WHEN Germany occupied Norway and Denmark in April 1940 the United States Treasury, in a protective countermove made at President Roosevelt's direction, "occupied" the $267 million in Norwegian and Danish property in this country. Secretary Morgenthau remarked: "Certainly it is in the interests of the American people that I sit on this money and do nothing . . . until the State Department can advise us more clearly on the status of these countries." In the next fifteen months the President directed similar moves involving seven and a half billion dollars owned by 32 countries (set forth in detail in the accompanying table), and it became clear that "doing nothing" really meant engaging in perhaps the most extensive exchange control ever undertaken by any country. With the position of the United States gradually shifting from that of an indignant neutral to one of active opposition to the Axis, the Treasury's control came to include not only the funds of countries occupied by the Axis, but those of the Axis itself and of the neutrals who might wittingly or unwittingly aid the Axis. In short, our financial policy was back on the 1917-18 basis.

Our control of foreign funds is highly important as a weapon of economic warfare. How does it operate? For what purposes? How effective is it? The control also raises questions, perhaps even more significant and perplexing, as to the peace. Will the United States be able to remove the controls and return to its traditional free exchange policy after the war? If so, whose claims now "frozen" under Treasury restrictions are to be recognized?


The United States undertook the control of foreign funds reluctantly. Our maintenance of a free exchange market was the logical counterpart of our traditional free trade policy, under the banner of which the government crusaded vigorously against the growing number of exchange restrictions imposed by other countries. Even apart from ideological considerations, we had an understandable distaste for foreign controls which operated as


Country Effective Date of Amount Percent of Total
    Blocking (millions of dollars)  
  Denmark April 8, 1940 $ 92 1.2
  Norway " " "  175 2.4
  Netherlands May 10, 1940 1,619 21.8
  Belgium " " "  760 10.2
  Luxembourg " " "  48 .7
  France June 17, 1940 1,593 21.4
  Latvia July 10, 1940 13 .2
  Estonia " " "  10 .1
  Lithuania " " "  6 .1
  Rumania October 9, 1940 53 .7
  Bulgaria March 4, 1941 2 (a)
  Hungary March 13, 1941 24 .3
  Jugoslavia March 24, 1941 71 1.0
  Greece April 28, 1941 122 1.6
  Finland June 14, 1941 17 .2
  Czechoslovakia " " "  5 .1
  Poland " " "  7 .1
  Albania " " "  (a) (a)
  Austria " " "  9 .1
  Danzig " " "  (a) (a)
      ------ -----
    Total   $4,626 62.2
  Germany (and Liechtenstein) June 14, 1941 $ 107 1.4
  Italy (and San Marino) " " "  72 1.0
  Japan (b) " " "  131 1.8
      ------ -----
    Total   $ 310 4.2
  U.S.S.R. June 14, 1941 $ 39 .5
  China (b) " " "  275 3.7
      ------ -----
    Total $ 314 4.2  
  Portugal June 14, 1941 $ 157 2.1
  Spain (and Andorra) " " "  30 .4
  Sweden " " "  516 6.9
  Switzerland " " "  1,484 20.0
      ------ -----
    Total   $2,187 29.4
  Grand Total   $7,437 100.0
bOrder not actually issued until July 25, 1941.
cLiberal general licenses involving these countries have been issued.
Sources: Figures for countries frozen through October 9, 1940, were compiled by the Treasury from property-census
reports required under the freezing orders. Similar official figures on later freezings will be available for the other countries if, and when, the Treasury releases the results of the property-census now being taken on all foreign holdings. The figures given here are derived from estimates emanating from the Department of Commerce, the Federal Reserve Board and government defense agencies.


moratoria on the huge volume of payments accruing to this country both on our trade and on our investments. Moreover, the United States was not touched by either the political hopes or financial despairs which tempted so many other countries to adopt controls. The resulting freedom and stability of our markets offered an irresistible attraction of profitable employment or asylum to nervous European capital. From 1935 to 1940 it flowed here by the billions ($7.6 billion, according to Federal Reserve figures).

