Full text of Diaries of Henry Morgenthau, Jr. : Volume 115 : Part 2

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Wednesday

March 16, 1938
4:30 p.m.

HMJr:

R. E.

Hello.

Wood:

Hello.

HMJr:

General Wood.

W:

HMJr:
W:

HMJr:
W:

HMJr:

Yes.

Henry Morgenthau, Jr.
Yes.

How are you?

Fine, thank you.

General, I wonder if General Westervelt could
come in Monday and spend a day or two with me

and talk things over - what we're trying to do
on this price business.

W:

George
left for the Coast, I mean the Pacific
Coast

HMJr:

Yes.

W:

But he'll be back in a week.

HMJr:

Uh huh.

W:

I can have him come just as soon as he gets back.

HMJr:

Well

W:

Would that be too late?

HMJr:

Unfortunately I expect to go away on the twenty-

W:

Well, he could come wherever you wanted him to.

HMJr:

But I mean, he's got obligations to keep him on
the Coast until then?

W:

Well,
it would keep him there until the twentyfourth

HMJr:

Oh.

fifth - south.

242

-2-

W:

HMJr:
W:

HMJr:
W:

HMJr:

243

He
couldn't get back to Washington on the twentyfifth.
does he fly?
Twenty-fifth Well, he does; I don't think he likes to.

Uh huh. But he could be here on the twenty-fifth?

Yes, I think he could, if he'll fly.
Well, I was going - I'm leaving the night of the
twenty-fifth if my present plans hold true. So

even if I had a day with him it would be something.

W:

HMJr:
W:

HMJr:
W:

HMJr:
W:

Well, I'll tell you what I'll do. I'11 wire him
Yes.

..on the

- I'll wire him out in Los Angeles.

Yes.

And ask him if he could fly back on the twenty- fourth so he could get to Washington and see you

on the twenty-fifth.
That's right.
I'll wire him. And then as soon as I get his reply
we'11 wire you tomorrow.

HMJr:
W:

HMJr:
W:

HMJr:

All right. And.
Will that be all right?
That's all right.
All right.
Now - you'll let me know. Now, that's number one.
Now number two. If I was going to sit down and try

to do the same - this is, of course, confidential -

the same kind of job on cement that we did on tires
W:

Yes.

HMJr:

Who would be the fellow that would be a good fellow

to sit on my side of the table?

244

-3-

W:

HMJr:
W:

(Laughs)
Who?

I say, that's a tougher problem.

W:

Well, you can - will you think that over?
I'll think it over and let you know.

HMJr:

I want - I want somebody that can do the job.

HMJr:

W:

You see, our trouble is there that we buy everything for consumption but we only occasionally
buy - we don't sell cement.

HMJr:

Yes.

W:

So the only time we ever buy cement/when we put

HMJr:

is

up a building.
Well, but you might know of somebody that - you
might have

W:

I'll inquire, Mr. Morgenthau, and I'll let you know.

HMJr:

Will you?

W:

Yes.

HMJr:

All right. Now, how's your business in the last week
or ten days?

W:

Damn poor.

HMJr:

I see.

W:

I don't like the looks of this thing at all.

HMJr:
W:

You don't?

I've been hopeful she'll make a turn but so far
it looks awful bad.

HMJr:

Uh huh.

W:

There's one encouraging - the only encouraging

thing is that this housing bill appears to be

taking hold.

-4HMJr:
W:

HMJr:

245

Yes, it does.
And our building departments are the only three
departments we've got that show an increase.
The building?

Paint, plumbing and roofing and mill work.
HMJr:

I see.

Those three are showing an increase and everything

else is skidding.

HMJr:

I - is skidding?
Yes.

HMJr:

Uh huh.

I mean, confidentially, I - of course we won't
publish our figures until the end of the month - we
ran through January and February around 2 per cent

decrease.
HMJr:
W:

Yes.

We're hitting now, the first two weeks in March,
a fifteen per cent decrease.

HMJr:

Not so good, huh?

W:

And, while some of that covered Easter - I mean,

as late a position as Easter

HMJr:
W:

HMJr:

Yes.

It's still bad. I would say even allowing for
that it's ten per cent.
I see.

Well, I don't want to live with my head

in the sand, anyway.
W:

HMJr:
#:

HMJr:

No.

(Laughs) None of us do.

All right.
All right.
But don't
- but think about a fellow that might
sit on my side of the table on the cement even
though somebody - even if he wasn't with Sears somebody we could put - say, well

-5246
W:

HMJr:

If
I had a man of my own of course he's at your
service.
Yes.

W:

Because we're absolutely independent.

HMJr:

Yes.

W:

I mean, nobody has any strings on us.

HMJr:
W:

Yes.

And he'd be working for you just as much as he'd
be working for us when we buy goods.

HMJr:

Yes.

But
unfortunately
I haven't
got, in that line,
any body
of the caliber
of Walker.
HMJr:

I see.

W:

Didn't you find Walker a very able fellow?

HMJr:

Oh, he's tops1

W:

And he's a fine man too.

HMJr:
W:

HMJr:
W:

HMJr:
W:

Yes. I was simply delighted.
He's a very able man and a very fine man.
I was most appreciative of having him.
He was delighted with you I might say.
Well, it was mutual.

All right.

HMJr:

Thank you.

W:

Good luck.

Wednesday

March 16, 1938
5:08 p.m.

HMJr:

Hello.

T.O.:

Dr. Burgess.

HMJr:

Hello.

R.

Burgess:

Oh, hello, sir.

HMJr:

Hello, Randolph.

B:

Well, they've held very well after the close.

HMJr:

They have?

B:

There're some bonds around but they're not being
pushed very much.

HMJr:
B:

I see. Any gossip, I mean, about our operations?
No. I saw the press and they said, "Did you buy
some cheap bonds?" And I said, "Well, there were
some cheap bonds to buy," but I said the market

behaved very well.
HMJr:
B:

HMJr:
B:

Uh huh.

And took care of itself very nicely.

Well, I think it's all to the good.
Well, I think so, yes. I think it was a good thing
to do, Henry. I was a little skeptical at first
as to whether it might not go through without it
but I think it was wise to do.

HMJr:

Well

B:

You were right as usual.

HMJr:

Well, I won't say that until about this time tomorrow
night.

B:

(Laughs) Well, I think we've got quite a question

tomorrow.
HMJr:

Yes.

B:

I think we ought to do - do probably something the

same thing but I'm not quite sure at what price it

ought to be.

247

-2HMJr:

Well, I'd like to see the market open and then

after you've got a feel of it I wish you'd call

me.

B:

Yes. All right. I've got to speak to the Stock
Exchange Institute at a quarter of nine but I'll
be back here at a quarter of ten.

HMJr:

B:

HMJr:

Good. Then as soon as you get a feel of the

market give me a ring.

All right.
Thank you, Randolph.

First rate.
HMJr:

Goodnight.

248

249
March 16, 1938.
5:10 P.M.

H.M.Jr:

Hello
Governor Ransom

0:

H.M.Jr:

Hello

R:

All right, sir.

H.M.Jr:

Well I just got through talking to Burgess
Yes.

R:

and he says that we were right as usual.

H.M.Jr:
R:

It worked.

H.M.Jr:

You've heard the story.

R:

Yes.

H.M.Jr:

Twelve and a quarter or twelve and a half million

R:

Yes.

H.M.Jr:

and there were other buyers in the market

besides ourselves after we showed our confidence.

That's right.

R:

H.M.Jr:

And he said Devine had six million and he sold
five of them.

R:

Yes.

H.M.Jr:

And the mar

R:

Ah - Burgess feels very happy

about it to-night.
(Hearty laughter) Well it worked.

H.M.Jr:

It worked and he's a good sport - he says it worked.

R:

Yes.

H.M.Jr:

Now, of course, tomorrow is another day.

-2250

R:

That's right. I've talked, in the meantime, to

George Harrison, John Sinclair and Marriner Eccles
so that I have talked to five men who would con-

stitute the Executive Committee. They were all
advised about it and all in agreement with it.

H.M.Jr:
R:

Good.

Of course, George has mental reservations - the
state of Siam
things but

may be involved and a few other

H.M.Jr:

Well the damn thing worked anyhow.

R:

That's the principal thing - it worked.

H.M.Jr:

Yes.

R:

H.M.Jr:
R:

And it shows that it will work.
That's right.
So let's watch tomorrow with interest.

R:

All right, sir. I'm glad it worked just that way.

H.M.Jr:

I am too.

R:

Proqves the case.

H.M.Jr:
R:

H.M.Jr:

(Laughs) That's right.
All right, thank you for calling me.
Good-bye.

March 16, 1938

My dear Mr. President:

For your confidential infor
nation, I beg to inform you that we
have sold today another $2,500,000 worth

of gold to Sweden which makes a total of
$7,500,000 they are keeping on deposit
with us.

Faithfully yours,

The President,
The White House.

251

252

CABLE

From: Sveriges Riksbank
Stockholm, Sweden

To: Federal Reserve Bank of N.Y.
Date: March 15, 1938

#20.

We wish to buy gold for $2,500,000 to the debit of our account
please make necessary arrangements please cable result.

253

March 16, 1938
Employment figures:
Week ending March 12

2,243,865

Increase over week ending

March 5

77,160

254

March 17, 1938.
10:22 a.m.
Hello

H.M.Jr:
0:

Go ahead.

Burgess:

Hello

H.M.Jr:

Hello

B:

Oh hello Henry.

H.M.Jr:

Good morning.

B:

H.M.Jr:

-

Well this is opening quiet
Yes.

B:

night.

and - ah - prices about the same as last

H.M.Jr:

Fine.

B:

The dealers say there's a little better tone.

H.M.Jr:

Fine.

B:

There's some buying around. We haven't done a

thing so far. We haven't even got bids in.

H.M.Jr:

Ah-ha.

B:

We're waiting, just as you said last night, to
see what - ah - what happened.

H.M.Jr:

Ah-ha.

B:

So my suggestion is we stay out as we can but

if it shows any weakness to go in again.

H.M.Jr:

Ah-ha.

B:

Is that your idea?

H.M.Jr:

Ah - It say that would be all right.
All right sir. Now it may be that your switches -

B:

we get some bond switches - we can take some bonds

off as they come along but we're going to do a job
if it shows any real weakness.

-2-

H.M.Jr:

Did you do any - did you switch yesterday's?

B:

Well we did it against our bill maturities.

H.M.Jr:

Ah-ha - ah-ha - I see.

B:

H.M.Jr:
B:

H.M.Jr:

B:

H.M.Jr:
B:

H.M.Jr:

We didn't sell anything else. Didn't sell
anything - had open bill maturities.
Ah-ha.

And we've got big enough bill maturities so
we can do it that way.

Right
- right - well let's watch it. Maybe
that was a quick fast storm.
If
it takes care of itself why so much
the- ifbetter.
The foreign exchange situation is much better.
Yes - yes the news looks better there. The
London market is better.

Yes, so if they - it may blow over without
capsizing us.

B:

That may be. We'll probably get another
reaction in before the day is over but we'11
see.

H.M.Jr:

O.K.

255

256
RE BANK HOLDING COMPANY LEGISLATION
Present:

Mr. Taylor

March 17, 1938.
11:00 a.m.

Mr. Upham

Mr. Gaston
Mr. Foley
Mr. Diggs

Mr. Ransom

Mr. Jones
Mr. Crowley

H.M.Jr:
Jones:

All counted and present, Jesse?
All present.

Well, I've got a letter; haven't had time to sign it.
Better
sign it. (Signs letter)
H.M.Jr:

Yes.

Jones:

Do you want to read it or want somebody else to?

H.M.Jr:

Have they all read it?

Jones:

No.

H.M.Jr:

Shall I read it aloud?

Jones:

H.M.Jr:

I haven't read it myself.
Well, you just hold up your hand if it doesn't sound
familiar.

Jones:

All right.

H.M.Jr:

"HAt the last meeting of the interdepartmental committee
held in your office March 14th to consider recommendations to the President regarding bank legislation, and
particularly to suggest a brief statement dealing with
bank holding companies to be included in his message to
Congress, you asked that the committee have further
meetings and endeavor to arrive at, first, a suggested
statement for the President's message, second, a
definition of what constitutes a bank holding company,
and, third, what governmental agency should be charged
with the enforcement of any Bank Act affecting holding
companies.

"We have had two meetings and a free discussion of the

257
-2-

problems to be considered.
Free discussion?
Jones:

Free discussion. Full and free.

Ransom:

Very free.

Jones:

And nobody was timid.

H.M.Jr:

And nobody got a black eye.

Jones:

Nobody was timid and nobody got a black eye.
Determined that Ronald Ransom - what was it that
you said you were?

Taylor:
Ransom:

Tried to get my status established, but didn't succeed

H.M.Jr:

"I attach the suggested statement for the President to
include in his message to Congress. This represents
the views of Governor Ransom of the Federal Reserve
Board, Acting Comptroller of the Currency Marshall
Diggs, Leo Crowley, Chairman of the Federal Deposit
Insurance Corporation, and the Reconstruction Finance

in doing it.

Corporation.

"It is the unanimous opinion that the operations of
bank holding companies should not be allowed to
expand. This being true is an admission that the
principle of bank holding companies is not in the
best interests of the country and that something
should be done about them. It is with this thought
that the last paragraph of the statement is included.
"Should the President determine to use it and the

Congress act upon his recommendation, the question
of branch banking will naturally enter into the
discussion.

"The committee feels that other factors than a
specific percentage of share ownership will enter
into a proper definition of control. At all events
it requires more time for study than we have had and
should properly be developed in the Congressional

Committee hearings.

258
-3-

"As to the supervising authority, Mr. Crowley,

Chairman of the Federal Deposit Insurance Corporation,
has stated that the present Glass-McAdoo-Steagall Bill
represents approximately his views, but thinks that
the President or Congress should decide.
"Governor Ransom and the Comptroller see no reason

for transferring this authority which now rests with
the Federal Reserve Board and the Comptroller,
although they feel that if a change is made it should
be the responsibility of one agency.
"The directors and executive force of the Reconstruction
Finance Corporation are of the opinion that this control
is so involved with the question of bank supervision that
the two should be considered together and ultimately rest
with the Federal Deposit Insurance Corporation."

Well, I'd say that this was a much better - that you
came much nearer to agreeing than I had any idea

Jones:
Ransom:

And down to there have - stated it about the way
Yes, sir. You said we would be privileged to comment
on it as we went along, and I would suggest that I'd
like to withhold comment until we put into the record
this suggested statement, about which I would like to
say something.

Jones:

Now, here's the suggested draft.

H.M.Jr:

Has everybody seen that?

Jones:

No, sir. I made a - have you got a copy of it?
Well, I've got a copy that Taylor gave to me this

H.M.Jr:

morning.
Jones:

I made one or two little changes, just a word or two.

H.M.Jr:

I don't think you'll catch it on reading it.
You want to read it and I'll watch it.

Jones:

See what the changes are. I would like to know myself.
I don't remember.

"The establishment and maintenance of a sound banking

system which would serve the public interest has been

-4-

259

a constant objective of this Administration. In
furtherance of this objective Congress should
again consider bank legislation, particularly the

holding company problem, and determine in what
manner existing laws dealing with these companies
should be strengthened
H.M.Jr:

It says here "In furtherance of this objective Congress
should again give consideration to the bank holding

company problem and determine
Jones:

I just thought "and in furtherance of this objective

Congress should again consider bank legislation,
particularly the holding company problem, and determine
in what manner existing laws dealing with these companies
should be strengthened and what limitations
should be

H.M.Jr:

- that's a little change.
Well, I don't - just talking for myself, I don't like
it as well, because the way it is now it directs

Congress's attention to the bank holding company, and

you bring in the question of bank legislation.
Jones:

H.M.Jr:

Will you read it the way it is there; I've forgotten.
I mean that's the whole thing. "In furtherance of this

objective, Congress should again give consideration to

the bank holding company problem and determine in what
manner existing laws dealing with these companies should
be strengthened and what limitations should be imposed
upon their development.
Jones:

That's all right.

Diggs:

And further, Mr. Secretary, this is a bill on monopolies,
so it wouldn't come naturally to say bank legislation
unless

H.M.Jr:
Jones:

No, I much prefer this.
"11 right.
"I recommend that the Congress enact at this session

legislation that will effectively control the operation

of bank holding companies and prevent holding companies

from acquiring control of any more banks, directly or
indirectly, or banks controlled by holding companies

-5-

260

from establishing any more branches, and that would

H.M.Jr:

make it illegal for a holding company, or any corporation or enterprise in which it is financially interested, to borrow from" - and I made an addition: "or
sell securities to - a bank in which it holds stocks."
I thought they might get around the borrowing
"To borrow from ...."

Taylor:

"... or sell securities to
"Sell its securities to..." - huh?

Jones:

What?

Taylor:

"Sell its securities to."

Jones:

"

Jones:

The idea is they can't sell any securities.
Can't feed securities. I think that's just as dangerous

H.M.Jr:

Offhand, I'd say that was a good addition, but I haven't

Jones:

How does that strike you (Ransom)?

Ransom:

Again, I have a comment on the entire provision that

Jones:

"Believing this to be a sound principle of government,
I suggest that any bank legislation make provision for
the gradual separation of banks from holding company
control or ownership."

Upham:

"Holding company control or ownership."

Jones:

I just - I put in a word there.

Foley:
Jones:

Yes, "control or ownership."
That's what we're shooting at - control. How do we
have it there?

Upham:

"Ownership"

Crowley:

You want "control" in there too. Got to have "control,"
because ...

Crowley

as the

been sitting in on all this.

I'd like to make at the time

-6-

261

H.M.Jr:

Put "control or ...."

Jones:

".... ownership, allowing a reasonable time for this

H.M.Jr:

accomplishment, time enough for it to be done in an
orderly manner, and without causing inconvenience to
communities served by holding company banks, or
unnecessary loss to stockholders.
Well now, the Treasury has a paragraph - a last

paragraph. Squeezed it down a little bit. I'll read
that. Nothing new in it except they've squeezed it

down.

"Believing it to be a sound principle of government,
I recommend that this bank legislation make provision
for the gradual separation of banks from holding company ownership, allowing a reasonable time for this
accomplishment, time enough for it to be done in an

orderly manner."

They simply felt that there were simply too many
"ifs, ands, and buts" in there. Want to take a look
at that?
Jones:

That's all right.

Ransom:

May I see it?

H.M.Jr:

Sure. Add the words "control or." But they simply
boiled it down.

Taylor:

In other words, "an orderly manner" would take care

of what

H.M.Jr:

See?

Jones:

Yes, we've said the same thing. It's all right.
Of course - "Believing it to be a sound principle of
government" - but I should think it could be taken
that if it wasn't a sound principle of government it

Ransom:

wouldn't be recommended.

Foley:

That's in both. That's in yours too.

Diggs:

We discussed that yesterday.

-7Jones:

262

Ithat
thinkinyou've
- I would think he would put
if we got
left to
it out.

Ransom:

Yes, that's

Jones:

See?

Ransom:

That's going to be the approach, yes.

I merely wanted to say this, Mr. Secretary, that in
this particular instance I have had to act on my own
and not speaking for the Board. I am not entirely
clear in my own mind whether the members of this
committee, and their alternates, when they meet

with you, are supposed to express Board sentiments
checked what I've been doing with all the Board members
who have been available, but unfortunately we have not
had a quorum at any one time since this matter came up.

or their own. In this particular instance, I have

And while I do not know that anything that I might say
on the subject would be not in agreement with the thoughts
of any other members of the Board, I would like to make
it perfectly clear that I am speaking for myself, and
that at such time as Board action is appropriate, I would
seek
to obtain it.
H.M.Jr:

Well, may I ask just one question.

Ransom:

Yes.

H.M.Jr:

As you go along in these meetings, you keep the Board
members who are here advised of what you're doing?

Ransom:

Correct.

H.M.Jr:

And as far as we know, when you come here and agree,

those who are advised are in agreement with you.

