Mission feels that thore is a preponderance
INDEPENDENT
FUND
of advantage at the present timo in making the Cuban
Stabilization Fund soparate from the Control Bank, for
the following reasons: (1)Responsibility for the
foreign exchange value of the poso and operations to
stabilize that value should be placed in an agency
fully responsible to the Government. (2) Profits or
lossos arising from stabilization operations should be
for the account of the Government and this accounting
can be carried on more conveniently and understandably
319
- 59 -
when the Fund is separate than when it is part of the
Bank. (3) is separate Fund makes it easier to handle
the financing of acquisitions of gold and foreign
exchange by borrowing from the public. The significance
of this measure is discussed further on in this Section.
ILLNAGEMENT OF
The management of the existing Stabilization Fund
THE FUND
in Cuba is wholly within the Treasury. With the ostablishment of a Central Bank it appears advisable to the
Mission that the Governor of the Bank should participate
in the management of the Fund just as the Minister of
Finance participates in the management of the Bank.
The comunity of interests and problems is so close
that this ningling of the managements should contribute
to efficiency and unified policy. The Mission therefore
recommends that the Stabilization Fund be administered
by a committee composed of three members: the Minister
of Finance, who should be chairman, an appointee of the
Minister of Finance, and the Governor of the Central
Bank.
OVERDRAFT METHOD
Probably the simplest method for financing the
OF FURNISHING
PESOS
peso requirements of an independent Fund is to give it
the right to incur a peso overdraft at the Central Bank
up to the cost of any gold or foreign exchange added
to the Fund's holdings. When the Fund buys gold or
320
- 60 foreign exchange--either in the open market or from
exporters delivering dollars as the law now requires-the Fund can pay for it with a check drawn on the
Central Bank, in pesos. The check being acceptable at
any bank, the seller of the gold or foreign exchange
will receive payment at his convenience. When the
check is presented to the Central Bank in turn by a
commercial bank, both the Central Bank's liabilities
(either notes or deposits due to banks) and the Bank's
assets-i.e., the overdraft of the Stabilization Fund-will increase by equal amounts.
TERMS OF THE
OVERDRAFT
Unless considerations of Central Bank credit
policy dictate otherwise, the overdraft need not be
repaid until the Fund wishes to use the gold or foreign
exchange securing it. it that time the Fund will support the peso in the foreign exchange market by selling
gold or foreign exchange in exchange for posos. The
pesos so obtained will be applied on the Fund's overdraft at the Bank.
The Mission recommends that when this Central Bank
overdraft method is used to finance accumulation of
gold and foreign exchange, the overdrafts bear no
interest and have no naturity. . This will give the Fund
the approxinate equivalent, so far as ability to obtain
or
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- 61 -
pesos is concerned, of the United States procedure of
financing acquisitions of gold by issuing gold certificates to the Federal Reserve Banks.
The Fund should retain title to any gold or foreign
exchange which it acquires, but the gold or foreign
exchange could be held by the Central Bank as trustoo.
EFFECT ON
COMMERCIAL
BANK RESERVES
us already stated, use of Central Bank overdrafts
to pay for accumulations of gold and foreign exchange
will increase, peso for poso, the currency or bank
deposits hold by the public, provided that offsetting
changes do not take place. The public's monotary habits
will autonatically determino whether the increase occurs
in currency or in deposits. To the extent that it
occurs in deposits, the overdraft method will result
also in increasing the reserves of the commercial banks
by a like amount. Those in turn will be the logal basis
for a multiple expansion of commercial bank credit, as
discussed in Section III. Under some circunstances,
increases of member bank reserves freely available for
the expansion of bank loans and investments may be
regarded as undesirable.
During the war, when Cuba's balance of international
payments may result in very large not payments to Cuba,
the financing of the Fund may be a major influence in
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the domestic credit situation. The Central Bank should
be given power to regulate this financing insofar as
possible so as not to cause undesirable effects on
donestic credit conditions. If it should be made conpulsory that the Bank finance the Fund without interest
and without limit, the Bank would probably be unable to
pursue a policy of moderating credit expansion in the
years immediately ahead without at least resorting to
strong energency measures of control.
The Bank will not have ordinary loans, or assets
suitable for sale in the open market, in nearly sufficient volume to absorb the member bank reserves created
in financing the Fund. Cuba's favorable trade balance
during the coming year will probably exceed $100 million.
Part of this balance nay be left abroad or placed in
dollar deposits in Cuba, but in addition to the trade
balance there will be several other sources of dollars
which may be offered to the Fund. More than $30 million
were estimated to be in public circulation in Cuba at
the end of March, and this may be offered in large part
to the Fund. To the extent that proceeds of the $25 million
credit from the Export-Inport Bank and the $20 million
Reconstruction Finance Corporation advance for the development of Cuban nickel deposits are spent in Cuba rather
323
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than for imports from the United States, they will have
tc be converted into pesos. It would be unsafe not to
reckon with a possible acquisition of at least $50 million
--perhaps several times that figure-by the Fund in the
next year or two. The appendix to this report shows
what might be the effect on the donestic credit situation
of an acquisition of 050 million by the Stabilization
Fund.
TWO SPECIAL POWERS
TO CONTROL BANK
CREDIT
To deal with such a situation, the Mission reconnends that the Bank be given two special powers: first
the power to raise the legal reserve requirements of
commorcial banks, as stated in Section V, and second,
the power to compal the Fund to obtain its pesos outside
the Central Bank. Other measures which my be necessary
to prevent inflation in Cuba lie outside the usual
functions of a Central Bank, though of course the Bank
may give advice to the Government on their adoption.
RESULTS OF THE
POWER TO RAISE
RESERVE
REQUIREMENTS
By uso of the power to raise reserve requirements
the Central Bank could linit the further expansion of
bank loans and investments to any degree desired, although frequent changes in reserve requirements would
be inadvisable. The qualifying provisions recommended
in Section V would make unnecessary any forced con-
traction of loans and investments already made. Each
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bank could continue to maintain its previous volune of
loans and investments outstanding, with such further
growth as the Control Bank and the conditions permitted.
Furthernore, banks could continue to receive their previous
income from loans and investments, possibly augmented by
some increase in interest rates and inconc from service
charges sufficient to componsate for the cost of
deposits against which high reserves are required.
FINANCING THE
The second special control which the Mission recon-
STEBILIZATION FUND
OUTSIDE THE
CENTRAL BAJIK
mends is that the Control Bank be given the power to
require the Fund to cesse drawing upon it, or oven to
reduce its overdraft to any extent and at any timo the
Control Bank doons it advisable. Exercise of this
power by the Bank shoul: require an affirmative voto of
fivo directors. The effectiveness of this power as a
credit-control devico is readily apparent: Buying gold
or foreign exchange with posos obtained from sources
other than the Central Bank tends to prevent the growth
of legal bank reserves.
THE OTHER SOURCES
AVAILABLE
To the extent that the Fund had to finance its
acquisitions outside the Central Bank it could draw
upon the general revenues of the Treasury, or it could
sell a new type of credit instrument to the market.
The Mission suggests that this new instrument might be
325
- 65 a short-term note of the Government secured by the gold
and dollars of the Fund. The Mission has been informed
that a note so secured would have exceptional credit
standing in the Cuban market and under ordinary circum-
stances would sell readily at a very low rate of
interest. Of course, if a firm money policy were being
put into effect by the Central Bank, the rate of interest
on these notes would reflect the general high level of
interest rates, although it should still have a consider-
able differential in its favor.
The extent to which the gold and dollars acquired
by the Fund should be prevented from having the effect
of increasing the reserves of the commercial banks should
be loft for determination in the light of circumstances
current at the time.
INTEREST ON
In all probability interest paid on those Fund
FUND BORROWING
notes to make them acceptable to lenders will ultimately
have to be paid by the Government out of its general
funds. The interest payments will probably exceed any
profits which the Fund can make by stabilization operations around par of exchange. On the other hand,
Stabilization Fund notes fully socured by gold or
dollars should be salable at considerably lower interest
cost than other obligations of the Cuban Government
C
326
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or of official credit agencies such as an agricultural
bank. At any timo when, for reasons of credit policy,
only a limited amount of Central Bank credit can be made
available to the Central Government, official credit
agencies, and the Fund, combined, it may be to net saving
to the Government as a whole if the Fund is financed
partly in the open market, leaving the available Central
Bank credit for the Government or the lending agencies.
Thereby obligations bearing the lowest rates of interest
would be sold to the open market while obligations bearing higher rates of interest would be bought by the
Control Bank. Since the Government is the residual
beneficiary of Central Bank earnings, this procedure
would reduce the Government's not cost of borrowing.
THE PROBLEM OF
A throatened excess of gold or foreign exchange in
INADEQUATE
INTERNATIONAL
Cuba should probably be regarded as abnornal. In setting
RESERVES
up the Central Bank attention must also be paid to the
opposito possibility, that of the exchange stabilization
authoritics having difficulty in meeting an adverse
balance of international payments.
CREDIT POLICY
The Mission fully recognizos the importance of pro-
IN RELATION TO
INTERNATIONAL
tecting the exchange stabilizing operations of the
RESERVES
Stabilization Fund from excessive credit expansion permitted by the Central Bank. The Fund is responsible
327
-67 for maintaining the foreign exchange value of the pesos
issued by the Bank. Conceivably the Bank might render
the Fund's task impossible if it allowed an expansion
of credit without relation to the gold and foreign exchange resources of the Fund. Cuba's economy is markedly
dependent on export markets for sale of its production
and on imports for supplies of many types of goods.
Accordingly the Bank's decision to stimulate domestic
purchasing power must be guided by the danger of ongon-
dering a domand for imports larger than current exports
can pay for, after meeting other necessary foreign
payments. The Mission therefore recommonds that Central
Bank credit policies be determined with constant referonce to the resources of the Fund and to the problem of
maintaining the foreign exchange stability of the peso.
The presence on the Bank's board of directors of two
of the three members of the Fund's management should
serve in large part to integrate their respective
policios.
EMERGENCY
To provide for the possibility that Cuba may some
EXCHANGE
LICENSING
day be faced with a net balance of foreign payments so
adverse as to exhaust or (threaten to exhaust) the
official holdings of gold and foreign exchange, the
Mission recommends that the framework be set up within
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which it will be possible to subject all foreign exchange
transactions to license. Such a step may be a necessary
preliminary to a basic adjustment of an exchange rate or
other measure designed to permit reopening of a free
exchange market on a secure basis. Or it might prove
desirable under the circumstances of the time to continue
the moderating influence exerted by a licensing system
upon such foreign payments as excessive imports, specu-
lation against the peso, heavy purchases of foreign
securities, flight of capital, etc. The President
should be authorized, on the advice of the Stabilization
Fund Committee, to require licensing of foreign exchange
transactions by the Minister of Finance. Whether or
not this power is ever utilized is loft to the judgment
of the Cuban monetary authoritics in power when the
need may arise. It is an energency power which should
be used only when the Fund's capacity to stabilize
exchange threatons to be inadequate.
DOUBTFUL USE-
Although not wishing to restrict the judgment of
FULNESS OF
EXCHANGE
those authorities acting in the light of actual future
DEPRECIATION
IN CUBA'S
BALANCE OF
PAYMENTS CONTROL
conditions, the Mission, as suggested in the previous
paragraph, holds the view that for Cuba some measure
of foreign exchange rationing is preferable to efforts
to restore balance of payments equilibrium by wide or
329
- 69 -
frequent fluctuations in the foreign exchange rate.
In support of this view it may be argued, first, that
Cuban exports will not be increased substantially by
depreciation of the peso; second, that the value of
Cuban imports will not be reduced to a sufficient degree
or in a desirable manner by a depreciating peso; and
third, that transfers of funds abroad may be 80 aggravated by depreciation or the fear of further depreciation
that it will do considerably more not harm than good.
Those suggestions, however, apply only to conditions
which can now be foreseen.
The Mission, however, fully recognizes the possibility that future events may cause the peso to become
overvalued or undervalued in relation to other currencios. At such a time the foreign exchange authorities
may conclude that this overvaluation or undervaluation
reflects enduring naladjustment in Cuban costs and
prices in relation to those abroad. In this event, it
would be appropriate to recommend to the Cuban Congress
a change in the price of gold and hence in the par of
exchange.
Under present and prospective conditions, however,
the Mission believes that the statutory gold value of
the peso should be set at parity with the United States
330
- 70 gold dollar and that the Cuban Stabilization Fund should
maintain the foreign exchange value of the peso within
a range of mir f, technical fluctuations around parity,
i.e., within a range of not more than two percent in
either direction. Central Bank credit policy should
be determined in full consideration of Cuba's exchange
outlook, but, when appropriate donestic credit policy
and other measures are unable to keep the balance of
foreign payments in equilibrium, the Government should,
in the opinion of the Mission, expect to achieve a more
satisfactory adjustment by directly restraining certain
types of international transactions than by a policy
of exchange depreciation.