But when the German war machine started to roll in earnest in April 1940 it became clear that any adequate protection of the foreign funds here would require government intervention. One immediate consequence of German conquests was seen to be the extension of German exchange controls, by means of which the Reich could intercept any payments which we might attempt to make to nations of that area. Moreover, would not Germany force the inhabitants of occupied areas to turn over to her their foreign holdings and all other property which might be "cashed" here? How were American bankers to know whether an order from an invaded area was made under German duress or not? Were instructions from puppet governments or governments-in-exile to be honored?

The occupation of Czechoslovakia and Poland had already created similar, but less critical, emergencies. The holdings of those countries in the United States were not extensive, and it appeared possible to prevent illegitimate transfers by subjecting transactions to the special scrutiny of the New York bankers' Foreign Exchange Committee. The invasion of Norway and Denmark, however, endangered really large holdings in this country. The bankers were hardly in a position to distinguish legitimate calls for payments from those made under duress or by parties not entitled to act.[i] At the same time, they had no legal right to withhold funds from legitimate claimants. Moreover, they could not provide even temporary protection for Norwegian and Danish assets held here outside of the banks. So twenty-four hours after the Foreign Exchange Committee voluntarily suspended dealings in Norwegian and Danish currencies President Roosevelt issued the first of the freezing orders.

Strictly speaking, the order did not "freeze" Norwegian and Danish funds, but rather subjected them to Treasury license. The 1917 Trading with the Enemy Act had given the Executive the power to regulate foreign exchange transactions in time of war, and the 1933 Emergency Banking Act widened this power to cover any emergency. But doubts arose as to whom and what the President was authorized to control. Did the power cover securities? Did it include anyone but banks? To clear up such doubts, Congress passed a joint resolution early in May confirming the President's action to date, and making an important addition, printed below in italics, to the language of the earlier acts:

During time of war or during any other period of national emergency declared by the President, the President may, through any agency that he may designate, or otherwise, investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, transfers of credit between or payments by or to banking institutions as defined by the President, and export, hoarding, melting, or earmarking of gold or silver coin or bullion or currency, and 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, as defined by the President, has any interest, by any person within the United States or any place subject to the jurisdiction thereof.

A wider power over foreign exchange could scarcely have been devised. The breadth of the grant aroused considerable misgiving in the minds of certain Senators who felt that it might open the door to controls quite at variance with the original protective purposes of the freezing. Senator Glass impatiently answered such doubts by insisting that the sought-for amendment was designed solely to prevent confiscation by Germany of property held in this country for the account of owners in the invaded countries. "That is all it does, despite the Solomonic difficulties which the Senator from Connecticut [Mr. Danaher] says will occur." A little later reporters showed so sharp an interest in possible motives of the Administration that Secretary Morgenthau remarked, "The Senators are easy compared with you fellows."

The origin of these doubts was the fear of isolationists that the Government would use its power over foreign funds to put economic pressure upon Germany. The Government insisted that its only objective was the protection of property threatened with German seizure. As a protective move, the freezing orders were almost unanimously approved in Congress and in the press. But what sort of a licensing policy was required to assure protection? Was it necessary literally to "do nothing," that is, prohibit all transactions involving frozen property? Obviously this sort of protection would work unnecessary hardships in the case of many perfectly legitimate transactions, for example, those connected with trade between the United States and the Netherlands Indies. Or did protection call for using the frozen funds to secure the defeat of the country that was threatening them? Representative Sol Bloom, Chairman of the House Foreign Affairs Committee, recommended an international conference to arrange for a contribution to the British war effort out of the frozen funds. Obviously "protection" did not furnish an unambiguous criterion for licensing policy.

The fear that the Government would pursue too aggressive a control policy was still in evidence even after the fall of France. The Federal Reserve Banks, as holders of large deposits of foreign governments and central banks, were seeking legislation which would free them from further liability if they paid claims presented by foreign officials whose status had been certified by the State Department. The bill [ii] placed in the State Department the sole responsibility for determining which of various claimants were entitled to the official funds of an invaded country. One of the main factors accounting for the refusal of Congress to act at that time was its fear that the new authority might be used to prolong the war. Senator Downey, in a statement which typifies the undercurrent of doubt which was expressed at the Senate hearings, said: "This law back of which we are undertaking to place our moral responsibilities may result in the scourge, devastation, and destruction of the people of France as a result of this money being paid over to carry on a war by some government acting outside the boundaries of France . . . "