Ransom:

Yes, I would not - if there were any difference of
opinion known to me, I would express it. Now,
unfortunately for me, the one man who I think is
best informed of all of us on this subject, Mr.
McKee, has been out of town, and I have not therefore
had the benefit of Mr. McKee's advice, although I have
talked to him once over the long distance telephone.
But that is not very satisfactory in as technical a
discussion as this.

-8H.M.Jr:

263

Well, the only thing I'd like to ask, to protect

ourselves - let's say we all agree on this statement.
Well then, I don't want to find
And I say to
the President, "We are in agreement." I don't want

to find a week from now that the Federal Reserve Board
meets and passes a resolution condemning that statement.
Ransom:

All I can say is that I would be surprised if they did
so, though I am not put in the position of representing
them, as I understand it, but having to speak for
myself. Now, if it came to the point that Mr. Jones
has suggested, and which perhaps would seem a logical
outcome of these discussions, namely, a committee

hearing by Congress for a thorough exploration of the
whole problem, and the Board should be called on for an
expression of opinion, individually or collectively,
I would anticipate that in the fundamental statement
we are entirely in agreement.
I have one or two reservations myself regarding the
proposed statement for the President's message. Mr.
Jones has already pointed out one of them - the

implication in the last paragraph. Speaking for
myself alone, I would like to see it in the message,
for two reasons.

H.M.Jr:

What's that?

Rensom:

The question of what

Jones:

The last paragraph.

Ranson:

The unfreezing process. We first propose that they
shall be frozen as they are, and then that something
else shall be done about it. I say that I personally
like that for two reasons

H.M.Jr:

May I ask - what you're talking - the point you're
talking to is what you call the death sentence.
The death sentence. It seems to me to be, as Mr.
Jones has it worded here, rather indeterminate. A
death sentence raises a great many questions of
administration, control, and supervision which I
think are important. Now, I think it also raises,
Mr. Secretary, the very important question of branch
banking. I don't think that particular question can

Ranson:

264
-9-

be intelligently avoided when we approach this

subject. But I have this feeling: that in submitting
the recommendation to the President, that, at least,
should be pointed out to him.

H.M.Jr:
Ransom:

Well, it's in Mr. Jones' letter.
Yes. Well, I'm fully in accord.

H.M.Jr:

Well,
it's very pointedly brought to the President's
attention.

Ransom:

Yes.

Jones:

"Should the President determine to use it and the

Congress act upon his recommendation, the question
of branch banking will naturally enter into the
discussion."

Ransom:

I just want to say that I am fully in agreement with

H.M.Jr:

What I was going to do was like this: "My dear Mr.
President: After a number of meetings of your
interdepartmental committee on banking, I have the
pleasure of forwarding to you a report on the bank
holding situation. You will find attached herewith a
copy of Mr. Jones' letter on this subject and also
a suggested message for you to send to Congress. I
am pleased to inform you that the recommended message
has the unanimous approval of the members of this
committee. We await your pleasure in regard to this

the fact that it will inevitably enter into it.

matter."

I mean - what?
Jones:

That sounds all right to me. You've (Ransom) got the
reservation that you do not speak for the Board.

Ransom:

Yes, I have to make that reservation.

H.M.Jr:

I know, but going into
If I'm speaking as a member of this committee, I'm
definitely committed.

Ransom:

265
-10-

H.M.Jr:

Well, listen, I'm satisfied, and that shadation - it
will never arise, as far as I'm concerned, and and it's like what we did yesterday, we act first,
then we get your authority afterwards.

Jones:

Ronald, let me see, in my letter I said "the views
of Governor Ransom of the Federal Reserve Board."
I don't say that you're acting for the Board.

H.M...

And 1 just simply say "members of your committee."

I don't say who is on "your committee" or anything
else. I just say "members of the committee." As a
matter of fact, this committee has no legal status,
as far as I know, anyway, has it?

Foley:

No.

Taylor:

Very questionable.

Jones:

I was careful to say also here for Mr. Diggs, "Acting
Comptroller of the Currency Marshall Diggs." Now,
when I get over here I remember that we had discussed
this question of where the control should be when Jefty
was here, so I said in that that "Governor Ransom and
the Comptroller see no reason for ..." because he had
expressed himself at the last meeting, and I had in
mind particularly that he wasn't here today and he was
here the other time.

Ranson:

May I finish please, Mr. Secretary. There were just
two points in the statement that I wanted to call your
attention to.

H.M.Jr:

Go ahead.

Ransom:

One is that I think it contains a gap in that it does
not specifically refer to existing law on the subject.

I discussed that at some length with the committee
yesterday and I am still of the same opinion, and
I still think that the statement that the President
makes would be a better statement if it referred to
the fact that legislation had been enacted during the
present administration on the subject, whether you

specifically referred to the Banking Act of '33 or '35

or not. I think that is a serious gap.

I am also somewhat puzzled about where we would come

out in the prohibition against - the provision that

-11-

266

would "make it illegal for a holding company, or

any corporation or enterprise in which it is
financially interested, to borrow from a controlled
bank in which it holds stock." The principle there
I think I understand. The practical operation I

will have to question and leave to these gentlemen,
many of whom have had greater experience in this field
than I have. It seems to me you will be putting some
very drastic limitations on some transactions which
might be perfectly proper.

Crowley:

Now, I am not at all insistent. I am merely pointing
that out because I think that if the President commits
himself to that and legislation should take that direction, we might find some extremely difficult administrative problems involved in it. The only change that I
would have made in that would be to change it in this
respect, and say "and that will make it illegal for a
holding company, or any corporation or enterprise
controlled by it to borrow from a controlled bank."
Well, Ronald, as I see this thing, we're not getting
into the detail of legislation on this thing. - Wait
until he gets through.

H.M.Jr:

Just one second. (Receives clippings from Mrs. Betts)
The market is up about a point. Government bonds are
up a fraction.

Jones:

Good.

Crowley:

commodities are up a little bit. Huh? Looks as
though the worst is over.
All right, go ahead.
Well, as I see the thing, you can't discuss in detail
what's going into legislation in a message. I think
in principle that this carries out every view that I
have on the thing and if he's going to deliver a message
he can't send one up there of milk and honey; he's got
to put some kick in the thing. And if you're going to
get any reform at all, the only way you're going to
get a reform is by going perhaps even farther than you
might hope to finally win. But if you come out here
and agree right off the bat that you're for just freezing,
then they'11 start to trade with you, and when you get
through all you've got left is the number of your bill.

-12-

267

And as far as your dealing with the subsidiaries

and the affiliates, I think, Ronald, a lot of our

Ranson:

Crowley:

H.M.Jr:

trouble - and as you g et in and study this thing,
you find so many banks and bank holding companies
that have affiliates that the bank holding company
is really a small part of their business, when you
find all the other things they have. And if anything
is going to bring down a trouble on our heads eventually
in this bank holding company thing, it is going to be
their depositing their funds in their parent bank and
switching assets back and forth and loaning to their
affiliates, so that when something happens they've got
all their banks in jeopardy, as we know has happened
in the past.
Now, I think that is all a matter of detail that has
to be discussed later. But in the principle of the
thing, I don't see how the President could say less
than he is saying here and have his message effective.
I wasn't suggesting that he say less, Leo, but that
it be somewhat clarified to avoid possible misunderstanding in the future. Now, if you gentlemen who
have handled this problem don't think that is a problem,
why, I'll defer to your judgment in this matter.
I don't think this message, as I say, gets into the
problem at all, and it is only setting forth a policy.
Now, just because he says that they shall not borrow that doesn't necessarily mean that the legislation
will be so rigid that it would cause unnecessary
hardship. And he doesn't say - in the elimination
of them, he doesn't say it will be three years or
four years. He says a program will be set up for
their gradual elimination. And I don't see where
branch banking comes into this thing at all, unless
we inject branch banking. I certainly don't think
there is any tendency on the Hill to deal with a hot
subject like that.
Well, Senator Glass in his bill didn't attempt to
nandle branch banking.

Jones:

These boys thought that it would come up, and we just

wanted to mention that to the President. He doesn't -

-13-

268

he's not going to be retarded by it. But you can't
keep any subject confined to just the line that you
want to go on when you get on the Hill.

And I think this, Ronald, that on the question that
you raised, it will, of course - Congress can always
give more time to correct it. You may find the
present situation like that of bank officers in banks,
don't you see, where Congress had to extend the time in
which they could pay those debts. So the house isn't
going to be pulled down by any legislation. But I think
that whatever he recommends should have just as much

teeth in it as he could put in it.

Ransom:

Let me just remind you that yesterday you took some of
the teeth out that I had put in. I think that was all
right.

Jones:

What was that about, the years'35 and '36?

Ransom:

About the device - may I look at this copy? Is this
the final draft?
No. Which is the final draft?

Jones:
Gaston:

There isn't any. Some words to come out of Mr. Jones'
draft, and then some words to be inserted in the other.
I have one in which those changes have been made. I
just noted in the margin your comments.

Ranson:

Yes. I took yesterday evening, Mr. Secretary, the
draft that we had before us yesterday, and I made
some textual changes in it, and I will submit that
to all of you for your consideration.

One thing that I would like definitely - the rest of
this seems relatively unimportant - I would like, if

we can, where we - to say "In furtherance of this
objective Congress should again give consideration to
the bank holding company problem and determine in what
manner existing legislation enacted during this
administration should be strengthened and what limi-

tations" and so forth. My reason again there is
that this administration has been in office five

years, has enacted some very important bank holding

company legislation, and I would not like the President's
message on the subject to give the impression to the
public or to Congress that legislation already enacted

was wholly inefficient, that it missed the target, or
that nothing had been done about it at all. And for

269

-14-

that reason and that reason alone I would like to
see somewhere inserted in this statement a reference
to legislation which had been enacted during this
administration on the subject.
Jones:

May I see that?

Crowley:

Well, we can work that out by simply saying that
existing legislation, being adequate

Ransom:

I wouldn't say that, because I'm not sure that it is.

Crowley:

You mean it isn't adequate to handle the problem.

Ransom:

- wouldn't like to see the President say that the
existing legislation was inadequate.

Crowley:

He
says
that when he says there is some reform he
wants
to make.

Ransom:

You may need additional legislation without referring
to existing legislation as inadequate.

Crowley:

If you
for
it? ask for additional legislation, why do you ask

Ransom:

To strengthen existing legislation.
Isn't that because it was inadequate?
Just a difference of words. To me the words seem

Crowley:
Ranson:

important.

Jones:

The rest of the textual changes I suggested there in
the light of what Mr. Crowley says about administration.
Did we have bank legislation before affecting bank holding companies?

Ranson:

Jones:

Previous to this administration, not to my knowledge.
I think you have to know.

Ransom:

No.

H.M.Jr:

Isn't the point - when was the Federal Reserve given
the authority to regulate bank holding companies when
they had over 50 percent?

270
-15Ransom:

1933.

H.M.Jr:

Well, wasn't that in this administration? That
answers Mr. Jones' question. And the point that
you're
making is that that legislation wasn't
adequate.

Ransom:

The point I'm making is that that legislation needs
to be strengthened.

H.M.Jr:

But it was in '33.

Ransom:

The situation has changed somewhat, too, Mr. Secretary.

Diggs:

Changing conditions, change in legislation.
No serious objection.

Jones:

H.M.Jr:

I don't think it is terribly important, one way or
the other. If they feel strongly - what word do you
use? "Supplement" existing bank legislation?

Ransom:

I think it ought to say "In furtherance of this objec-

tive Congress should again give consideration to the

bank holding company problem and determine in what

manner existing legislation enacted during this administration should be strengthened and what limitations
should be imposed upon the development of such holding

companies." That is really our objective, as I see it.
I don't think there is any disagreement on that. As to
objective I think this committee is of one mind, Mr.

Secretary.
H.M.Jr:

Well, I could go with you down to "should be strengthened" - period. "What limitations should be imposed
upon ..." " - I think that that comes out, because you're
not going to place limitations - I mean you're going to
do away with them. You say "legislation enacted during
this administration should be strengthened" - period.
See, you're not going to put limitations, you're going
to do away with them.

Jones:

That's right.

H.M.Jr:

Could you take that, Ronald? Down here - "legislation
should be strengthened" - period; then cut off the rest.

Ransom:

That's all right, surely.

-16H.M.Jr:
Ransom:

Then go on with the rest of the story. This is
just a preamble.

I

think, as a matter of fact, Mr. Secretary, that

change ought to be made in the draft Mr. Jones
submitted, because if we're going to say what
limitations should be imposed on their development
and then impose an indefinite death sentence

Diggs:

That's your draft, sir.

Jones:

This my original draft?

Diggs:

No, that's the section
My draft with this change.
That's right.

Jones:

H.M.Jr:
Jones:

271

"The establishment and maintenance of a sound banking
system which would serve the public interest has been

a constant objective of this administration. In

furtherance of this objective, Congress should again
give consideration to the bank holding company
problem."

H.M.Jr:
Crowley:

Ransom:

Crowley:
Ransom:

H.M.Jr:
Ransom:

That's the same;up to here it's just the same.
Well now, don't you say there "In furtherance of this
objective Congress should again give consideration" isn't that admitting they did it once?
The point about that is, Leo, that it seems to me
important that this particular administration should
put itself on record as having already dealt with it
by existing legislation.
Well, we do that to "again."

It doesn't specifically refer to the bank legislation
passed through this administration. "Again" would
imply there that there was existing legislation.
"Existing legislation" - that's all he's putting in.
"Again give consideration to the bank holding company
problem and determine in what manner existing legisla-

tion enacted during this administration should be

272
-17-

strengthened."
Jones:

I'm for that, if they didn't have legislation dealing

with holding companies before.

Ransom:

Well, Mr. Upham says not, and it is my understanding

Upham:

There was none before that.

there was not.

Ransom:

All right. With that assumption - "what manner
existing legislation enacted during this administration should be strengthened" - and cut that there.
Just have to add this (writing in revision).
"Enacted during this administration should be streng-

H.M.Jr:

"To determine in what manner existing ...."

Jones:

"Existing laws" instead of "existing legislation."

Ransom:

"Laws dealing with these companies" - strike out

Jones:

H.M.Jr:

Gaston:

thened."

"legislation" - "enacted during this administration."
don't see why you should point exclusively to that
legislation. You could say "determine in what manner
existing laws, including legislation dealing with
these companies enacted during this administration."

Jones:

That's all right.

H.M.Jr:

Fix it up, Herbert. You've earned your salary today.
While he's writing that, may I take a look at my

H.M.Jr:

market for a minute. We had a bad one yesterday.
(Secretary goes out)

Gaston:

"In furtherance of this objective, Congress should
again give consideration to the bank holding company
problem, and determine in what manner existing laws,
including legislation dealing with these companies
enacted during this administration, should be strengthened, and what limitations should be imposed upon
their development."

-18Jones:

That last is to come out.

Ransos:

Yes, I think that's enough.
Little inconsistent otherwise.

Gaston:

You're quite right.

Gaston:

273

"I recommend that the Congress enact at this session

legislation that will effectively control the operation

of bank holding companies and prevent holding companies
Jones:

Now wait just a minute, Ronald's got a

Ransom:

That's not important; just a textual change.

Jones:

Yo ahead.

Gaston:

and prevent holding companies from acquiring

control of any more banks, directly or indirectly,
or banks controlled by holding companies from establishing any more branches, and that will make it
illegal for a holding company or any corporation or
enterprise in which it is financially interested to
borrow from or sell securities to a bank in which
it holds stock." Mr. Ransom's suggestion there
was that we make it "an enterprise which it controls
to borrow from or sell securities to a bank which it
controls."

Ranson:

I don't - just don't know what we're getting into.
Leo says we're not getting into any trouble on it,
and he's had more experience than I've had, so it's
all right with me.

Jones:

we're talking about a bank holding company, see?
Another corporation that wasn't a bank holding
company would not be precluded by that from selling
them a security or borrowing from the bank.

Crowley:

My idea was, Ronald, when we sit down and discuss

whatever we're going to do, that then we'll try and
reach a mind on what we're going to do with these
fellows on controlling these loans, as to how far you
want to go on the thing. But what I'm getting at
is, I don't think in a message that you can work it
out in detail so they will understand everything that
we don't understand ourselves now; because I don't think

274
-19-

that you or Marshall or Jesse or any of us can
say definitely how far you want to go on that
thing in detail. Can you?
No, I wouldn't undertake now to say that.
So this covers the thing. No use trying to go into
detail. He's in as deep water as we are, as I see it.

Ransom:

Crowley:

I'm not at all insistent on this. I think it opens

Ransom:

up & pretty wide field, but we're opening a pretty

.

Jones:

wide field anyway.

Branch banking, too. It's all the same. You open
up - you're not going to exclude anything from these
hearings when they get to having them.
Now, have we got a completed copy?

Crowley:

Of course, personally, I think there's been a lot of

Ransom:

Yes, I rather suspect so. Carrying out instructions.

shadow-boxing here.

(Secretary returns)
H.M.Jr:

Well, everything's all right. Boy! That was a bad

Ransom:

That was bad.

Jones:

Now, the way we are in agreement

H.M.Jr:
Diggs:

day yesterday, wasn't it?

I'll send you people a photostat of a complete copy of

what I send the President, see?

Mr. Secretary, the first meeting I attended here, it

seemed to me our big problem at that time, which isn't

going to be solved here, was the Bank of America and
Trans-America. That was the big problem.
H.M.Jr:

That's right.

Diggs:

My feeling has been that the Trans-America can dispose

of all of its stock, distribute it, and will do so on

very short notice, if such a bill is passed; so we've

not accomplished anything really, because the other

-20-

275

holding companies are very minor and are not giving
any trouble. And I'm just wondering whether we're
getting at what seems to be disturbing every one.
Ransom:

I might inject something of an answer to that that

might throw some light on it, because you haven't been
in on our other conferences. What you (Diggs) say
is the reason that I objected to any very broad
statements of great economic questions being involved
in this problem, because I was afraid that as soon as
you got rid of your existing holding company problem
you still had these large aggregations of controlled
banks under existing branch banking systems. But I

think that's avoided, Marshall, by the wording of this,
which doesn't commit the President to any tatement that
there is a broad economic question involved. This
really, after all, reduces to an effort to further
control existing agencies. Now, if those agencies
disappear of their own accord, it doesn't seem to me
we'd have that problem. Might have another problem,
even more difficult to solve. But that would have to
come in due course. Now, does that in part answer

your question?
Diggs:

But we haven't got to the one thing that disturbed

H.M.Jr:

Well, isn't the question of Bank of America one largely

Diggs:

Yes, to some extent, probably. In other words, as long
as it was controlled by Trans-America and the borrowing
back and forth there - I think that's one thing which
this does eliminate. But once he distributes his
Trans-America stock, they can still continue to carry

us here at the first meeting. We still have that.

of bank examination?

that. on.

H.M.Jr:

He can continue to do what?

Diggs:

To borrow, which is what we try to eliminate.

H.M.Jr:

Who can borrow what?

Diggs:

Trans-America could borrow from the Bank of America,

if they distribute their stock and are not an affiliate

or a holding company.

276
-21H.M.Jr:

That's where I say, then, you come in.

Diggs:

Then we come in from the examination standpoint.

H.M.Jr:

Diggs:

H.M.Jr:

Diggs:

And if it's a good risk, all right. If it isn't,

you say "No. If I mean it seems to me that that is
your responsibility.
That's right.
If it's a good risk for the Bank of America to loan
the Trans-America, all right. If it isn't, it is up
to your examiners to shut down on them.
Right.

That seems to me to meet the situation.
Diggs:

whether it's a good loan or not, from then on out.

