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This correspondence between Agent Nugent and Commissioner Anslinger's office was obtained through the FOI act.

REPORT OF SURVEY

COMMERCIALIZED HEMP (1934-35 CROP)

in the

STATE OF MINNESOTA

H.T. NUGENT FIELD SUPERVISOR

October, 1938

TREASURY DEPARTMENT BUREAU OF NARCOTICS MINNEAPOLIS, MINN.

OFFICE OF DISTRICT SUPERVISOR DISTRICT NO 12 STATES OF MINNESOTA, IOWA, NEBRASKA, NORTH AND SOUTH DAKOTA,  October 22nd, 1938

In re: Commercialized Hemp State of Minnesota.

Mr. Harry J. Anslinger, Commissioner of Narcotics, Washington, D.C.

Dear Mr. Anslinger:

Pursuant to your instructions that a complete and comprehensive survey be made of the commercialized hemp industry in southern Minnesota, particularly with respect to the extent of the 1934 and 1935 crop of harvested hemp stored in the fields at the present time, permit me to advise that I proceeded to Minnesota on September 1st, 1938, and for a period of six weeks covered the southern section of the state from Winona County, in the east, to Yellow Medicine County, in the west; visited many farms and talked with the farmers; conferred with officers of companies responsible for the growth of the 1934, 1935 and 1937 crops; obtained statistical information regarding acreage planted, harvested and removed from the fields, discussed the hemp situation with state, county and local officials, as well as numerous citizens interested in the subject and the following report is respectfully submitted for your information:

HISTORICAL

Prior to 1933 the growing of hemp in Minnesota had been confined to experimental crops, altho in the neighboring state of Wisconsin hemp had been grown for a number of years on a commercial scale in several counties. In North and South Dakota experimental work in the growing of hemp had been carried on for a number of years. Glowing reports were prepared by agricultural authorities and the suitability of soil and climatic conditions of the territory were stressed. The value of hemp as a farm product was emphasized, but no mention was made of the fact that from 1880 to 1933 the hemp grown in the United States had declined from 15,000 to 1,200 acres, and that the price of line hemp had dropped from $12.50 per pound in 1914 to $9.00 per pound in 1933.

During the Fall of 1933, one Frank E. Holton appeared at Mankato, Minnesota, armed with an array of statistics dealing with hemp production. Holton, prior to 1917, had been Cashier of the national Bank, at Minneapolis. The record is not clear regarding the severance of his connection with that institution, but he subsequently engaged in the business of dealing in land mortgages and securities under the name of the Dansher-Holton Land Company. That venture ended in a failure and Holton started dealing in mining stock. He was connected with the Homestake Extension Mines Corporation and with the Mines Brokerage Company. In 1927 he filed a petition in bankruptcy, listing liabilities at $85,000 and assets at $2,000. Holton was a promoter of anything which would net him an income, so when he met Harry W. Bellrose, President of the World Fibre Corporation, Chicago, Illinois, who controlled the Selvig patent on a decorticating machine, he visualized a great hemp industry and decided upon southern Minnesota as his field of operations. He negotiated with Bellrose and secured the patent rights for the Selvig machine in the State of Minnesota.

At the time of Holton's visit to Mankato in the Fall of 1933, the farmers had finished a poor season and conditions were favorable for inaugurating a new venture. He conferred with farmers, citizens of Mankato and individuals interested in the town's financial institutions. Mass meetings were held and Holton extolled the virtues of hemp as a means of bringing a new and profitable product to the community. He characterized the Selvig patented decorticating machine as something which would revolutionize the hemp industry. Holton's scheme for growing the hemp under a so called "grower's contract" would enable the farmer to maintain a financial interest in the processing and manufacturing of the hemp as well as in the growing of it because the contract provided for the payment by the farmer of $10.00 per acre for each acre planted. The cost of the seed would be deducted, as would $1.00 per acre planted as a contract fee. The farmers could pay the $10.00 upon execution of the contract, or in lieu of cash, Holton would accept their promissory notes. In return, Holton agreed to pay the farmers $15.00 per ton for the hemp grown. Nothing contained in the contract, however, made any stipulation with respect to its duration and a perusal of it suggests the thought that little thought was given to the phraseology employed in drafting it (See Exhibit "A").

NORTHWEST HEMP CORPORATION:

In order to carry out his hemp growing venture, Holton organized the Northwest Hemp Corporation under the laws of the State of Minnesota. The purpose of this corporation, as shown by the official record, was to "encourage and develop the growth of hemp and flax and other fibre plants, and to enter into contracts with growers for the planting of such products; to engage in the manufacture and distribution of hemp and flax fibre and to own and operate factories to handle and decorticate all such fibre plants, etc." The total number of authorized shares was to be 500 of no par value and the amount of capital was $1,000. The Certificate was filed October 3, 1933.