Meanwhile, in contrast to these fears, experience was beginning to reveal what in the following months became painfully clear: the existing controls were not adequate to prevent Germany either from acquiring the American assets of invaded countries or from cashing in on loot in this country. John Pehle, head of the Division of Foreign Funds Control, optimistically told a group of New York foreign traders in March 1941, that, by our freezing policy, this country serves notice to the world that it has a definite and direct interest in the use to which these assets shall be put and that this country reserves the right to prevent any attempted use of such assets in a manner harmful to our defense efforts and our economy . . . Persons who placed their assets in this country out of confidence in our free institutions and our integrity will not have that confidence violated by our permitting such assets to be wrested from their true owners . . . Duress—whatever success it may have had elsewhere—receives no recognition here. Moreover . . . freezing control is serving a definite function in minimizing the liabilities and responsibilities of American banks and other business institutions against the assertion of . . . conflicting claims pending ultimate clarification as to the true ownership of such property.

But the Treasury's efforts to secure an extension of the control sufficient to accomplish these objectives met with months of opposition, both from isolationists and from those who believed that more rigid controls would drive Japan and Vichy into closer collaboration with Germany, or provoke retaliatory moves against American property.

Meanwhile Germany and Italy flourished on the delay. They found—rather to their own surprise—that while it was somewhat complicated to manipulate the funds of invaded countries, their own funds could handily be used for a variety of purposes, despite the British blockade. They could buy and pay for propaganda designed to help ease the bulky United States into the small place reserved for it in the proposed New Order. They could buy and pay for supplies to be sifted through the blockade via friendly neutrals, or shipped to Latin America in an effort to keep at least some part of their peacetime trade alive. They could buy up their own defaulted bonds, now quoted at bargain rates, or purchase American-owned interests in firms located in Europe. Or they could use the sturdy American vaults to store funds looted from other countries or simply moved from less secure depositories. Certain henchmen of the German and Italian leaders thought of these nest-eggs here as a "hedge" against an uncertain future.

This pleasant convenience seemed too good to last. Beginning late in 1940, accordingly, Germany and Italy started moving their assets out of the increasingly frosty atmosphere of the United States to the more congenial warmth of Latin America. Our Government's hesitations almost seemed to put a blessing on the move. Secretary Morgenthau, asked by reporters in February whether the Government was going to do anything about Axis financial operations in this country, said cryptically, "I am a farmer and therefore must be optimistic." But by June 2 he had abandoned hope. Asked whether he still favored the long-postponed freezing, he replied that the barn was empty, and added that the funds had been larger than a Shetland pony.

Twelve days later President Roosevelt locked the barn door. Spot estimates placed the size of the German and Italian "horse" at $179 million (see table). However, the new order, the most sweeping yet issued, included not only Germany and Italy, but the European neutrals as well—Switzerland, Sweden, Spain, Portugal and the Soviet Union (not yet a belligerent). But from the order's long list of countries, which in its completeness included names which even geographers are likely to forget (Andorra, San Marino, Liechtenstein) and others which have an independent place only on old maps (Poland, Austria, Czechoslovakia), there was one conspicuous omission. The assets of Japan were not touched.

Six weeks later, on the occasion of Japan's new aggressions in Indo-China, the President explained the exclusion of Japan from the freezing as part of a policy calculated to keep the war from spreading. The eventual failure of this reluctantly accorded favor was recognized in the issuance on July 25, 1941, of an order freezing Japanese assets. Chinese assets were frozen simultaneously at the request of the Chinese Government, which hoped that the American control would bring a much-needed degree of order to the management of widely dispersed Chinese resources both here and in occupied China.


The control system, as it now stands, is designed to give the Government a veto power over any foreign transactions which might prejudice "national defense and other American interests." While provisions have been made for a census of all foreign holdings in this country and for regular reports on transactions involving foreign interests, the heart of the control is the licensing system. Licenses are required for the following transactions, if they involve the property of any of the 32 specified countries, or are undertaken for a national of any of them: (a) transfers of credit between a United States banking institution and another banking institution, foreign or domestic; (b) payments by or to United States banking institutions; (c) foreign exchange transactions by any person within the United States; (d) export or earmarking of coin (gold or silver), bullion, or currency by any person within the United States; (e) transactions in evidences of ownership by any person within the United States; (f) transactions designed to evade the foregoing.[iii]