SUMMARY OF
RECOMMENDATIONS
OF SECTION VII
Specifically, and in rucapitulation, the Mission
nakes the following recommendations concerning the
establishment and functioning of a Cuban Stabilization
Fund and concerning the disposition of Cuba's gold and
foreign exchange reserves:
(1) Cuba's stocks of monetary gold and foreign
exchange should be segregated in a Stabilization Fund
to be used for the stabilization of the peso. The Fund
should be charged with the responsibility of purchasing,
holding, and selling gold and foreign exchange to
331
- 71 -
stabilize the peso. The Fund should stabilize the
foreign exchange value of the peso at the equivalent
of the gold value of the peso, allowing only minor,
technical fluctuations around that level.
(2) Management of the Fund should rest with a
committee of three, consisting of the Minister of
Finance, the Governor of the Central Bank, both ex
officio, and one member selected by the Minister of
Finance.
(3) The Fund should be authorized to obtain pesos
from the Central Bank with which to purchase gold or
foreign exchange on the basis of overdraft facilities
bearing no interest and having no maturity but fully
secured by gold or foreign exchange. In addition to
incurring overdrafts at the Central Bank, the Fund
should be authorized to borrow from the public (including the commercial banks) on interest-bearing notes
socured by gold and foreign exchange. The Fund should
be authorized to plodge its holdings of gold and
foreign exchange to secure those notes. The Central
Bank should have the power to require the Stabilization
Fund to cease expanding its overdraft at the Bank or
to reduce it to any extent the Bank deens advisable.
332
- 72 -
(4) Profits and losses from the operation of the
Fund should be for the account of the Treasury.
(5) The Fund should be required to publish audited
reports showing the disposition of profits and any disposition of foreign exchange or gold made at prices
other than the prevailing market price at reasonable
intervals after the transactions take place.
(6) The President of the Republic should have
power to order, on the recommendations of the Fund
Committee, that any or all foreign exchange transactions, imports, exports, and international movements
of funds be subject to license by the Minister of
Finance.
(7) The Fund should be authorized to hold pesos
against its overdrafts at the Central Bank, in any form
acceptable to the Bank.
The purpose of this provision is to make it possible,
when desirable, not to reveal the time and the magnitude
of the operations of the Stabilization Fund. Operations
may be conducted in confidence much more successfully
if, at a time when the Fund is selling its gold or
dollars in order to support the peso, it can maintain
its overdraft at the Central Bank rather than reduce
it as soon as gold or dollars are sold. Otherwise, the
333
- 73 Fund's operations and the size of its holdings of gold
and foreign exchange could readily be detected through
an inspection of the changes in the size of the Fund's
overdraft in the balance sheet of the Central Bank.
The overdraft may be maintained unchanged if the Fund
is permitted to secure its overdraft either with gold
and foreign exchange or with pesos. As gold and foreign
exchange are withdrawn, pesos obtained from their sale
could be substituted. The security for the overdraft
would still be complete. To preserve its control over
bank reserves, the Bank should be given authority
over the form in which the Fund may keep its peso hold-
ings, as between currency, deposits in the Central Bank,
or deposits elsewhere.
(8) The Fund should be permitted to invest in
high-grade foreign securities any of its gold or foreign
exchange not pledged as security for its liabilities
with due regard to the need to have a considerable
portion of its foreign exchange resources sufficiently
liquid for immediate use.
334
- 74 -
VIII. liscellaneous Provisions
The Bank should be authorized to hold deposits only
DEPOSITS
of commercial banks, the Government, governmental institu-
tions, and foreign governments and central banks. Deposits
may be accepted in any currency at the discretion of the
Bank.
SYHBOL FOR PESO
The law might provide for the adoption of some symbol
for the peso in order to facilitate its differentiation
from the dollar.
EXAMINATIONS
AND AUDITS
The Bank should have the power to require examina-
tions and statements of condition of banks in Cuba
audited by public accountants acceptable to the Bank, and
to authorize or prohibit the opening of new banks and
branches.
RESEARCH
The Bank should be authorized to conduct research,
to publish bulletins and reports, and to obtain information necessary for the conduct and formation of its
policies
FISCAL AGENT
The Central Bank should be the fiscal agent of the
Treasury of the Republic, and as such should perform
such services as are typically required of fiscal agents
by the Minister of Finance. Expenses due directly to the
carrying out of such services should be reimbursed to
the Bank by the Treasury.
335
- 75 TAX PRIVILEGES
The Centrol Bank should be free of certain taxes
(to be specified by Cuban tax specialists). It possibly
should have the mail franking privilege, though this is
not essential.
BRANCHES
The Bank probably should have the power to establish
branches and agencies.
336
- 76 SUMURY OF PRINCIPAL RECOMMENDATIONS
I. Capital
5 million pesos in cash of which about 3 million to be subscribed
by member banks and about 2 million by the Government.
3 million pesos of capital surplus, to be contributed by the
Government in the form of special Treasury obligations.
Dividends on member-bank shares to be limited to 4 percent;
the Government to receive no dividends, but to receive
all earnings after provision for earned surplus, which
accumulates on behalf of the Government.
II. Management
Board of Directors of seven members to control the Bank.
The members will include:
The Governor of the Bank, selected by the President.
The Finance Minister, ex officio.
The herd of the Agricultural Bank or an additional
Class B director.
Two Class h directors appointed by the President
from panels norinated by the member banks.
Two Class B directors appointed by the President.
In Advisory Council on Monetary Policy, composed of Cabinet
officers and Presidential appointees, to consult and
advise with the Government and the Bank on major matters
of credit policy.
337
- 77 III. Loans and Investments
The Brnk shell have the power to:
Rediscount for member banks 120 day commercial and 180
day agricultural paper or make 90 day advances
secured by such paper.
Make direct emergency 90 day loans to member banks on
any sound assets.
Extend loans to the Government, subject to specified
limitations.
Extend loans to official credit agencios, subject to
specified limitations.
Help finance the Stabilization Fund's accumulation of
gold or foreign exchange.
like direct loans to the public under specified energency
conditions.
Carry out open-market purchases and sales to implement
credit policy.
IV. Note Issue and the Reserve Requirements of the Central Bank
The Bank to have the exclusive note issue power.
The Bank to assume the silver certificate liability and the
silver peso reserves.
The Brnk to maintain n reserve against its notes (and possibly
its peso deposits) of 25 percent in the gold- or dollarsecured overdrafts of the Stabilization Fund, subject to
energency relextion. This reserve requirement not to
338
- 78 apply against notes issued by the Bank to replace silver
certificates.
The Bank to hold full dollar cover against dollar deposits.
V. Reserve Requirements of Commercial Banks
The commercial banks to hold reserves of 25 percent of their
deposits (in the currency of the deposit), of which fourfifths is to be naintained CS n balance in the Central
Bank.
The Bank to have power to vary reserve requirements of member
banks CS 0 noons of credit control, with limitations on
this power designed to protect the interest of the banks.
VI. Status of the Dollar in Cuba
The legal tender power of the dollar to be terminated at
ence, but banks to be required to hold dollar assets
substantially equal to their dollar liabilities.
it the end of five years all legal reserves to be held in
pesos.
VII. The Stabilization Fund and its Relation tc the Central Bank
The stocks of nonetary gold and foreign exchange to be segre-
gated in 0 Stabilization Fund, to be administered, for
the account of the Government, by the Finance Minister,
the Governor of the Bank, and an appointee of the
Finance Minister.
The Fund tc finance its operations by interest-free overdraft
at the Control Bank unless the Bank, for reasons of
339
- 79 -
credit policy, withdrews this privilege, in which case
the Fund is to turn to the money market for accomodation.
The Fund to stabilize the foreign exchange value of the pesc
at the equivalent of the gold value of the pesc, per-
ritting only minor technical flucturtions.
Power to change the price of gold (and hence parity of the
pose) to rust with Congress.
340
- 80 JPPENDIX
TENTATIVE BALANCE SHEETS OF THE PROPOSED CENTRAL BANK
Case I. The balance sheet of the Central Bank, set up in
accordance with the terms of this report and on the basis of the
Cuban currency and deposit figures of January 31, 1942, would look
scrowhrt C.S follows:
(In millions of pesos or dollars: $)
Liabilities
Assets
b. Silver certificates
j. Com. banks: 20% of peso
deposits
3
e. Earning assets
2
101
k. Capital: Banks
$14
1.
115
m. Capital Surplus
Total peso assets
Total assets
O.
p.
Dollar
Total
3
Government
2
3
Total peso liabilities
101
deposits
$14
Total liabilities
58
115
Related Items
3
7
67
Peso
13
n. Com. banks: 20% of dollar
Related Items
Peso notes outside banks
Peso cash in commercial banks:
Legal minimum (5% of peso
deposits)
Excess reserves
Commercial bank deposits:
0
i. Government deposit
2
d. Securities without interest
79
h. Bank's own notes
16
C. Fund overdraft
f. Dollar currency
6. Silver certificates
78
1
a. Silver coin
72
Required reserves of Central Bank:
25% of its notes
25% of its peso deposits (if
required)
4
100% of its dollar deposits 14
139
Each of the items in the balance sheet above may be briefly
explained. When the Bank assumes the liability for the 79 million
pesos of silver certificates outstanding on January 31, 1942 (item
e.), it will receive the 78 million pesos of silver coin held
against them (item a.) and the 1 million pesos of gold so held.
It is assumed that the Fund, which will hold the official gold and
341
- 81 foreign exchange of Cuba, buys this 1 million pesos of gold by a
corresponding overdraft on the Bank (item c.). The overdraft is
increased to 2 million pesos when the Fund buys the 1 million dollars
which the Government held on January 31, 1942, and which is assumed
to be deposited with the Central Bank (item i.). The 2 million of
peso currency that the Government held on January 31, 1942, is
assumed to be paid in as the Government's subscription to the capital
stock of the Bank (itom 1.), an operation which contributes 2 million
pesos to the Bank's holdings of silver certificates (item b.). The
remaining 14 million pesos of silver certificates in this item are
deposited by the commercial banks. These banks had 24 million pesos
of silver certificates and coin in their vaults on January 31, 1942.
Under the plan proposed they could count only 3 million pesos of
this (5% of their peso deposits: item o.) toward meeting their legal
requirements. They might wish to hold another 7 million pesos (10%
of their peso deposits: item p.) in excess of the legal minimum as
working reserves. This would leave them only 14 million pesos of
silver certificates to pay in to the Central Bank as a subscription
to capital (item k: 3 million pesos) and toward providing the reserve
balance (item j: 13 million pesos) which the law will require them
to keep with the Central Bank. The 14 million pesos of silver
certificates are thus 2 million pesos short of the 16 million required
for capital and reserves. This 2 million pesos the commercial banks
may borrow directly from the Central Pank or the Central Bank may
put the funds out through loans to the Government or to the Agricultural
342
- 82 -
Bank (if it is in existence) or possibly through open-market operations.
Whatever the method, earning assets of the Bank (item e.) will amount
to 2 million pesos. The 3 million peso surplus of the Bank (item m.)
is contributed by the Government in the form of securities without
interest (item d.). This accounts for all the peso items. The dollar
items reflect the fact that the connercial banks are required to pay
in 20% of their dollar deposits (item n.) in the form of dollar
currency (itom f.). Should the Central Bank in order to obtain
earnings invest this currency in dollar securities abroad, which
it has the right to do, item f. would change its title accordingly;
but the transaction would be without effect on the peso balance
sheet and would add nothing to the Bank's power to influence the
volume of peso credit through open-market operations.
Case II. The main report has called attention to the wide
range of possibilities in Cuba's balance of international payments
during the war. The surplus on merchandise trade may be more than
$100,000,000 a year. Some of this will be used in payment of dividends abroad and for other purposes and much of what is not used up
may be loft in the form of dollars instead of being converted into
pesos. The outcome is unprodictable, but it would be reasonable
to suppose that the Stabilization Fund will be called upon to buy
at least $50,000,000 in the next your or two. If exporters generally
convert their dollars into pesos, Fund acquisitions may be several
times this figure.
343
- 83 Should $50,000,000 be acquired by the Fund by means of an
overdraft on the Central Bank, and should the resulting 50 million
pesos go half into circulation and half into commercial bank deposits,
the Central Bank's balance sheet and related items presented in Case I
would be altered CS shown below:
(In millions of pesos or dollars: $)
Liabilities
Assets
Fund overdraft
Securities without interest
78
0
52
3
Earning assets
Total dollar assets
Dollar currency
Total assets
2
135
149
Peso
Total
18
3
Government
2
Capital Surplus
Con. banks: 20% of dollar
deposits
Total liabilities
3
135
$14
149
Related Items
25*
92
Dollar
1
Capital: Banks
Total poso liabilities
83
79
29th
5
deposits)
Excess reserves
Commercial bank deposits:
Bank's own notes
Government deposit
Com. banks: 20% of peso
deposits
$14
Related Items
Peso notes outside banks
Peso cash in commercial banks:
Legal minimum (5% of peso
Silver certificates
72
164
Required reserves of Central Bank:
25% of its notes
25% of its peso deposits
(if required)
100% of its dollar deposits
7*
5
Silver coin
Silver certificates
14
* To the extent that excess reserves are kept in the form of balances
at the Centrol Bank, the Bank's issue of its own notes will be reduced, and
its required reserves will be reduced accordingly.