Following the organization of the company, Holton proceeded to sell stock and negotiate the grower's contract. Many citizens of Mankato and Blue Earth purchased shares of stock at $500.00 per share and during the following six months he had succeeded in obtaining the signatures of 551 farmers to contracts covering 6,358 acres in southern Minnesota counties and with those contracts came cash and promissory notes, the latter variously estimated at between $35,000 and $40,000. Holton, in the meanwhile, had interested the officers of the National Citizens Bank of Mankato in his venture and they became quite active in rendering assistance. At least two of the officers and directors are known to have invested quite extensively in stock of the Northwest Hemp corporation.

THE 1934 CROP:

During the late spring of 1934 the actual growing of the hemp was under way. Seed had been supplied by Holton and it had been planted by the farmers. In order to facilitate operations and provide accessibility for handling of harvested crops, the growing area was divided into three units, viz., Blue Earth, Mankato and Lake Lillian. At Blue Earth and Mankato two buildings were constructed to house the decorticating machines (See Exhibits "B" and "C"). At Lake Lillian an old railroad building, adjacent to the depot, was leased from the Minnesota & Western Railway Company (See Exhibit "D"). Decorticating machines were leased from the World Fibre Corporation of Chicago, and installed in the three buildings. Everything was set for the harvesting, decorticating and marketing of the 1934 crop of hemp.

All authorities agree on three phases of hemp growing, i.e., first, it should be harvested when the pollen bearing plants are in full bloom; secondly, it must be harvested with machines designed for that purpose, and thirdly, the retting of the hemp stalks is the most important item in handling the crop. Dew retting, or spreading the green stalks on the stubble and allowing them to remain there until sufficiently decomposed so that the bark can be readily separated from the stalks is a recognized practice in this country, but the fact that Holton knew nothing about growing hemp is evidenced by his instructions to the farmers to cut , bundle and stack the crop without any retting operation. As a result two significant features were brought to light, viz., the decorticating machines failed to properly separate the fibre from the stalks and four years later the hemp still stacked in the fields was found to contain tops, leaves and stalks that were still green. To add to the difficulties encountered, Holton failed to provide any harvesting machinery as provided in the contract and the farmers were compelled to employ a rather unorthodox method of cutting and bundling the stalks.

In order to keep the hemp growing project alive, Holton arranged to move quantities of the harvested crop to the three decorticating plants at Mankato, Blue Earth and Lake Lillian before it had been properly retted. Hemp stalks properly retted and decorticated should produce 25 percent fibre, but the processing operations at Mankato and Blue Earth were netting much less that amount, while the machine at Lake Lillian would not separate fibre at all. During the Fall of 1934 and the following Winter, practically nothing was accomplished in the way of marketing the 1934 crop. The decorticating plants at Mankato and Blue Earth were operated intermittently and experimentation was the order of the day, but Holton continued to keep alive the enthusiasm of the farmers and stockholders.

THE 1935 CROP:

Came time for the planting of the 1935 crop and Holton had succeeded in prevailing on 147 farmers to sign another grower's contract, but of that number only 13 resided in the Mankato and Blue Earth areas. The farmers in those areas who had grown hemp under the 1934 contracts were too close to the seat of operations, I.e., Mankato, where the Northwest Hemp Corporation maintained an office, and they surmised that all was not well, or at least not as well as had been predicted, consequently only a few evidenced a desire to take further chances. The farmers in the Lake Lillian area, one hundred miles to the northwest, were still in the dark but sublimely hopeful that they would eventually receive the $15.00 per ton for the hemp they had grown in 1934, and were so impressed by Holton's promises that 134 of their number agreed to plant 1,904 acres. Again Holton secured their signatures to the growers contracts and collected their promissory notes in lieu of cash. Again he furnished the seed and it was planted.

As in the Fall of 1934, the farmers cut, bundled and stacked their hemp without retting. The Lake lillian farmers were becoming impatient. Holton's promise to have the decorticating machine adjusted, or changed, so as to enable it to process the hemp had not materialized and, too, the 1934 crop still remained on the fields, so they took matters into their own hands and subscribed $1,600 with which to purchase a drying apparatus. One Carl Anderson was placed in charge of operations and they undertook to decorticate the hemp by first trying to dry it and then running it through the decorticating machine, but the operation was fundamentally wrong and their efforts to decorticate the hemp at a reasonable production cost was not successful. Approximately twenty tons of fibre were reclaimed. It was stored in the building and remains there at the present time.

No better success was obtained at the decorticating plants at Mankato and Blue Earth. A few tons of hemp were decorticated at a time and the decorticating machines only operated when samples of fibre were needed to send to prospective purchasers. Dissension broke out in the ranks of the stockholders. The National Citizens bank of Mankato had considerable money tied up in the hemp venture and a number of its officers and directors had invested quite heavily. A movement was started to oust Holton as controlling factor in the northwest Hemp Corporation, but it was a one man corporation and Holton controlled the stock and held the principal assets, viz., the promissory notes given by the farmers at the time they signed the grower's contracts, as well as the contracts which were so worded as to give him a lien on the hemp stacked in the fields. The 1934 crop had not been removed from the farms and little prospect prevailed for removing that grown in 1935.