H.M.Jr:

Yes, if it's a good loan. And then, in addition to

that, there is another investigation going on, which
you may or may not be familiar with, and that's the
question of S.E.C., and they're going into TransAmerica from the standpoint of listing. So I think
that investigation, plus very careful bank examination, ought to meet the situation, once Trans-America

divests itself of its stockholding in banks.
And the other thing, to answer your question, is this.
After all, this is an expression on the part of the

President as to his attitude towards bank holding
companies, and it gives these fellows ample warning
to get their house in order. So - I mean I don't think
any of these things can be done overnight, and I think
in this case it would be dangerous to do it overnight.
But it's putting these fellows - the President putting
them on notice: "Now look here, this is something that
this administration doesn't like. Now, you fellows get
ready.' I think it's going far enough and fast enough,
personally.
Diggs:

Crowley:

Well, I think it's going far enough.
I don't think, Marshall, that Giannini can run out as

fast as he might think he could, because when he distributes his stock he's got to do something with his holding

-22-

277

companies that hold his other affiliates. What
I think will happen with Giannini - he'll come to

Washington, meet with the Federal Reserve, Comptroller's

Diggs:

office, and F.D.I.C., and work out a program that likely
will give that thing a gradual house-cleaning.
Well, where are we going to be with the Northwestern
and First National? I mean let's assume that we Congress enacts a law saying that they must be
eliminated in five years or ten years. Will they
take five years to do it, or will they immediately

sell the stock and will it be deflationary in the

Northwest?
H.M.Jr:

Jones thinks that, on reconsideration, he'd like to
see that last sentence left in there: "and without

causing inconvenience to communities served by holding
company banks," etc.

Jones:

I think that's a thing the President ought to say.

Crowley:

Would you say "loss" or "undue hardship
I don't care. Doesn't make any difference.

Jones:
Ransom:

Jones:

Make no suggestion on it, Mr. Secretary, but I did
have a mental reservation whether the President wanted
to suggest that there was going to be a loss to stockholders at a period when it is so very difficult to get
capitalization into banks anyway, and I myself would
have been reluctant to suggest the use by the President
of the words "loss to stockholders" at a time when
they are super-sensitive about it anyway.
But, Ronald, these fellows are going to holler. You
can't keep the other fellow from hollering. Says,
"This is going to be a loss." He beats them to the

draw here.
Crowley:

My short experience in legislation - if you give them
a message that's got a good shot

Jones:

"And without causing inconvenience" - that answers
them when you say, "What you fellows going to do

without a bank?" And then "or loss to stockholders
H.M.Jr:

I think you better leave that part off. Kind of puts

"

278
-23-

ideas in your head.
Jones:

"Without causing inconvenience to communities served
by holding company banks."

H.M.Jr:
Upham:

And leave off the "loss to stockholders."
Yes, we've agreed to that.

H.M.Jr:

I'd leave that off. But the community part I'd like.

Jones:

I'm compromising with you.

H.M.Jr:

All right on that?

Jones:

O.K.

H.M.Jr:

Now, Gaston, if you'd assume this responsibility of
getting everything together, and then, say, maybe by
four o'clock have my letter of transmittal and everything ready, and then have a photostat of everything
I send to the President, so I can send it to each of

you.

Now, just this one thing. I had a press conference
this morning and told the boys we were going to meet.
They said, "What you going to do?" I said, "I don't
know what we're going to do until we meet." See if
you (Gaston) agree. "Going to send something over to
the President?" I said, "If we agree, we will." So
I don't see any harm in saying - not today, but some
time tomorrow or Saturday, to give the President a
chance - "Yes, we did agree, and sent something over

to him." But give him a couple days' head start.

Does anybody see any objection to that?
Jones:

H.M.Jr:

I don't see a bit.
So, Herbert, I'd simply say, if the boys ask, in

order to give the President a chance - say that we're
making progress.

Gaston:

Yes, yes.

Jones:

And everything is referred to the Secretary.

279
-24H.M.Jr:

And then, if I sent it over tonight, why, maybe by
Monday we'll admit we sent it over and that gives
him a couple days' head start on it.

Gaston:

The President a week ago last Tuesday said that he
expected to have a report from you in two weeks, and
why couldn't we tell the boys, "Well, the President
said in two weeks. That was a week ago Tuesday. We
hope to get something in time."

H.M.Jr:

As a matter of fact, we'll have this on his desk
tomorrow morning for his press conference. If he
wants to handle it, he can handle it at his press
conference. I don't want to - just simply say that
we're making progress, so as not to put him'on the
spot.

Well, I'm tickled to death. May I thank everybody.

TREASURY DEPARTMENT

280

INTER OFFICE COMMUNICATION
DATE

Secretary Morgenthau

TO

Wayne C. Taylor

FROM

Attached as A is the revised draft of the proposed message on bank

A.M.

holding companies which Mr. Jesse Jones will submit this afternoon.

This

represents a combination of the FRB and RFC proposals; the first paragraph

being Ransom's and the second and third paragraphs, with slight modifications,

Jesse's. This is satisfactory to FRB, RFC and the Comptroller of the Currency provided the President is made aware of the fact that the last paragraph

inevitably will raise the branch banking question.
Attached as B is a revision of A as we (Messrs. Oliphant, Upham and I)

think it should be. The only change is in the last paragraph which is somewhat strengthened in our draft.

weT.

Enclosures - 2

3/16/84

281

The establishment and maintenance of a sound banking system

which would serve the public interest has been a constant objective

of this Administration. In furtherance of this objective Congress
should again give consideration to the bank holding company problem

and determine in what manner existing laws dealing with these companies should be strengthened and what limitations should be imposed
upon their development.

I recommend that the Congress enact at this session legislation

that will effectively control the operation of bank holding companies
and prevent holding companies from acquiring control of any more banks,

directly or indirectly, or banks controlled by holding companies from

establishing any more branches, and that will make it illegal for a
holding company, or any corporation or enterprise in which it is

n sell securities to

financially interested, to borrow from a bank in which it holds stock.
Believing this to be a sound principle of government, I suggest
that any bank legislation make provision for the gradual separation of
control
banks from holding company ownership, allowing a reasonable time for
1

this accomplishment, time enough for it to be done in an orderly manner,
and without causing inconvenience to communities served by holding company banks, or unnecessary loss to stockholders.

.

282

Secretary Morgenthau
Mayne C. Taylor

Attached as A is the revised draft of the proposed message on bank
holding companies which Mr. Jesue Jones will submit this afternoon. This
represents a combination of the FRB and RFC proposals; the first paragraph

being Ranson's and the second and third paragraphs, with slight modifications,

Jesse's. This is satisfactory to FRB, RFC and the Comptroller of the Currency provided the President is made aware of the fact that the last paragraph

inevitably will raise the branch banking question.
Attached as B is a revision of A as we (Mesers. Oliphant, Uphan and I)

think it should be. The only change is in the last paragraph which is somewhat strengthened in our draft.

Enclosures - 2

3-16-38

#. 283
Secretary Morgenthan
Wayne C. Taylor

Attached as A is the revised draft of the proposed message on bank

holding companies which Mr. Jesse Jones will submit this afternoon. This
represents a combination of the FRB and RFC proposals; the first paragraph

being Ranson's and the second and third paragraphs, with slight modifications,

Jesse's. This is satisfactory to FRB, RFC and the Comptroller of the Currency provided the President is made aware of the fact that the last paragraph

inevitably will raise the branch banking question.
Attached as B is a revision of A as we (Mesers. Oliphant, Uphan and I)

think it should be. The only change is in the last paragraph which is somewhat strengthened in our draft.

Enclosures - 2

KNNr/net
5-16-38

284

Secretary Morgenthan
Wayne C. Taylor

Attached as A is the revised draft of the proposed message on bank
holding companies which Mr. Jesse Jones will submit this afternoon. This
represents a combination of the FRB and RFC proposals; the first paragraph

being Ransom's and the second and third paragraphs, with slight modifications,

Jesse's. This is satisfactory to FRB, RFC and the Comptroller of the Currency provided the President is made aware of the fact that the last paragraph

inevitably will raise the branch banking question.
Attached as B is a revision of A as we (Mesers. Oliphant, Uphan and I)

think it should be. The only change is in the last paragraph which is somewhat strengthened in our draft.

Enclosures - 2

/Hr/set
5-16-88

285

A

The establishment and maintenance of a sound banking system

which would serve the public interest has been a constant objective

of this Administration. In furtherance of this objective Congress
should again give consideration to the bank holding company problem

and determine in what sanner existing laws deeling with these companies should be strengthened and what limitations should be imposed
upon their development.

I recommend that the Congress enact at this session legislation

that will effectively control the operation of bank holding companies
and prevent holding companies from acquiring control of any more banks,

directly or indirectly, or banks controlled by holding companies from
establishing any more branches, and that will make it illegal for &
holding company, or any corporation or enterprise in which it is

financially interested, to borrow from a bank in which it holds stock.
Believing this to be a sound principle of government, I suggest
that any bank legislation make provision for the gradual separation of
banks from holding company onnership, allowing a reasonable time for

this accomplishment, time enough for it to be done is an orderly manner,
and without causing inconvenience to communities served by holding company beaks, or unnecessary less to stockholders.

286

The establishment and maintenance of a sound banking system

which would serve the public interest has been a constant objective

of this Administration. In furtherance of this objective Congress
should again give consideration to the bank holding company problem
and determine in what manner existing laws dealing with these compenies should be strengthened and what limitations should be imposed
upon their development.

I recommend that the Congress enact at this session legislation

that will effectively control the operation of bank holding companies
and prevent holding companies from acquiring control of any more banks,

directly or indirectly, or banks controlled by holding companies from

establishing any more branches, and that will make it illegal for a
holding company, or any corporation or enterprise in which it is

financially interested, to borrow from a bank in which it holds stock.
Believing it to be a sound principle of government, I recommend

that this bank legislation make provision for the gradual separation of
banks from holding company ownership, allowing a reasonable time for

this accomplishment, time enough for it to be done in an orderly manner.

287
A

The establishment and maintenance of & sound banking system

which would serve the public interest has been a constant objective

of this Administration. In furtherance of this objective Congress
should again give consideration to the bank helding company problem

and determine in what sanner existing laws deeling with these companice should be strengthened and what limitations should be imposed
upon their development.

I recommend that the Congress enact at this session legislation

that will effectively control the operation of bank holding companies
and prevent holding companies from acquiring control of any more banks,

directly or indirectly, or banks controlled by holding companies from
establishing any more branches, and that will make it illegal for &
holding company, or any corporation OF enterprise in which it is

financially interested, to borrow from a bank in which it holds stock.
Believing this to be a sound principle of government, I suggest
that any bank legislation make provision for the gradual separation of
banks from holding company ownership, allowing & reasonable time for

this accomplishment, time enough for it to be done in an orderly manner,
and without causing inconvenience to communities served by holding conpany banks, or unnecessary less to stockholders.

283

3

The establishment and maintenance of a sound banking system

which sould serve the public interest has been a constant objective

of this Administration. In furtherance of this objective Congress
should again give consideration to the bank holding company problem

and determine is shat sanner existing laws dealing with these companies should be strengthened and what limitations should be imposed
upon their development.

I recommend that the Congress enact at this session legislation

that will effectively centrol the operation of bank holding companies
and prevent holding companies from acquiring control of any more banks,

directly or indirectly, or banks controlled by holding companies from

establishing any more branches, and that will make it illegal for a
holding company, or any corporation or enterprise in which it is

financially interested, to borrow from a bank in which it holds stock.
Believing it to be a sound principle of government, I recommend

that this bank legislation make provision for the gradual separation of
banks from holding company ownership, allowing a reasonable time for

this accomplishment, time enough for it to be done in an orderly manner.

289

THE ESTABLISHMENT AND MAINTENANCE OF A SOUND BANKING SYSTEM

MIICH WOULD SERVE THE PUBLIC INTEREST HAS BEEN A CONSTANT OBJECTIVE

OF THIS ADMINISTRATION. IN FURTHERANCE OF THIS OBJECTIVE CONGRESS
SHOULD AGAIN GIVE CONSIDERATION TO THE BANK HOLDING COMPANY PROBLEM

AND DETERMINE IN WHAT MANNER EXISTING LAWS-DEALING WITH THESE COMPANIES LEGISLATION ENACTED DURING THIS ADMINISTRATION SHOULD BE
STRENGTHENED (AND WHAT LIMITATIONS SHOULD BE IMPOSED UPON THEIR DEVELOPMENT OF SUCH HOLDING COMPANERS.)

I RECOMMEND THAT THE CONGRESS ENACT AT THIS SESSION LEGISLATION THAT WILL EFFECTIVELY CONTROL THE OPERATION OF BANK HOLDING
COMPANIES, AND PREVENT HOLDING COMPANIES FROM ACQUIRING CONTROL,

DIRECTLY OR INDIRECTLY, OF ANY MORE BANKS, PREVENT, DIRECTLY OR
INDIRECTLY, OR BANKS CONTROLLED BY HOLDING COMPANIES FROM ESTAB-

LISHING ANY MORE BRANCHES, AND THAT WILL MAKE IT ILLEGAL FOR A
HOLDING COMPANY, OR ANY CORPORATION OR ENTERPRISE IN-WHICH-IT IS
FIPANCIALLY-INTERESTED CONTROLLED BY IT TO BORROW FROM A CONTROLLED

BANK IN-WHICH-IT-HOLDS STOCK.
SUCH LEGISLATION SHOULD MAKE PROVISION FOR THE GRADUAL SEPARATION OF BANKS FROM HOLDING COMPANY OWNERSHIP, ALLOWING A REASONABLE

TIME FOR THIS ACCOMPLISHMENT, TIME ENOUGH FOR IT TO BE DONE IN AN
ORDERLY MANNER, AND WITHOUT CAUSING INCONVENIENCE TO COMMUNITIES
SERVED BY HOLDING COMPANY BANKS, OR UNNECESSARY LOSS TO STOCKHOLDERS.

290

THE ESTABLISHMENT AND MAINTENANCE OF A SOUND BANKING SYSTEM

WHICH WOULD SERVE THE PUBLIC INTEREST HAS BEEN A CONSTANT OBJEC-

TIVE OF THIS ADMINISTRATION. IN FURTHERANCE OF THIS OBJECTIVE
CONGRESS SHOULD AGAIN GIVE CONSIDERATION TO THE BANK HOLDING
COMPANY PROBLEM AND DETERMINE IN WHAT MANNER EXISTING LEGISLATION ENACTED DURING THIS ADMINISTRATION SHOULD BE STRENGTHENED
TT
AND WHAT LIMITATIONS SHOULD BE IMPOSED UPON DEVELOPMENT OF SUCH
HOLDING COMPANIES.

I RECOMMEND THAT THE CONGRESS ENACT AT THIS SESSION LEGISLATION THAT WILL EFFECTIVELY CONTROL THE OPERATION OF BANK HOLDING COMPANIES, PREVENT HOLDING COMPANIES FROM ACQUIRING CONTROL,

DIRECTLY OR INDIRECTLY, OF ANY MORE BANKS, PREVENT BANKS CONTROLLED
BY HOLDING COMPANIES FROM ESTABLISHING ANY MORE BRANCHES, AND THAT

WILL MAKE IT ILLEGAL FOR A HOLDING COMPANY, OR ANY CORPORATION OR
ENTERPRISE CONTROLLED BY IT TO BORROW FROM A CONTROLLED BANK.

SUCH LEGISLATION SHOULD MAKE PROVISION FOR THE GRADUAL SEPARATION OF BANKS FROM HOLDING COMPANY OWNERSHIP, ALLOWING A REASON-

ABLE TIME FOR THIS ACCOMPLISHMENT, TIME ENOUGH FOR IT TO BE DONE
IN AN ORDERLY MANNER, AND WITHOUT CAUSING INCONVENIENCE TO COMMUNITIES SERVED BY HOLDING COMPANY BANKS, OR UNNECESSARY LOSS TO
STOCKHOLDERS.

291

MEMORANDUM
March 17, 1938
To:

The Secretary of the Treasury

From: Ronald Ransom

Subject: Bank Holding Companies

CONFIDENTIAL
Mr. Taylor suggested in the meeting on yesterday that it
might be helpful to give you copies of some material prepared
for me in connection with the discussion of the above subject.
I attach the following:
1. Suggested improvement of bank holding

company statutes (L-552). Mr. Jones, at the
meeting in his office on March 10th, asked the

agencies to answer three questions. This memorandum was prepared to answer the questions, which were

on (1) objectives to be sought; (2) administration;
(3) definition of a bank holding company.

2. Outline of bank holding company bill (L-549).

This contains ten proposals which it would seem desir-

able to incorporate in any legislation on this subject,

and was prepared prior to the introduction of S.3575.
This present draft contains a few revisions and is
dated March 9, 1938.

3. The Glass-McAdoo Bill S. 3575 (L-550). This
analyzes the more important provisions of the bill,

particularly as they relate to duplication of super-

vision of member banks, conflicting provisions for
supervision of holding companies and overlapping requirements applicable to affiliates.

4. Provisions of law on supervision of bank
holding companies. This refers to existing statutes.

It was prepared in answer to a question asked by Mr.
Upham on the question of present responsibilities of
the Reserve Board and the Comptroller's Office over
holding companies. Mr. Wingfield reached an agreement
with Mr. Kelly on this memorandum.

292

-2-

5. Tabulation showing present authority

of various supervisory agencies to examine banks.

6. Tabulation showing present supervisory
powers over holding company affiliates and affiliates of member banks. This also points out dupli-

cation of supervisory powers which would be created

by S. 3575.

7. Memorandum submitted by me at the meeting

in Mr. Jones' office on March 16th in answer to
inquiry as to suggestions for incorporation in

message to Congress.

8. Memorandum showing a few textual changes

which I will suggest at the meeting on March 17th
in the memorandum on the statements for the message

which will be submitted by Mr. Jones after the meet-

ing in his office on the 16th, and attached thereto
a "clean copy" of the statement as it would appear
with these textual changes.

9. Extract from the Federal Reserve Bulletin
of February, 1938, containing article on Group
Banking in the United States. This careful study
of the subject merits consideration in connection
with the entire problem.
10. Copy of Regulation P, Board of Governors
of the Federal Reserve System, Holding CompanyVoting Permits.

We have prepared a map of the United States showing location of holding companies and subsidiary banks and branches of
such banks as of December 31, 1936. We will be glad to submit

this map to you if you should care to see it or supply a
photostatic copy if you wish it.

Treas

THE SECRETARY OF THE TREASURY
WASHINGTON

March 17, 1938.

The President,
The White House.

Dear Mr. President:

I have the pleasure to report to you that after a
number of meetings of your Committee on Banking agreement
has been reached on recommendations 8.5 to the bank holding
company situation.

You will find enclosed herewith a letter to me from
Chairman Jones of the Reconstruction Finance Corporation,
who has acted as Chairman of a sub-committee which has been

meeting on the situation daily for the last week, and also
the text of a proposed message to the Congress.

I am pleased to be able to tell you that the proposed

message has the unanimous approval of the members of the
committee which has considered the problem.

We await your further pleasure.
Sincerely,

Minus

Secrotary of the Treasury.

Enclosures.

(Suggested form of Message)

The establishment and maintenance of a sound

banking system which would serve the public interest
has been a constant objective of this Administration.

In furtherance of this objective Congress
should again give consideration to the bank holding
company problem, and determine in what manner existing

laws, including legislation dealing with these
companies enacted during this Administration, should
be strengthened.

I recommend that the Congress enact at this

session legislation that will effectively control the
operation of bank holding companies and prevent

holding companies from acquiring control of any more

banks, directly or indirectly, or banks controlled by
holding companies from establishing any more branches,

and that will make it illegal for a holding company,
or any corporation or enterprise in which it is
financially interested, to borrow from or sell securities to a bank in which it holds stock.
Believing it to be a sound principle of government, I recommend that this bank legislation make

-2provision for the gradual separation of banks from
holding company control or ownership, allowing a
reasonable time for this accomplishment, time enough
for it to be done in an orderly manner and without
causing inconvenience to communities served by holding
company banks.