Mennwhile dollar deposits of the commercial banks could grow
rapidly without affecting the poso carning assots of the Central
Bank. Their only effect on the poso balance sheet would be to
increase capital subscriptions, which the banks are required to
make at the rate of 2 percent of their total deposits, and to cut
- 84 -
down correspondingly the Central Bank's note issues. The reduction
in note issues would occur because the commercial banks would use
their idle excess reserves (in the form of currency in their vaults)
to make the capital subscription.
Several comments may be made on this second balance sheet.
Money in circulation outside the commercial banks has risen 43
percent as compared with Case I. Peso deposits have risen 37
percent and dollar deposits, although not shown as increasing in
the table, could in fact increase by much greater percentages
without material effect upon peso earning assets of the Bank.
These peso loans or earning assets remain at the low figure of 2
million pesos (i.e., no additional loans have been made to the
commercial banks, the Government, or the proposed agricultural
bank). Should the Bank allow its loans to run off completely
and should it convert its 3 million posos of Government securities
without interest into 90-day bills and sell them to the market, as
it has the right to do, it would diminish the peso reserves of the
commercial banks by only 5 million. The commercial banks hold 48
million pesos of reserves--25 million pesos more than the 23
million (25 percent of 92 million of peso deposits) which the law
required them to keep either with the Central Bank or in their
own vaults. This 25 million pesos of excess reserves would be
reduced to 20 million if the Central Bank eliminated its earning
assets and sold all its securities without interest; but the 20
million, amounting to 22 percent of the expanded volume of peso
344
345
- 85 -
deposits, would still be far greater than any reasonable working
needs of the commercial banks, which in Case I were assumed to be
10 percent of peso deposits--a generous figure.
On the basis of these excess reserves the commercial banks
could expand their loans and deposits in an active business
situation, the exact amount depending upon how much the public
added to their pocket money instead of increasing their deposits
at the banks. It is clear that if the Central Bank wished to prevent this further expansion of currency and deposits in Cuba, the
only instrument it could employ would be that of requiring the
Fund to finance itself in the market and to reduce its overdraft.
To the extent that the Fund borrowed from the commercial banks
(or from the depositors at these banks) excess reserves of the
commercial banks would be drawn upon to pay off the Fund's overdraft at the Central Bank and hence would disappear.
While it is true that the only instrument the Central Bank
could use to eliminate excess reserves once they had accumulated
(as in Case II) is that of requiring the Fund to repay a portion
of its overdraft, the excess reserves might have been prevented
from appearing at all had the commercial banks been required to
hold 100 percent reserves from the very first against any expansion
of deposits. Even this extreme uso of the power to raise reserve
requirements, however, would not prevent a 50 million peso increase
in Cuban currency and deposits resulting from a Fund purchase of
346
- 86 -
50 million dollars through overdrrft at the Central Bank. It is
also unlikely that an expansion of this sort could be wholly provented by financing the Fund outside the Central Bank, but the
expension would be curtailed to the extent that (1) the Fund
employed Treasury resources, (2) the Fund notes were sold to others
than the commercial banks, or (3) Fund notes, sold to the commercial
banks, replaced maturing loans without expanding the total loan
portfolio of these banks. It would hardly be possible to finance
the Fund on such a scale by these three methods alone, and hence
some expension of commercial bank credit on reserves supplied by
the Central Bank would be inovitable.
One further point may be noted in connection with the excess
reserves of the commercial banks in Caso II. It is assumed that
they are all kept in the form of additional currency in the banks'
own vaults. They could almost CS well be kept in the form of an
additional balance at the Control Bank. More the whole 25 million
posos thus transferred, the note issue of the Central Bank would
drop from 29 million pesos to 4 million and commercial bank deposits
at the Central Bank would rise from 18 million pesos to 43 million.
The transfer would be without effect upon the assets of the Central
Bank but, if the Central Bank were required to keep 25 percent
reserves against its note issue alone, its required reserves would
be reduced by the discretionary action of the commercial banks
347
- 87 -
from 7 million pesos to 1 million. If, however, the Central Bank
were required to hold 25 percent reserves against both its note
issue and its peso deposits, its required reserves would be the
same whether the commercial banks decided to hold their own
reserves as a balance with the Central Bank or as currency in
their vaults.
Throughout Case II the assumption has been made that the Fund
purchases 50 million dollars by overdraft on the Centrol Bank, and
the effects of this operation on the credit siturtion have been
traced. The discussion in the main report suggests the possibility
that before the wer is over the Fund may have to purchase 2. much
larger amount of dollars than this. It is evident that the grocter
the scale of the Fund's operations, the greater the effects on the
domostic credit situation will be.
348
HRL
This telegram must be
paraphrased before being
communicated to anyone
other than a Governmental
Sidney
Dated April 22, 1942
Rec'd 1:14 p.m.
agency. (BR)
Secretary of State,
Weshington.
228, April 22, 3 p.m.
Referring to the Department's telegram no. 128,
March 27.
Commonwealth Pank has cashed another Navy bill
drawn by Patroney in the amount of $251.850.
Instructions for this and any further Navy bills
respectfully requested.
PALMER
WSB
349
April 22, 1942
Mr. Livesey
Mr. Dietrich
Will you please send the attached cable to the American Embassy,
Chungking, "For Adler from White".
FD:eh
350
April 21, 1942
To:
Adler, Chungking, China
From:
Mr. White
g
Reference your cable No. TF25, April 9, 1942.
1. Contents of part of cable giving gist of memorandum
which Board proposes to submit to Dr. Kung is not clear. It
would seem from the contents of the cable received that the new
proposal would mean an undesirable curtailment of the authority
and functions of the Board. Fox is inclined to oppose the
proposal. Please cable immediately your evaluation of the Board's
proposal and reasons for your adherence to it, if you do.
2. Other questions raised in your cable are being answered
in separate cable.
ISF/efs
4/21/42
351
TELE GRAM SENT
AS
This telegram must be
being
April 22, 1942
1 p.m.
paraphrased communicated before to anyone
other than a Governmental
agency. (BR)
AEEDASSY,
CHUNGKING (CHINA)
311
FOR ADLER FROM WHITE.
QUOTE. REfErEncE your no. TF25, April 9, 1942.
1. Contents of part of coble giving gist of
memorandum which Board proposes to submit to Dr. Kung
is not clear. It would SEEM from the contents of the
cable received that the new proposal would mean a un-
desirable curtailment of the authority and functions
of the Board. Fox is incl DEd to oppose the proposal.
Please cable immEdiately your Evaluation of the Board's
proposal and reasons for your adhErEncE to it, if you do.
2. Other questions raised in your cable are being
answered in separate cable.
PULL
(FL)
3D:FL:EMcB
352
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, London, England
DATE: April 22, 1942, 6 p.m.
2070
NO.:
This is a message in strict confidence from Casaday
for the Secretary of the Treasury.
Many clients of one of the American banks here, I
have been informed by an official of the bank, have made
inquiries with respect to the amount of United States
currency which can be taken into the United States legally.
Most of the inquirers are not nationals of blocked countries
and presumably are not subject to the freezing control of
the United States. The official of the American bank also
reports in this connection that dollar drafts or checks
can be cashed in Lisbon at a rate of 24.90 escudos to the
dollar but that a rate of 15 eseudos to the dollar exists
in Lisbon for the purchase of United States currency.
I WOL 1d appreciate being informed in view of the
inquiries about this situation as to whether the United
States has put into effect or contemplates regulations
similar in general purpose to the British Statutory Rules
and Orders no. 1514 and no. 1515 of 1940. Copies of these
were transmitted with the Embassy's despatches
5905
of September 5, 1940 and 5948 of September 16,
1940. In the Embassy's despatch 1113 dated August 2, 1941
the purpose of the British regulations under reference was
stated.
MATTHEWS
C
353
P
DEPARTMENT OF STATE
WASHINGTON
In reply refer to
April 22, 1942
FD 864x.5151/3
The Secretary of State presents his compliments
to the Honorable the Secretary of the Treasury and
encloses a copy of despatch no. 60, dated April 11,
1942, from the American Consulate, Suva, Fiji Islands,
transmitting a proposal of the Benk of New South Wales
regarding purchase of American currency.
Enclosure:
From Consulate, Suve,
no. 60, April 11, 1942.
eh:copy
4-22-42
NO. 60
354
STRICTLY CONFIDENTIAL
Suva, Fiji Islands.
April 11, 1942.
SUBJECT: Bank Buying Rate for
United States Dollar
Notes.
THE HONORABLE
THE SECRETARY OF STATE,
WASHINGTON.
SIR:
I have the honor to transmit herewith a copy of a letter, dated
April 1, 1942, received from the local Manager of the Bank of New South
Wales, in which he puts forward two schemes for eliminating the high
insurance charges necessary for the repatriation of United States notes.
The very unfavorable note buying rate due to these charges and a way to
dispense with it has, for some time past, been the subject of discussion
between this office and the Managers of the Bank of New South Wales and
of the Bank of New Zealand, and the former's letter, which is the result,
is transmitted for whatever action the Department may consider appropriate.
If either of the suggested schemes should be thought feasible it would
mean a considerable saving, approximately 10 to the dollar, to the men of
the United States Services when changing the notes in which they are paid.
Owing to the infrequency of mails it is respectfully requested that
the Department's reply be telegraphed. As reported in my despatch No.
59, of April 8, 1942, the United States mail arriving here on March 25,
1942 is the only one which has been received since November 29, 1941.
Respectfully yours,
Enclosure:
Copy of letter dated
April 1, 1942.
File No. 851.5
Wainwright Abbott,
American Consul.
In cuintuplicate.
Copy for "Division of Commercial Affairs".
WA/b1
eh:copy 4-22-42
A true copy
of the signed
original. B.L.
BANK OF NEW SOUTH WALES
SUVA, FIJI ISLANDS.
355
April 1, 1942
Wainwright Abbott, Esq.,
United States Consul,
SUVA.
Dear Sir:
UNITED STATES DOLLAR NOTES
With an increasing number of United States Army, Navy and Air Force personnel
based and calling here, we are anxious to improve the present rate to the public for
the purchase by the Bank of United States dollar notes.
The current Bank rates for notes are:Buying
$4.00 equals £F1
Selling $3.5813 equals £F1
The wide margin is due mainly to the heavy insurance rate between Fiji and the
U.S.A., i.e. £F9-5-3% or approximately 9-1/4 cents to the dollar. We are compelled
to include this loading in our buying rate, as under existing regulations our sales
of dollar notes are very limited, with the result that it is necessary to remit our
surplus holding periodically to the United States.
We suggest that the position could best be met by the two Banks in Fiji being
authorized by the United States Treasury to destroy by fire periodically, in the
presence of the United States Consul in Suva, a representative of the Treasury of
the Fiji Government, and the Manager and Accountant of the Bank concerned, those
notes which the Bank is unable to sell in the ordinary course of business. We, of
course, would exploit every avenue of sale, including visiting naval units, before
any notes were destroyed. The Treasury of the United States to credit the account of
the Bank concerned at an American Bank, with the dollar amount of the notes destroyed,
upon receiving a list setting out the denominations and numbers of the notes, together with a certificate by the parties mentioned, that the destruction was complete.
Alternatively that the Banks be granted facilities similar to those afforded us
by the Commonwealth Bank of Australia for the remittance of Australian notes without
insurance. These provide for:-
(a) Notes to be cut in halves, with one set of numbers appearing on each
half. Each half to be stamped "Cancelled" in indelible ink and bold type.
(b) All notes to be narrated, and parcels of half notes with relative
narration sheets, to be forwarded to Australia by severate mails.
(c) Settlement to be effected by Commonwealth Bank on receipt of first set
of halves.
(d) In the event of loss of either set of halves in transit reimbursement to
be effected against Bank's indemnity.
It is difficult to estimate the number of dollars likely to be destroyed under
the first proposal, as we are unable to gauge the future market or the possible
avenues for disposal. However we feel that by the elimination of the insurance
loading from our rate, the benefit to the Americans concerned would be greatly
appreciated.
356
-2-
We enclose a copy of this letter for despatch to the United States Treasury
in the event of your being prepared to recommend the proposal.
Yours faithfully,
(SIGNED) T. BRYCE
MANAGER.
A true copy of
the signed origi-
nal. B.L.
Copy :eh:bj: :4-22-42
357
TELEGRAM SENT
April 22, 1942
PD
This telegram must be
paraphrased before being
communicated to anyone
other than a Governmental
agency. (BR)
10 p.m.
AMEMEASSY,
ANKARA, (TURKEY) .
166
FROM TREASURY.
QUOTE Your 168 of March 16 on increasing discount
at which United States currency is selling in Near and
Middle East. Under the program of Economic warfare
being pursued by this government, EVERY Effort is being
made to minimize the Economic benefits accruing to the
Enemy as the result of conquest or Economic penetration.