NATIONAL CELLULOSE CORPORATION:

During the fall of 1935, and at a time when the situation was most acute, one M.J. Connolly, of New York, appeared at Mankato and claimed to have certain patents for utilizing hemp fibre and its by-products, particularly hurds which could be used in the manufacture of cellulose products. Connolly had a long and checkered career in promoting fibre companies and he found the southern Minnesota territory a ripe field. The anti-Holton faction, led by Joseph H. Gunderson, an officer of the Blue Earth State Bank, at Blue Earth, who was one of the original subscribers to the hemp venture, and V.A. Batzner, and officer of the Citizens National Bank of Mankato, waxed enthusiastic over connolly's scheme to use the hemp in the manufacture of cellulose products. Holton's attempts to market hemp had been unsuccessful and he saw an opportunity to unload his burden, so the National Cellulose Corporation was formed with capital stock of one thousand shares, without par value. A certificate was issued by the State of Minnesota on October 3rd, 1935, and the farmers, the stockholders of the parent company and citizens alike took on a new lease on life.

The National Cellulose Corporation had entered into an agreement with the Northwest Hemp Corporation whereby the former would transfer to the latter all Connolly's patent rights to formulae relating to the treatment and processing of hemp and the manufacture of hemp products. Connolly was to get sixty percent of the capital stock of the new company and be paid $1,000 per month and expenses for the first ninety days after commencing operations. The Northwest Hemp Corporation agreed to turn over the decorticating plant at Mankato to the new company, take 40 percent of the capital stock and pay it $30,000. Of this sum $20,000 was to be deposited immediately upon organization in the National Citizens Bank of Mankato and credited to the account of the new organization. The balance of $10,000 was to be paid in thirty days. Furthermore, the Northwest Hemp Corporation agreed to deliver all of its 1934 and 1935 hemp crops to the National Cellulose Corporation at $12,000 per ton with a maximum of 15,000 tons. The organization was perfected, but the Northwest Hemp Corporation never put up any of the money pledged. Connolly, however, started operations, put in some new machinery, placed his son on the payroll, and started experimenting in the production of cellulose products. Quantities of hemp were hauled in from farms adjacent to Mankato. The new machinery turned out tons of pulverized hurds, but no purchasers could be found for the product. Money was going out and none coming in. Finally a Government cellulose expert visited Mankato and after surveying the operations, reported that Connolly did not know what he was doing, so the new venture folded up. Connolly departed from Mankato and all the blissful expectations of the farmers were dimmed by the reality that they still had the hemp stacked in the fields, and the local interests backing the venture became convinced that they had been taken for another financial ride.

HEMP CHEMICAL CORPORATION:

The woes and worries of those interested in promoting the National Cellulose Corporation and marketing the 1934 and 1935 crops of hemp were increased when it was learned that they were using a corporation title already registered in an eastern state. The State Securities Commissioner advised that the name of the corporation would have to be changed, so at a meeting of the stockholders it was voted to change the name to the Hemp Chemical Corporation and under that name the Connolly project continued to operate until operations were discontinued.

CHEMPCO, INCORPORATED:

Joseph H. Gunderson, Cashier of the Blue Earth State Bank, at Blue Earth, Minnesota, and hereinbefore mentioned as being quite active in the promotion of the original growing project, as well as the formation of the National Cellulose Corporation, was a small town banker with big city ideas. A product of Rake, a hamlet on the Iowa side of the state line, he started his career in a bank at Frost Minnesota, and then went to the Blue Earth Bank as Cashier. He had invested heavily in the hemp venture, but regardless of the failures which it had encountered, he had visions of doing something in a big way, so after the Connolly debacle he solicited financial aid from his friends and in the early Spring of 1936 organized the Chempco, Incorporated, under the laws of the state of Delaware, "to process, buy, sell, deal in and use fibre plants, etc., etc." The Certificate of Incorporation , as a foreign corporation, being filed in the Office of the Secretary of State, at St. Paul, Minnesota, on March 10, 1936.

Chempco, Incorporated, took over the old plant of the Union Fibre Corporation, at Winona, Minnesota, which had gone into bankruptcy several years before (See Exhibit "E"). Gunderson, its president, negotiated with Dr. J. M. Johnson, of Hartington, Nebraska, who had organized the Nebraska Fibre Corporation during 1935 and grown 3,676 acres of hemp under a grower's contract with 161 farmers in the Hartington region of Nebraska, for the purchase of that crop. The Nebraska hemp was still stacked on the farms and the farmers were anxious to dispose of it. Gunderson's proposition to buy the hemp and process it at Winona was a blessing in disguise and he encountered little difficulty in acquiring it. In addition to that, Gunderson announced that he was in the market to buy any of the 1934-1935 crop grown in Minnesota under Holton, or Northwest Hemp Corporation contract, that farmers wanted to sell.