These broad provisions are backed up by sweeping definitions of terms. A "national" of an occupied country is defined to include (among others) not only citizens, but also any person who was residing or domiciled in such a country on or since the effective date of the freezing. Thus United States citizens who were residing in Europe at the time of the invasion would qualify as nationals of the occupied country even though they had since returned to the United States. Any business firm in which a national had a "substantial interest" was itself to be regarded as a national. Thus, if such a returned citizen was also the holder of a substantial interest in an American corporation, that corporation might, technically, require a Treasury license before it could make its payroll. No efforts are made, of course, to press the orders to absurd points. At the same time, many United States citizens returning from Europe did find to their surprise and inconvenience that their accounts had been blocked. (It was found possible—and necessary—to resort to the issuance of general licenses to alleviate the commonly recurring cases of unintended hardships.) "Property interest" is broadly defined to include all conceivable types of holdings. Treasury regulations, issued shortly after the control was imposed, listed, "but not by way of limitation," some sixty types, including money, real estate, bank accounts, evidences of debt, trade documents and securities. Banking institutions include, among others, "any person holding credits for others as a direct or incidental part of his business." Macy's, the Edison Company and bookies would all seem to qualify easily.

The breadth of these provisions can be more fully appreciated perhaps by reference to Mr. Pehle's advice as to how an individual can determine whether a contemplated transaction requires a Treasury license:

1. Does the proposed transaction involve in any way, directly or indirectly, trade or commerce with any one of the foreign countries designated in the freezing Orders—keeping in mind the definition[iv] of "foreign country" employed in the Order?

2. Does the proposed transaction involve in any other way, directly or indirectly, either a national of any one of the foreign countries designated in the Order or any property in which any such national has, or has had since the effective date of the Order, any interest whatsoever—keeping in mind the broad definition of "national" employed in the Order?

It would be very hard to conceive of a foreign transaction which beyond any reasonable doubt fell outside the license requirement.

Anyone desiring to engage in such a transaction must file with the Federal Reserve Bank a notarized application setting forth in detail the nature of the proposed transaction. While one license is sufficient for any single transaction, each party to the transaction is held responsible for obtaining that license. Applications are forwarded to the Treasury's Division of Foreign Funds Control, except for a small proportion which the Federal Reserve Banks decide on the basis of General Authorizations from the Treasury. Treasury decisions are issued on the basis of policies determined by a committee on which the State, Treasury and Justice Departments are represented.

Wherever possible, recurrent types of applications are handled under general licenses, of which 71[v] had been issued by August 16, 1941. The effect of such licenses is to "free" the frozen accounts affected, although all licenses are revocable without notice. Thus the accounts of United States citizens who come under the definition of "national" but have since returned to the United States are free. Other general licenses free certain accounts for all transactions, and all accounts for certain transactions. For example, a number of Netherlands colonial accounts have been freed to facilitate the East Indies trade. Swiss, Swedish and Spanish accounts and the accounts of the Portuguese Government are generally licensed, subject to certain controls required of these governments. A sweeping general license released Soviet accounts on the occasion of the German invasion. Other licenses permit payments to any "blocked" (frozen) account, as long as such payments are not from a blocked account. Banks may deduct service fees or pay obligations to the federal government from blocked accounts.

The absence of a general license covering a certain transaction does not mean, of course, that the transaction will not be permitted. Special licenses may be issued, permitting a particular transaction. Such licenses may be either for a single occasion or for a limited period of time. Thus a special license was granted in February 1941 to cover the Rumanian purchase of the International Telephone and Telegraph Company's properties there for $13 million. Foreign-owned corporations here have frequently been granted licenses permitting them to continue operations on the basis of their normal requirements in the past.

The typical operation of the control, then, involves the general blocking of specified types of accounts, and the subsequent issuance of licenses granting exceptions to the general order. In the case of Latin America, however, the converse procedure has been followed. Latin American accounts, as such, are free, but the President's list of Certain Blocked Nationals makes exceptions of some 1,800 Latin American firms. This blacklist, which is 50 percent more extensive than Great Britain's, was issued to clarify the ambiguous status of trade between this country and Latin America. Under the June 1941 order freezing Axis accounts, any Latin American firm which was stained by having an Axis interest would itself be blocked. But how were American traders to determine the status of their Latin American customers and agents? The blacklist was the Government's effort to take over that responsibility. At the time the Government published the list, it also issued a general license to all unlisted Latin American firms which might otherwise be subject to the earlier orders.