This policy wasfollowed when the United States promptly
blocked or INNER QUOTE froze END INNER QUOTE all
Norwegian and Danish assets in the United Prates upon
their occupation by Germany in April, 1940. . This prevented the Axis from using such assets in its war
Economy. Thereafter, as other countries were occupied
by, or submitted to, the Axis, this country blocked the
assets of the conquered areas. On June 14, 1941, the
United States blocked the assets of EVERY country in
continental
358
-2- #166, April 22, 10 p.m. to Ankara
continental Europe EXCEPT Turkey. German and Italian
assets were blocked at this time and also those of
Switzerland, Spain, Portugal and Sweden so that these
neutrals might not be Employed as cloaks for the Axis.
While Russian assets were also blocked at the same time,
they were freed when Germany attacked Russia. Japanese
as=Ets WERE blocked July 26, 1941, and at the same time
Chinese assets WERE blocked at the request of China
so that Japan might not USE occupied China for cloaking
purposes and the Chinese Government might gain maximum
advantages from Chinese assets in the United States.
As Early as June 6, 1940, a strict control was
imoosed on all securities entering the United States
so that the Axis could notliquidate looted securities
in our markets. From time to time this control has been
tightened by verious additional measures.
Obviously it is not fessible to outline the complete
SCOPE and application of this policy. The foregoing is
merely illustrative.
The problem of minimizing the benefits to the Axis
from the large amount of United States currency held in
occupied countries is perticularly difficult and important.
Every time
359
-3- #166, April 22, 10 p.m. to Ankera
Every time that the Enemy acquires goods or services
from non-occupied or neutral areas without having to
deliver goods or SERVICES, there is e net increase to
the EnEmy Economy and war potential. Recognizing that
the Enemy does have many ways of compelling neutrels
to furnish goods and services on credit, still there
are limitations on this technique beyond which the
neutrals' Economy may collapse -- preventing further
Effective aid to the Enemy.
Obviously the Enemy can 111 Afford to pay the
neutrals in goods and SERVICES without injury to this
war Effort. From their point of view it is preferable
to Effect payment in, for instance, United States
currency -- which can be taken from the occupied Greas.
The neutral will accept United States curpency as long
as such currency CEN be profitably deployed in the purchase of goods and SERVICES in other parts of the world.
is you indicate in your 168, there are substantial
amounts of United States currency THEIR QUOTE-working
its way down from central and Eastern Europe through
the Balkans to the Near and Middle East END INNER QUOTE.
The same is true with respect to Switzerland, Spain and
Portugal.
It is in our intorest
360
-4- #166, April 22, 10 p.m. to Ankara
It is in our interest to SEE that United States
currency is E drug on the market in the se neutral
countries. The more WE can reduce its Exchange value
the less the Enemy can obtain in the way of goods and
services through this means of payment. Accordingly,
this government is Encouraging this reduction in value.
Thus, for example, on March 13, 1942, the United States
Treasury imposed import restrictions on all currency
brought into the United States from any part of Europe
EXCEPT Turkey. Under this regulation any such currency
will bE impounded. Further measures of this type
are being studied.
Your reference to the decline in the prestige
of the United States crising out of the stendily
increasing discount at which United States currency
is selling, is of course an important consideration.
The Enemy no doubt Exploits the natural fears and
prejudices of these people to Encourage the receptance
of the value of United States currency C.S f. barcneter of
the war. For these reasons it is important thrt it
become known thrt the depreciation in United States
currency in this ARED is C definite policy of this
government and that the reasons underlying the
policy
361
-5- #166, .pril 22, 10 p.m. to inkere
policy be disseminated through appropriate channels.
In this connection, compare the British policy of
voiding all Sterling currency in countries outside the
Sterling Area. Perticular attention should be celled
to the fact that the cable transfer rate of United
States dollars represents C. much superior index to the
prestige of the United States dollar in neutral
countries.
WE should appreciate receiving your views C.S to
the Effectiveness of en Educational program of this
cherecter and suggestions C.S to how to noke it most
effective in the Near and Middle East.
You refer to the fact that substantial amounts
of United States currency are being brought to the
Near and Middle East by the United States Government
rnd representatives of all SERVICES who are arriving
in Ever-incressing numbers, and that the discount
on such currency works E. herdship in such CASES.
Certain steps have been taken in SOME areas,
and C. blanket procedure is being developed now for
the Sterling Area, in order tc SECURE C. favorable
r t e for United States currency properly in the
possession of ruthorized government officels. This
program
362
-6- #166, April 22, 10 p.m. to Ankera
program contemplrtes the establishing of E dollar
credit to the account of banks in Each OPEN against
telegraphic advice that the currency has been mutilcted
and delivered to designated American consular officers.
Authority to USE such facilities would be limited to
officers and paymesters charged with the duty of
preventing the USE of this procedure where the
United States currency WC.S required locally by American
officers or Employees.
In the C A SE of Turkey, however, it is not
clear ct this time that E procedure of this type
is necessary or desirable. American officials in
Turkey should be encouraged to cable their respective
departments their local currency requirements.
Arrangements can then be made to advance dollar
credits through the NEW York correspondent of their
local banking connection. END QUOTE
HULL
(I./.B)
FD:FL:ME R-S/2 NE Di. FA A-A
FF
EA
363
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE April 22, 1942
TO
FROM
Secretary Morgenthau
Mr. Dietrich
CONFIDENTIAL
Registered sterling transactions of the reporting banks were as follows:
Sold to commercial concerns
Purchased from commercial concerns
£54,000
£15,000
Open market sterling remained at 4.03-3/4, and there were no reported
transactions.
In New York, closing quotations for the foreign currencies listed below
were as follows:
Canadian dollar
12-1/2%
Argentine peso (free)
.2375
Colombian peso
Mexican peso
Uruguayan peso (free)
Venezuelan bolivar
.0516
.5775
.2064
.5295
.2860
Cuban peso
3/16% premium
Brazilian milreis (free)
In general, New York banks still sell Portuguese escudos at .0410, being
able to obtain cover from banks in Portugal at .0407-1/4. However, it was
reported that one local bank sold 250,000 escudos today in the New York market
at .0405-1/2 and .0406.
The Federal Reserve Bank of New York purchased 200,000 Swedish kronor in
New York at .2385-1/2 for account of the Central Bank of the Uruguayan Republic.
The latter declared that the kronor are for commercial use.
There were no gold transactions consummated by us today.
No new gold engagements were reported.
42.67
In London, spot and forward silver remained at 23-1/2d, equivalent to
The Treasury's purchase price for foreign silver was unchanged at 35
Handy and Harman's settlement price for foreign silver was also unchanged at
35-1/8
We made no purchases of silver today.
SECRET
FAR EASTERN
SURVEY REPORT
In July, 1941, I was directed by the
Assistant Chief of Staff, G-2, War Department,
to proceed to Singapore and investigate and
report on the advisability and practicability
of establishing a system of secret intelligence
in the Far East. A report in compliance with
By
Lieut. Colonel Warren J. Clear, GSC.
the directive has already been submitted. This
is a supplemental report covering observations,
extraneous to the directive, subsequent to
December 7th, 1941.
Warren
grear
WARREN J. CLEAR,
Lieut. Colonel, G.S.C.
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1942
union
CONTENTS
Page
3
5
7
9
Chapter III. The Dialectical Aspects of Japanese Preparations for War
Chapter IV. Japanese Staff, Training and Tactics
Chapter V. Reasons for Loss of the Philippines
Chapter VI. The Loss of British Malaya
Chapter VII. Some Military Reasons for Japanese Successes
Chapter VIII. The Japanese Army in the Pursuit
Chapter IX. Japanese Air Strength
Chapter X. Japanese Employment of Air Power
Chapter XI. Japanese Merchant Marine Tonnage
Chapter XII. Japanese Reserves of Critical Materials
Chapter XIII. Japanese Vulnerability to Guerrilla Attacks
Chapter XIV. Japanese Army Meteorological Service
Chapter XV. Combat Observations
Chapter XVI. Loss of the Prince of Wales and the Repulse
1
Chapter I. The Japanese Army in the Current War
Chapter II. Japanese Propaganda Preparation for the War
10
13
16
18
20
22
24
26
29
30
33
NOTE.-This report has been prepared from memory. Complete, documented
report, including photographs, maps, map-overlays, copies of Japanese military
orders, pamphlets and books, was brought out of Corregidor Feb. 5th to Java by
submarine but burnt when Japanese bombers destroyed the plane in which Briga-
dier General Patrick J. Hurley and I flew to Port Darwin, March 19, 1942.
(III)
enbos devil To assessment on ok
SECRET
SECRET
2
"Major
Major." of Infantry," an officer is referred to simply as an "Army
One of the presumed reasons for the new "general list" is the
contemplated expansion of the tank and air corps, plus a large rearmament
and
the "general list" makes the shifting of large
numbers
of program
officers less
noticeable.
The Japanese General Staff is wholly responsible for the marvellously
CHAPTER II
JAPANESE PROPAGANDA PREPARATION FOR THE
organized and highly efficient Army of today.
The General Staff has, for 10 years, used China as a training.
WAR
ground for men and a testing-ground for material.
The Japanese General Staff leaves the Army "severely alone""does nothing," as the Army puts it.
Observations of conditions in India, Burma, Thailand, IndoChina, British Malaya, the Netherlands East Indies (including the
Celebes and Moluccas) showed the native races inhabiting those
It deals largely in the intangible called "thought." Its metier is to
plot, plan, reflect, coordinate, suggest, weigh, observe. It conjectures
what the enemy may do and what Japanese generals should do to
meet him.
countries to be badly disaffected.
The military and naval reverses suffered by Great Britain during 2
years of war had seriously damaged British prestige throughout the
Policy in war and the elucidation of all pending military problems
is its special function.
It has made the 1942 Japanese Army the great striking force it is.
Orient.
Over 200,000 paid and schooled professional Japanese agitators
were, until December 1941, at work in all these countries, with
apparently telling effect.
This far-flung propaganda network, working. with fanatical intensity and purpose, was, until the outbreak of war, the largest,
best-trained and most effective organization ever conceived and
conducted for such purposes.
In August 1941, the scope and intensity of its activities were
increased by Capt. Fritz Wiedemann (former Nazi consul-general in
San Francisco) assuming directional control.
During the months of September, October, and November, 1941, he
had it delivering hammer blows at the foundations of British Empire
in the Far East.
He suspended all propaganda activities of the organization along
cultural, educational, and political lines and directed its full force and
effectiveness to one objective-the focussing of the attention of 600
million native peoples on their own physical suffering and the cause
of it.
It was a master stroke. In 3 months he secured more devastating
results than the Japanese had been able to achieve in 10 years with
the same machinery.
When the Allied Nations instituted economic sanctions against
Japan, one of the immediate results was to deprive the teeming lowincome races of the Far East of the cheap Japanese cotton goods with
which they clothed themselves, as well as the cheap sneakers, shoes,
canned goods, and other Japanese products.
(3)
SECRET
4
SECRET
When any men, more especially primitive peoples, are deprived of
the essentials of living, a resentment is aroused that increases in
geometrical proportions to their sufferings and want.
The Japanese propaganda machine, under Wiedemann's astute
direction, directed the full fury of the unreasoning resentment of
hundreds of millions of subject natives against the United States as
the author of their woes. Great Britain was no less a villain to these
people who want only revenge and relief, even if it is the Japanese
Army that gets both for them.
CHAPTER III
THE DIALECTICAL ASPECTS OF JAPANESE
PREPARATIONS FOR WAR
Wiedemann mobilized against British imperialism all in the Orient
who are cold, wet, and hungry-and all of their millions are cold, wet,
or hungry at sometime or other. To Japan the value of Wiedemann's
propaganda genius can be measured in terms of naval squadrons and
The Japanese Army has been trained and instructed not only to
carry out a preconceived plan of campaign, but to execute a series of
related actions.
army corps.
The training of its leadership has also been concentrated on developing, in officers of all grades, an instinct for taking maximum advantage
Coincident with intensified Japanese propaganda in Indo-China
and Thailand was an economic penetration of those two countries.
In late September 1941, Japan induced the Thailand Government to
of changes not only in tactical and strategical situations, but of
changes in the psychological and political attitudes of whole peoples
grant her a credit of 30,000,000 ticals.
as well.
One week later she bought 12 million ticals worth of rice from
Thailand, using the Thailanders' cash to do it.
When Japanese troops first entered British Malaya they gave 100
Singapore dollars, in Japanese scrip, to individual natives. The same
device (100 guilders, printed in Japan) was used in Borneo and other
islands of the Netherlands East Indies,
In addition, natives were told that the homes and property of the
British and Dutch were theirs and they were invited to move in and
take them over or else to loot them of furniture and other valuables
that the Japanese themselves did not want.
The Japanese Fifth Column in British Malaya and the Philippines
achieved amazing results. Servants, bus-boys, chauffeurs, and waiters were "planted" in hotels, clubs, military and naval officers' quarters, and private homes.
In Manila a considerable number of Chinese, including Chinese
consular officials, appear to have been in the pay of the Japanese.
When this charge was first brought to the attention of G-2 Philippine
Department it was discounted but an investigation, instituted just
prior to hostilities, confirmed it.