During 1936, the activities of Chempco, Incorporated, were chiefly devoted to processing the hemp obtained from Nebraska territory and the fibre was marketed through the Harry H. Straus organization, which later developed the Central Fibre Corporation and the Champagne Paper Company, but in the Spring of 1937 the Chempco, Incorporated, entered into grower's contracts with seventy-nine farmers on Winona and Wabasha Counties of southern minnesota, and besides furnishing the seed, sent balers and trucks to the farms and removed the harvested crops from the fields. The contract used by Chempco, Incorporated, was vastly different from that used by Holton and the Northwest Hemp outfit. The farmer paid no money to the company under the Chempco contract. Seed was furnished by the company on "memo" and the cost deducted from the delivery price of the hemp. It further stipulated that "all payments, provisions and conditions as hereinabove provided in this contract, shall be completed in its entirety not later than April 1, 1938." (See Exhibit "F"). Holton's contract was a one-sided document as I shall hereinafter point out.

During the early part of 1937, Gunderson interested the Harry H. Straus organization in the possibility of hemp to the extent that the Central Fibre Corporation was organized by Straus, Lawrence F. Dixon, et al. Chempco entered into an agreement with the Central Fibre corporation whereby it would buy and process all hemp produced by the latter company. In turn the Central Fibre Corporation would market the fibre, but Chempco, Incorporated, encountered financial difficulties and during 1937 the company showed a loss of $25,000. The company bought up 2,611,259 pounds of the old 1934 and 1935 crops grown under the Northwest Hemp Corporation contracts, but failed to make payment in full for it. Dr. Johnson of Hartington, Nebraska, invested heavily in the company and had his son, J. A. Johnson, a young man under thirty years of age, made Vice President at a generous salary and expenses. No one, except, perhaps, E. A. Hafner, the Secretary, who had been with the old Union Fibre Company, at Winona, for a period of ten or twelve years knew anything about hemp. Gunderson had gone overboard at the Blue Earth Bank and had to resign on account of the defalcations, the bonding company making good the shortage. Finally, early last Summer the company folded up and its only tangible assets are about 3,000 tons of hurds stacked at the plant and Gunderson is back on his father's farm at Rake, Iowa, with his wife and three children, where he exists upon parental charity.

CENTRAL FIBRE CORPORATION:

As hereinbefore stated, this company was organized in the early part of 1937 by Harry H. Straus, Lawrence F. Dixon, Walter V. Landeck and others. Straus is reported to have been the financial backer. Organized under the laws of the State of Minnesota "to grow, cultivate and produce, sell and generally deal in flax, hemp and other agricultural crops and products", the Certificate of Incorporation was filed on the 24th day of February, 1937. The company leased a section of an old grist mill at Blue Earth, Minnesota, and opened an office therein during March of that year. During the Spring of 1937, the company entered into contracts with sixty two farmers in southern Minnesota and started in the hemp business. In addition to that, the company purchased 428,583 pounds of the old 1934 1935 crop grown under the Holton, or Northwest Hemp Corporation, contract.

Decorticating machinery was installed and a total of 148,090 pounds of fibre were produced, but it was never shipped and at the time of my visit to the plant last month, it was still stored there. After processing the hemp grown under contract and that acquired by purchase from the farmers, the company closed the plant at Blue Earth, removed the machinery, and all that remains of its venture in southern Minnesota hemp is the fibre stored in the old mill building. I examined the bales, they are well stored, but the fibre may well be classified as "tow", or short length fibre mixed with hurd. The decorticating machine used by the Central Fibre Corporation was not capable of separating more than 18 percent of the fibre from the stalks and much of the long length fibre was broken during processing. I was informed that the Champagne Paper Company, owned by the Straus interests, is building a paper mill at Brevard, North Carolina, and that as soon as operations are commenced the fibre in storage at Blue Earth will be moved to Brevard and used in the manufacture of paper. The life of the Central Fibre Corporation was a short but active one. It fulfilled its obligations to the farmers, paid its bills and departed from Blue Earth with a clean bill of health.

CANNABIS, INCORPORATED:

After the collapse of the national Cellulose Corporation, or as it was later called, Hemp Chemical Corporation, Holton found himself in a precarious position. First, the farmers had about exhausted their patience with him; they wanted to dispose of the hemp stored on their farms, so when Gunderson, himself, and thru agents, offered to buy their crop, the sale was quickly consummated and hemp started to move toward Winona. Following that, the Central Fibre Corporation commenced buying the 1934 35 crop and tons of hemp moved toward the plant of that company at Blue Earth and it was being purchased at much less than the $15.00 per ton stipulated in the Northwest Hemp Corporation contract. Litigation added to his troubles, but of that I shall write in a later paragraph.