While it is impossible to make an accurate estimate of the value of blacklisted holdings in the United States, or the value of frozen holdings which have subsequently been freed by general license, these uncertainties probably do not materially affect our knowledge of the total of frozen holdings. Of the total, 80 percent belong to 5 countries: Netherlands, 22 percent, France, 21 percent, Switzerland, 20 percent, Belgium, 10 percent, Sweden, 7 percent. Perhaps a third of the Netherlands holdings are free under colonial licenses. Switzerland and Sweden are substantially free under licenses, but substantially frozen by general war conditions. None of the other 27 countries holds more than 4 percent of the total. If we except the funds of countries subject to general licenses, the remaining figure ($5 billion) probably indicates the amount of foreign funds actually immobilized under the orders. Funds freed for colonial trade may be offset against the Latin American funds actually frozen by the blacklist, though not included above. While a small volume of transactions takes place under license, the scattered indications we have on current capital movements indicate that the frozen funds are actually frozen, and will remain to be dealt with after the war. A more accurate—but not substantially different—picture of the frozen funds will be available on the completion this fall of the foreign property census, provided for in the June order.

There is another and most interesting type of turnover in the foreign funds—namely, by evasions. The volume is uncertain, for when an evasion is successful it leaves no record. The only safe assumption is that there is evasion wherever the possibility for it is known. In the case of the Foreign Funds Control there were—and still are—such possibilities, the most important of which may be summarized as follows:

(1) By dummy accounts and neutral agents. For example, as long as American, Swiss, Swedish and Spanish accounts are not rigidly controlled, Germany has a convenient list of "innocent" accounts through which it could accomplish limited operations not possible in its own name.

(2) By United States gold and silver purchases. As long as the United States buys precious metals there is no final assurance that such metal did not emanate from Germany. Gold or silver seized in the course of invasion may well have reached the United States via an intermediate market (e.g., Mexico, South America) from which we still purchase. The Treasury has indicated its awareness of this problem, and currently requires assurances from countries selling the metal; but such precautions are short of a perfect guarantee.

(3) By currency imports. European nations have long hoarded United States currency, which is most attractive due to its comparative stability. Our reimports of dollars are considerable. (January 1940-January 1941, $11 million.) The increase in circulation of large-denomination bills—the form which foreign hoarding usually takes—suggests that another avenue of evasion is being continued, although customs and postal officials watch for incoming currency.

(4) By the smuggling of securities or other valuable property (e.g., precious gems) into this country. There is no way of preventing German smuggling of seized valuables into the United States except by the vigilance of customs and post-office agents. The present control already provides for their coöperation.

(5) By the black market and by foreign assignments. The existence of a black market for illegal exchange transactions is a usual counterpart of any country's exchange control. Often such markets are more or less openly known and tolerated. There is no known black market in the United States, but it may exist or come to exist. Meanwhile, assignments of frozen funds, both voluntary and forced, are thought to take place abroad. There is some reason to believe that in lieu of statutory provisions to the contrary such assignments might ultimately have some legal status in our courts if the controls were removed.[vi]

Even before Axis and neutral funds were blocked, the Government took fragmentary action under the anti-trust acts and by means of export controls to close gaps in the freezing; but the existence of uncontrolled foreign accounts continued to invite evasion. The difficulty of operating an exchange control which left out half of the foreign transactions was painfully obvious. During the World War the first few months of experience with partial financial controls showed the impossibility of preventing evasions, and the control was consequently extended to cover all countries, including our allies. Under the limited "protective" orders of 1940, the need for complete controls was recognized immediately in the case of securities. All securities imported from any source were from the outset subject to the control.[vii]

It is not easy to find a convincing reason for the delay which occurred in extending the freezing. Appeasement of Japan was bringing doubtful success, and the maintenance of Axis financial privileges was growingly inconsistent both with our defense program and with our policy of protecting the funds of invaded countries. Nor did the United States enjoy anything like corresponding privileges in Germany and Italy, where for years rigorous exchange controls have been in operation. However, now that the control has been extended to cover virtually all foreign transactions except British, the remaining loopholes probably do not require action more drastic than tightened administration. Naturally the success of the control would be improved by further coöperation from Latin American nations, which so far have followed our freezing steps only to a limited extent.