American Army and Navy officers were particularly indiscreet
(
Moreover, the Japanese Army's psychological preparation of the
Japanese people for the present struggle carefully avoided the Nazis'
initial error of holding up before the eyes of the German people the
glittering prospects of a short and "soft" war.
Nor have they based their plans and operations, in the psychological
sphere, on a conditioning of the home-front alone.
Even on the home-front they did not place their reliance on the old
tried and true formula of intense national patriotism alone, although
they knew they were in command of a people brave by tradition and
made trebly brave by patriotism and religion.
In other words, they did not, and do not, place their reliance on
national sentiment alone. Japanese Army documents exist that
point out the difficulty of sustaining the national morale and national
effort in a long war by appeals to nationalistic patriotism alone.
These pamphlets emphasize how important it is to give the officers
and men in the Army itself the vision of specific rewards and the
promise that they will come back to a Japan in which their future is
assured without fear of unemployment or want.
One of the booklets points out the lesson of the Punic Wars, when
the hardy peasants of Italy, men who owned their little acres as do the
peasants of Japan, were conscripted for 17 years to fight Rome's
battles.
These men marched and fought and died-and when they won they
sent their booty, largely in the form of captives, back to Rome.
These thousands of captives, once arrived in Italy, became slaves,
and when the legionnaires returned to Rome and were demobilized they
(5)
SECRET
6
SECRET
found agricultural combines (Latifundia) working whole groups of
farms with slave labor that their (the soldiers') sacrifices had provided
for the politicians.
They could not compete: their only recourse was to straggle into
Rome to get the daily dole of corn.
The Japanese pamphlets also point out how the British armies went
into Germany after the First World War and history repeated itself.
The British didn't ship hordes of German captives back to England
to work in the Wales coal mines but they compelled the Germans
to dig their own coal in Germany and turn it over, without charge, to
the French.
The French, in turn, receiving the coal without cost, sold it to bordering countries at a price which made it impossible for British coal
mines to compete with. British ex-soldiers by the thousands lost
their jobs in the coal mines.
They bad saved England and lost their own livelihood.
This, say the pamphlets, with apparent sincerity, must never happen to the Japanese soldier, who returns from the wars today.
All Japanese propaganda, on all psychological fronts, carefully conceals the predatory aims of Japanese Imperialism
The "Co-Prosperity Sphere," the "New Order in Asia," is offered to
all Asiatic peoples as the vision of a new world.
The success of this propaganda is beyond question. It is enlisting
the active support of the disaffected Asiatic peoples that make the
bulk of the British Empire in the Far East.
It has endowed the Japanese forces with the conviction that they are
fighting for not only national but personal material rewards and that
every man will go back to a new Japan in which the ex-serviceman and
his family will be guaranteed freedom from want or unemployment.
The particulars of these guarantees to the individual soldier are
plausible and persuasive and are already being formulated into law.
CHAPTER IV
JAPANESE STAFF, TRAINING AND TACTICS
The Japanese favor unusually large army, divisional and brigade
staffs.
Their staff work is good but no better than that of our (U. S.)
army.
The Chief of Staff of the larger units is usually the actual commander making the vital decisions.
Japanese ability and skill in the realm of major tactics cannot be
disputed. The present conflict has provided numerous examples of
large-scale operations, boldly conceived and planned, and carried
through to a successful conclusion in the face of adverse weather
conditions, great natural obstacles, and often determined enemy
opposition. The Japanese army has been campaigning for ten years
on the Asiatic mainland and has imbibed valuable lessons and practical staff experience in supply, movements, staff control, and coordination of all arms.
Contrary to widely circulated reports the Japanese Command does
not expend infantry carelessly or callously. It recognizes the great
fire effect of modern automatic weapons. The Japanese infantry
are instructed to call on artillery, tanks, toxic smoke, and aircraft to
soften up the opposition and pave the way for the final assault.
And they are not encouraged to get themselves needlessly killed if
tanks, planes, and artillery can do the hard work for them. When
sacrifice is necessary, however, the Command can call on the troops
to fight to the last man and the last round or to attack repeatedly
in the face of heavy losses, and in the defensive, positions are held
to the last extremity.
The principles governing the organization of defensive positions
closely resemble our own. Positions are sited in considerable depth
and consist of a number of strong points, each capable of all-round
defense. Dummy positions are interspersed.
Particular training is given in all forms of night operations. Special
emphasis is given to the advantages to be gained by night marches
and advances as means of obtaining surprise and avoiding casualties.
Simplicity is the underlying principle of Japanese organization.
Aircraft is employed for strategical and tactical reconnaissance,
cavalry for protection.
In practically all their major operations the Japanese have attained
their tactical objectives by the envelopment.
(7)
SECRET
8
SECRET
The tactical and technical efficiency of the Japanese field artillery
is below our standards. On the Bataan peninsula Gen. E. P. King's
artillery destroyed Japanese batteries whenever they opened up on our
positions. Forty Japanese guns were knocked out in 3 days by our
artillery.
Japanese engineers and pioneer troops excel in their ability to
restore broken road, bridge and rail communications. Demolitions
designed to hold their forces up for days in Luzon and Malaya were
CHAPTER V
REASONS FOR LOSS OF PHILIPPINES
solved in a few hours.
The reverses, and losses of territory suffered by the United States
in the Philippines area, cannot attributed to faulty military or naval
Japanese forces possess the great advantage of being less dependent
on lines of communication than British or American troops. They
retain greater freedom of movement
strategical conceptions or failures in the field.
Lack, for 40 years, of a continuing, consistent foreign policy in the
The Japanese are proficient in landing operations and after effecting
a landing move inland at great speed, self-contained for several days.
Pacific, and a refusal, in the interests of political expediency, to
consider and support the recommendations and requests of responsible
military and naval authority, are the large factors in ourdefeats odate.
Beyond these determining causes of our present predicament looms
The advance is pushed rapidly, using roads until opposition is
encountered. Then direct frontal attack is avoided and small parties
carry out attacks on flanks and rear by outflanking movements
the undeniable fact that our acceptance of a considerable degree
through jungle, river and sea.
The Japanese army is instructed to look upon water and woods as
of responsibility for the Philippines without a definite politicomilitary-naval plan and full preparation for their defense, constituted
a fatal weakness in American strategy.
means, not obstacles.
In Malaya and Luzon jungles our forces often did not prepare
Although these islands lie within easy striking distance of Japan
sufficient fields of fire with adequate view, and the Japanese made the
most of this neglect.
They also used trees to great advantage, for snipers and observation, whole parties sometimes being thus concealed in a clump of
woods or jungle.
The Japanese were far more aware than we or the British that good
gun positions are rare in jungle or densely wooded country and that
the search for them involves long, detailed and delaying reconnaissance.
They realized that in order to get guns off the roads it was invariably necessary to transport, or construct on the ground, portable
ramps with which to bridge ditches and soft ground. The preparation of gun positions also entailed the building of gun platforms on
soft ground.
(These handicaps to the use of field artillery also hold true in northern Australia and other large areas of that country.)
The Japanese, therefore, used 90-mm. trench mortars whenever
possible instead of field artillery.
Early in the campaign on Luzon it became apparent that communications would be inadequate and unreliable due to insufficient
equipment, lack of personnel, and inadequate maintenance of supplies.
Radio sets deteriorated rapidly.
Lines laid along roads were constantly broken by enemy fire and
bombing directed against roads.
(
(1,600 miles), the China Coast (700 miles), and Formosa (500 miles),
they are 6,600 miles from San Francisco. Their reinforcement from
the east was, therefore, practically impossible without the provision
of a string of powerfully fortified fuelling bases.
Even with the assistance of such bases an American fleet would be
strategically imperilled if and when it undertook to engage the
Japanese fleet in Japanese home waters and at the end of a long line
of communications.
If the stepping-stones across the ocean to the Philippines were not
adequately armed and garrisoned, neither were the Islands themselves;
nor was any alternative plan for their protection evolved or decided
upon.
They were held by about 5,000 American troops whose chief
responsibility was to organize and train an army of Filipinos that
would attain a presumed strength of 400,000 on the date the Islands
achieved complete independence in 1946. By December 1941, less
than 150,000 Filipino trainees had been inducted into service.
The lack of military strength in the Philippines meant that the
United States had no striking power beyond the triangle on which
the Pacific Fleet is based-Dutch Harbor (Aleutian Islands), Balboa
(Panama), and Pearl Harbor (Hawaiian Islands).
This is all the more true since the fall of Manila.
(9)
SECRET
11
SECRET
("The fighter-plane of high maneuverability is to be preferred to
the better-armored, slightly faster plane that is less maneuverable in
combat," is the consensus of opinion of British and American pilots
CHAPTER VI
THE LOSS OF BRITISH MALAYA
The loss of Malaya can be attributed primarily to British lack of
preparation for defense of the Peninsula and Singapore.
The people of the British Empire, and the Government, refused
successive military commanders at Singapore the funds and other
means that would have put the Peninsula and the Island in a defensible condition.
The failure to supply the means had, of course, evil repercussions,
strategically and tactically.
From the moment the campaign began the military leadership was
hampered and bedeviled by lack of troops and equipment with which
to meet successive situations.
They were repeatedly compelled to take desperate risks in the distribution of their forces by making dangerous reductions in one area
in order to concentrate elsewhere forces of minimum strength to meet
a critical emergency.
Three divisions had to meet a situation that demanded forces
totalling nine. Twelve divisions should have been allotted to this
bastion of empire in the Far East.
The heart of the British Empire, Australia, Borneo, British Malaya,
Burma, Ceylon, India, and the wealth of the Indies, depended, for
protection, on the shield of Singapore.
Military leadership was not entirely blameless.
The necessary number of airfields were not prepared on the Peninsula.
After the Japanese destroyed three airports on the Peninsula it was
impossible to bring fighter plane protection north to the troops at the
front.
When the question as to why their lines broke was put to over 200
enlisted survivors of the campaign the invariable reply was: "The
F. did not protect us from the dive-bombers."
The air strength was inadequate at the opening of the campaign.
Out of a total of 250 planes less than 150 were first-line combat planes.
Three days after the initial Japanese attack the British had less than
80 serviceable planes at their disposal.
The American fighter-planes in Malaya (Brewster-Buffaloes) could
not compete with the Japanese fighter-planes, particularly as regards
maneuverability.
(10)
consulted in Far East.)
The Fifth Column and its activities entered largely into reasons for
the fall of Malaya.
The Fifth Column, mainly composed of disaffected Tamil Indians
and Malays, gave the following assistance to the Japanese forces:
(a) furnished Japanese military with information concerning British
defensive positions and troop dispositions.
(b) procured bancas and other small boats for Japanese infiltration
parties slipping down the west coast of Malaya.
(c) furnished food to small Japanese units landing behind British
lines after Japanese rations were consumed.
(d) cut
(e) frequent was due to treachery.
(f) guided flares, automobile
lights, torches,
(g) spread rumors
(h) guided
(k) maintained Fifth transmitter in Singapore
throughout
The Civil of British not render expected
and reasonable assistance to the armed It did not maintain
public
utilities, condition.
Adequate facilities were not evacuees from cities.
telephone campaign. Government Japanese Japanese failure and particularly flashlight and among of through night-landing air-raid telegraph Column Indian railroads, signalling. prepared the warning lines. jungle. troops. radio Malaya in parties system for forces. good did by
Fire-fighting defenses were not maintained even prior to heavy
bombings.
Dock labor was not properly cared for or controlled.
Civil Government did not assist in preparation of emergency defenses which became necessary as troops withdrew down the Peninsula
toward Singapore.
Military leadership also persisted in the fatal policy of adhering to
the linear defense.
The Japanese infiltrated through the British lines at night and fired
into the lines from the rear before dawn. The lines often broke.
Instead of instructing isolated units to form strong-points of allround defense the British invariably tried to withdraw entire sections
of the line and re-establish it to the south.
The withdrawal, rather than the fight, was accepted by the whole
chain of command, with the exception of some of the old British
regiments of the line such as the Argylls, the Manchesters, and East
Surreys.
The old "spit and polish" regiments upheld the highest traditions of
British infantry.
SECRET
12
SECRET
The Argylls went into action early in the campaign with 850 men
and came out with 79 men and one officer.
On the other hand an Australian brigade lost only 167 men killed
during the whole campaign.
The Australians did not make a creditable showing.
The Indian troops, with the exception of the Jurkhas, were disaffected, including the Sikhs who threatened to mutiny before and
during the campaign.
CHAPTER VJI
SOME MILITARY REASONS FOR JAPANESE
SUCCESSES
The British lacked tactical mobility.
British forces in Malaya were over mechanized and overtrucked.
They were mentally and physically road-bound
They were particularly vulnerable to Japanese infiltration tactics
because of inadequate road-net.
It must be repeated here that the campaigns in the Far East have
thoroughly discredited the linear and static defense.
Companies, battalions, regiments, and divisions in line is what the
enemy's dive-bombers and mechanized units want to find.
They know that at some point in the line there will not be strength
enough of antiaircraft artillery and antitank guns to defeat the attempt
to penetrate.
In modern war the defense cannot hope to achieve a line proof
against penetration everywhere and at the same time expect immediate assistance by adequate reserves.