In order to keep his original project alive, Holton organized Cannabis, Incorporated, under the laws of the State of Minnesota. The officers and directors were all occupying similar positions with the Northwest Hemp Corporation. The purpose of the corporation. As shown by the record, was to "manufacture and prepare hemp and other fibre from raw material sources, etc., etc., and a Certificate of Incorporation was file don April 9th, 1937. The company leased the old woolen mill on Second Street, at Winona, Minnesota, and during the Spring and Summer months of 1937 conducted much experimental work endeavoring to adapt the woolen mill machinery to the manufacture of hemp products. (See Exhibit "G"). After attaining little success, Holton finally decided upon mops as a product. He at least had a sales talk, I.e., he had many thousand tons of hemp, the decorticating plant at Blue Earth was separating the fibre and he had a manufacturing plant at Winona.

On the occasion of my first visit to the plant of Cannabis, Incorporated, I found it idle. E.G. Witt, in charge of this plant, and who styles himself Assistant Secretary and Assistant Treasurer of the company, explained that they had trouble with the machinery and a breakdown occurred the previous day. He stated that they were making the necessary repairs and the plant would be in operation the following day. I returned the following day, but on the occasion of that visit I found the machinery still idle. Two men and one girl were in the plant and when Mr. Witt started to demonstrate the operations it was quite evident that he was making a pathetic attempt to support his rather extravagant statement regarding the extent of their operations.

Mr. Witt stated that the fibre used in the manufacture of mops was hauled by truck from the Blue Earth decorticating plant as it was needed at Winona. Questioned as to the approximate tonnage used each month, Mr. Witt was rather vague, but a subsequent investigation at Blue Earth developed the fact that approximately 40 tons of hemp had been decorticated at the plant during the period April 1st to October 1st, 1938, or a period of six months. The decorticating machine at that plant is capable of separating 17 percent of fibre content from the stalks, therefore 6.8 tons of fibre was reclaimed from the 40 tons of hemp stalk. At that rate, the so-called manufacturing plant of Cannabis, Incorporated, at Winona, uses a trifle more than one ton of fibre each month in the production of mops and the fact supports the contention that it is being maintained simply to support Holton's sales talk and appease the clamor of the farmers for the removal of the old 1934-35 crops of hemp from their properties.

LAWSUITS AND LITIGATION:

The Northwest Hemp Corporation, thru its president, Frank E. Holton, ran into financial difficulties during the Spring of 1935. Money was needed to purchase the seed to be planted by the farmers under the 1935 grower's contracts. Promotion expenses had been heavy. Holton negotiated a loan from the Citizens National Bank of Mankato and by agreement assigned his interest in 550 grower's contracts as collateral. During the month of August, 1935, he borrowed $14,375.00 from the National Citizens Bank and gave his promissory notes to cover it. As collateral, he delivered 286 promissory notes, ranging in amounts from $4.00 to $1,000 and aggregating $17,328.50, which had been signed by the farmers at the time the grower's contracts were executed in 1934, together with 250 shares of stock of the Northwest Hemp Corporation.

Every effort was made by the bank to persuade Holton to repay the loans but without success. On March 13, 1937, the bank commenced proceedings to foreclose the pledges by selling the notes, stock, etc., at public auction and the sale by the sheriff was fixed for March 25, 1937. Holton applied to the District Court of the Sixth Judicial District of Minnesota for a restraining order, alleging usury and that an officer of the bank had been given 40 shares of Northwest Hemp Corporation stock and $2,500.00 in cash as a bonus for arranging the loans. A temporary restraining order was issued and hearings were scheduled, but before the Court could settle the matter, Holton borrowed $9,500.00 from another bank in Mankato and it was accepted by the Citizens National Bank in settlement of all obligations. The promissory notes, stock certificates contract assignments were all returned to Holton by the bank, and the temporary restraining order was vacated by the Court on July 12, 1937.

In the meanwhile, J.H. Gunderson and his agent, Riley Lewis, a broker, were buying up stacks of the 1934-1935 crop from the farmers. Most of the hemp so purchased was shipped to the Chempco, Incorporated, plant at Winona, but quantities went to the Central Fibre Corporation plant, at Blue Earth, and Lewis sold 202,450 pounds direct to the Maisewood Insulation Company at Dubuque, Iowa. Holton claimed that the hemp grown under the 1934-1935 contracts was the property of the Northwest Hemp Corporation; that the Citizens National Bank of Mankato and Riley Lewis were inducing, soliciting and urging the farmers to sell their crops to other interests, so during September 1937, he filed action against the bank and Lewis, applied for a restraining order and asked for $50,000.00 damages. A hearing on the application for the restraining order was held before Hon. Harry A. Johnson of the District Court of the Sixth Judicial District of Minnesota on October 7th, 1937, and, after listening to arguments, the application was denied.