RECONSTRUCTION FINANCE CORPORATION
WASHINGTON
JESSE H JONES

OF BOARD

March 17, 1938

Dear Mr. Secretary:

At the last meeting of the interdepartmental
committee held in your office March 14th to consider
recommendations to the President regarding bank legislation, and particularly to suggest a brief statement dealing
with bank holding companies to be included in his message to
Congress, you asked that the committee have further meetings

and endeavor to arrive at, first, a suggested statement for
the President's message, second, a definition of what constitutes & bank holding company and, third, what governmental
agency should be charged with the enforcement of any Bank Act
affecting holding companies.
We have had two meetings and a free discussion of the
problems to be considered.

I attach the suggested statement for the President to
include in his message to Congress. This represents the views

of Governor Ransom of the Federal Reserve Board, Acting
Comptroller of the Currency Marshall Diggs, Leo Crozley, Chairman of the Federal Deposit Insurance Corporation, and the
Reconstruction Finance Corporation.

It is the unanimous opinion that the operations of
bank holding companies should not be allowed to expend. This
being true is an admission that the principle of bank holding
companies is not in the best interests of the country and that
something should be done about them. It is with this thought
that the last paragraph of the statement is included.
Should the President determine to use it and the Congress act upon his recommendation, the question of branch

banking will naturally enter into the discussions.
The committee feels that other factors than a specific
percentage of share ownership will enter into a proper definition
of control. At all events it requires more time for stucy than
we have had and should properly be developed in the Congressional
Committee hearings.

Page two

Honorable Henry Morgenthan

As to the supervising authority, Mr. Crowley, Chair

man of the Federal Deposit Insurance Corporation, has stated
that the present Glass-McAdooSteagall Bill represents

approximately his views, but thinks that the President or

Congress should decide.

Governor Ranson and the Comptroller see no reason

for transferring this authority which now rests with the Federal
Reserve Board and the Comptroller, although they feel that if a
change is made it should be the responsibility of one agency.
The directors and executive force of the Reconstruction
Finance Corporation are of the opinion that this control is so
involved with the question of bank supervision that the two should
be considered together and ultimately rest with the Federal Deposit
Insurance Corporation.

Sincerely yours,

Jone Jones
Chairman

Honorable Henry Morgenthau, Jr.

Secretary of the Treasury

Washington, D. C.

298

March 17, 1938

MEMORANDUM FOR COL. MeINTYRE:

I am sending you herewith a memorandus to the

President from Bell and myself. We are ready to
discuss its contents at the President's pleasure.
It is most urgent that Magill and I see the
President about the tax bill. I would appreciate
your arranging an appointment at the President's
earliest convenience.

the

THE WHITE HOUSE
WASHINGTON

March 8, 1938.
MEMORANDUM FOR

THE SECRETARY OF THE TREASURY

will you speak to me about
this?

F. D. R.

OFFICE OF

300

TREASURY DEPARTMENT
WASHINGTON

MEMORANDU FOR THE PRESIDENT:

At a conference had with you by the Acting Director of
the Bureau of the Budget on Monday, March 7th, last, with respect

to your policy on flood control, you suggested that serious thought
be given to the proposition of having Congress enact a billion-

"

dollar flood control program; the work to be done by the Army Engi-

neers: the funds to be raised by the Treasury through the sale of
Government bonds in the regular manner; such funds to be loaned to

those States desiring the prosecution of flood control projects,

repayable over a period of fifty years, without interest. such repayments to be used in retiring the bonds sold by the Government.
By your memorandum of March 8, 1938, you referred to the
Secretary of the Treasury a memorandum of the same date addressed to

you jointly by the Secretary of the Interior and Honorable Frederic
A. Delano, upon the subject of a public works revolving fund.

With respect to the subject first above mentioned the
following facts and observations are submitted: Disregarding the

flood control of the main stem of the Mississippi River, which is
really in R class by itself, there are now on the books flood control
projects, authorized by the Omnibus Flood Control Act, as amended,

NATIONAL RESOURCES COMMITTEE

301

NORTH INTERIOR BUILDING
WASHINGTON

March 8, 1938.

CONFIDENTIAL

MEMORANDUM for The President:

Mr. Abel wolman, who was with Doctor Parran of the Public Health

Service at a recent conference with you in regard to pollution, has reported the very interesting suggestion you have made in regard to a

Public works revolving fund which might be used as a loan fund advanced

to the States and other local governmental units under contracts for payment to the Federal Government over a term of fifty years. This, it

appears to me, is an exceedingly interesting suggestion and in no way
inconsistent with views which the Resources Committee has expressed in
dealing with flood-control, reclamation and other important Federal projects
including, of course, water power development, pollution abatement and road
construction. As I write, there are no members of the Advisory Committee

available to discuss this project, but in order promptly to report on the

message relayed to me by Mr. Wolman, I assure you that I see nothing in
this plan which would violate the principles which we have worked upon and
advocated. I will take the matter up with my colleagues immediately with
a view to preparing a confidential memorandum for you on this subject, if
you desire it.
I am also informed that Mr. Wolman spoke to you of the memorandum
his Committee had prepared in regard to the New England Compacts and the
proposed McCormack amendments to the Flood-control Act of 1936. AS Mr.
Wolman told you, a report covering some six closely knitted pages has been

submitted on this subject, but it has not been studied by the Advisory
Committee nor transmitted to the general Committee. While we regard the

opinions of the Water Committee on the question of the New England Compacts
and the McCormack Amendment as entirely sound, I would like to have them

pretty carefully considered by the Advisory Committee, and perhaps the full
Committee, before transmitting them to you. of course, if you desire the
Wolman memorandum, even though not cleared by our Committee, I will send

it over at once. Undoubtedly the suggestions that you have made in regard
to loans to State and local governments in carrying out public works
projects could be applied perfectly well to the New England problem.
Respectfully submitted,

MAR 8 1938
APPROVED:

Chairman.

Frederic A. Delano,
Chairman, Advisory Committee.

-2-

302

estimated to cost the Federal Government, for construction, a total
of $344,000,000, and to cost local interests, for lands, easements,
rights-of-way, and damages. a total of $107,000,000, or a grand

total of $451,000,000. In addition, Congress has authorised and
directed the making of examinations and surveys of some 335 additional

streams and localities with a view to the adoption of projects for the
control of floods. How many of such projects will actually be adopted
and what their total cost will be cannot. of course, "be even approximated at this time. Other such examinations and surveys will undoubted-

ly be provided for in the future. We think it safe to predict, there
fore, that the ultimate cost of a nation-wide plan for flood control
will certainly amount to a billion dollars, and probably more. While
we have not had time to go into the matter thoroughly from every angle,

your suggested plan for financing national flood control would seem

to 18 to have a great deal of merit and one worthy of detailed collaborative study by the Treasury Department, the Bureau of the Budget,
the National Resources Committee, and interested Departments, par-

Mcularly, War and Agriculture. The following phases of the matter

are of particular interest:
(1) We are now connitted to an annual expenditure of about

$50,000,000, with the great probability that this sum must be materially
increased if the demands of local interests are acceded to and if the
existing policy of local cooperation is discarded. Hence, the payment
of annual interest on one billion dollars of Government bonds would

-3-

3Q3

probably be cheaper than our annual outlay for flood control. Assuming
that the Treasury would have to pay an average interest rate of 3 per cent
over a period of fifty years on a $1,000,000,000 bond issue, we would

pay out in interest over that period, if the bonds are retired at the
rate of $20,000,000 a year, the sum of $765,000,000. It is seen, there

fore, that the total cost of flood control would be $1,765,000,000.
of which the States would pay $1,000,000,000, or about 57 per cent, and
the Federal Government $765,000,000, or about 43 per cent. On the present

basis of $451,000,000 of projects now authorized, of which the Federal
Government pays $344,000,000 and the States $107,000,000, the ratio is
Federal Government about 76 per cent, and the States about 24 per cent.

This is based upon a continuation of local cooperation; otherwise the
Government cost would, of course, be 100 per cent.

(2) The country at the present time is apparently flood control
conscious and with every recurring flood demands upon the Government for

relief will become more insistent and far-reaching. The adoption of
a scheme of financing. such as you suggest, would at once indicate whether

the pressure comes from those who will eventually pay the bills or from

politicians. It would also, without doubt, we believe, result in the
prosecution only of projects of real merit, in which the cost of construction bears a proper relation to the benefits to be derived. Porkbarrel tactics would tius be eliminated.
It is proper to point out that there would necessarily be some
delay in getting under way a program such as the one under consideration
and that in the interim the Government would have to continue the program

-4-

304

now in effect. Assuming that Congress would enact the required legis-

lation early in the calendar year 1939, (serious doubt being entertained
that action would be taken during the present session, with the 1938

elections coming on), it would then be necessary for the legislatures
of the verious States to enact enabling legislation and for compacts to
be entered into between States with respect to projects interstate in
character and such compacts would probably have to be sanctioned by the
Congress.

There are two angles to this matter which are of particular
concern to us, to-wit: (a) the handling of the funds loaned to the
States, and (b) their repayment to the Treasury. As to (a), while loans
should be allocated to States, the funds should remain in the Federal
Treasury and be drawn upon to meet the costs of prosecuting the projects

for flood control, an account being kept for each State and periodic
statements furnished to it. Otherwise there might be a danger that the
funds would in some instances, be diverted. And with respect to (b).
there should be some assurance to the Federal Government that the loans
made to the States would be repaid and that such repayments would be

made in the annual installments contemplated by the plan. Just how this
may be accomplished would have to be worked out and provided for in the

legislation to be enacted by the Congress.

Adverting now to the suggestion that a revolving fund be

created for the handling of public works, we wish to register our op-

position to such a plan. Revolving funds violate the principles of
proper budgeting and are highly objectionable in many ways and for many

305

-5reasons. Such a plan would necessarily include projects for flood

control and would, of course, displace the plan for financing this class
of public works which we have discussed in the forepart of this memo-

rendum. If it be your desire to make loans to States and local governments for mublic works authorized not only by Federal law but by State

and municipal law, it is our definite recommendation that the authority
of the Reconstruction Finance Corporation be broadened so as to enable

it to make such loans in the manner set forth in the accompanying draft
of an Act prepared by Jesse Jones of that Corporation. This would be
more business like and we believe the loans would be better administered.
Moreover, we believe that Congress would be less likely to make grants

to the States out of funds of the Reconstruction Finance Corporation
than it would out of a revolving fund.

Secretary of the Treasury

MurBill
Acting Director of the
Bureau of the Budget

AN ACT

To

amend Seatien 5d of the Reconstruction Finance Corporation Act as amended.

m meated by the Senate and the House of Representatives of the United
Dates in ORIGIN assembled, That the Reconstruction Finance Corporation Act

approved January 22, 1932, as amended (U.S.C. Title 15, oh. 14) is further

amended by striking out all of Section 5d and inserting in lieu thereof the
following:

#See. 5d. For the purpose of maintaining and promoting the economic stability
of the country or encouraging the employment of labor, when credit at prevailing

rates for the character of loan applied for is not otherwise available, the Corperation is authorised and empowered to moice loans to or purchase the obliga-

tions of any business enterprise. Such loans or purchases shall, in the opinion
of the Board of Directors, be so secured as reasonably to assure repayment or

retirement; my be made or effected either directly or in cooperation with banks
or other lending institutions through the purchase of participations; shall have
ruch minrition as the Corporation may determine, notwithstanding any other pro-

vision of law limiting the maturity of obligations taken by itp shall be made
only when, in the opinion of the Board of Directors of the Corporation, the
borrower is solvent; and shall be subject to such terms, conditions and restrictions as the Corporation may determine,
The power to make loans and purchase obligations given herein shall terminate

is accordance with the provisions of Section 1 of the Act approved January 26.
1937 (Public No. 5 - 75th Congress); but no provision of law terminating any of

the functions of the Corporation shall be construed to prohibit disbursement of
funds on loans, purchase of obligations, commitments or agreements to make such

-2loans or purchases made prior to the close of business on June 30, 1939, or such
earlier date as the President may authorize.
The Reconstruction Finance Corporation is authorised and empowered to

make loans to, or contracts with States, municipalities, and political sub
divisions of States, with public agencies and instrumentalities of one or

are States, mmicipalities, and political subdivisions of States, and with
public corporations, boards and commissions, to aid in financing projects
authorised under Federal, State, or municipal law, such loans or contracts to
be made through the purchase of their securities, or otherwise, and for such
purpose the Reconstruction Finance Corporation is authorized to bid for such
securities; Provided that loans hereunder shall be made only to applicants

none of whose obligations will be in default at the time of disbursement by

this Corporation pursuant to the provisions of this Aot; Provided further, that
nothing herein contained shall be construed to prohibit the Reconstruction
Finance Corporation in carrying out the provisions of this paragraph from pur
abasing securities having a maturity of more than ten years."

308

March 17, 1938.
2:31 P.M.

0:

Go ahead.

Burgess:

Hello

H.M.Jr:

Hello

B:

Oh Hello Henry.

H.M.Jr:

Yes.

B:

Well - ah - this market behaved reasonably well.

H.M.Jr:

Good.

B:

It's been pretty orderly without - without many
blocks that are pushing; a few more sellers than
buyers

H.M.Jr:

Yes.

and the quotations have receded a little

B:
H.M.Jr:
B:

Yes.

but we haven't seen any evidence of - of

forced selling.

H.M.Jr:

I see.

B:

About half an hour ago it looked a little bit

weaker and we went out and picked up one block

H.M.Jr:

Yes.

of a couple of million.

B:

H.M.Jr:

Yes.

B:

And I've got Meddy (Madison) looking around to

see if there is anything else pressing.

B.M.Jr:

Right.

B:

And anything pressing we'll pick up.

H.M.Jr:

O.K. - that's satisfactory.

-2-

H.M.Jr:

Ah - but the quotations are 3-4 - in one or two
cases five off but its very orderly.
All right, Randolph.

B:

We'11 probably pick up - ah - oh some more before

H.M.Jr:

O.K.

B:

But it isn't as bad as it was yesterday.

H.M.Jr:

All right.

B:

Very good.

H.M.Jr:

Thank you.

B:

the day is over.

309

310

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

DATE March 17, 1958.
SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF FRANCE.

ROM

I called Mr. Cariguel at noontime today and told him
briefly of market conditions here and of our operations. He was
anxious to know who had been the principal sellers of francs in
this market recently and I told him that business had been too

small to bring out any big selling or buying, for that matter, in
francs here. I added that I did not remember having seen the name

Lazard recently. Cariguel thought that firm had of late been much
quieter.

Referring to conditions in France, he thought that everything hinged on the success or otherwise of efforts to form a
national government. It was his personal belief that France would
have one in due course as everybody agreed that that was the most

essential job to be done. The difficulty NO far had been to get
different parties to come along and agree on a program as well as
on a leader, both socialists and radicals vying for the job. Naturally, Blum was anxious to retain the premiership but it was a great
question whether he would command the confidence of the whole country.

The franc had not been under pressure today; as a matter

of fact, he had gained 340,000 in preventing it from going higher.
However, at the moment of talking, he said, it had turned a little
and it began to look as though he might have to support it somewhat
before the day was over. He did not think this movement would carry

very far. At any rate, they were not disposed to let it for the time

12 60M 1.37

311 31.

%

FEDERAL RESERVE BANK
OF NEW YORK

DATE March 17, 1938.

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

SUBJECT: TELEPHONE CONVERSATION WITH

b

L. W. Knoke

ROM

-2-

BANK OF FRANCE.

being, if they could help it.
I asked whether he was satisfied with the way we were executing his orders and he replied he was completely so.

LWK:KMC

312
PARAPHRASE OF TELEGRAM RECEIVED

M

FROM: American Embassy, Paris, France
DATE: March 17, 1938, noon.

NO.: 419
RUSH.

FROM COCHRAN.

The French control for the day gained about a few

million francs on balance, mainly due to favorable trading
in London yesterday evening where sterling was weak and to

a less extent to some sales of francs on the market in
New York. The control early this morning sold some more

francs, but at eleven o'clock by the time I left the Bank
of France, the trend had turned. With the rate moving from
159.75 to around 161.50 the control had yielded in sterling
this morning's intake. At the Bank of France officials are
not aware that the present government is considering any
new monetary or financial plans.
I visited Couve de Murville at the Ministry of Finance

at eleven this morning. This contact told me that the
Ministry of Finance had not been studying for the government

any plan for gold stocks revaluation or any other important
item in a comprehensive program for monetary and financial
affairs. The present government has no such program, according to Couve de Murville. It is not expected that any new
financial proposals will be made, but the statement to be
made before Parliament this afternoon may set forth the need
for urgent voting of 3,200,000,000 france of supplementary

313

-2credits for national defense purposes.
WILSON.

END SECTION ONE.

33110033
51

EA: LWW

RAM

PARAPHRASE OF SECTION TWO, TELEGRAM NO. 419 OF MARCH 19,
1938 FROM PARIS.

314

At the time I visited at the Ministry of Finance, the results of the meeting of the Council of Ministers this morning had not yet become known.

On my two visits this morning I gained the very definite impression that technical men in the Bank of France
and career men in the Finance Ministry say that a national
defense loan cannot be raised by the present government.

It is their belief that the recent intermittent strength
of the franc has been mainly due to rumors and hopes that
very shortly the Blum Government would be forced to resign.

The present direction of the Ministry of Finance has
made bankers, and SEX brokers, particularly bitter. They
do not trust Blum's judgment in this field, and believe that
in choosing George Boris as his chief of cabinet he has
made a most unfortunate move. George Boris was formerly

associated with the Belgian promoter Loewenstein. Most

bankers look on him as a highly inteeligent journalist little
removed from blackmailing. Mendee-France, the present

Under secretary in the Finance Ministry, has written a book
on the Poincare franc, and is only ******** a 31-year old
student.
END MESSAGE.
WILSON.

EA:LWW

315

PLAI N

MBo

London

Dated March 17, 1938

Rec'd 2:23 p.m.

Secretary of State,
Washington.

225, March 17, 7 p.m.
FOR TREASURY FROM BUTTERVORTH.

The following EXCERPTS from today's FINANCIAL NEWS

reflect the attitude of the City described in my No. 222
of March 16, 8 p.m.
II

In EVERY market there was something very much like

panic. There was very little real discrimination between
market and market. Those groups which might reasonably

be expected to benefit from a war scare suffered with
three which would obviously lose. The decline was uniVEIDEL. The market SEEMED to be suddenly terrified by the

international situation -- which is certainly terrible
Enough -- and investors dashed for liquidity. The second
stage -- the speculative buying of commodities and armament shares -- has not yet taken place. For the present
the market SEEMS satisfied to limit its commitments to
nothing, and to hold cash. For this extraordinary behavior
the international situation is directly responsible. Those
who had hoped that the removal of Mr. Eden from the ForEign
Office

2- No. 225, March 17, from London.

316

Office would lead to a flull' in foreign affairs have been
sadly disappointed. The tide to war is flowing more
strongly than EVER. Austria is now a part of the German
Reich and the German and Italian Governments are nearing

victory in Spain, although EVEN C. push to the SEC, cutting
off Catclonia from Spain would not necessorily End the war.

This tide has been flowing for the last five years and now
the market is beginning to take notice of it and adjust
industrial and fixed-interest yields accordingly. Yesterday's logged however are too large to be accounted for in
such C. rational way. In them there was a deal of pure
paric, and for that reason WE do not EXPECT that these

losses will be maintained. There is indeed another pos-

affility which appears to be distressing the investor and
this 2. the donger of slump. For the first time Mr.
Chumberlain has publicly admitted that he was dissatisfied
about The program of industry; he admitted that SOME industries were doing badly, an admission which three months
ago he could never have been compelled to nake. Moreover
Mr. Chemberlain prophesied that the depression would get

worse.o HE attributed it to the international position an extreordinary Explanation, for if it were true, then
the industrial recovery would never have taken place at
all

317

3- No. 225, March 17, from London.

all."
Security markets improved somewhat today due mainly

to bear covering on the view that yesterday's declines out
ran invediate advisable (repeat advisable) adverse developments. HOWEVER the atnosphere is not good; I have never

SEEN British opinion show SC little cohesion in the face
of decisive issues.
The franc touched 161-3/8 but for most of the day the
range was between 159 1/2 and 160 and COVERED operations

continued to make it fairly stronger bid. This r Esulted
in the dollars being somewhat offered. HOWEVER the MOVEment of nervous money to NEW York has by no means aboted.