The reaction of the Axis to the freezing of their funds was quick and indignant. Both Italy and Germany characterized the freezing as entirely unjustified. The day after the President's order Italy issued a hastily-composed and somewhat hollow decree imposing similar controls against American assets there. Aside from the inconvenience imposed on American residents there who had to forego the use of their checkbooks pending clarification of procedure, the decree probably added little to measures which Italy had already undertaken.[viii] Germany published no new orders, but simply said that "necessary measures" had been ordered against American property in Germany. If the United States acted too late to catch a good part of the German funds, Germany in adopting exchange controls years ago acted too early to be able to retaliate. No new measures in the Reich could increase the frozen status to which American property there had long since been reduced. Administration officials here were willing to concede that our billion of dollars in Europe is lost, whatever the date from which that loss is to be computed.

Considering that the freezing of Axis funds was merely an extension of a year-old program it brought a surprising amount of confusion in its wake. Some foreign exchange dealers and foreign traders realized only at that late date that they were included in the operation of control. A flood of questions arose. Were Latin American wholesalers the "ultimate consignees" for whose non-Axis status the Treasury held American exporters responsible? Or did the exporters have to have assurance that goods would not ultimately be resold to blacklisted firms? Such apparently was the requirement of the order. Yet it would mean virtually the end of trade with Latin America, pending suitable investigation. How about goods in transit? Were banks to regard existing letters of credit as valid? In the handling of licensed purchases of foreign exchange, were the banks permitted to pay by means of unblocked dollar accounts?

These are only a few of the questions which at once made their appearance to embarrass every step of foreign trade. The difficulty came from several sources. First, since the new order eliminated free European exchange in the United States, banks immediately had difficulty in effecting the small but necessary volume of United States remittances to Europe, even for such purposes as the support of our citizens abroad. Italy immediately indicated her unwillingness to sell lira for dollars, since the use to which the dollars could be put was so uncertain.[ix] Second, the June extension, in raising doubts about the status of Latin American customers, for the first time affected a really significant volume of our wartime trade. Third, the Treasury has been loath to establish precedents on questions of licensing policy. Many important decisions on applications are handled orally, and on an ad hoc basis, which makes the development of orderly procedures very difficult. Fourth, the orders and rulings are replete with legal verbiage which is obscure to bankers and dealers. Fifth, the various facets of the control have been developed one at a time, without sufficient codification, and in many cases are duplicated by export controls and priority ratings.

No doubt such difficulties were to be expected as the growing pains of exchange control, at any rate in some degree. The Treasury naturally has an interest in clearing them up, since the success of the control depends to a considerable extent on the effectiveness of bankers' coöperation. The State Department has undertaken an active rôle in expediting legitimate Latin American orders, thus clarifying the status of a part of our Latin American trade. Recent orders and notices from the Treasury indicate that procedural changes recommended by the bankers' Foreign Exchange Committee have received some attention. Ultimately, the smoothness with which the control operates will depend largely upon the Treasury's success in working out procedures making possible quick and clear-cut answers on applications.

Japanese financial quarters were reported to be neither surprised at the June order nor pleased at their temporary exclusion from it. Tokyo commentators registered an appropriate degree of shock and displeasure at the eventual freezing of their funds in July; but their reaction to Japan's reprieve six weeks before had been that tightened American economic pressure was definitely on the books. After the United States acted, Japan retaliated by freezing American assets in Japanese-controlled territory. Actually, our freezing order did not in itself shut off American supplies. The first comments of the American press assumed that it meant the end of appeasing Japan. But the State Department was quick to point out that the licensing system was actually a flexible one, leaving the Government free to apply it to whatever extent might be thought to be in the national interest.

The effect of the order was at first greatly in doubt. Japanese ships, laden with millions of dollars in silk, steamed in aimless circles off the California coast. The Treasury declared its intention not to interfere with the departure of the ships, should they dock, but pointed out that their cargoes would be subject to license. One, the Tatuta Maru, decided to dock for refueling without unloading, but a persistent group of American process-servers eventually secured the cargo. Meanwhile, the New York silk exchange closed in chaos, pending some agreement as to how operators could cover their futures contracts. Women stormed the department stores in a hosiery-buying bee that brought the stores a Christmas in July. Unemployment stared 175,000 American silk workers in the face. As for the crucial subject of oil, no one knew whether Japan was going to get further shipments or not.