During the Fall of 1935, and at about the time Holton was in bad shape financially, the Northwest Hemp Corporation made application to the State Securities Commission for permission to sell the stock of that company, altho many shares had already been sold. A hearing was held and under the date of November 19th, 1935, in a formal notice, permission was denied. The basis given for denial was, in effect, that the Commission believed fraud would result from the operations outlined in the application; that too large a proportion of the profits would be inuring to the principals and those with whom the principals proposed to do business, rather than stockholders of the corporation; that while the application had the color of being beneficial to the farmers, upon analysis it appeared that the farmers would be subject to domination of the applicant and his associates with respect to their rights to contract with others in the growing of crops; that the contract was so worded that at the best the farmer received only what the applicant wished to pay; that it was unfavorable to the grower and disproportionately favorable to the applicant who had contributed only a nominal amount in proportion to the amount paid in. The notice was aimed at Holton rather than the corporation as such.

The average citizen would construe the Commission's notice as an order not to sell stock in the company, but not Holton. He continued to sell stock for whatever cash he could get for it and will sell it to-day if he can find a buyer. I, personally, saw certificates of stock that were issued during October and November, 1937, and I know the names of many who purchased stock during that year. In one instance, two maidenly ladies of La Seuer, Minnesota, bought one share of stock for which they paid Holton five hundred dollars. He promised a handsome return on the investment. Receiving no dividend, they took him to task and threatened criminal action. Holton gave them several shares gratis and more promises. Since the date of the original purchase, they have received nineteen additional shares for no extra cash as a result of additional threats. The southern area of Minnesota is replete with similar instances of Holton's perfidity, but I was not instructed to investigate his financial affairs and any reference to them in this report is for the sole purpose of emphasizing relevant facts which have bearing upon the hemp grown by the Northwest Hemp Corporation, controlled and dominated by Holton, and its ability to dispose of the 1934-1935 crops now stacked on farms of the southern area of Minnesota.

EXISTING 1934-1935 CROPS ON FARMS:

The records of the Northwest Hemp corporation, augmented by a perusal of Court records and personal visit to many farms, disclosed the following planting of hemp under grower's contracts during 1934 and 1935:

...................................................................... ...1934 ..........1935

Number of producers..........................................551 ............147

Acres planted..................................................... 6,358 ........2,085

The consensus of opinion is that two tons per acre is a fair estimate of yield, therefore the 8,443 acres planted should have produced a total of 16,886 tons of hemp.

The Northwest Hemp corporation claims ownership of all hemp grown under contracts during the 1934-1935 period, but its records were found to be in chaotic condition and, in order to arrive at any satisfactory conclusion with respect to the number of tons stacked on the farms, it was necessary to consult many growers, scale records, records of purchasers and individuals interested in the crops. As a result of such rather exhaustive inquiry, the following is an estimate of the tonnage actually removed from the fields:

Northwest Hemp Corporation

Mankato Decorticating plant.............................. 150 tons

Blue Earth Decorticating Plant........................... 800 "

Lake Lillian Decorticating Plant........................ 250 " ................................................................................ ........1,200 tons ..................... tons National Cellulose Corportation.......................................................... 200 "

Chempco......................................................................... .......................... 1,300 "

Central Fibre Corporation..................................................................... . 215 "

Maizewood Chemical Company............................................................ 100 "

................................................................................ ....................................... 3,015 tons

Allowing 15 percent for depreciation, burning, theft, etc., the following recapitulation, in round figures, represents the situation at the present time in the Mankato-Blue earth-Lake Lillian areas of southern Minnesota at the present time:

Estimate tonnage grown................................................................ 16,000

Approximate tonnage removed from fields for decorticating at plants............................................................... 3,000

................................................................................ .................................... 13,000

Less approximately 15 percent for depreciating, burning, theft, etc................................................... 2,000

Estimated tonnage stored on fields of farms and at decorticating plants.............................................. 11,000

The major portion of the harvested hemp now stored on the fields is on farms located in Kandiyohi, Renville, Blue Earth and Faribault counties, in order of tonnage, while lesser quantities are scattered over a half dozen other counties. (See Exhibits "H" , "I" and "J"). At the three decorticating plants. Viz., Mankato, Blue Earth and Lake Lillian, large quantities have been stored since 1934 and 1935(See Exhibits "K", "L" and "M"). In most instances the stacks are well preserved, altho number that were improperly stacked have become soggy in the interior as a result of the rain and snow. Authorities agree that hemp in well preserved stacks can be decorticated and produce good fibre even if stored on the fields for a period of ten years.

PILFERING AND BURNING:

Due to publicity given to the existence of the stacks of old 1934 and 1935 hemp on the farms, they have become a source of supply for the traffickers in marihuana. In many instances, the stacks are located adjacent to the public highway (See Exhibits "N", "O", and "P"), and quite accessible to any one desirous of obtaining a supply of leaves and tops because, as the analyses have shown, those parts of the plant still contain an active narcotic principle and all one has to do is remove the top layers of bundles and find a most desirable product for smoking purposes. Many of the stacks, particularly in Blue Earth and Faribault counties have been pilfered (See Exhibits "Q" and "R"). The Bureau records contain a number of cases in which it was developed that the marihuana had been obtained from stacks in southern Minnesota and with adequate personnel to devote to the task of investigating all cases of theft of marihuana, or hemp, coming to the attention of local the law enforcement officers, many more violators of the Marihuana Tax Act could be prosecuted.