Dealers report the "feeling" that the Belgian authorities
are now giving gold with reluctance.
KENNELY

SMS:KIP

03413079

Thursday

318

March 17, 1938
2:49 p.m.

HMJr:
H.M.

Cochran:
HMJr:
C:

HMJr:
C:

HMJr:
C:

Hello, Cochran. I can't make out much - just
what Mr. Blum did do today.

Well,
it's a little difficult. Just now they're
still having a debate in the Chamber.
I see.

Blum appeared and read a long declaration; it was
very general in terms, gave little indication of
financial and monetary policies.
Yes.

He asked that discussion of foreign policy be
deferred until next Tuesday and then financial
and monetary matters discussed after that date.
I see.

When he finished the long statement - prepared
statement - then he gave another hour talk,
principally upon the dangers of war and appealing
for a National Union Government.

HMJr:

Oh, really?

C:

He said the Communists ought to be included.

HMJr:

I see.

C:

And the impression was that he wanted himself to
head that Government.

HMJr:
C:

I see.

National Union. When he finished the speech
was received very coldly by everyone except his
immediate party, or the Socialists, and the CommunOf

ists.

HMJr:

Yes.

C:

The Radical Socialists, who have been working with

them in this Popular Front here up to the present ...

HMJr:
C:

Yes.

.did no applause whatever - only three members out

of the whole party. And then after that there was

a recess and there was some appealing by Blum to

-2-

319

Flandin. You see, Flandin is one of the leaders
of this minority for the Rights.
HMJr:
C:

HMJr:
C:

Yes.

..to get him to come in to a National Union under

Blum.

Yes.

Flandin refused. He appealed to Reynaud and Reynaud
seemed to be favorable but his own party is opposed

to his going in. Then after the meeting resumed between six and seven o'clock this evening - Reynaud

HMJr:
C:

HMJr:
C:

spoke and was booed by his own party.
I see.

And so it looks more and more difficult for Blum to
head any sort of a national government. At the same
time he's trying to hold on.
I see.

And I talked with one of our men at seven-forty, who
was over at the Chamber and he talked from the press
box. He said there had been several speakers after

Flandin but nothing definite - they were talking on
intervention in Spain and so on. And they expect to
get a vote some time this evening.

HMJr:

I see.

C:

And it would be a vote of confidence.

HMJr:

Yes.

C:

But it would not be on policy but simply on the
technical point as to whether they should postpone
debate until next Tuesday.

HMJr:

All right.

C:

That's the way it stands now.

HMJr:

All right.

C:

And on the Bourse - on the Exchange Market - our
friend had gained a hundred and forty thousand
pounds up until this speech was made public, that

is, the formal parts.

-3HMJr:
C:

HMJr:
C:

320

Yes.

Then the market turned and he lost all of that
and a little more by six o'clock.
I see.
I mean the market was disappointed because they

had hoped for this speech to show that a national
government was on the way.

HMJr:

Uh huh.

C:

And the

HMJr:

I see.

C:

The statement of the Bank of France showed that

market, that is, the French securities
were off during the Bourse because this thing didn't
come out until after trading hours.

million francs loaned by the Treasury.

HMJr:
C:

Yes.

So everything is very uncertain tonight; if they
don't get something better than they've had this
evening there might be more pressure tomorrow.

HMJr:

Uh huh.

C:

You see? And if Blum should withdraw

HMJr:

Yes.

C:

HMJr:
C:

the two men most spokenof still are Daladier and
Herriot.

All right.
And then there's some talk of even getting Marshall
Pitcairn eventually to head a government of the French.

HMJr:

I see.

C:

That I don't know.

HMJr:
C:

I see. Well, thank you.
All right, sir. You don't want me to call you
just on the fall of the government or on the vote,
you'll get that over the ticker or the news - ?

-4HMJr:
C:

Yes.

HMJr:

Yes.

C:

But if there's anything else - so far there's
been nothing on financial policy except just the
statement that they're going to ask for an extra
three billion two hundred million for national
defense.

HMJr:
C:

HMJr:
C:

Yes.

That's the only thing so far.
All right. Goodnight.
Goodnight, sir.

321

322

REB

GRAY

Paris

Dated March 17, 1938

Rec'd 4:07 p. m.

Secretary of State,
Washington.

425, March 17, 7 p. m. (SECTION ONE)

ThE session at the Chamber of Deputies this

afternoon was one of the most curious and interesting
I have EVER attended. The governmental declaration
read by Blum was as EXDECTED of a general character

and without particular interest EXCEPT for the statement that military expenditures will be increased.
At the close of this declaration Blum asked that
the debate on interpellations on foreign policy be
postponed until next Tuesday and that the other
interpellations be postponed until 1 later date
stating that he would make this a question of confidence.

Blum then went into a detailed Explanation of
the Efforts hE had made both last January and a
few days ago to form a National Union Government.
HE spoke in the most solemn manner of the dangers
threatening

323

REB

2-#425, From Paris, Mar.17,7p.m.

threatening France, of the fact that French disunion increased the chances of war and he made a

moving appeal for the formation of a National Union
Government which would be, he said, an essential

factor in preventing a war.
WILSON
HPD

324
PARAPHRASE OF SECTION TWO OF TELEGRAM NO. 425 of

March 17, 1938, from Paris

From Blum I got the impression that he was indicating
he was ready to resign in order to make way for a Government of National Union which might be headed by some one

else, provided he were met half way by the Center and

Right. However, there was on the part of not only the
Center and Right but even the major part of the Radical
Socialists, complete silence and even open hostility.
Blum insisted in making his appeal that if the country
was to have real unity, assurance must be given to the working classes that they would not be exploited by a Union
Government. He stated that without the Communists the
French unity would not be achieved. The opposition evident-

ly merely interpreted this as a partisan declaration,
and there was most marked hostility to Blum personally.
At one time Blum made reference to the necessity in case

his appeal for union was not heeded of appealing to the
people to get the necessary strength for a majority government. I have spoken with some people who interpret this
as a threat to dissolve Parliament and call for new

elections, but in my own opinion, I do not believe this
is 80.

In the opinion of one observer, despite the words

about the gravity of the situation and the threat of war,
not more than a handful of Deputies were interested in
anything else than jockeying for advantage politically.
As

325

-2As I was leaving an ambassador said to me that they would

go on playing politics until the Maginot Line was attacked
by the Germans.

After Blum's demand for the postponement of the

interpellations there will be a brief debate and then a
vote. It is probable that the Government cannot last more
than a few days, assuming that it obtains a vote of confidence on the technical question.
END MESSAGE.
WILSON.

EA: LWW

326
PARAPHRASE OF TELEGRAM
RECEIVED

FROM: American Embassy, Paris

DATE: March 17, 6 p.m.
FROM COCHRAN

No. 421

Ministerial declaration made before Chamber this

afternoon gave little indication of financial and monetary policies, the discussion whereof Blum suggested
for next week.

I talked with the Bank of France at 5:30. During a/
day of thin and nervous trading, the Control had gained
140,000 pounds, but market turned when above declaration
became known mainly because the statement offered less

hope of an early collapse of the Government than had
been anticipated by the market. The above gain had been
wiped out and some more sterling was being lost at the

hour I talked with the Bank of France. Rentes and
French shares were better during Bourse on hope for
national government and on slight easing of apprehen-

sions over international situation. Statement of Bank
of France as of March 10th showed one billion france
drawn by Treasury.
WILSON

EA:DJW

327
Thursday

March 17, 1938
3:53 p.m.
W. R.

Burgess:

Hello, Henry.

HMJr:

Yes.

B:

Well, I think this market's behaved pretty well
right through the close, and

HMJr:

Good.

B:

in fact it was a little stronger at the close
than it had been when I talked with you last.

HMJr:

Fine.

HMJr:

A thirty-second or two. On the day it's down from
one to about three thirty-seconds.
Is that so?

B:

The active market is about the same as the close.

HMJr:

Yes.

B:

B:

We bought all together just three million. That
was all we could find that was really pressing on
the market.

HMJr:
B:

HMJr:
B:

Good. Well, I'm perfectly satisfied.
Well, I think it gave a good account of itself.
I'm perfectly satisfied.
Now, do you want half of these, or all of these or
none of them?

HMJr:

We'll take half.

B:

All right. We'll divide it up in halves then.

HMJr:

We'11 take half.

B:

All right. That's good.

HMJr:

We'll take a chip.

B:

Yes. Yes.

-2-

328

HMJr:

All right, I'm perfectly satisfied.

B:

Well, that's good, I'm glad of that.

HMJr:

Goodnight.

B:

Very good, Henry.

Goodnight.

Thursday

March 17, 1938
3:56 p.m.
HMJr:

Hello.

T.O.:

Governor Ransom.

HMJr:

Hello.

T.O.:

Go ahead.

Ronald
Ransom:

I just got the report from Burgess on the market
for the day and I just wondered if you had any.

HMJr:

I told Burgess a little while ago I was entirely
satisfied.

HMJr:

Yes. Well, that's all right, then.
That's all - I mean

R:

That's fine.

HMJr:

Yes.

R:

329

330
WORKS PROGRESS ADMINISTRATION
WALKER-JOHNSON BUILDING

1734 NEW YORK AVENUE NW.
WASHINGTON, D.C.
HARRY L. HOPKINS
ADMINISTRATOR

March 17, 1938

Mrs. Henrietta S. Klotz
Assistant to the Secretary
U. S. Treasury Department
Washington, D. C.

Dear Mrs. Klotz:
I am attaching a brief memorandum which

may be of interest to the Secretary.
Sincerely yours,

Sanum Rose
Emerson Ross, Director

Division of Research,
Statistics, & Records

331
WORKS PROGRESS ADMINISTRATION
WALKER-JOHNSON BUILDING

1734 NEW YORK AVENUE NW.
WASHINGTON, D.C.
HARRY L. HOPKINS
ADMINISTRATOR

March 17, 1938

MEMORANDUM

TO:

Mr. Morgenthau, Secretary of the Treasury

FROM:

Emerson Ross, Director

Division of Research,
Statistics and Records

WPA employment has gone up rapidly during the past two

weeks. By March 12, one half of the additional 500,000 workers
to be added had been put to work. Figures for recent weeks are
as follows:

Week Ending
March 12
March 5

February 26
February 19

Number

2,244,000
2,167,000
2,076,000
2,009,000

No important changes have occurred during the past week

in the relief situation with the exception of the WPA beginning to.
catch up with the unmet need.

The preliminary industrial production figure of the Fed-

eral Reserve Board confirms the evidence of the Bureau of Labor
Statistics employment figure in showing that production and employment conditions in February were approximately the same as in January.
The seasonally adjusted index dropped one point, from 80 to 79. The
unadjusted index remained the same as in January, at 79.

The preliminary results of an interesting study concerning
the continuity of WPA employment have just become available. These
results indicate the high rate of turnover existing among WPA employees.
The number who have remained continuously on the program is surprisingly small despite the fact that unemployment was at high levels during
the whole period of WPA operations and consequently job opportunities

were available for only a fraction of the unemployed. For the twentynine states for which figures are now available only 16 percent of the
WPA employees who were on the program at any time had been employed
continuously from March 1936 (the peak month) through November 1937.

Of the persons employed at the peak in March 1936, only 24 percent were
employed continuously through November 1937.

332

March 17, 1938

Excerpt from Herman Oliphant's weekly report of March 17,
1938, to the Secretary.
Reorganization - Genessee Valley Gas Company. We are waiting
for the SEC plan of reorganization which has been promised to us.

P

March 17, 1938

My dear Mr. President:

For your information I am
sending you herewith our report on
United States trade with China and
Japan for the month of February.

Faithfully yours,

The President,
The White House.

333

334
March 17, 1938

My dear ar. Secretary:

For your information, I am
sending you herewith our report on
United States trade with China and
Japan for the month of February.
Sincerely yours,

The Honorable

The Secretary of State.

335

March 17, 1938

Dear Mr. Secretary:

For your information, I am
sending you herewith our report on
United States trade with China and
Japan for the month of February.
Sincerely yours,

The Honorable

The Secretary of War.

At

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE

TO

FROM

March 17, 1938

Secretary Morgenthau
Mr. Haas

Subject: Current trade with Japan and China

A. United States trade with Japan during February 1938. 1
1. United States exports to Japan during the month of
February were 8 percent less than during January 1938 and
22 percent less than during February 1937.
February
January

December
November

October

September
August

1938

1937

$19,266,000
20,981,000

$24,847,000
22,364,000

1937

1936

$16,140,000
18,133,000
20,129,000
16,842,000
24,643,000

$16,433,000
24,100,000
26,668,000
21,328,000
10,764,000

2. Exports of raw cotton to Japan were 4 percent less than
in January 1938, and 50 percent less than in February 1937.
Exports exclusive of raw cotton were 21 percent less than the
average for the past six months.

United States exports of cotton to Japan
February 1938
January 1938

December 1937
November 1937

October 1937
February 1937

$ 5,565,000
5,817,000
1,908,000

797,000

1,571,000
11,079,000

3. Exports of iron and steel scrap were $1,668,000 in

February 1938 as compared with $534,000 in January 1938. They
were, however, only 30 percent of the average maintained from
May to August 1937.

17 Previous reports cover weekly figures only. This report
is for the whole month of February.

336

337

Secretary Morgenthau - 2

United States exports of iron and steel scrap to Japan
February 1938
January 1938

$1,668,000

October 1937
September 1937

1,148,000
1,402,000

534,000
479,000
633,000

December 1937
November 1937

Monthly average,
May to August 1937

5,600,000

4. Shipments of aircraft and parts, shown separately for
the first time in February 1938, amounted to $244,000.
5. The following items show large increases in our exports
to Japan during the month of February 1938, as compared with
our exports of these items during the month of January 1938.

The amounts for February 1937 are shown for comparison.
February

Scrap iron and steel
Vehicles, parts and
accessories

Fertilizer and fertilizer materials

Tobacco and manufactures

Hides and skins, raw
(except furs)

January

February

1938

1938

1937

$1,668,000

$ 534,000

$1,391,000

1,612,000

1,185,000

1,688,000

362,000
290,000

24,000

Nil

81,000
449,000

226,000

22,000

159,000

The following items show decreases in our exports to
Japan during the month of February 1938 as compared with the
month of January 1938. The amounts for February 1937 are
shown for comparison.

February
Raw cotton

Petroleum and products

Industrial machinery

Copper and manufactures

Ferro-alloys

January

February

1938

1938

1937

$5,565,000
3,004,000
2,609,000
1,367,000

$5,817,000
5,066,000
2,853,000
1,883,000

$11,121,000
3,193,000
1,417,000
1,060,000

24,000

192,000

48,000

338

Secretary Morgenthau - 3

6. Of the total $19,266,000 of exports to Japan during
February 1938, the following items account for almost all:
$ 5,565,000
3,004,000
2,827,000

Raw cotton

Petroleum and products

Iron and steel and manufactures
Industrial machinery

2,609,000

1,367,000
1,337,000

Copper and manufactures

Automobiles, parts and accessories

422,000
362,000

Paper base stocks

Fertilizer and fertilizer materials

290,000
244,000
226,000

Tobacco and manufactures

Aircraft and parts
Hides and skins, raw (except furs)

$18,253,000 95%

Total

1,013,000

All other

$19,266,000

Grand total

7. United States imports from Japan decreased 23 percent
during February 1938 as compared with our imports during

January 1938 and de creased 53 percent as compared with February
1937.

United States imports from Japan
February
January

December
November

October

September
August

1938

1937

$ 8,723,000
11,342,000

$18,384,000
17,683,000

1937

1936

$11,674,000
17,190,000
15,420,000
15,988,000
16,297,000

$16,427,000
15,340,000
15,930,000
16,012,000
16,948,000

8. The imports of raw silk from Japan showed the principal decrease; imports other than raw silk decreased about
$1,900,000, but individual items maintained about their same
relative position.

5%

339

Secretary Morgenthau - 4

February 1938
January 1938
December 1937

Raw silk

Total imports
other than raw silk

$5,225,000
5,947,000
5,909,000

$3,498,000
5,395,000
5,765,000

Total
8,723,000
11,342,000
11,674,000

9. Of the total of $8,723,000 of our imports from Japan

during the month of February, the following items account for
almost all:

Silk, unmanufactured

$5,225,000

Cotton manufactures

550,000
213,000
198,000

Edible vegetable products other than tea
Silk manufactures

Hats and hat materials
China and porcelain ware

196,000
189,000
149,000
141,000

Perilla oil

Fish and fish products

132,000
117,000
103,000
94,000
92,000

Menthol

Pyrethrum flowers
Tea

Wood and manufactures

Earthenware and stoneware
Total

$7,399,000 85%
1,324,000 15%

Grand total

$8,723,000

All other

B. United States trade with China during the month of
February 1938.

1. United States exports to China and Manchuria for the

month of February 1938 decreased 24 percent from January 1938

but increased 16 percent over February 1937. Exports to North
China and Manchuria increased 15 percent while exports to
Shanghai, South China and Hong Kong decreased 37 percent.

United States exports to

February 1938
January 1938
December 1937

North China
and Manchuria

Shanghai, South
China and Hong Kong

Total

$2,417,000
2,101,000
2,748,000

$3,690,000

$6,107,000
7,993,000
7,947,000

Whole month of February 1937

5,892,000
5,199,000

$5,262,000

340

Secretary Morgenthau - 5

2. Leading export items to China
a. To North China and Manchuria:

Iron and steel and manufactures

Cotton, unmanufactured

Vehicles, parts and accessories

Petroleum and products

Copper and manufactures

Industrial machinery

Wood and paper

February

January

1938

1938

$ 649,000

$1,074,000

232,000
117,000
103,000

68,000
104,000
15,000

$2,208,000

Total

All other

209,000

Grand total

130,000
285,000
270,000

545,000
287,000
275,000

91%
9%

$1,946,000 93%
155,000

7%

$2,101,000

$2,417,000

b. To Shanghai, South China and Hong Kong
January

February

Automobiles, aircraft, parts and
accessories
Tobacco and manufactures
Firearms and ammunition

Printed matter

Iron and steel and manufactures

Petroleum and products
Ginseng

Edible vegetable products

Cotton, unmanufactured

1938

1938

$ 988,000

$1,777,000

$30,000
240,000

225,000
424,000

188,000
185,000
145,000
142,000
111,000

Total

$2,813,000

Grand total

$3,690,000

All other

269,000
546,000
9,000

877,000

1

207,000

Nil

76%
24%

$3,457,000 59%
2,435,000 41%
$5,892,000

3. United States imports from China and Manchuria declined
about 18 percent in the month of February 1938, as compared with
January 1938. Imports from North China declined about 9 percent
and imports from Shanghai, South China and Hong Kong declined
21 percent.
1

Not shown separately in January 1938.

341

Secretary Morgenthau - 6

United States imports from
North China
and Manchuria
February 1938
January 1938
December 1937

Shanghai, South
China and Hong Kong

$ 978,000

1,069,000
1,200,000

Total

$2,685,000
3,401,000
4,395,000

$3,663,000
4,470,000
5,595,000

Whole month of February 1937

$11,804,000

4. Leading imports from China
a. From North China and Manchuria:
January

February

Textile materials and manufactures
Bristles

Perilla oil

Sausage casings

Furs and manufactures

1938

1938

$347,000
218,000
182,000
85,000
56,000

$ 289,000

$888,000
90,000

Total

All other

Grand total

$978,000

221,000
80,000
25,000
34,000

91%

$ 649,000 61%
420,000

9%

39%

$1,069,000

b. From Shanghai, South China and Hong Kong
February
1938

Tung (wood) oil

Tin, ore, bars, etc.