After a few days of extreme disorder and uncertainty, some of the major difficulties were on the way toward settlement. Price ceilings on silk contracts were being arranged under the OPACS. The government declared that efforts to bring about the immediate absorption of silk workers into other defense employment promised success. Plans were afoot to arrange for payment of Japanese bond obligations under a Treasury license. And the President, in conference with Cabinet members, worked out a schedule of oil shipments under which Japan could purchase no fuel suitable for aviation, and crude petroleum products only on the basis of prewar quantities. The 100 percent coöperation pledged by Britain, the Netherlands Indies and Latin America, makes it possible to develop an oil policy with teeth in it. Official spokesmen reported that the United States shipped no oil to Japan during August. But if a prewar quota were put into effect, it might permit a considerable flow of oil, since Japan's purchases even before 1937 were on a war basis and at a rate allowing for the accumulation of stocks.


If we look ahead toward the time when the control is liquidated and the assets now frozen come up for ultimate disposition we can see problems even more perplexing than those which currently beset us. Shortly after the first freezing order was issued, Secretary Morgenthau intimated that the frozen funds might eventually be released for settlement of debts owed to Americans, possibly including the old war debts. While this suggestion may have prematurely inserted additional complications in the freezing problem, it at least hinted immediately that the termination of freezing is probably not to be envisaged as a simple removal of restrictions. If at the time peace returns international finance is still hedged about with controls maintained outside of the United States, then it will not be within this country's power, singlehanded, to "defrost" international holdings, and an effort to do so might be distinctly to our disadvantage.

A simple removal of restrictions would mean that we would no longer place any obstacles in the way of the financial operations of foreign countries with respect to their holdings here. That was essentially our policy prior to the outbreak of war. Foreigners could move their funds to or from this country. They could buy or sell foreign exchange, gold, securities or goods in our markets. Under suitably coöperative conditions of international finance, such free operations would not conflict with our own interests. But even before the war, certain persistent distortions appeared in the nature of foreign operations. The one most generally publicized was the steady flow of gold into this country, a flow which in the six years 1935-40 brought us $15 billion. The proceeds of the sale of gold accrued to foreigners in the form of balances in our banks or goods and securities purchased in our markets. Foreign investments were liquidated abroad by American owners, and the proceeds returned to the United States. Meanwhile the United States exported $4 billion more in merchandise than it received from abroad. Obviously international funds were flowing from the world to our banks, and to a lesser extent our goods were flowing out to foreign countries. At the time of the freezing, the United States was in possession of two-thirds of all the gold in the world. The investments of subsequently frozen countries here amounted to over $7 billion, whereas ours in those countries were only $1½ billion. It was at this moment of almost maximum distortion that the United States froze European holdings.

What would happen if the controls were removed? Would that by itself resolve the glut of foreign funds? We might gladly offer back the gold which is stagnating in our vaults. But under conditions of widespread exchange control, it is hardly likely that other countries would care to turn their holdings here into gold, a thing which would have far greater value here than abroad. So if the United States permits foreigners to decide for themselves how to use their defrosted assets, they would be expected to convert them into goods for removal from the country, or into investments yielding earnings which could be converted into goods and removed. In return for this steady drain on the productive facilities of the country, the United States could boast a gold pile of doubtful value, and some foreign securities on which the earnings are blocked abroad.

A simple outright defrosting, then, might prove to be merely a roundabout way of handing Europe a $7 billion check on our postwar production. Should such a policy nonetheless be undertaken as a matter of "paying our debts"? This would seem to be an ironic position for the world's leading creditor country, and in excess of any obligation we ever undertook, especially with respect to refugee foreign funds. Would such a policy be desirable as a means of stimulating a depressed postwar production? This would be a highly expensive version of stimulation -- a public works policy without any public works.

If nevertheless the United States decided to release the frozen funds without restriction, the problem of conflicting claims would arise. Who is entitled to the funds of owners that have disappeared? If Germany continues to dominate fallen European countries, a release of funds would in effect turn them over to Germany -- the very thing freezing was imposed to prevent. Or should the titles of governments-in-exile be recognized? What about central banks? The out-and-out defrosting of funds may be recognized as in effect a procedure whereby the courts, rather than the Treasury, arbitrarily decide on applications.