During the period of my survey in the hemp growing area, a number of farmers, tiring of being awakened at night by the barking of dogs at the looters, as well as of keeping the stacks of hemp properly trimmed, have defied Holton's admonition not to destroy the stacks and simply set fire to them. In each instance, the farmer, when questioned, has stated that lightning struck the stack and the resultant fire destroyed it, because Holton has threatened to take court action against any farmer who destroys any of the 1934 or 1935 crop. Generally speaking, the farmer is in sympathy with the officers in the enforcement of the Federal and State Marihuana Acts. Numerous instances were called to my attention wherein farmers have discharged shotguns at persons prowling about the hemp stacks and the Sheriffs of Blue Earth and Faribault Counties have answered many telephone calls from farmers who have reported that men were pilfering the stacks, but as long as the stacks remain on the fields they will be a source of supply for the traffickers and a constant annoyance to those engaged in enforcement of the marihuana laws.

VIOLATIONS OF THE MARIHUANA TAX ACT:

Since the effective date of the Marihuana Tax Act, October 1st, 1937, practically everyone interested in the growing, processing or dealing in hemp in southern Minnesota has been violating some provision of the Act and the regulations pertaining thereto. At the outset, confusion existed with respect to the application of the Act to the old 1934 and 1935 crops, due in great measure to misinformation supplied and the erroneous impression created with respect to the conditions of the plants which had been harvested and then stacked on the fields; then a similar situation presented itself in dealing with the 1937 crop which had been harvested and was ready to be moved to the decorticating plants.

The records of the Bureau indicate that the Central Fibre Corporation and Chempco, Incorporated, made what may be construed as an honest effort to comply with the Marihuana Tax Act. The former registered with the Collector of Internal Revenue of the District of Minnesota as a dealer, while the latter registered as a processor for the fiscal year 1938, but in transferring tons of the old 1934-1935 crops from the farms to the mills, as well as that grown under contract during 1937, both companies were liable to the transfer tax imposed by the Act because the stalks contained an abundant supply of tops and leaves. Furthermore, the Central Fibre Corporation should have registered as a processor in Class 1 for the reason that it was engaged in processing the stalks with tops and leaves at the Blue Earth decorticating plant.

The Northwest Hemp Corporation, thru its President, Frank E. Holton, maintained that the provisions of the Act did not apply to activities of that company and gave wide publicity to a letter written by the Bureau under date of October 19, 1937, in reply to a letter from the company under the date of October 11, 1937, in support of that position, but in referring to the letter from the Bureau, Mr. Holton adroitly omitted a very significant statement contained therein, viz, "assuming that these stalks are practically free of leaves or flowering tops containing resin." The Northwest Hemp Corporation, however, finally registered as a dealer in Class 111 for the period April 1st to June 30, 1938, but, as in the case of the Central Fibre Corporation, it, too, should have registered as a processor in Class 1 because it was engaged in processing plants which contained leaves and flowering tops. Furthermore, while the Central Fibre Corporation and Chempco, Incorporated , arranged to register all the farmers as producers with whom they had grower's contract, as well as those from whom they had purchased quantities of the 1934-1935 crops, the Northwest Hemp Corporation made no such provision for farmers from whom it obtained hemp plants for decorticating at the Blue Earth plant.

For the fiscal year 1939, Chempco, Incorporated, registered as a dealer in Class 111, altho it has discontinued operations at its Winona plant. The Northwest Hemp Corporation has also registered as a dealer, but since July 1st, 1938, or between the period of July 1st and August 24th, that company has transferred a total of 138,330 pounds of hemp from four different farms in Faribault County to the decorticating plant at Blue Earth as follows:

Martin Severtson....................................22,390 lbs

Ross Mattin...............................................32,310 "

Dennis O'Neal...........................................79,960 "

Donald Willet..............................................3,670 " .....................................................................138,330 lbs .

The fibre produced from the hemp was shipped to the Cannabis, Incorporated , at Winona, Minnesota, for use in the manufacture of mops. In transferring the plants from the farms to the decorticating plant, both the company and the farmers violated the provisions of Chapter IV, Regulations No. 1, having to do with transfer taxes because they contained tops and leaves, and the farmer incurred further liability for failing to register as a producer. On the occasion of my first visit to the Blue Earth decorticating plant, as well as on the occasion of subsequent conferences with Mr. Holton, I called attention to the transfer provisions of the Marihuana Tax Act and up until the time of my departure from the Mankato-Blue Earth territory, or October 15, 1938, no further deliveries of hemp to the decorticating plant had been made.