Bristles

Flax, hemp and ramie and manufactures

Edible vegetable products
Hats and hat materials

Cotton manufactures

Chemicals and related products

1938

$ 689,000

$ 886,000

159,000
105,000
101,000
76,000

327,000
145,000
131,000
79,000

622,000
234,000
231,000

Total

$2,217,000

Grand total

$2,685,000

All other

January

468,000

311,000
285,000
470,000

83% $2,634,000 77%
767,000 23%
17%
$3,401,000

3-17-38
CHINA'S FOREIGN EXCHANGE SITUATION

All

A. CHINA HAS VIRTUALLY NO FOREIGN EXCHANGE LEFT AND ONLY
150 MILLION OUNCES OF SILVER AVAILABLE FOR SALE AT THIS TIME.

1. According to reports available to us, China's dollar,
sterling and other foreign balances are virtually all gone.
In fact, she has over-sold her exchange position by about
20 million.
2. She now has available for immediate use only the 150 million
ounces of silver in London, plus an unknown -- but probably
negligible -- quantity of foreign currency assets she was reported
to have had a month ago.

(China doubtless has several hundred million more ounces

of silver in hoards and in circulation in areas still under
Chinese government control, but very little of it will be available for export or for metallic reserves in the near future).
B. CHINA'S FOREIGN EXCHANGE SITUATION IS BECOMING ACUTE.

1. The recent decision on the part of the Japanese to require
ell foreign exchange in North Chinese areas to be turned over
to the new Central Reserve Bank of China, which is under Japanese
control, has aggravated the situation. It will reduce the supply
of foreign exchange available to the Chinese government and will

increase the demand for foreign exchange.

2. The Chinese government in the past week has placed addi-

tional restrictions on exchange transactions in an effort to
protect the yuan rate, and to increase the supply of foreign
exchange available to the Chinese government.

It is not likely, however, that even with increased restric-

tions the Chinese government will be able to prevent the development of a large "black" market for yuan exchange.

3. Depreciation of the yuan, whether of the official rate or
of the "bootleg" rate, will not seriously handicap the Chinese

government in its efforts to prosecute the war. What China
needs is more foreign exchange, not in order to maintain
present levels of exchange rates, but in order to pay for needed
imports of war material.
Unless China obtains foreign exchange quickly she will
have to curtail her purchases of war material from foreign
countries (except from Russia, who may be extending her credit).

342

-2-

343

C. WHAT ECONOMIC ASSISTANCE CAN WE GIVE CHINA NOW?

We could purchase the silver China now has in London. The
purchase can be made in one of the following ways:
(a) We can accelerate purchases of Chinese silver from
twice a month as at present to once a week.

1.

(b) We can pay for the silver we purchase upon delivery
aboard steamers in England instead of on arrival in
New York as at present.

(c) We can make a loan against deposits of silver with a
bank in England for the account of the Federal Reserve
Bank of New York (as fiscal agent of the United States
Treasury).

(d) We can purchase yuan (up to 95 percent of the value of
silver in London) using the silver in London as
collateral. The yuan purchases can then be liquidated
according as silver in London is purchased, melted

and refined in this country.
Of the four alternatives indicated above, the last would
be of most assistance to China because it would make most foreign
exchange available to her at once. The risk involved in the last
method of purchase would be the risk of keeping silver on deposit in London until we could ship it here (probably four months).
2. Unless China obtains foreign exchange through one of the
above indicated methods she may find herself in such straits as
to cause her to dump the silver on the London market in the
knowledge that we would probably have to purchase her dumped
silver immediately (in order to support the silver market).
3. By purchasing the remainder of Chinese silver assets now
in London, depreciation of the yuan is at best postponed possibly a few months unless in the interim she can develop more
effective control over exchange transactions than she now has.
When the additional foreign exchange she may obtain from

the sale of her silver will be used up, China will have to
reduce its purchases of foreign goods, and either permit the
yuan to depreciate or develop strict and effective exchange
control and peg the yuan at a desired rate. The likelihood
that the Chinese Government will be able to develop strict

enough control over exchange transactions to avoid substantial
"black" exchange markets from existing is small.

3-17-38 ?
344

Sflawn
Comment an plan
I call Danglas
& Junes
make
same comment

Send to Pres at

Warm springs

Pus
ask
for
actim

March 17, 7938

3vd white

CONFERENCE SUGGESTIONS

tousee

Basis of Conference.

Confronted with a situation which requires immediate
correction.
Should not spend time in analyzing causes or in

making further investigations.
Every legitimate interest should cooperate in a
constructive program for better transportation
system which will endure.

Not the time or place for argument as to relative
treatment of labor and investors.
REORGANIZATION OF CAPITAL STRUCTURES

Financial Reorganization Alone Is Not the Remedy

Railroad industry not static - must continually make
improvements to render service.

Credit of railroads must be maintained to finance
improvements.

Reorganization upon minimum basis without correction

of general situation would again result in
building up debt and recurrence of trouble.

345

-2-

345-A

Financial Reorganizations Only Part of General Program.

Some carriers require reductions in capital structures
and fixed charges.

Investors recognize this as evidenced by proposals
in pending cases.

Chicago and North Western proposed reduction in fixed
charges from $16,500,000. to $5,600,000.
New Haven reduction from about $15,000,000. to less
than $8,000,000.

Many carriers do not require reductions in capital
structures, such as Chesapeake and Ohio and
numerous others.
DUPLICATE AND UNNECESSARY FACILITIES CANNOT
BE SUPPORTED

Theory of Highly Competitive Facilities Proved Unsound.

Demonstrated that public will not pay rates sufficient
to support highly competitive systems.
One of two alternatives.
Government must either subsidize to compensate excess

cost occasioned by competition - not expedient.

or, must be elimination of wasteful transportation
80 that remaining railroad facilities may be
self-supporting.

-3-

Can Be Accomplished Only By Some Sacrifice on the Part

of all Interests.
Investors through curtailment in capital structures
where necessary.

Labor to an extent which is equitable.
Communities by elimination of competitive services
where unnecessary duplication.

Government by financing financial reorganizations
and physical plant re-arrangements to a moderate
degree.

PROGRAM

Conour generally with program outlined by Commissioner Eastman.

Consolidations of independent carriers and elimination of
unnecessary duplicate facilities and service.
Coordination of all transportation agencies.
Result would be better and more economical service.

Should provide for equitable treatment of labor.

346

-4METHOD OF ACCOMPLISHMENT

Believe method of accomplishment should be through direct
a new agruce
power given and developed experimentally.
Because of its many duties and large personnel questionable

whether I.C.C. could act with required promptness.
An expeditious and summary method desirable, as for example:

Create Federal Railroad Authority

Three to five members, properly staffed.

Authority not only to plan, but to act.
Findings to be given weight accorded Court of Record.

Transfer powers of I.C.C. over consolidations and
financial reorganizations to the Board.
Repeal present law regarding consolidations.
Specific powers to:

Approve voluntary consolidations in public interest.
Compel consolidations if in public interest.
Determine equitable basis for treatment of labor.
Bring about financial reorganizations.
Clothe with proper authority to seek government
loans.

347

348
NOT PUBLISHED

March 17, 1938
-1-

WhiteHouse

INTERSTATE COMMERCE COMMISSION

Bureau of Statistics

Railway Tax Accruals, Class I Steam Railways and
Their Lessor Companies,
Year Ended Dec. 31, 1936.

U. S. Government Taxes

$94,007,783

Other then U. S. Government Taxes 1/ 227,263,926
$321,271,709

1/ Excludes $1,375 British taxes, $991,024 Canadian
taxes, $23 French taxes, $124,965 Lexican taxes,
and $2,536 not segregated.

The total railway tax accruals of Class I steam railways only, was $325,689,094 for the year 1937.

349

-2-

INTERSTATE COMMERCE COMMISSION

Bureau of Statistics

United States Government Taxes Charged to Railway Tax

Accruals by Class I Steam Railways and Their
Lessor Companies, Year Ended Dec. 31, 1936

Percent

Kind of tax

Carriers' excise tax
(approved Aug. 29, 1935)

Income taxos

Exciso taxes (Social Security
Act of 1935)

Capital stock taxes

Taxes on telephone and telograph
messages

Assessments for Fodoral Coordinator
Taxes on gasolino and oils

Electrical energy taxes
Boor and liquor taxos
Taxos on club duos
Documentary stamp taxos
Miscellanoous
Total

₫

Reverse item.

of

Amount

d

total

50.31

$47,298,891
32,821,724

34.92

8,800,585
4,651,370

9.36
4.95

240,653
97,321
67,503
3,872
5,935
3,207

.26
.10
.07
.01
.01

2/ 10,264

(1)
d

.01

21,986

.02

$94,007,783

100.00

1 Loss than 0.01 percent
Includes credit of $16,017 on account of adjustments of ac2

crunls for prior years.

COMMISSION

350

Bureau of Statistics

Railway Tax Accruals by States, Class I Steam Railways and
Their Lessor Companies, Year Ended Dec. 31, 1936
(Excluding Switching and Terminal Companies)*

State

Amount

Per mile
of road
owned 1

Alabama

Arizona
Arkansas

California
Colorado

Connecticut
Delaware

Florida
Georgia
Idaho

Illinois
Indiana
Iowa

Kansas

Kentucky

Louisiana
Maine

Maryland

Hasanchusetts
Michigan
:innesota

Hississippi
Missouri
Montana

Nebraska
Neveda

New Hampshire
New Jersey
New Mexico
New York

North Carolina
North Dakota
Ohio

Oklahoma
Oregon

Pennsylvania
Rhode Island

South Carolina
South Dakota
Tennessee
Texas
Utah

Vermont

Virginia
Washington

West Virginia

Wisconsin
Tyoming

District of Columbia
Total

$2,498,420
2,905,912
2,039,642
6,596,832
3,558,592
820,531
150,441

2,336,000
2,273,243
2,410,820
15,025,490
7,865,212

$551

1,420
481
940
840

844
501
475

418
891

1,266
1,168

4,096,535

444

6,100,961
4,185,617
3,944,855
1,264,522
2,238,151
4,094,124
5,719,052
5,817,006
3,377,539
3,151,970
4,113,167
3,068,779
1,877,492

708

1,113

746,414

748

18,550,347
1,883,266
27,115,368
3,972,484
1,852,544
12,599,941
3,822,910
2,460,287
12,890,077

9,644

675,687

1,154
1,010
681

2,012
2,130
829
721
921
450
814
503

693

3,486
1,068
361

1,490
586
819

1,281
3,633
766

2,403,953
1,897,549
2,867,827
5,905,734
2,132,301

1,038

261,634

350

5,282,102
3,922,261
7,761,843
4,705,252
1,689,329
173,879
227,263,926

463
828
395

1,269
794

2,187
703
919

4,968
1,015

1 Based on mileage owned by class I steam railways and
their lessor and proprietary corponies.
Represents all tax accruals other than those payable to
the Federal Government.

351
March 17, 1938
CONFIDENTIAL

MEMORANDUM ON DISALLOWANCES:

In a letter submitted to the Chairman of the Reorganization
Committee of the Senate in response to a request by him, the
Comptroller General stated that the disallowances under direct
settlements amounted to $117,000,000 during the period from 1922

to 1936, inclusive, while the total allowed for the same period was

$4,625,000,000. In examining this report it was noted that in the
fiscal year 1934 more than $56,000,000 was reported as being disallowed,

almost half of the total for the entire period. This aroused considerable interest as to what items were involved in this large total
during the first year of the Roosevelt Administration. The General
Accounting Office was requested to state the items, or at least the

principal items, accounting for this huge disallowance. As a result,

one of the officials of the Accounting Division of that office
personally came to one of the Committee clerks to make the explana-

tion. His explanation was that an average percentage of disallowances

had been worked out and, in order to level the disallowances, this
percentage had been applied to the total amount allowed in each year,
thus, in the year 1934 when the amount allowed was over $2,000,000,000,

the disallowances were naturally the greatest. of course, the General
Accounting Office apparently overlooked the fact that $2,000,000,000

of this total for 1934 involved the setting up of the stabilization
fund which was directed by a specific act of Congress and over which
the Comptroller General has no control.

In a further effort to secure more accurate information, the
General Accounting Office was asked if they could furnish the actual

i
-2figures of disallowances for each year. As a result, a second table
was submitted informally and in that table the disallowances for the
fiscal year 1934 are set down as $13,731,000 less than one-fourth of
the amount previously reported for the same year.
When information such as this is submitted to a Congressional
Committee, is it any wonder that the Reorganization Committee desires
to improve the present system?

352

a 353
March 17. 1000.

To: The Secretary
From: Mr. Shoup

This is the full report on the tax section, to accompany

the - statement I handed in day before yesterday.

tas

2. 354

REPORT ON FUNCTIONS AND STRUCTURE OF TAX SECTION OF DIVISION OF
RESEARCH AND STATISTICS. TREASURY DEPARTMENT (VISE SONE ATTENTION
TO REVEMUE-ESTINATING SECTION).

A report made as the Request of the Secretary of the Treasury
By Gari shoup

March 14, 1938.

:
TABLE OF CONTENTS

355

SUMMARY OF SUGGRATIONS

DETAILS OF REPORT

Description of Research Personnel under Assistant Director of Tax Section.
types of Work Done by the Tax Section.
Qualities Needed by a Tax Research Staff of the Secretary of the Treasury.
Changes in Existing System That will Tend to Produce the Qualities Noted
is Preceding Section.
Personnel Implications of Changes Suggested in Preceding Section.
Place of the Revenue-Netimating Section.
Consultation with Other Branches of the Government That Are Studying Taxes.

in 35S
SUMMARY OF SUGGRSTIONS FOR REORGANIZATION OF TAX SECTION AND REVISION-

ESTIMATING SECTION OF DIVISION OF RESEARCH AND STATISTICS,
TREASURY DEPARTMENT.

These suggestions - no increase in the total salary roll of the
section.

1. Give the tax section a $9,000 director (preferably. two co-directors
at $9,000 each, to relieve each other periodically) who will report directly
to the Under Secretary or Assistant Secretary in charge of tax satters.

2. Divide the work of the section between
(a) Handling specific requests for information made by the Under

Secretary (or Assistant Secretary) for his own use (thus not including replies
to correspondence addressed to him) - including research projects that are
matters of hours or dagre as well as these that require weeks OF months and

(b) handling (1) requests from all other sources, including COFFEE
spondence and personal calley (11) the preparation of the tax sections of

the Secretary's Annual Reports (111) the checking of tax matters in prepared by other branches of the government.

3. Assign the hamiling of the Under Secretary's requests to the director

(or two co-directors): assign the lamiling of requests from other - to
as/assistant director at shout $6,800.

4. Build up the rest of the staff chiefly with fever but more experienced
analysts them at present.

5. Move extremely carefully in the selection of new personnel. Hash of

the present difficulty my have arison from selecting staff - under
pressure of time.

#.

357

6. Give special opportunity for staff members to grow is research

ability and interest w insisting that free time to time they write (partly

on government time) and yellish - studies is temption
.

is scholarly Journale, or in book form, and try to arrange for - femal
training of juster members.

7. study the possibility of saling the noveme-estimating section a
sub-costion in the Tax Section.

-3.

358

DETAILS OF REPORT

This report is chiefly a statement of the general principlee that the
present writer believes should be kept in mind with respect to the work of

the tax section. The three OF four days alletted to this task did not of
course allow for any detailed apprecial of the work see being earried on,
OF for a complete blue-print of reorganization.

The report first describes the personnel of the section is terms of
their training and experience. It then describes the general nature of

the work that the section carries on. Following this is a description of
the particular qualities that seem to be needed by a tax research staff
in the Treasury.

These descriptive parts of the report are followed by (a) suggestions
for changes in the system, (b) suggestions for changes in type of personnel
(without any recommendations concerning any specific individual).

.4.

353

Description of Research Personnal under Assistant Director of
tax Section

There are in the taxation division, in addition to the assistant
director, ten economic analysts and research assistants of various
grades, plus a secretarial assistant and three senior stenographers.

The latter four will not be covered in this discussion. The annual
salaries of the other ten total $30,800. The assistant director receives
$6,500.

Almost all of these tea have been respuired in the past two years:
some within the past three or four months.

As to previous training, one of the ten came to the section with a
thorough background of training in tax research (he came some time before
Mr. Smoker took charge). Two others had had a moderate amount of training

in tax research through a year or two of graduate work. A fourth came with

nearly as thorough a training as the first. but in branches of public finance
other than taxation. A fifth came with a considerable background of research

in the field of government administration, but practically no research in
taxation. The other five know either nothing at all about taxaties when they
joined the section, or only what they had picked up from undergraduate courses
or on the W. P. A. project compiling data on 1934 inconce.

of the ten, two have dector's degrees. None of then, I understand, has
taught a course in public finance or taxation. As to published works (beeks.
1/ The statements in this section are based on information supplied by
Mr. Susker, supplemented. is a few instances, by knowledge that the present

writer already had acquired. The members themselves were not approached for

information on this point or any other points in this survey.

2/ Net including one junior economic analyst who is with the section only
temporarily.

5

360

articles in scholarly Journals, reports). one of the eleven has made
substantial published contributions in tonation and two other have

contributed miner pieces in this field. Since joining the tax section
they have, through Treasury policy, been discouraged from publishing.
Meet of the staff members have had to be instructed (and instruct
themselves) both in research methods in general and in taxation in
particular, at the same time that they have been working under pressure

to accomplish specific research tasks. Naturally, a heavy burden of
close supervision and constant repriting and even checking has therefore
rested on the assistant director.

It appears that four out of the ten already are, or have possibilities
of soon developing into, independent workers capable of submitting memoranda

on involved topics, though there is perhaps some question whether all of

these four are likely to achieve enough simplicity of style, precision of
expression, and directness of approach to the problem in hand so that the

a could be given directly to the Under Secretary or whatever
Assistant Secretary is in charge of tax matters. The comments is this
paragraph, heaver, need to be checked carefully before being accepted,
since the present writer is not thoroughly acquitaded with all the members

of the tax section.

361

Izeas of Tax Issa by the Yes Section

This part of the report is based on a study of the activities of the
tax section during the period January 1 - March 10, 1938.

the work of the tax section may be divided roughly into seven categories:

1) Answering letters of inquiry from the general public that are not
indicated by any Treasury official as deserving of special attention.
Miss Stegler, in Mr. Hase' office, answers all of these except these that
involve matters too technical to be handled by hers the latter are eared

for chiefly by Mr. Spiegel and Mr. Atlas is the tax section, who also check
on Miss Siegler's replies.
The present practice is simply to send references to published material.

Father than to supply any data is the reply itself.
2) Answering letters of inquiry from the general public that are
indicated, by some Treasury official OF some Congressum, as deserving of
attention.

Some of the letters raise substantial research problems: time. a
membersof the Beston City Council writes to Mr. Magill for comparative date
on tagation is the United States and Surepes a request comes through Senator

Josh Lee for on estimate of yield from a 2 per can't summover tax.

3) Assuring requests from Congression for their own use (not simply
letters from constituents formanded by Congression). Many of these requests

are phone calls. Meet of the requests would, I should suppose, require

.,-

362

several hours or even a day OF more to answer, and once in a while one

requires several days. Time Representative Barton wate to know the
total amount of Federal taxes paid by, and the Federal money expended

in, New York State and each of five other states in each of the years
1933 - 1937 inclusive: Representative Smith water to know how mach the

Federal tax revenues would be increased if state and local salaries and
Federal securities were whelly taxable.

4) Answering requests from Treasury officials for fairly prompt
information for their our use - not information to be used in replying
to letters. Most of those requests have of course come from Mr. Magill.
Some have come directly from the Assistant Secretaries and the General

Counsel. This part of the section's work is probably the most vital, the
most exacting, and the most time-consuming of the seven categories of

work listed here. A project of this type my take only a few hours, but
commonly it is a matter of two or three days or even more. It is often
accompanied by a #deadline" requirement. There is usually no advance

notice. All of these projects, of course, clear through Mr. Hane' office.
in and out.

