SECTION V (A) MONEY AND SOVIET INFLUENCE FOREIGN MONEY OF ANONYMOUS ORIGIN The subcommittee encountered the situation which indicated that undisclosed moneys coming into the United States might conceivably be of Soviet origin, and a preliminary assessment was made of all the facts available. The chairman of the subcommittee designated a special subcommittee composed of Senator Olin Johnston as chairman and Senator William E. Jenner as a member, and this subcommittee commenced hearings on June 15, 1956. Senator Johnston's opening statement reflected the purpose of the inquiry: The Internal Security Subcommittee has been taking testimony which indicates that Communists in the United States became increasingly active in the late 1940's in industrial investments. We know from our testimony that Communists here are becoming more and more interested in capital enterprises. The subcommittee is now pursuing this line of inquiry. At the same time and possibly along different lines, we have noticed that, in recent years, a number of United States companies have been taken over in whole or in part under circumstances that are not readily understood. This phenomenon has been made possible through use by individuals of foreign banks, companies, and organizations, which have acted as a cover through which true identity is hidden. The end result is an anonymous position in United States industry. This could represent, among other things, Americans evading our laws, or Communist or untaxpaid underworld interests. To the extent that this situation may be found to constitute a threat to the Nation's internal security, it will be scrutinized to determine whether there are possible loopholes in our laws which permit these practices. We believe that evidence being brought to our attention reflects the need for an investigation and possible legislation to protect the internal security of the United States against infiltration created by programs of certain foreign countries which permit undisclosed moneys of citizens of all nations, including Communist ones, to invade the United States economy. The testimony of Arthur I. Bloomfield, the senior economist of the Federal Reserve Bank of New York, indicated that testimony brought out that it would be possible for Soviet sources to cause capital to come into the United States and to buy into American industry, even into. I some of the most vital defense projects. This testimony brought out that foreign investments in the United States at the end of 1954 amounted to $26.8 billion which reflected a great increase in the last 5 years. Testimony brought out that at the end of 1954, the value of Swiss holdings of American stocks amounted to almost $1.5 billion. Switzerland was constantly mentioned throughout the hearings as a particular troublesome point of origin, in that according to Swiss law it is impossible and even illegal for a Swiss bank to disclose the iden tity of the owner of an anonymous account. The maintenance of anonymous accounts in Switzerland, the subcommittee found, is s common practice in that country and there is no conceivable way of knowing the nationality, much less the identity of stockholdings that would be purchased from these accounts. Mr. Bloomfield's testimony acknowledged that the Federal Reserve banks are not able to trace the ultimate owners of stocks, and under the present laws and regu lations there is no way to do so. Mr. Bloomfield conceded that if Soviet sources were in fact buying American securities that it could be done in such a way that it could not be traced by the Federal Reserve bank or any other agency. The subcommittee proceeded with the inquiry and called as wit nesses M. Joseph Meehan, Director of the Office of Business Economics, and Walther Lederer, Chief of the Balance of Payments Division, and Samuel Pizer, Chief of the International Investment Section of the United States Department of Commerce. These witnesses testified that there is no way under existing regulations to determine the source of foreign money being invested in the United States. They brought out that it is conceivable that many of the investments now listed as of foreign origin may in fact be secret American investors drawing the capital from a foreign source. According to the testimony of Mr. Meehan, neither the Department of Defense, the Depart ment of the Treasury, or the Federal Reserve System has any means of determining the source of these foreign funds. He estimated that the total of $26.8 billion made up foreign investments in the United States and which could be withdrawn on very short notice at any time. This fact raised the possibility that sudden selling on the part of foreign sources could cause considerable economic disruption in the United States. The subcommittee put into the record the testimony of Hon. J. Sinclair Armstrong, Chairman of the Securities and Exchange Commission, taken before another committee of the Congress, which included this statement: We are extremely concerned at the growth in anonymous investments and it is impossible to obtain information because many holdings are in the names of foreign interests. It appears that there may be securities coming into this country from Canada and Switzerland which would be required to be registered under the Securities Act, and they are apparently being traded in the securities markets of this country without registration and we cannot tell where the money is coming from. The subcommittee also took the testimony of Jerome D. Fenton, Director of the Office of Personnel Security Policy and Robert Lee Applegate, staff director of the Industrial Security Programs Diviion of the Department of Defense. This testimony also indicated hat the Department of Defense has no way of ascertaining the idenity of all foreign investors in American concerns doing defense contract work. The subcommittee recognized an inherent difficulty in such a situaion in that it would be unrealistic that classified material revealed o the officers of the defense corporation who would be cleared because of their good name and reputation, could be withheld from the conrolling owners of the corporation who would hire such officers, GERMAN BONDS AS SOVIET LOOT The subcommittee ascertained from the testimony of Jacques J. Reinstein, the Director of the Office of German Affairs of the Departnent of State, that German bonds looted by the Soviet Army, when t invaded Berlin in 1945, were being presented for validation in the United States. The subcommittee looked into this situation because his represented a possible avenue of Soviet money coming into the United States. Money acquired by the Soviet Government in this way would be. noney illegally obtained. It was brought out during the hearings hat the Soviet title to these bonds was technically the title of a thief. In order to prevent the unlawful validation of these and other ponds, there was set up a validation board jointly by the German Federal Government and the Government of the United States to nvestigate all bond holdings prior to validation. Following a default by Germany to pay her bond obligations after Hitler assumed