Could the United States insist that the frozen funds be used to liquidate United States claims against the frozen countries? If all United States claims, including the old war debts, were offset against the frozen claims, the clearance (country by country) would be in the order of $2.5 billion. Clearance of claims on this basis, however, would hardly be equitable. The war debts were incurred by governments, whereas two-thirds of the frozen funds are owned by private banks and individuals. If the war debts are omitted, the possible clearance would be reduced to roughly $750 million. If, in addition to this, we thought it desirable to use the frozen funds of foreign governments and central banks in part payment of the claims of our Government, the clearance would reach close to $2 billion.

It may be concluded, then, that clearance possibilities even on the widest possible scale would account for less than half the frozen funds, and less than a third of American claims against frozen countries. On a more restricted and more equitable basis, the solution would be even less definitive. The essential problem -- how to put international finance onto a basis which gives some meaning to foreign claims in any country -- remains.

The defrosting of frozen claims might far better be made an occasion for the review and amendment of international financial practices. In the long run it might be wise to permit unrestricted use of the frozen funds in return for guarantees that the countries of the beneficiaries would relax their own controls. The task ahead is to free the world from the distorting influence of conflicting and arbitrary controls. Germany's defeat would no doubt remove one of the major obstacles to the creation of an orderly international financial pattern. It also would probably remove many complications regarding the claims of nations now under German occupation. But the defeat of Germany will not in itself be enough. The frozen funds can be released satisfactorily only after international agreements have produced a financial milieu in which foreign claims everywhere will be neither frozen nor liquidated, but revived for their useful function in international relations.

[i] There was even the possibility under the decisions of American courts that banks would face a double liability if they paid out funds on the basis of orders issued under duress, although qualified lawyers have expressed the opinion that such liability would probably not be imposed if the banks acted in good faith without negligence or knowledge of duress.

[ii] The bill, as eventually passed and signed by the President on April 7, 1941, included insured banks as well as the Federal Reserve Banks in its protection.

[iii] This provision is in form a "catchall." Since it opens the door to an undefined class of restrictions, it presents an undesirable (and constitutionally doubtful) extension of controls which even without it are already arbitrary enough. Its use so far, the writer is informed, has been mainly to permit the blocking of safety-deposit cash, withdrawn from regular accounts in anticipation of freezing.

[iv] (i) The state and the government thereof on the effective date of this Order as well as any political subdivision, agency, or instrumentality thereof or any territory, dependency, colony, protectorate, mandate, dominion, possession or place subject to the jurisdiction thereof,

(ii) Any other government (including any political subdivision, agency, or instrumentality thereof) to the extent and only to the extent that such government exercises or claims to exercise de jure or de facto sovereignty over the area which on such effective date constituted such foreign country, and

(iii) Any person to the extent that such person is, or has been, or to the extent that there is reasonable cause to believe that such person is, or has been, since such effective date, acting or purporting to act directly or indirectly for the benefit or on behalf of any of the foregoing.

[v] General licenses, as well as the orders, rulings and regulations, are reprinted in the Federal Reserve Bulletins, or copies can be obtained from the Federal Reserve Banks.

[vi] The editors of the Columbia Law Review (June 1941, p. 1052-54) discuss at some length the status of such assignments. While their view that this loophole "may seriously jeopardize the effectiveness of the foreign funds control system" seems to the writer to be without convincing support, it would appear to be rudimentary common sense to amend the orders so as to make clear that such assignments definitely will not be recognized.

[vii] Except those coming from Canada, the United Kingdom, Bermuda and Newfoundland, where the controls of those countries already afforded adequate protection.

[viii] The new Italian controls have a certain "nuisance" effectiveness. Americans there now have to convert their dollar incomes at a less favorable rate, and American firms operate under the handicap of a greater mesh of red tape.

[ix] The liberalization of Argentine exchange controls, timed intentionally or unintentionally to jibe with the extension of United States control and the virtual elimination of a free dollar from exchange markets, may result in a shift, at least temporary, of international finance to the Argentine markets. United States remittances abroad have to be effected increasingly through pesos.

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  • JUDD POLK, Research Fellow on the staff of the Council on Foreign Relations
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