5) Writing (et the request of Treasury officials, as is (4) above)

memorado on what may be called #leng-term projects". The - will
often take one or more of the senior staff subhese a week or neveral weeks

to prepare. They usually have no "deadline" attached. Work on then is

interrupted frequently to parene more intellate tasks.

-8-

363

6) Checking - tax date and tax policy recommendations in memorands,

reports, etc., dream - w other sections of the Division, by other divisions
of the Treasury. or by other branches of the government. Thus monoranda

prepared by the revenue-estimating division are reated through Mr. maker for

initialing: Statistics of Income data compiled in the Internal Revenue Unit
are inspected and suggestions sometimes made for improvement in form of

presentation, etc. Census bureau material on state and local tax statistics,
rested through the Central Statistical Board, will come to the Division for
suggestions; recently the tax section had to inspect a report touching on
railroad taxation, by the Interstate Commerce Commission.

7) Preparing and checking certain sections of the Secretary's Annual
Report.

In addition, the section builds up and keeps current some information

files concerning certain taxes, certain states, etc., so that the inquiries
mentioned in (1). (2). (3). and (4) above my be assured propily. This
is therefore not a separate activity, but a phase of those others.

364

Qualities Issial be a Tax Research staff of the Secretary of the
The kind of tax research needed by the Secretary is is several respects
different from the kind earried on by others such as a private organisation
(e.g. the National Industrial Conference Board), a foundation (e.g. The
Twentieth Gentury Fund). or graduate departments of universities. The
Secretary needs prompt answers to a large number of questions that are

usually of restricted scope and quite technical. The other organisations,
in contract, carry out fever projects, each of greater scope, with leevays
of weeks and months for completion instead of days OF hours, and often,

though not accessarily, with more generalising and less working-up of highly

specific technical date such as tax-rate schedules. analyses of individual
companies, etc. The problem of making tax estimates increases the contrast,

but this problem is not considered in detail in this report.
1) The Secretary's tax research staff must therefore be verentile,
since is will be called upon at short notice to change free one topic - e.g.,

the analysis of a report published by the Breakings Institution on the -

distributed profite tax - to another topic in - entirely different part of
the tax field - O.E. the advisability of a certain method of compensating
the states for less of property tax revenue resulting from the expension of
the Federal Government's property holdings.

Verentility in this sease is in large part a matter of the length of
time a person has been magad is tax research. It also depends of course

upon personal capacity. Finally, is is enhanced if an adequate file of date,
reaging from several-velause works down to neversper clippings, is mistained

-10-

365

on a wide variety of tax subjects. A Department library is helpful, but
cannot whelly take the place of a file of material that is in the same
room as the research staff and available to no one else.

2) The Secretary's tax research staff must also be thoroughly at
home is the technical details of tax law and tax administration, particularly
with respect to existing law and law proposed in pending bills, committee

reports, etc. It must, for instance. be able to look at the income statement
published by Corporation X and drew therefrom all possible inferences con-

cerning the probable repervessions on that corporation of Title I-B of the
income tax - and Title I-D as then proposed, which my not be the same as
11 was the week before.

3) The staff need not be required or expected to make original centributiens to the basic principles of taxation. Perhaps 18 need not even be
required to make original factual contributions, sugh as are obtained through
extensive field work in interviewing business mm, collecting unpublished

data, etc. In both these respects the staff differe from the other research
agencies noted above.

4) However, the staff does need to be well asqualated with the contri-

butiens of others in those fields of basis principles and factual discoveries.
The staff is called as from time to time to give recommendations on problems

with far-reaching implications, as for instance when 18 is requested to

suggest the best ways in which to raise half a billion dollars of added
DIVISION IS should therefore not only have a thorough knowledge of what the

authorities in the past have had to say, but also keep abreast of significant
current output is scholarly Journals, reports, books, etc.

11 -

366

5) the staff needs to be skilled in conciseness. The readers of its
material read under pressure, and met receive the most information possible
is the smallest number of write.

6) The staff must to composed of fast veriers. In this respect the
task is with like that set by a newspaper reporter, whose material loses all

value if 18 is not available within a certain time.
7) The staff mest be imbused with the idea of service. This statement

sounds trite, but 11 refers to a fundamental attitude. This assitude nofirsts a disposition never to think of any request as prime facio impossible.
It also indicates a willingness, in case is does prove impossible to deliver
a finished piece of work, to deliver one partly finished rather than nothing

at all, and to trust to the sense of fairness of the top officials to
appreciate why the work is only in partly finished shape. To trust in this
manner is always semounts dangerous for the professional standing and future

of the one who does the trusting. but is is one of the risks that accompany

the attitude of "service" as defined here. Finally, this attitude also
implies a willingness to hide so far as possible the strain under which one
works, unless the situation becomes " intelesable than a general showdown is deemed accessary.

8) The staff must be able to foresast, to - appreciable degree, the
questions that the Under Secretary (or Assistant Secretary) is 1thely to
ask, particularly when the Revenue Act is undergoing revision. Shront

surmises in this direction will min it possible to supply information whom

otherwise, oving to the striet time limite toposed, the staff would either
have to work evertime (with resulting damage to later work, probably) or
confess to as Imability to meet the request.

2

-12-

367

Shaness in Existing States that Hill Tent a Produce the Qualities
Nates in Progeliar Seaties
All the discussion in this section assumes that no more will be spent

is total salaries for the tax section than at present. The current figure

is $37,300 a the head of the section, but not including
the $6,860 spent for a secretarial assistant and three senior stenographers).

1. (a) Verentility would probably be increased if the staff members
were fewer but more experienced than is now the ease. One $5,200 - is
likely to give greater versatility than two $2,600 mea working in combination.
In general, this requirement calls for persons who have had several years of

experience in tax research OF tax teaching. The section at present I
too heavily weighted with specialists rather than verentile persons, and

there seems to be - oversupply of specialists in the field of state and
local finance
It is sometimes difficult to get the highest grade of research person
to undertain the emailing daties. consisting se mach both of such and

routine, that dimmeterise government work. The solution probably lies is

two directions: (1) Spend plenty of money to got one or two top (2) spend practically all of the rest is gossing young - who are, becover,
old enough to have had - tax-research training. Sease excellent people
of 25 to so years of age she have recently received dester's degrees 1/ Net including $2,000 salesy for one of the justor economic analysts.
who is. I unierstand, here only temporarily.
a/ See the seeties above, #Description of Research Personal water Assistant
Director of Tax Section".

- 13 -

be indused to enter the service if they are offered salaries appreciably
above the level they are likely to ears immediately elsewhere - a salary
of, say, $3,600 to $4,000 instead of $2,600 to $3,000. This may seen

like overpaying them, but is is not, if they are chosen only after as
extremely careful investigation. A bold policy of paying high salariee
to young - who have no reputation but who are clearly going to have
one (and this can probably be pretty well ascertained by the time they
are 25 OF 30) is the best resource for as employer such as a governmental
research agency.

(b) At the present time a file of data is being built up. and 11
need only be noted here that increased efforts in this direction are

likely to pay for themselves. In fast, is might prove desirable for the
section to build up a fairly extensive tax library of its own; the
expenditure of a few thousand dollars is this may, plus a few hundred each

year, sight repay itself in the saving of time. When a reply must be
composed in a few hours, OF by the next day, the fast that the material

is right at hand in the same room, and not, possibly, out being used by
others, may make the difference between being on time and being late.

Thus this matter concerns point 6 below (speed of work) as well as the

present point (versetility). The collection and suistenance of such a
library would not take the full time of one person, but complete responsi-

bility for 11 night take up part of the time of one of the juster staff
members. This person would be expected to be so well acquisited with the

contents of the books, pertedicals, etc., that he could ast as a gatah-

reference "living inter" for the other staff more

368

- 14 -

359

2. An increase in the staff's familiarity with technical details
and aptitude for handling those details can be obtained in the same

gasner as just indicated in (1) above. But it can also be obtained to
a large degree by setting aside hours for study and by attending technical

courses in local institutions. The material to be learned is of a specific,
definite kind: in contrast, the power to be verestile, as that word is used
above, comes largely in the doing. Provided they are not always under

pressure to deliver, a young but energetie and intelligent staff can probably
pick up the required-technical material in a few months.

S. Original factual contributions through field work - e.g. visiting
match factories to discover the effects of the match tax - may at some
future time be an important function of the staff, but, because of pressure
of other work, 18 seems to be out of the question at present.

4. As indicated above, 11 is important that the staff keep acquainted

with the contributions of others in the fields of basic principles and
factual discoveries. This will not be done to the extent is should wills
the Secretary and the Under Secretary inform the staff that they are expected

to use some part of their office time in this manner, and that is passing

judgment on delays in answering - etc., allowance will be made for
this faster.
5. It is not evident how conciseness in reporting can be obtained.
The fault of course usually goes far back to elementary and security

school training. Constant reiteration of this requirement my produce -

-15-

370

results.

6. (a) The speed of work is in part a astter of the kind of individual.
IS simply comes down to the fast that, so far as possible, slow workers should
be replaced with fast verbers.
(b) The speed of work is also a matter of administrative procedure.
Replies would come mash quicker if there could be a decrease in the number

of way stations between the writer of the reply and the one who requested it.

AS present, as I understand 11, a reply to Mr. Magill written by one of
Mr. tusker's staff must be approved by Mr. Zucker (and it is always revised,
more OF less, by him). then usually read by Mr. O'Donnell, always read by
Miss Michener, perhaps read also by Mr. Haas, and then delivered to Mr. Magill.

If, in contrast, the staff member who prepared the report could hand it direct1y to Mr. Magill, a great amount of time would be saved. This procedure is
not fessible of courses unless the staff member in question is of high calibre.

However, even if a junior staff member prepares the a one check by a senior staff member - should be adequate.

Material that is to be printed and given wide distribution should always
be checked by persons other than the author. but with other material speed

is probably secrified too wash by the amount of routing that now goes on.
The staff should, however, contain one person who has a highly developed

critical faculty which he is willing to use unsparingly, and to when all bus
the most "rush" resuscripts can be referred.
In preparing menoranda the tax-section staff semetimes needs to consult

with the monetasy section under Mr. White (e.g. if a question of shot money"

- 16 -

371

is involved) or with the financial section under Mr. Seltner (e.g. in studying
the mdistributed profite tax). OF with the astuarial section under Mr. Heagh

(e.g. is certain watters relating to death taxes and social security taxes).
Such consultation is facilitated senswhat by the present arrangement shereby

all these sections are under one division. Whether the reneval of the tax
section from this division would impede this kind of cooperation is a question
deserving more attention, but the present writer's impression is that not
enough would be lost to conterbalance the gains to come from separation.

(e) The matter of a separate library for the section has been disoussed under point 1 above.

7. The question of service, 1 line that of speed, is largely one of
individual inslination. In general, is appears that young workers are
likely to have this assitude is a stronger fosta than older workers.

s. The ability to forecast demands probably - only with cansidemble experience is Treasury work the willingnose to try to foresast
is another phase of the "service" problem noted in No. 7 above.

- 17 -

372

Personal Institutions of Increated in Preseting Seaties
For these changes to because effective, the research staff would have

to be composed of fever numbers than at present, a larger proportion of
whom would be in the high-making grades of "Doonomic analyst". Ny in

pression is that the section is at present too heavily weighted with loverrank workers. This slows w the finished replies because more checking
and revising is needed, and there are fewer people capable of doing the
checking and revising.

If the two right - could be found, one possible arrangement would

be as follows (this may be called "Plan I):
(a) Two co-directors, receiving about $9,000 a year each, would

head a Tax Research Division. Each co-director would be, in reality,

not a "director" so 1 as a highly skilled, verentile research specialist
in texasion, with emphasis of course on the commonie and business aspects

of the subject. He would w. or would shortly become. an *authority" in
the field (without the degention or addiction to policy formation that that
word sometime commotes). Both of the co-directors would report directly

to, and receive their assignments directly from, the Under Secretary or
whatever Assistant Secretary was given charge of taxation. Two would be

needed, in order to alternate their duties someshas as follows

V In order that the present salary total would not be associal.

-18-

373

while one, the 'ee-director is charge", was on active daily call from the
Under Secretary New fear OF five months, the other would be on "reserve

duty". engaged partly on long-term projects requested by the Under Secretary
and partly on general study and research of his our to keep abreast of new

discoveries in his field - but in rush periods he too could be on daily call.
AS the end of the four or five months period the co-directors would
reverse positions. the second beeening co-director in charge. The periodic
change would probably be a benefit to everyone concerned. including the
Under Secretary.

(b) One assistant director of the division, receiving about $6,500.
He would answer letters of inquiry from the general public; accept personal
calls from outsiders that was to discuss tax matters, prepare and check
ea sections of the Secretary's Annual Report (though this night be important
enough to assign to one of the co-directors), and check the tax items in
the various documents, statements, etc., that are drewn up by other branches

of the government. These taskt should - directly to him (not through
the co-director) and . from his without checking by the co-director. There
should, however. be a working agreement between his and both co-directors

that they would 8 far as possible supply his ea request with what material
they had readily available that he needed for his corresponsimes, checking.

etc. If no each working arrangement proved practicable, all the assistant

director's work would have to be rested through the 00-director in - .
1/ See No. 4 is section, "types of Work Dear w the Tax Sections.
2/ See No. 5 is section, "types of Work Done by the Tax Section".
3/ See No. 4 in section. "The Qualities Needed by a Research staff of the
Secretary of the Treasury".

-19-

374

& procedure that would be possible, but undesirable in the demands that
11 would make on the time of the co-director.
(a) Each co-director would have one economic analyst starting at

about $3,600 (o.g. a young post-graduate student of exceptional ability,
with a dector's degree).
(d) The assistant director would need at least one assistant,
probably starting at about the $3,000 level, who also should have a doctor's
degree.

(e) An assistant analyst starting at about the $2,600 level could be

given the library and "index" duties noted in 1 (b) in the immitately
preceding section, and could also be on call from the economic analysts
in (e) above.

If 11 is not possible to find the two co-directors needed for Plan I,
another arrangement, *Plan II", seems practicable.

This would be the same as Plan I except that in place of two co-directors
there would be one director who would have immediately under his as assistant

director starting at about $6,500. This assistant director (to be distinguished from the assistant director in charge of public requests for information.

etc.) would relate activities with the director. 1 as the two co-directors
would relate in Plan I above; but responsibility for the time and extent of
retation would rest with the director. In all other respects Plan II would
be the same as Plan I (except that the money saved on the salary of - of

the directors could be used to get higher grades of analyst).

375
- 20 -

If neither Plan I nor Plan II is practicable, a #Plan III* might be tried
as follows

(a) A single director of a Tax Research Division, receiving about
$9,000 a year, would set centionally such as the "eo-director in charge"
is Plan I but would probably have to shoulder more administrative and super-

visery duties, since the lack of a 00-director (or, as in Plan II, another
assistant director) would have to be supplied by an increased member of

junier staff members, under the supervision of the director. The director
would report directly to the Under Secretary Tor Assistant Secretary in
charge of tax miters).

(b) One assistant director of the division, with the same salary

and duties as in Plan I (answering replies from the public, etc.). It
would be even more important than in Plan I that these duties should be

cleared directly through his if possible, and not through the director,
in view of the other added supervisory work the director would have.
(e) The director would be assisted by two senior economic analysts
at the $4,500 level.
(d) To those two analysts would be assigned the two $3,600 analysts

noted in (e) in Plan I.
(a) The assistant director would have as assistant, as in Plan I.
(f) An assistant analyst at the $2,600 level would be employed as

in (e) in Plan I.

21 -

376

Place of the Revenue Estimating Section

A difficult problem, and one not possible to analyse carefully within
the time limits of the present study, is the determination of the proper
place of the revenue-estimating section.

Under the present system this section is independent of the tax section.

Each is is charge of an assistant director who reports directly to Mr. Haas.
A disadvantage of this arrangement is the chance 11 gives for lack of
coordination. The Under Secretary may, for instance, want to know the
economic aspects of a proposed treatment of capital gaine, including the
revenue aspects. The sections may differ is the relative urgency they
attach to the work, and hease in proupiness of reply: they may not understand the request in exactly the same way: and still other differences
making for a lack of harmony may arise.

On the other hand, the revenue-estimating section must analyse current

business trends and forecast business conditions, not only (a) to supply
the Under Secretary with revenue estimates in response to special requests,

but also (b) to supply the Bureau of the Budget periodically with estimates
for current and enering fiscal years, and (e) to inform the Secretary each
week or oftener of business conditions and trends, for his general use.

About all that can be said in the present report is that the dissess

for lack of discussed above, are important enough to demack
further study of this problem seen.

23

377

Immitation with other America of the Government That Are
Utilizing Issue

another important topic for further study is the relation of the
Secretary's tax research unit to other research units is the Government.
Greater personal contact between members of the various write, such as those

is the Bureau of Internal Revenue, the Department of Agriculture, and the

social Security Board, would be helpful. Moreover, the Secretary's unit
eas obtain valuable information by discussions with non-research white is
the Treasury such as the various administrative sections in the Bureau of
Internal Revenue. Frequent and informal contact is probably on the whole

a better approach than any infrequent, formal contact, but is night be
designable to provide - sert of fessal mechanism for bringing together
the Government's tax research specialists at more OF less regular intervals.

378

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE March 17, 1938
TO

FROM

The Secretary

Mr. Taylor

(Memorandum of Day's Activities)

I had a call from Herbert Feis today about the proposed message

to Congress on the Hungarian debt offer. You will remember that Feis
left these papers with me early in the week, at the time that the French
situation was being discussed. Subsequently the President has indicated
that one of the messages which he contemplates sending to Congress in

the near future relates to the Hungarian debt offer. Dan Bell and I
have gone over the proposed message and with the exception of minor

points we see no objection to agreeing with the draft proposed by the
State Department. We would like to discuss the matter with you tomorrow

morning, as it will be desirable to clear this message before the
President leaves for Warm Springs.

After the Banking meeting this morning, I called Jesse Jones to
tell him that I thought that the proposed message was in very good shape

and to tell him that in the near future we would want to discuss the
broadened legislation which he will need, including certain types of

capital to industry. He said that he wanted to go down to the Hill
to take the pulse of various members before deciding exactly how he

should
I believe this is the way in which he usually operates.
proceed.
I then mentioned to him the possibility of acquiring stock in various
enterprises through underwriting or otherwise, and found, as I expected,
that he had no enthusiasm for this proposal.

-I do not think that we have heard the last of the Home Loan

Bank situation, and can only again emphasize the fact that it is
necessary for the Administration to make up its mind on this subject,
which, in my opinion, will become more and more involved as time

goes on, and it is with this in view that I caused the questions
which I gave you today to be prepared.

I also had a call today from Maxey of the U. S. Housing
who discussed briefly some of the problems of their financing.
We have taken care of them up to June, but I think that we should

discuss this situation again inside of a month, let us say after
you return from the South.

e.f.

379

380
March SB, 1938

At Cabinet on Friday, March 18th, the President
raised the question as to what could be done for the

political refugees in Austria. He said, " After all,

America had been a place of refuge for so may fine Germans

in the period of 1848 and why couldn't we offer them again
a place of refuge at this time. He suggested that we
combine the quotas of Germany and Austria and let the

Austrian refugees come in under the combined quota.

Miss Perkins said that this could not be done
legally. The President asked the Cabinet if they thought
they could increase the quota by getting an act through
Congress. The consensus of opinion was that they could not
get such an act through Congress. Miss Perkins said that
possibly the International Labor Bureau at Geneva could
handle this situation. The President said that he thought
this was a good idea. He said he thought if different countries
were appealed to that, depending upon their size, they would
take from 100 to 1,000 families each and, in this way, we could
find homes for 10,000 or 15,000 families.
Sunday night I discussed this idea confidential with
Irving Lehman and he thought very well of it and, I think,
my wife suggested Hamilton Fish Armstrong as the American
representative.