power, the German creditors and the German Governnent purchased on the American market very substantial amounts of German bonds at rather low prices. These bonds were held in the aults of the banks in Berlin at the time Berlin fell in 1945 and the Russian troops entered the city. These bonds were of the German overnment, of the Dawes and Young loans, and there were bonds of various German corporations and German private institutions and anks. The face value of these bonds was $600 million. The bonds ooted from Berlin were estimated to be about $350 million. Although ome may have been destroyed in the fighting, most of them were aken away by the Russians. The validation board was set up to liminate these looted bonds in the event they should find their way nto this country for validation and payment. Of the bonds subnitted thus far, approximately $140 million face value have been alidated. There have been 6 individual cases in which bonds have een refused validation which totaled several hundred thousand dolars and in the opinion of the board were part of the estimated $350 illion worth of these bonds looted by the Soviet. The validation. oard has presently in process millions of dollars worth of these secuities on which no decision has been rendered and the board has anther 2 years to run. The bonds payable in dollars and in bearer form must be presented or validated here in New York and payment can e made later. The certification that must be made was that the bonds were held outside of Germany in April 1945 to entitle them to validation. Many of the cases now before the board are on certifica tions by foreign banks that these bonds were in their vaults on the qualifying date. The testimony concludes that at present all but $260,000 of the $350,000,000 of looted bonds are unaccounted for. One man who attempted to validate bonds in the amount of $245,00, encountered a ruling from the validation board that his bonds were, in fact, in Berlin at the time of the looting and his claims to the contrary were rejected. He is presently under subpena of the subcommittee. B. CHINA GOLD Money entered the hearings when the Morgenthau papers in the possession of the subcommittee and related testimony gave us a behind-the-scenes view of how and why certain United States officials, previously shown by the subcommittee to have been Communists, were able to block gold shipments to the Chinese Government, while it was under assault by the Soviets. The subcommittee received testimony, with documentation, from Dr. Arthur N. Young, who was financial adviser to the Chinese Government and the Central Bank of China during World War II. It is important to note Dr. Young's testimony here as one more example of how subsurface bureaucratic maneuvering steered American policy in a disastrous direction. Dr. Young's testimony was amply supported with a host of documents, most of which came from the Morgenthau diaries. In substance, his story was an account of how Congress sought to give our ally, Chiang Kai-shek, desperately needed economic aid and how Harry Dexter White and his fellow conspirators held back that aid, while secretly communicating with the men who became the Red rulers of China. 2a As Dr. Young explained it, economic aid to China during the war was at least as important as military aid, if not more 2 important. Henry Morgenthau, Jr., war-time Secretary of the Treasury, had made this clear as long ago as January 1942, when he appeared before Congress to ask for a $500 million loan for the Generalissimo's government. Secretary Morgenthau stated that 4 years of war against Japan had forced the Generalissimo to virtually recreate China's economy. The Japanese held Manchuria, China's richest industrial area. They also held many of the seaports through which passed China's commerce. As a result, China's tax base was perilously reduced. Congress attempted to give China economic aid and immediately authorized a $500 million loan. There was full recognition that speed was of the essence. "To give quickly" said Congressman Vorys of Ohio, "is to give twice." 2 On March 21, 1942, the United States Government signed a pledge to grant China a credit of $500 million. The funds were to be transferred "in such amounts and at such times as the Government of the Republic of China shall request." 1 The Japanese had attacked China in 1937. 1 Financial Adviser Young and officers of the Central Bank urged that part of this credit be taken in gold, which would be sold in China as an offset to currency inflation. China asked for $20 million in gold in February 1943. China got that $20 million in gold 6 months later. On July 27, 1943, the Chinese Ambassador transmitted to Secretary Morgenthau a request for $200 million of gold. In reply Secretary Morgenthau stated: The Treasury agrees to the request of the Government of China transmitted to me by Ambassador Wei Tao-ming that $200 million be made available immediately from the credit on the books of the Treasury in the name of the Government of the Republic of China for the purchase of gold. * On receipt of requests from the Government of China that specific amount should be transferred from the credit of the Government of China on the books of the Treasury and be used for the purchase of gold, the necessary action will be taken to consummate these requests. The details of the arrangements will be discussed with Dr. P. W. Kuo and Mr. Hsi Te-mou. Dr. Young cited many documents to substantiate the story he told from his own experience. They boil down to this; China asked for $200 million in gold, in July 1943. China got only approximately $29 million from the time of loan to July 1945. Meanwhile her currency collapsed in a suffocating inflation, which helped to bring down anti-Communist Chiang Kai-shek and bring up the Chinese Reds. Documents contained in the 900 volumes of the Morgenthau Diaries, which the subcommittee staff has been studying for two years and portions of which are now in the subcommittee records, make clear that this complete nullification of the will of Congress and economic destruction of a valiant ally was accomplished by the Communist underground apparatus of Harry Dexter White. During the period under scrutiny, White was Under Secretary of the Treasury. Both Whittaker Chambers and Elizabeth Bentley have stated under oath that White was involved with the Communist underground in government, which furnished secret documents for transmission to the Kremlin. Notes in White's own hand were found in the Chambers "Pumpkin Papers." FBI Director J. Edgar Hoover has stated to the subcommittee that the Bentley charges about the White-Treasury apparatus were substantiated from more than 30 sources. "WE HAVE STALLED AS MUCH AS WE HAVE DARED” In a memorandum dated December 9, 1944, White discussed with Secretary Morgenthau one of the many Chinese requests for gold. "We have stalled as much as we have dared," said White, "and have succeeded in limiting gold shipments to 26 million during the past year." On May 10, 1945, in the privacy of his own office, White was discussing with his staff the Chinese gold situation. He admitted that |