The attacker possesses the great advantage of selecting his own
point of penetration of a line, the point where he seeks a decision or
break-through, and he can launch his surprise there. He will usually
find that the defender committed to linear defense dispositions will
not have adequate reserves on hand to meet the surprise.
The successful defense of the Bataan peninsula was not accomplished by infantry in pill-boxes, trenches, and troops waiting in a
static role. Successive enemy attempts to turn defense flanks were
smashed by small, highly mobile detachments of half-track 75's and
antitank guns. Bataan succumbed to dysentery, malaria, and weakness induced by inadequate rations, not to Japanese attack.
British resistance on the Island of Singapore (where 80,000 British
forces surrendered to 20,000 Japanese), was ineffectual because the
chain of command had been destroyed. Squads had lost their cor-
porals, platoons their sergeants, companies their captains, and
battalions and regiments their C.O.'s. Only a disorganized mass of
human beings confronted the Japanese.
The Japanese operations in Malaya, Netherlands East Indies and
Luzon were characterized by a high degree of mobility, great speed,
and reliance on infantry weapons such as the tommy gun, machine
gun, and trench mortar.
Japanese troops were not burdened by impedimenta. They carried
simple, compact rations; light, small-caliber arms and ammunition;
light clothing, and employed a minimum of transportation.
In many instances the means of transportation of units as large as
a company consisted of natives impressed into service as carriers, or
Fifth Columnists who had been counted on for such assistance.
The Japanese infantry infiltrated, by individuals and small groups,
and fought behind the British lines for as long as a week without
recourse to food or ammunition supply trains.
The Japanese soldier showed marked ability to live off the country.
In some instances individuals and small infiltration units killed and
cooked dogs, goats, and other small animals to supplement their
emergency rations.
Each soldier carried on his person sufficient food to sustain him for
5 days in the field.
This food supply included:
(a) one-half pound hard candy
(b) one can of coffee
(c) package of concentrated food
(d) vitamin pills
(e) package of hardtack
(f) 5-inch sack of rice
(g) water-purifying agent (chlorine)
(h) quinine
(i) laxative and digestive pills
The Japanese soldier also carries a miniature listerbag, shaped like
a three-fingered glove, for water-purification purposes.
In landings on Malaya and Luzon the Japanese employed newly
designed (1938) and specially constructed carriers for landing craft
and assault boats.
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The sides of these carriers rolled, or slid, away and allowed landing.
craft, berthed on rollers, to be rolled into the sea with full loads of
men and equipment on board.
Several types of landing-craft were employed, most of them featured by double-keels (for stability and strength), and armored,
dropable bows which permitted field guns and small tanks to be run
off the boats onto the beach.
The armored fronts of these boats would stop 50-caliber bullets but
30-caliber fire would penetrate the sides.
(Following three attempts to land troops on Bataan in these
landing-barges, I saw four Japanese landing-boats, filled with dead
Japanese, riddled by .50 calibre fire from two of our P. T. (patrol-
torpedo) boats. This fire had passed through both sides of the
landing-craft.)
In Malaya the British anchored the flanks of successive lines of
resistance on supposedly impassable swamps, morasses, and other
natural obstacles to enemy advance. These swampy areas were
usually impenetrable by boat and too deep to ford.
The Japanese infantry negotiated them by furnishing each man
with an inflatable belt and sometimes, in addition, canvas paddles
strapped to the calves of the legs.
The Japanese, following the razing and occupation of Penang,
slipped down the west coast of Malaya, by night, in bancas and other
small craft. They abandoned the boats and made their way through
swamps and jungle growth that the British deemed impassable.
By boat, and by infiltration, they made their way behind the
British lines.
The Japanese are also equipped with craft for river operations
including pontoons propelled by outboard motors and hydroplane
type boats with a speed of at least 12 knots.
The variety and suitability of the Japanese landing equipment and
the thoroughness of their preparations, including air and water recon-
naissance, detailed administrative arrangements, preservation of
secrecy, avoidance of strong enemy concentrations, and the striking
at weak points which their well-organized intelligence system enables
them to discover accurately, are some of the reasons for the ease and
rapidity with which they have gained many objectives to date at
comparatively small cost.
The distances from front to rear between the British echelons facilitated the infiltration and cutting-off tactics used so effectively by the
Japanese.
The Japanese found the British over-mechanized and over-trucked
(in jungle country) and they made the British pay to the full for their
deficient tactical mobility.
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The British comparatively cumbrous system of movement and
supply necessitated keeping to the roads with long transport columns
that were particularly vulnerable to attack from the air and ambush
by small enemy outflanking parties.
The Japanese quickly discovered that bluff is far more economical
than force. Infiltrating parties were instructed to use every possible
device to make their presence known, once they had reached points
behind the British lines. By bursts of M. G. fire, flares, rattles, and
various strategems they shook the confidence of Indian and Malay
troops, and in some cases that of the Australians and British themselves. Particularly did they panic the freshly inducted divisions of
the "MacArthur Army" in the Philippines.
Unexpectedly confronted by such attacks from their rear, and not
having received specific instruction in methods to meet them, the
troops believed they were being cut off by large enemy forces instead
of merely being harassed by small, lightly equipped raiders.
British and American antitank defense was not sufficiently deep.
A. T. defense must be in depth or it is too easily penetrated. If
sufficiently deep it is very difficult to overcome and tanks are compelled to pay too high a price for forward movement.
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CHAPTER VIII
THE JAPANESE ARMY IN THE PURSUIT
The Japanese Army exploits to the full the new mobility inherent
in the employment on a large scale of air power and mechanized and
motorized forces.
Pursuit, as carried out by the Japanese Army, is immediate and
unremitting. It follows so closely the break-through that its essential
ingredients are speed and mobility rather than power. Power is not
needed if the retreating defender is not given opportunity to regain
the privilege of strong, controlled resistance.
The use of captured enemy matériel is an important element in the
continuity of the Japanese pursuit.
The Japanese Army conducts classes in the study of various enemy
weapons, particularly field artillery and army artillery, in which
officers and ordnance repair personnel are instructed in the repair of
partially disabled enemy guns.
Enemy field guns, abandoned hurriedly, or because of lack of
ammunition, are picked up and trucked or towed forward with the
pursuit until dumps of appropriate ammunition are reached, then
being brought into action. Instances are related by officers of where
the Japanese used captured guns from which the breech blocks had
previously been removed. They had either found the blocks or had
brought other similar blocks along with them.
The Japanese infantry often discard their own rifles in the pursuit,
after their ammunition is depleted, and arm themselves with enemy
rifles picked up in the pursuit. They do the same as regards machine
guns.
The Japanese pursuit in recent campaigns, particularly on the
Malay Peninsula, was so unremitting that trucks and other vehicles
were abandoned in large quantities without being drained of water and
gasoline. The large quantities of these two vital needs thus obtained
were of great assistance to the Japanese.
The speed with which the Japanese deepened their advance in
British Malaya, together with their control of the air, enabled their
pursuit parties to cut across both civil and military means of communication with the result that they arrived in cities and towns before
the civil authorities and populace knew of their proximity or had
taken any steps to remove or destroy vital stores of food, fuel, and
other supplies.
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Japanese tanks and trucks drew into garages and filling stations and
filled up with gasoline and water.
Japanese motor-repair units broke down and stripped large numbers
of badly damaged British trucks and other motor equipment and used
the spare parts to restore and maintain similar British vehicles that
they had put to their own use.
The Japanese Army has proved to its own satisfaction the higher
tempo of the pursuit the cheaper it is in men and the greater the prospects of obtaining large quantities of usable enemy weapons, vehicles,
ammunition, food, fuel, and other supplies.
This means, too, that the pursuing forces will be largely spared the
terrific task of laboriously bringing up great quantities of food, fuel,
and ammunition in order to resume a pursuit halted by the lack of
such supplies.
The Japanese always dispose of captured supplies towards the front,
never to the rear or flanks.
Their air reconnaissance located and photographed enemy oil, food,
and ammunition dumps and storage points in order that troops in the
pursuit could later locate and use these supplies.
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Classification is based on combat experience, initiative and combat
ability.
There are 1,500 Division I pilots in the total air service (Army and
CHAPTER IX
JAPANESE AIR STRENGTH
On October 1, 1941, the Japanese air strength totaled 7,000 planes.
On the same date monthly production totaled 750 planes.
This production included 100 bombers, 450 fighter planes, and 200
trainers. These figures are based on factory-by-factory monthly output figures as of that date.
No known additional plane-production plants were under construc-
Navy).
Division I pilots and bombardiers usually have had 4 years' combat experience in China.
The very noticeable difference in bombing accuracy between
groups of planes on the same missions can be attributed largely to the
fact that Division I pilots and bombardiers may be assigned to one
phase of the mission and Division II personnel to other phases.
This was clearly demonstrated in the Port Darwin bombing of
March 19 when 91 Japanese bombers were observed in action.
Division I pilots and bombardiers, in one flight of 18 bombers,
tion prior to the war, as Japan's plane output is limited by lack of
assigned to destroy shipping, sank 11 of 17 ships their first time over,
from a height of 24,000 feet.
It is not believed that her plane production can be stepped up to
more than 1,000 per month even with the additional critical materials
They also achieved direct hits on the power station, telephonecentral and other concentrated targets from the same height.
At the same time Division II personnel were executing indiscriminate
bombing and strafing of the Royal Australian Air Force Field, hangars
materials rather than lack of plants.
made available through recent conquests.
Many material bottlenecks still persist.
A production of 1,000 planes per month was scheduled for September 1942, including a limited number being produced in Chosen
and Manchuria. It is doubtful if this figure can be reached.
Five thousand German technicians are employed in Japanese
aviation factories and with their assistance the Japanese are now producing a new model Messerschmitt 109 with redesigned wings with
rounded tips, retractable tail-wheel, more powerful engine, no bracing
struts, and generally improved silhouette. It is a faster, betterclimbing plane than the German model they improved upon.
The Japanese have also discarded the wing guns of the German
model Me. and equipped their new model with a 20 mm. cannon
firing through the air screw hub and two 6.5 mm. machine-guns
mounted on the fuselage in order to centralize weight and improve
maneuverability.
All Japanese fighter planes lack armor protection for pilot and
engine and are not as fast as our latest types of fighters. They are,
however, highly maneuverable, and the Japanese consider maneuver-
ability, within reasonable limits, the most important fighting characteristic in a plane.
The Japanese Navy zero-zero fighter has proved itself in combat
definitely superior in maneuverability to our P-40. The BrewsterBuffalo cannot compete with it.
Japanese military and naval pilots and bombardiers are divided
into two classes: "Division I" and "Division II."
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and repair sheds, as well as the field occupied by American air personnel.
Their performance was not comparable with that of the Division I
group.
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21
The Japanese consider their air force an indispensable, but not a
dominating, arm. Where the British Air Force believes the plane
to be the essential vehicle around which to build a plan of operations,
the Japanese regard the plane as a useful weapon with which to
assist military operations. It might be said that they look on it as
an air-mobile battery, or, in its reconnaissance uses, as a pair of
flying, long-range binoculars.
The Japanese opened every campaign in the Far East since December 8, 1941, by successful efforts to knock out the enemy's air strength
CHAPTER X
JAPANESE EMPLOYMENT OF AIR-POWER
Within the space of 3 months the Japanese tore down a facade of
empire that the white man had taken three hundred years to build.
This unchecked onslaught on far-flung dominions with unqualified
success can be measured in terms of air power and air power alone.
Elsewhere in this report the effectiveness of Japanese infantry
tactics is described, but the fact remains that the Japanese did not
and secure possession of his landing fields.
When they deprived the enemy of his landing fields in northern
Malaya they made it impossible for the British fighter planes to protect the ground troops against the Japanese dive-bombing attacks
which were particularly effective against the Indian troops.
The fighter-planes did not have the flying range to come a couple
of hundred miles from the south, fight, and return to their fields.
move a soldier nor strike a blow on land without air superiority.
Even in those instances where they had only local air superiority they
achieved the incredible with small, highly mobile infantry forces.
Just as the Japanese Navy, with local superiority, put forces ashore
and covered their landing, so were audacious land operations made
possible and successful because the Japanese air force dominated the
air above their troops.
The Japanese air force not only protects the Japanese land forces,
their bases, their lines of communication, and their concentrations,
but it also gives prompt, intimate and sustained support and co-operation to the ground forces in every operation.
The Japanese Army goes into action both on the ground and in the
air, operating as one team.
The fighting commanders, the task force commanders, have full
control over all their weapons and the necessary aircraft for the task
are just another weapon for the commander to employ. It is his war
and he is presumed to know the proper use of hisair-weapon as he does
the use of his infantry or artillery.
There is no divided control. Plans do not have to be agreed upon
through painful compromise, after regrettable delay, nor are operations
hampered by lack of co-operation.
A Japanese manual says: "It is not cooperation we should seek-it
is coordination we must make certain."
Before committing his forces to battle the Japanese Army Commander has large air formations assigned to him and placed under
his direct command (men, officers, and planes), and he in turn often
delegates command of smaller air units down to regimental commanders.