Throughout the southern area of Minnesota there are 400 or more farmers who are violating the provisions of Article 96, Regulations No. 1, in that they are not properly safeguarding the hemp containing tops and leaves now stored on their farms, but those farmers are innocent victims of a situation created by happenings over which they had no control. As hereinbefore pointed out, many of the stacks are adjacent to the highways and quite accessible to any one seeking a source of supply of marihuana for smoking purposes. On the other hand, many of the stacks are from one-quarter to one-half mile distance from the dwellings. When strangers are seen near the stacks, the farmers usually call the Sheriff or, if at night, fire a shotgun. I do not believe that the farmer is expected to provide guards for the stacks, altho that is about the only way looters can be kept from them, and it would be unfair to impose any penalty for failure to do so.

CONCLUSIONS:

The problem confronting the bureau at the present time with respect to the commercialize hemp situation in southern Minnesota is, first, what disposition shall be made of the harvested 1934 and 1935 crops now stacked on the farms, and, secondly if it is disposed of by purchase, how can it be transferred from field to mill without imposition a transfer tax? In considering the problem, two factors must be considered, i.e., the position of the farmer and that of Frank E. Holton, President of the Northwest Hemp Corporation. The farmer is entitled to compensation for the product of his labor, but in providing such compensation, the interest of Holton in the crops under the grower's contract, must be considered. The Northwest Hemp Corporation, dominated by Holton is in no financial position to take over the hemp for decorticating and marketing, altho for the past three years by means of alluring promises contained in individual letters to the farmers, Holton has endeavored to stimulate their hopes that he will eventually come to their rescue and fulfill his contract obligations. If it were not for the fact that he holds their promissory notes, which practically amount to chattel mortgages on their property, they undoubtedly would feel less inclined to string along with him.

In recent weeks, Holton has been devoting his time to the promotion of a hemp growing venture in the State of Mississippi similar to that which he inaugurated in Southern Minnesota during the Fall of 1933, and which precipitated the present situation. His Mississippi scheme is to grow hemp in that state and mix it with cotton in the manufacture of textiles, but while growing the first crop in the South, and so that the actual manufacturing project can get started, he proposes to transfer the old 1934-1935 from Minnesota to Mississippi. According to his version of the project, it will revolutionize the textile industry. The proposed project is widely disseminated among the farmers. It contains a ray of hope for them, however fantastic it may appear to those familiar with the cotton industry of the South. Holton's forte is preying on the gullibility of his victims and he has found himself strangely rewarded for his endeavors in the farm belt of southern Minnesota, altho in the Lake Lillian area he is decidedly persona non grata at the present time on account of misrepresentations to the farmers in that district.

Neither the exact status of the grower's contract or the promissory notes has been passed upon by any Minnesota court of record, but the opinion is freely expressed by legal authorities that if the matter is brought before any judicial tribunal the decision will be in favor of the farmers. The farmer, however, dislikes court actions, - they cost money and take up his time, consequently they have been reluctant to obtain any judicial interpretation of the contract or the status of the promissory notes, so as the matter stands, Holton holds a whip hand over the farmer and unless his noninterest in the harvested hemp is definitely established by competent authority, he will endeavor to exact his pound of flesh in the event that a market for the crops is found, or they are removed from the fields by other means.

Prior to my departure from the hemp growing area of the state, a movement was started by the farmers in the Lake Lillian area to remove Holton from his position as President of the Northwest Hemp Corporation thru receivership methods and endeavor to dispose of the 1934-1935 crop of harvested hemp through either Federal or State assistance. A committee was formed and Olai A. Lende, Attorney-at-law of Granite Falls, Minnesota, was appointed Chairman and Legal Adviser. Mr. Lende obtained power of attorney to act for the farmers in that area. The farmers believe that some form of relief can be obtained by either Federal or State legislative action. The opinion is formed, as a result of my survey of the hemp situation, that such action is the only remedy for the reason that, first, I do not believe a buyer for the old 1934-1935 crop can be found, and secondly, there is no market for hemp at a price which would net the farmer a reasonable return, let alone profit, for his product.

RECOMMENDATION:

The existence of the old 1934-1935 crop of harvested hemp on the fields of southern Minnesota is a menace to society in that it is being used by traffickers in marihuana as a source of supply and as long as it remains in the fields it will be of potential trouble and annoyance to those engaged in the enforcement of the Federal and State marihuana acts. Every stack contains a plentiful supply of desirable tops and leaves for smoking purposes. The farmers are entitle to reasonable compensation for their time and labor in raising the hemp and I do not subscribe to any action which would deprive them of that return on their investment. They acted in good faith when they planted the seed and they have no desire to run afoul of the law because of circumstances which have caused them to be in possession of the crops since the passage of the marihuana Tax Act. Federal funds were made available and wild hemp was removed from counties in the state last Summer. The removal of the harvested crops by some such similar means is worthy of consideration and I recommend that the Bureau endorse and approve any suggested Governmental assistance, whether Federal or State, which may bring about the removal of the harvested hemp crops now stacked on the fields of southern Minnesota.

Respectfully,

H.T. Nugent, Field Supervisor.

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