When the operations are ended the air forces in question return
to bombing and strafing missions.
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Japan is also employing 1,500,000 tons of merchant shipping on
regular schedules to China ports.
One million additional tons are engaged in coastwise and port-to-
port (short-haul) shipping which has increased in volume since
CHAPTER XI
JAPANESE MERCHANT MARINE TONNAGE
As of October 1, 1941, Japan possessed over 6,000,000 tons of
merchant shipping.
The pre-war imposition of economic sanctions against Japan automatically freed her great merchant tonnage for the military and naval
operations she has conducted since December 8, 1941.
While much of this tonnage must eventually return to trade, a
large portion of her imports and exports transport can now be conducted within conquered territories and adjacent seas, thus requiring
much less tonnage and less fuel capacity than the pre-war trade
because of the shorter distances involved.
Japanese shipping is now operating on interior lines, far removed
from Allied naval bases, which means it moves, to date, with comparative security and relatively small losses.
Japan's military operations in Luzon, Mindanao, Netherlands East
Indies, British Malaya, and Borneo required, at their peak, simultaneous employment of 2,000,000 gross tons of shipping.
This was the equivalent of between 330 and 340 ships of 6,000
tons each.
The military operations referred to required the transportation and
maintenance of 18 divisions,
Concurrent with these extended military operations, Japan had to
supply naval forces that required the services of 15 ten-thousand ton
tankers or a tanker tonnage of 150,000 gross tons.
In addition, over 100,000 gross tons of shipping was required to
fuel and munition the land-based air forces operating in Malaya,
Luzon, Thailand, Netherlands East Indies, and the Mandated Islands.
This tonnage was the equivalent of 17 ships of 6,000 tons each.
At the height of her far-flung military operations throughout the
western Pacific, therefore, Japan had a total of 2,250,000 tons of
merchant shipping committed to military and naval requirements.
(This figure includes shipping required for military operations in
China and Manchuria.)
This total tonnage involved all of the tonnage formerly employed
on her overseas trade (2,000,000 tons), plus the diversion of 250,000
tons of her total tramp tonnage of close to 2,000,000 tons.
(22)
October 1, 1941.
Tramp tonnage still involves 1,600,000 tons, less 250,000 tons
diverted to military and naval transportation purposes.
Following the occupation of Luzon, the Netherlands East Indies
and Malaya, Japan requires only 800,000 tons of merchant shipping
to maintain the forces holding these occupied areas.
This releases 1,450,000 tons previously committed to supplying
military requirements at the peak of operations in these areas.
Of the 1,450,000 tons thus released, 600,000 tons have been recommitted to requirements in Burma.
This leaves approximately 800,000 tons of merchant shipping available for additional operations that could be undertaken concurrently
with Burma campaign.
Japan has lost an estimated 200,000 tons of merchant shipping by
enemy action and otherwise since December 8, 1941, but these losses
have been restored by seizures, captures, and repairs of Allied shipping
and production of Japanese shipyards.
It must be concluded that Japan will not be hampered by lack of
shipping in any contemplated military operations in the west and
southwest Pacific, Bay of Bengal, and Indian Ocean.
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Japan is also employing 1,500,000 tons of merchant shipping on
regular schedules to China ports.
One million additional tons are engaged in coastwise and port-to-
port (short-haul) shipping which has increased in volume since
October 1, 1941.
CHAPTER XI
Tramp tonnage still involves 1,600,000 tons, less 250,000 tons
diverted to military and naval transportation purposes.
Following the occupation of Luzon, the Netherlands East Indies
and Malaya, Japan requires only 800,000 tons of merchant shipping
to maintain the forces holding these occupied areas.
This releases 1,450,000 tons previously committed to supplying
military requirements at the peak of operations in these areas.
Of the 1,450,000 tons thus released, 600,000 tons have been recommitted to requirements in Burma.
This leaves approximately 800,000 tons of merchant shipping available for additional operations that could be undertaken concurrently
with Burma campaign.
Japan has lost an estimated 200,000 tons of merchant shipping by
enemy action and otherwise since December 8, 1941, but these losses
have been restored by seizures, captures, and repairs of Allied shipping
and production of Japanese shipyards.
It must be concluded that Japan will not be hampered by lack of
JAPANESE MERCHANT MARINE TONNAGE
As of October 1, 1941, Japan possessed over 6,000,000 tons of
merchant shipping.
The pre-war imposition of economic sanctions against Japan automatically freed her great merchant tonnage for the military and naval
operations she has conducted since December 8, 1941.
While much of this tonnage must eventually return to trade, a
large portion of her imports and exports transport can now be conducted within conquered territories and adjacent seas, thus requiring
much less tonnage and less fuel capacity than the pre-war trade
because of the shorter distances involved.
Japanese shipping is now operating on interior lines, far removed
from Allied naval bases, which means it moves, to date, with comparative security and relatively small losses.
Japan's military operations in Luzon, Mindanao, Netherlands East
Indies, British Malaya, and Borneo required, at their peak, simultaneous employment of 2,000,000 gross tons of shipping.
This was the equivalent of between 330 and 340 ships of 6,000
tons each.
shipping in any contemplated military operations in the west and
southwest Pacific, Bay of Bengal, and Indian Ocean.
0
The military operations referred to required the transportation and
maintenance of 18 divisions.
Concurrent with these extended military operations, Japan had to
supply naval forces that required the services of 15 ten-thousand ton
tankers or a tanker tonnage of 150,000 gross tons.
In addition, over 100,000 gross tons of shipping was required to
fuel and munition the land-based air forces operating in Malaya,
Luzon, Thailand, Netherlands East Indies, and the Mandated Islands.
This tonnage was the equivalent of 17 ships of 6,000 tons each.
At the height of her far-flung military operations throughout the
western Pacific, therefore, Japan had a total of 2,250,000 tons of
merchant shipping committed to military and naval requirements.
(This figure includes shipping required for military operations in
China and Manchuria.)
This total tonnage involved all of the tonnage formerly employed
on her overseas trade (2,000,000 tons), plus the diversion of 250,000
tons of her total tramp tonnage of close to 2,000,000 tons.
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Borneo, and an additional 100,000 tons came out of Ceram in the
Moluccas, plus 700,000 tons from Brunei, British Borneo, and 200,000
tons from Sarawak.)
Large quantities of tin are now available to Japan in Malaya and
in the Dutch Islands of Banka, Billiton, and Sinkep, off the east coast
CHAPTER XII
JAPANESE RESERVES OF CRITICAL MATERIALS
On October 1, 1941, Japan possessed reserve storage of five and a
half million tons of oil. The locations of this storage are described in
a previous report to War Department.
On the same date she had stock-piles of rubber sufficient for the
needs of her Army and Navy for 2 years.
The scrap-iron and pig-iron reserve was sufficient for 1 year's operations of present mills' capacity.
Reserves of tin, lead and copper had been reduced. Less than 6
months' reserves were on hand.
A months' reserve of nickel and chrome had been built up.
Any references to Japan's 1941 position regarding critical materials,
however, must include comment on the strategic and economic
importance of the Dutch and British possessions in Malaya and the
Malayan Archipelago.
Strategically, the long Malay Peninsula and the line of islands of the
Archipelago serve a double purpose. They form a land bridge to
Australasia and a barrier between the Pacific and Indian Oceans,
From an economic point of view, even in time of war, the economic
importance of the Malayan Archipelago should be kept constantly
in mind by military and political strategists.
The population of the Dutch Islands alone is several millions more
than the total population of the whole British Colonial Empire,
almost equal to that of Japan, and more than half that of the United
States. If British Malaya and the Philippines are included, the
population exceeds 100 millions.
These vast numbers are barely industrialized, yet their homelands
are endowed with a rich profusion of natural wealth. Highly industrialized Japan will know how to make the most of such a situation.
In 1940 the Archipelago produced 9,000,000 tons of crude oil.
(In Sumatra the Palembang-Jambi district in the south, and the
Medan district in the north together produced 5 million tons; the
fields of western Java, east of Batavia, and of eastern Java, between
Sourabaya and Rembang, furnished 1 million tons; another million
tons was produced in the Balik Papan region of Dutch Borneo;
another million tons in the Island of Tarakon, off the east coast of
(24)
of Sumatra. The tin on the above-named islands is a continuation
of the ore belt which runs through Thailand and French Indochina
into southern China.
In 1940 Malaya's output of tin amounted to 85,384 tons, compared
with 44,563 tons produced in the three Dutch islands, to which Banka
contributed the greater part, with Billiton second and Sinkep third in
importance.
Together, British Malaya and the Netherlands East Indies produced
over 55 percent of the world's total output for 1940.
Malaya's tin ore is smelted on the island of Penang and in Singapore, as is the ore from Billiton and Sinkep.
Bauxite is in large deposits in Johore and on the Dutch island of
Bintan, opposite Singapore.
Johore's exports of bauxite to Japan rose from 36 tons in 1936 to
100,000 tons in 1940 and the production of the ore in the Netherlands
East Indies, which exceeded 250,000 tons last year, also assisted the
Japanese in building up their aluminum industry.
In addition to oil, tin, and bauxite the Malay Archipelago produces
coal; iron ore (total exports 1940, 2,200,000 tons); manganese ore
(50,000 tons exported to Japan in 1940); scheelite, wolframite (8,000
tons to Japan in 1940); low-grade nickel ore (30,000 tons exported to
Japan in 1940).
The most important crop accruing to Japan through her conquest
of the Malay Archipelago is rubber. In 1941 the Archipelago exported
1,142,000 tons, equivalent to 81 percent of the world's total shipments.
An additional 9 percent came from Thailand and Indochina, so that
90 percent of the world's supply is now in Japanese hands.
The remainder was produced in Ceylon, Burma, and Latin America,
mainly Brazil.
Other important crops produced on the rich soils of Netherlands
Indies include large quantities of copra, palm oil, fibers, spices,
tobacco, quinine, cinchona bark, tea, coffee, and pepper.
Netherlands Indies provides 90 percent of the world's supply of
quinine and pepper, three-fourths of its kapok, one-third of its copra,
and one-fifth of its palm oil.
Chrome has just been found in the Moluccas in apparently large
deposits.
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contrary it is essential that he be as well organized and carefully
trained as the regular soldier for his job.
His activities should not be merely incidental or haphazard or sporadic.
CHAPTER XIII
JAPANESE VULNERABILITY TO GUERRILLA ATTACKS
The Japanese Army is peculiarly vulnerable to guerrilla attack in
the territories it has over-run since December 8th, 1941.
Japanese forces of occupation in British Malaya, Luzon, Siam,
Indochina, Java, Sumatra, Borneo, and the islands of the Celebes
and Moluccas are incredibly small.
The Japanese manifest a complete disregard of the possibility of
guerrilla operations being conducted against them in the named
territories, although they have had to combat extensive and persist-
ent guerrilla attacks in China. In the other areas they are relying
on the docility and helplessness of the natives, the bulk of whom, it is
true, have welcomed the invaders with real, or feigned, friendliness.
There are, in all these countries, however, thousands of natives who
are not disaffected and who would welcome the opportunity to reduce
the efficiency and strength of the invader's forces.
These men would have to be organized and trained before introdueing them into enemy-held territories. Preferably they should be
natives of the country in each instance.
It might be physically possible to fly white men into Java today
from Port Darwin, Australia, but they would stand as much chance
of escaping detection and death as would a small Japanese force
introduced into San Francisco tomorrow. Even as individuals hidden
in the hills of conquered territory in the Southwest Pacific they could
not survive for long. The white man's food problem and native
informers would soon end their activities.
Chinese guerrillas have not obtained results in any way comparable
to their numbers.
They have been elusive and persistent, but lack of organization and
training has, to a considerable extent, prevented their obtaining
results commensurate to their strivings and sacrifices.
They have not spared themselves. They have marched hundreds
of miles and endured great privations in order to annihilate small enemy
forces, while at the same time failing to strike vulnerable points in
communications and supply which were exposed to them while they
were en route to kill a few more Japanese.
Merely because the guerrilla operates in territory in the possession
of the enemy he need not be unschooled in his profession. On the
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They should be based on and follow carefully preconceived plans.
These plans should always provide for offensive operations. When
the guerrilla accepts a defensive role, by assignment or enemy compulsion, his usefulness is destroyed, if not himself.
It is habitual with the Japanese to leave supply lines and communications without adequate protection. Details as small as two sentries,
one off and one onduty, are assigned to guard vital installations (in occupied or conquered territory) such as telephone centrals, power stations,
electric lines and transformers, railroad shops, gasoline storage, power that
dams, and bridges and ferries at critical points. It often happens
no guards at all are placed at such vital points and installations.
It is reliably reported that many miles of railroad and telegraph
lines in occupied Malaya and Java are wholly unguarded against
sabotage. If previous recommendations to the British and Dutch military
authorities in these now enemy-occupied territories had been accepted
and acted upon, well-trained guerrillas would now be seriously harass-
ing the enemy and forcing him to commit large numbers of troops to
the protection of innumerable transportation and communication
points and installations
Immediate steps should be taken to organize, train and weapon Indies.
guerrilla units in Australia, the United States and West carefully
Officers and enlisted men from the regular forces could be
selected and trained for such duty, preferably volunteers.
The selection, organization and training of these units should be a
function of the regular forces. "Amateurs" cannot be efficient guerrillas and amateurs cannot create them. If the training of guerrillas
is instituted on a justifiably large scale it should be carefully formulated and comprehensive. Only men possessing intelligence, train- resourcefulness and obvious self-confidence should be selected for
and the training program should be inclusive enough to develop
ing linguists, intelligence men, demolitions men, chemists, radiomen, related to
engineers and other technicians to carry out special tasks
their specialized abilities.
Untrained guerrilla units are now operating, with limited success,
against the Japanese in Java, Borneo, Sarawak, Amboina, Timor,
New Guinea, and New Britain.
Guerrilla operations now being conducted in the Philippines, partic- wide-
on the islands of Luzon, Mindoro, and Mindanao, are more
spread ularly and successful than in any of the previously named regions.
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Unfortunately, because of lack of training, present guerrilla operations in all these areas consist, mainly, of attacks on Japanese personnel, viz.: messengers, isolated guards and patrols, staff cars, mili.
tary police, etc. This is largely due to the fact that many guerrilla
bands, including their leadership, are motivated by one purpose: to
stalk and kill the Japanese invader.
Specialized training would triple the effectiveness of such volunteer
units.
CHAPTER XIV
JAPANESE ARMY METEOROLOGICAL SERVICE
For years the Japanese army had meteorological experts assigned
to observations throughout the islands of the southwest Pacific,
including Sumatra, Java, Borneo, the Moluccas, the Celebes, and all
other islands of the Netherlands East Indies.
They were also located in British Malaya, Burma, Thailand,
Indochina, and the Philippines until as late as September, 1941.
Many of these men, including professors in the science of meteorology, sought and secured employment as laborers on the rubber
plantations, in the rice fields, and tin mines.
Documentary evidence secured subsequent to the outbreak of war
in the Far East discloses that the Japanese meteorologists made
particular studies relative to the beginning and end of the monsoons,
their deductions being based on precipitation, pressure, temperature,
and sun-spot observations.
The Japanese Army makes the claim that its synoptic weather data
enables it to forecast when the monsoon will begin, how long it will
continue, and whether it will be normal or wet or dry.
In addition to the data secured and correlated by these military
meteorological personnel, the Japanese civil meteorological services
furnish the army, throughout the Orient, with day-to-day local and
route forecasts.
There is evidence that the Japanese Army received continuous data
from over 18,000 rainfall and sunshine stations or observation posts
in the southwest Pacific.
The timing and routing of Japanese military thrusts into the Philippines, Netherlands East Indies, Burma, and India in recent months
indicate careful study and full consideration of weather factors in
those areas.
The staff of each field army includes commissioned meteorologists
and enlisted assistants. Some of these men are university professors
of meteorology temporarily commissioned to augment the permanent
military meteorological service.
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were lost in Malaya and Luzon because such advance notice was not
received by signal officers, particularly in the case of withdrawals.
Communication lines (wire) should not be laid along roads as they
will be continually knocked out by bombing, artillery, and mortar
fire directed at the latter.
CHAPTER XV
Flag signaling could seldom be used.
Portable radio sets should be issued every company and battalion
COMBAT OBSERVATIONS
commander. Every Japanese company and battalion commander
was equipped with one and thus had contact with units on his right
and left and with the air.
Close, continuous communication was maintained between Jap-
Malaria and dysentery are foes that will be encountered, and must
be combated, throughout the Far East and southwest Pacific theatres
of war. They reduced our forces on Bataan.
Steps should be taken to limit the public purchase of quinine in the
United States to antimalarial use only.
The Japanese forces in Malaya, Burma, China, and Luzon used the
leaves of the "chirata" plant (indigenous to Nepal) to combat malaria.
They also used other Nepalese herbs to ward off dysentery and various
anese ground and air forces.
The "peep" (1/4 ton reconnaissance car) was found to be indispensable. It is superior to motorcycles for most military uses although the motorcycle was a much-used communications aid.
Mobile water supply (motorized water tanks) should be available
for all large units in the field.
tropical diseases.
It is more effective and economical to use tanks and half-track
Troops must be hard-and be prepared to live hard.
Troops should be specially instructed in the destruction of trucks,
75's, and mobile 37 mm. guns in beach defense than it is to use men.
Mobile gun and tank defense held the long beach perimeter of
tanks, guns, and other equipment that may be disabled or about to be
abandoned. As described elsewhere in this report the enemy quickly
repaired and made effective use of such equipment whenever possible.
British and American troops were compelled to abandon large
quantities of matériel in retirements and in their haste drivers of
motor vehicles, for example, often merely removed distributors.
The Japanese either had distributors adaptable to the vehicles in
question or obtained them from completely disabled similar vehicles.
Motorized and mechanized equipment abandoned in withdrawals
should either be blasted or burned. Each piece of such equipment
should be fitted with an adequate demolition device.
It should be possible to empty gasoline tanks and water-jackets
immediately by connections within the driver's reach while the
vehicle is in motion. Dive bombers may force him to abandon his
truck at a moment's notice.
The Japanese transport columns secured thousands of gallons of oil
and gas from hastily abandoned British trucks, tanks, and other
vehicles.
Army radio sets to be used in the Far East and southwest Pacific
theaters should be specially designed and constructed for tropical
use.
Ordinary radio sets deteriorate rapidly in humid climates and must
be almost constantly run to keep them dry.
Commanders should give earliest possible information to signal
communications officer regarding any move. Great quantities of wire
(30)
Bataan Peninsula.
Troops pinned down to watching beaches would be far more useful
if they constituted a mobile reserve. Lack of such reserves, after
flanks had been turned, had much to do with the loss of the Malay
Peninsula.
I
The American soldier can be relied on to carry out his duties even
when under fire for the first time. On Batsan and Corregidor, A. A.
gun crews, under their first bombing and strafing, performed well.
Some instances of physical failure to function (where men dropped
shells while loading guns) were due to actual shell shock.
The unique Japanese system of dispersion of planes and air-field
installations deserves attention.
Immediately after taking over Clarke Field and Nichols Field
(as well as Khota Baru and Singora airfields in Malaya), the Japanese
secured dispersion of planes and fuel by laying out over 40 landing
strips (with hand labor and graders) some distance from the central
field.
This was also done in the vicinity of Manila.
They allot two or three planes to a strip, together with oil (in
drums) and minimum servicing facilities.
Enemy bombers coming in to attack are likely to find only two or
three planes while other Japanese fighters are gaining altitude from
other strips.
Strips are sometimes two or more miles apart.
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Hangars and repair facilities are located a considerable distance
from runways at main fields.
These arrangements contribute greatly to the security of planes
while on the ground as well as that of supplies and personnel.
Sulfanilamide proved very effective in treatment of wounds on
Bataan and Corregidor. It inhibited gas bacteria.
CHAPTER XVI
THE LOSS OF THE "PRINCE OF WALES" AND
THE "REPULSE"
Gas-gangrenous wounds over large areas of the body were caused
by contaminated earth being driven into flesh by bomb blasts.
The 105 mm. howitzer and the 75 mm. howitzer are more effective
than the 75 mm. gun in British Malaya, the Netherlands East
On December 10, 1941, the Prince of Wales and Repulse were sunk
by Japanese aircraft.
Indies, and Australia.
The facts concerning the engagement are as follows: Admiral
Sir Tom Phillips put to sea with the two major ships and a flotilla
There are 52 fortified or semifortified points in the Marshalls,
Carolines, and other ex-Mandated Islands.
Concreted works include concrete, camouflaged submarine slips 350
feet long, with 4 1/2 feet reinforced concrete roof. Fifteen such slips
are in the Pelew Islands (pictures).
Two new 43,000-ton battleships launched August 22, 1941.
Japanese casualties in China since 1937 total 80,000 killed, 300,000
of destroyers in order to interrupt the Japanese landings in the Gulf
of Siam. He was not accompanied by an aircraft carrier nor was he
escorted by land-based naval planes. The Fleet Air Arm was not
present.
There is also no evidence of arrangements for cooperation with
the R. A. F. in the form either of air escort for the squadron or of
wounded, 60,000 missing.
Japanese casualties in operations on Luzon, British Malaya, and
Netherlands East Indies total 12,000 killed, 30,000 wounded, 4,000
missing, exclusive of inestimable losses through transport sinkings.
The Japanese 90 mm. mortar proved itself more practicable and
effective in close country than 75 mm. guns. British Malaya, Netherlands East Indies, and northern Australia are tropical countries,
densely wooded, that limit use of the 75 mm.
In the Port Darwin raid of March 19, no warning was received although P-40 fighters (U. S.) were up on patrol.
The Japanese found the radio frequency of our planes and
"jammed" their attempted reports.
Increasing roar over radio at Operations Office at airport was finally
interpreted as indicative of air raid but too late to warn personnel at
field.
attacks against enemy air bases in order to keep the Japanese aircraft
on the ground.
Admiral Phillips was evidently relying, for protection, on overcast
weather and surprise. His partial final instructions were: "I want
0
to finish quickly and so get well clear to eastward before the Japanese
can mass a too formidable scale of air attack against us."
At 9:50 p. m. in the evening preceding the engagement, however, he
discovered that he was being shadowed by three Japanese aircraft and
thereupon turned back for Singapore. From that moment, with no
means of keeping hostile reconnaissance aircraft at their distance, much
less of providing proper protection from air attack, his big ships were
doomed.
At 11:15 a. m. the following morning the action started with an
attack by six aircraft. The attacks grew quickly in intensity. They
were of two kinds, evidently in order to distract the A. A. gunners and
to lessen the concentration of their fire, and also to complicate the
problems of evasive action set for the helmsmen.
A number of aircraft carried out high-level bombing from 17,000
feet, scoring hits on both ships.
Other aircraft delivered torpedo attacks.
The Prince of Wales was struck by a torpedo and, with her steering
gear smashed and with a list to port, became a much easier target.
Three more torpedoes heavily increased the list to port and she
went down by the stern.
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The Repulse, hit by a heavy bomb that lessened the volume and
effectiveness
of her A.A. fire, was hit by three torpedoes and quickly
slid
to the bottom.
The total number of Japanese aircraft engaged was 43, 7 of which
were shot down.
R. A. F. aircraft arrived on the scene an hour after the ships had
been sunk.
Their operations had been hampered by attacks on their airdromes
Conclusions: the engagement proved conclusively that the battleship, in all the more normal circumstances of war, cannot withstand
reasonably strong air attack with its own resources alone.
On the one hand was pure sea power. On the other was pure air
power. In no previous meeting in history of the two powers, sea and
air, had there been such balance, such absence of all extraneous and
abnormal factors.
The answer was shatteringly in favor of air power.
It proved that naval units cannot operate without air support in
areas where a reasonable weight of enemy air attack is normally to be
expected.
It did not, however, signal the end of all usefulness of the battleships.
It proved, simply, that the battleship has suffered a certain further
diminution of its usefulness by reason of the fact that its future opera-
tions will of necessity be circumscribed by additional precautions.
And it further proved that a battleship cannot normally expect to
survive in fair fight with anything like an equivalent aerial force in
the absence of air support.
Not only the action in which the Prince of Wales and Repulse were
lost, but all other subsequent engagements in the Southwest Pacific
involving sea and air power, demonstrated that naval (surface) units
cannot operate if the air above them is controlled by the enemy.
OFFICE
o
360
Copy No.
13
BRITISH MOST SECRET
(U.S. SECRET)
OPTEL No. 132
Information received up to 7 A.M., 22nd April, 1942. :
1. MILITARY
BURMA. IRRAWADDY FRONT. Chinese troops supported by U.K. armoured
forces cleared the enemy from the south bank of the PIN CHAUNG and enabled our
troops further south to withdraw. Chinese troops are holding YENANC DYAUNG,
SITTANG FRONT. Chinese forces are in action twelve miles north of
PYINMANA.
KARINNI FRONT. The Japanese have crossed the BALUCHAUNG in two places
and attacked the Chinese seven miles north of LOIKAW from the direction of MONGPAL,
2. AIR OPERATIONS
WESTERN FRONT. 21st, Beaufighters off the Norwegian Coast success-
fully attacked with cannon and machine gun fire three merchant vessels of 7500,
4000 and 1000 tons respectively, and an auxiliary naval vessel. Hits were also
made on the conning tower of a U-boat. Off BREST a promising attack was made on a
U-boat.
MALTA. Between 1400/20 and 1207/21 175 bombers with fighter escort
attacked. At TAKALI and IUQA two Spitfires were destroyed on the ground and ten
others damaged. Fighters shot down eight enemy aircraft. Probably destroyed
eight and damaged fifteen, Three more were destroyed by A.A. fire. Five of our
fighters are missing and others were damaged.
PACIFIC. On 19th bombers made a direct hit on a ship in RABAUL harbour
and shot down one enemy fighter, probably also destroying another.
20th. SALAMOA aerodrome was attacked, a hangar was completely
wrecked and hits were made on buildings and fuel dumps.