At lunch Monday, March 21st, I brought this whole
question to the President's attention again and asked him if
something could not be done at once. He said that I should
get together with Summer Welles and have something ready for
him within 24 hours or anytime be fore he left for Warm
Springs. I got Welles over here at 3 o'clock and we went
over the whole proposition and he thought extremely well of it
and his whole attitude was simply fine. I asked him whether
he could have something ready by 11:30 Tuesday, March 22d.
He said he would work all evening, if necessary, to get it
ready.

He came here on Tuesday and I was most pleasantly

surprised to find that he had two finished documents on this
subject. I asked him if he had shown these to Mr. Hull and
he said he had and they met with his approval. The documents

covered the subject admirably and I had no suggestions to make.
I called Miss LeHand and asked for an appointment to
see the President. She called back in two minutes and we had
an appointment for 12:45. The President read the document

through and was enthusiastic about it. He said, "I have only
one suggestion to make. The words 'religious' and 'racial'

should be changed to 'political'. I think it would be better.

We all agreed.

-2-

Summer Welles told the President that he thought if
he made an appeal for money for these political refugees he
would get an excellent response on the North and South
American Continents. It was agreed that at the same time
that the President made his appeal that it would be announced
that the United States Government recognized that Austria was
part of Germany. This would be necessary in order to combine
the two immigration quotas.

Welles then said, on further consideration Mr. Hull
also wanted at this time a further announcement in regard to
customs duties as it would affect the combined Austria and
Germany.

381

FLOOD CONTROL

Wallace memorandum to President, March 15
Wallace memorandum to President, March 16
Bell memorandum to President, March 17
Douglas memorandum to President, March 18
"

new sraft of bill aloans to industry" sn mar.L2

382

383

Wallace memo to FDR
3/15

384
DEPARTMENT OF AGRICULTURE
WASHINGTON

OFFICE OF LAND USE COORDINATION

March 15, 1938.
MEMORANDUM FOR THE SECRETARY.

Subject: Department of Agriculture participation
in comprehensive flood-control program.

(1) The Flood Control Act of 1936 provides that . Federal

investigations of watersheds and measures for run-off and waterflow
retardation and soil erosion prevention on watersheds shall be
prosecuted by the Department of Agriculture." Thus the Department

is responsible first for "investigations of watersheds," and
second for control "measures ... on watersheds.

(2) Investigations are now being vigorously prosecuted on
many watersheds. In the near future we should be ready with specific
plans to undertake comprehensive upstream engineering and land-use

"measures" in some of the most critical areas.

(3) A number of preliminary examinations of watersheds were
started when funds became available last August. These examina-

tions are to determine the general location and extent of flood-

producing areas and whether upstream engineering works are justified. Preliminary examinations have already been completed on
some 20 watersheds scattered throughout the country, including

the basins of such major streams as the Trinity (Texas), St. Croix

(Minnesota), Lehigh (Pennsylvania), Pee Dee (North Carolina),
Upper Arkansas (Colorado), and Merced (California). About 50 or
more such investigations will be completed by July 1.

(4) If the preliminary examinations show that flood control
measures would be feasible, then detailed surveys of certain portions of these watersheds will be made. Such surveys will outline
the specific upstream measures required and will indicate the benefits to be attained from the contemplated flood-control program.
Specific watershed projects will be recommended to the Congress,

together with estimates of their cost, as required by the Flood

Control Act.

15
385
-2-

(5) Several detailed surveys will be under way by the first
of June. Probably the first will be for the watersheds of the

Los Angeles, San Gabriel, and Santa Ana Rivers in southern Cali-

fornia. Another will be for the Yazoo Basin. Other detailed surveys

contemplated for the immediate future include parts of such important

watersheds as the Susquehanna, Allegheny and Pee Dee.

(6) By participating in the development of the plans, the three
major flood-control "action" agencies of the Department (Forest

Service, Bureau of Agricultural Economics, and Soil Conservation

Service) will be thoroughly familiar with each project and will be
ready to function promptly in carrying out a control program -

whether as a relief measure, under special funds made available
for the work, or under regular appropriations made pursuant to

the Flood Control Act. All upstream activities are being closely

integrated with the downstream program of the Corps of Engineers,
so that the work of the two agencies can result in the maximum

good
at the least possible cost and without overlapping or duplication.
(7) In summary: By July 1, 1938, the Department of Agriculture will be prepared to undertake comprehensive flood-control
work, on a carefully planned basis, on a number of critical watersheds, if special funds are made available. If the procedure set
forth in the Flood Control Act is followed - necessitating special
reports to the Congress on each watershed - actual control work

will most likely not get under way until a year later. In either

case, the Department is developing a sound base for upstream flood

control and specific plans will be prepared on a widening front
until plans have been prepared for all major watersheds of the
country.

386

March 16 -Wallace
memo to Pres

13

387
DEPARTMENT
WASHINGTON OF AGRICULTURE THE WHITE HOUSE

HMW Mar 17 8 50 AH 38 50
RECEIVED

March 1 6, 1938.

The President,
The White House.

Dear Mr. President:

When you told me last Wednesday about the possibility

of making loans to States in order to start extensive flood

control operations, I asked our people how soon we could be
ready to go forward with the upstream engineering and land-

use phases of such a program. The enclosed memorandum shows

that, on the basis of detailed surveys and plans now being pre-

pared, we could undertake comprehensive control work on a

number of the most critical watersheds by July of this year.

This represents a full year's gain over what will be
possible if we follow the procedure of making detailed reports
to Congress on each watershed, as called for in the Omnibus

Flood Control Act, and then awaiting specific authorizations
for the work proposed in such reports.
I think the basic planning work now under way guarantees

that all work started will be the most essential in a field
where certainly very much needs to be done.

After this brief memorandum has served your immediate
purpose you may wish to pass it on to the Water Resources

Committee.

Sincerely yours,

Nawallace
Secretary.

(Enclosure)

388

3/17 - Bell memo to
FDR

BUREAU OF THE BUDGET

389

WASHINGTON

MAR 17 1938
MEMORANDUM FOR THE PRESIDENT:

A few days ago you asked me to give you a memorandum setting

forth the fiscal situation respecting flood control.

The Omnibus Flood Control Act of 1936, as amended, authorized

flood control projects estimated to cost the United States, for

construction, a total of approximately $344,000,000. Work has been
started on certain of these projects whose total estimated construction costs amount to $160,160,117. The amount appropriated
or allotted to June 30, 1937. (all emergency funds) was $6,570,372;
unexpended balance available July 1, 1937. $1,069,852; allotments,
fiscal year 1938, $51,986,773. of which $29,608,515 were appropriated (or regular) funds and $22,378,258 were emergency relief

funds (allotments to January 31, 1938): total available for obligation in fiscal year 1938, $53,056,625; total obligations to

January 31, 1938, $17,908,354; total expended to January 31, 1938,

$10,466,851. (See Section "A" of tabulation hereto attached.)

Flood control projects not authorized by law, but for which
emergency relief funds have been allotted to the Army Engineers
by the Works Progress Administration: Estimated construction
cost, $3,689,850; allotted to June 30, 1937. $1,947,449; amount
unexpended July 1, 1937, $609,228; allotted fiscal year 1938, to
January 31, 1938, $1,742,458; total available for allotment in
fiscal year 1938, $2,351,686; obligated to January 31, 1938,
$1,518,523; expended to January 31, 1938, $1,454,642. (See Sec-

tion "B" of tabulation hereto attached.)

Mississippi River, and tributaries: The Act of May 15, 1928,
as amended by the Act of June 15, 1936, provided for flood control
of the Mississippi River and tributaries, at a total estimated
cost of $597,000,000. There has been appropriated or allotted to

June 30, 1937. a total of $288,153,424; unexpended balance avail-

able July 1, 1937. $8,921,943; allotted for fiscal year $45,000,000,

of which $30,000,000 were appropriated (or regular) funds and

$15,000,000 were emergency relief funds: total available for obligation in fiscal year 1938, $46,300,788; obligated to January 31,
1938, $17,265,615; expended to January 31, 1938, $14,458,521. (See

Section "C" of tabulation hereto attached.)

It should be noted that the word "tributaries", as used in
connection with flood control of the "Mississippi River and tributaries", means outlets of the Mississippi and so much of its
tributaries as may be affected by the backwaters of its main stem.

39

2-

17

Totalizing the foregoing gives the following:
Total estimated construction cost of
flood control projects:
Authorized by law
Emergency Relief Projects

Total estimated construction cost of

$941,000,000
3,689,850

projects now under way

Total appropriated or allotted to June 30, 1937
Total unexpended balance July 1, 1937

Total allotments, fiscal year 1938:
Regular funds

$944,689,850
760,849.967
296,671,245
10,601,023

$ 59,608,515

Emergency funds

Total funds available for obligation,

39,120,716

98,729,231

fiscal year 1938

101,709,099

January 31, 1938

36,692,492

Total obligated fiscal year 1938 to
Total expended fiscal year 1938 to
January 31, 1938

26,380,014

In addition to the appropriations and allotments for the prosecution of flood control projects by the Army Engineers during the fiscal
year 1938, as set forth above, the Works Progress Administration and,
to a lesser extent, other Federal agencies have done and are now doing

much work along the lines of flood control. Sometimes this is incidental to other work and in the case of some projects it is the main
objective. Practically all of this work is on projects which have

not been adopted by Congress as part of its flood control program.
However, many of the projects have been included in the program for

flood control recommended by the National Resources Committee. Such

projects fall within the general classification "conservation work"

under which over 7,000 projects have been approved. Of these about
5,000 have been for irrigation and water conservation and some 400

for erosion control and land utilization. Through January 31, 1938,

actual expenditures under the various Emergency Relief Appropriation
Acts on these two types of projects had been about $400,000,000. While

it would require a detailed analysis of each project to determine the
amount expended for flood control, it is evident that such expenditures represent many millions of dollars.

DWBBll

Acting Director.
Enclosure.

March the 1936.
FLOOD CONTROL PROJECTS

391

FOR WHICH ALLOTMENTS WERE MADE IN 1936
(1)

(2)

Total Estimated
Construction Cost

Project

(4)

(3)

Total

Appropriated

Unexpended
Balance

or allotted to

Available

June 30, 1937

(6)

(5)

Allotments

Fiscal Year 1938

July 1, 1937

Regular Funds

Fiscal Year 1930 (8)

(7)

Total Funds

available for

obligated

Expended

to
to

obligation
Emergency Funds

Fiscal Year 1938

260,000
123,300
50,000

467,000
521,300
76,330

January 31, 1930

January 31, 1938

Flood Control General - Authorised by
Flood contro APTE... June 22, 1936

and August 20, 1937.

162,000

37,996

-

219,304
205,000

61,915

7,034

811

799

5,200

32,000

2,258

2,171

6,050

71,000

471

261

405
76

162

53

76,000

82,000

1,029

1,026

29,930

16,870

46,000

574

438

66,186

41,714

128,200

1,756

1,596

96,784

48,516

145,300

1,082

917

19,250

6,250

25,500

575

452

55,250
600,000
12,900
40,000
13,400
14,500

-

-

3,750,000
223,000
347,500
7,500
11,500

-

56,640
42,290

-

34,300
32,940
30,010

-

-

-

-

-

-

250,000
191,000

13,897
7,112

109,000
44,400

-

657,100

3,860,000

7,676

120

-

1,105,000
406,000
1,185,000
1,800,000
2,625,000
1,900,000

21,536

422,000
391,000
236,000

541

-

--

445,750

299,016

292,830

56,000
29,000

13,600

-

1,256,250

12,457

46,000

-

1,404,400

-

135,000

-

(below Plum Bayou)

Saline Point, LA

-

North Little Rook to Gillette, Ark.

-

Bayou des Glaises, LA

845,000
965,000

263,695
60,916

8,230

-

cinoinnati Ohio
Ironton, ohio,
Welleville, ohio

2,142,780
5,409,450

133,137
14,178

-

thistington, W. Va
Newport, Ky

-

Kenova, W. Ve

436,540
976,500
540,000
840,000

3,929
302,373

-

ceredo, W. Ve

-

Indianapolis, Ind. (Fall creek Section)

13,236,941

3,517

-

(2)

widdlesboro, Ky

cannelton, Ind
Brookport, I11

-

Reservoir System for protection of

3,585

-

Helle Fourche, S. Dak

Harrisburg, III
Metropolis, III
Tell city, Ind
coloonda, Ill

-

29,000

86,778
161,909

-

26,800

80,000

Forsyth, wont

Paduoah, Ky

-

5400,

ohio Rivor Lovese and Floodwalls
Eveneville, Ind

-

25,800

Ind.

-

78,900

1,000,000

391,080

96,484
196,245

2,570
15,000
3,500
6,000

-

-

25,500

Glasgow, Mont

Muncie,

37,770
11,030
94,000
40,900

-

145,300

Topela Kana

Brevoort Levoon, Ind

64,150

-

381,200

Pekin Latarah Levee and Drainage

Pittaburgh, PM

52,850
40,000

-

46,800

District, Ill
Oakford Special Levee and Drainage
District, Ill
Mason and Menard Levee and Drainage
District, Ill

166,534
165,000
26,800

-

82,000

T11

130,000

46,000

M.400

Pennepin Levee and Drainage District,Mo

141,000
109,000
47,000

71,000

13,600
109,000

Spring Lake Levee and Drainage District,

250,000
25,000
375,000
335,000
207,000

-

11]

Menderson Drainage District 3. I11
Penny slough, Ill
Gregory Drainage District, No
Pabius Rivor Drainage District, MO

1,250

-

Ill.

South Quincy Lever and Drainage District

10,000
0.000

-

Seahorn Levee and Drainage District, III
any Island Leven and Drainage District,

2,723
6,650
1,650

10,000
8,000
1,250

-

546,000
220,000
32,000

96,663

6,112
9,656

-

III.

South Beardstown District, III

114,946

-

columbia Lovee and Drainage District,

154,935
136,500

-

Wilson, Wenkel and Prairie du post, Ill.

50,000
56,500

1,221,175
1,823,532

-

859,000
520,000

00,000
80,000

1,219,925
1,822,282

-

1,153,000

yerry County Districts 1 and 2, 110

6,647
16,007

90,000

-

East St. Louis, Ill. (East side Levee)

42,500

-

134,000

1,018,003

191,140
19,932

226,075

Itawnsbe County, Miss

1,234,143

387,000

15,935

-

1,194,442

2,058,298
391,080

2,963,701

144,000
47,500

-

Kingston-Edwmrdeville, Pm

William-Barro and Renover Township, Ps...
Rome, Ge

243,000

-

170,000

-

3,857,000

-

custoriand, ltd
Yeerefield, W. Vs

36h.27

-

,

139,000
150,000

Potonno Park Levoes

-

1

-

,Bolling Field

-

-

Washington, D. C.

1,302,701

,

605,000
90,000

Tar liver, H. a

1,681,000

-

7,400,350

-

(1)

,

Pennsylvania
Augusta, 30

1

Southern New York and Eastern

1

76,330

207,000
398,000
26,330

$

tanoille River, Vt

6,760,000
10,260,500

0

verrimack River Reservoirs
Connectiout River Reservoirs

26,010
28,010
26,010
117,140
170,570
296,000
109,310
98,500
121,910
117,860

34h

23,650

70,900

542

505

400,000

1,000,000

48,991

45,103

12,900

25,800
00.000
26,000

626

626

3,006

1,606

29,000

1,551

751

4,006,500

69,852

539,981

275,000
590,500

11,067
8,135

8,135

40,000
13,400
14,500

256,500
52,000
243,000
--

291,140
140,160
139,740
69,830
70,240
70,250

70,250
70,240
472,860
721,430

8,905

7,500

5,331

5,331

11,500

8,006

8,006

347,780
162,450
174,000
102,770
100,250
96,250

10,462
8,625
6,097
2,506

9,012

3,312

3,203

3,030

3,030

98,250

1,816

1,818
2,350

96,250

3,020

590,000
900,000

11,370

1,014,000
208,690

1,310,000

46,447

318,000

18,277

141,000

180,600
194,690
132,140
50,000

279,100
316,600
250,000
191,000

8,204
15,846
14,973
142,003

510,000

90,000

600,000

12,623

30,300

296

30,300

14,664

7,467
5.834
1,684

9,913
11,314
40,775
12,670
7,201
11,608

9,346
34,524
12,111

-

-

-

190,000

-

-

134,000

-

-

200,000

-

-

-

-

-

-

-

250,000
315,000
88,500

-

-

400,000

-

-

232,000
340,000
23,300

5,780,000

1,053,917

-

-

-

-

-

$160,160,117

$6,570,372

8,078,700

15,000

582,500
50,000

71

247,000

706

667,000

11,126

300,000
150,000
315,000

66,277

48,486

1,543,041

207,638

220,000
220,000
226,000

105,751

70,543
111,641

214,390
214,775
796,000

204,836
18,269
46,890

13,292,700

7,055,945

132,815
15,145
1,8,000

69,523
9.574
12,195
43,719

4,409,917

13,405

129,309
12,370

4,979

4,676

100,000
55,000

500,000
267,000

35,440

60,000
6,000

400,000

13,000

100,000
228,000
231,000
154,000

2,049

6,053,917

1,442

4,913,953

954,430

187,927

2,260,109
162,662

153,570

10,649

6,996

500,000
500,000

341,692

262,191

10,000
40,000

$29,606,515

8,044

110,500

1,000,000
155,000

173,900

194,244

20

10,690

350,000

126,000
93,000

500,000
500,000
231,325

January 31, 1938

35,000
22,000

122,000

799,430
153,570

$1,069,852

to

January 31, 1938

250,000

4,000,000

-

-

-

-

Total - Flood Control, General

76,080
275,940

61,000
-

Snagging in interest of Flood Control

75,642

87,000

-

surveys, Department of Agriculture

office, chief of Engineers

16,260,000
5,000,000
2,500,000

-

surveys, War Department

640,000

26,000

106,000
105,000

-

Great Salt Plains Reservoir, okla

141,000

-

-

yort Supply Dan, okla

100,000

137,000

-

Poplar Bluff to Enoble, Ark

Conohas Dan, N. Mex.

267,000
763,100
29,300

-

stagge Ferry, Ark
ysulkner County, Ark
Near Dardanelle, Ark.

1,020,000

-

village Creek, Ark

Iola, gans.

350,000
110,500

-

(above Plum Bayou)

Newport, Ark.

4,900,000

-

North Little Rook to Gillette, Ark.

34,580,000

-

(3)

North Little Rock, Ark
Little Rock, Ark.

-

5,214,000

1,394,000

86,000

Fiscal Year 1938

-

-

1,139,883

138,748
138,695
520,060

214,775

Willamette River, Oreg.

545,000

-

214,390

Lewis River, Wash.

15,000
396,000
18,710
29,000
122,000
39,000
43,000
73,000
403,158
30,000

(8)

Expended

to

-

-

5,000,000

cowlite River, Wash

-

tood Mountain Dam, Puyallup River, Wash

Ehergency Funds

Fiscal Year 1930

(7)

Obligated

-

220,000
220,000

stilaguanish River, Wesh,

available for
obligation

31,290
218,000
261,000
107,000
242,000

1,498,041

Pendleton, Oreg.

186,500

(6) Total Funds

0

,

Columbia River Basin, oreg

Regular Funds

(5)

-

$

$

Matchitoches, LA

-

-

LA

Los Angeles County Drainage Area

July 1, 1937

730,000
300,000
150,000
315,000

Bayou Pierre, LA

santa Ans Rivor, Calif. (Predo Dom)

June 30, 1937

Fiscal Year 1938

,

Tiptonville-Obion River, Tenn

650,000
50,000
247,000

Available

-

Columbia, La

Balance

or allotted to

-

Homochitto River, Miss

35,000

Allotments

(4)

1

Construction Cost

ourfale River, Miss
Big Black River, Miss

River Parish,

Appropriated

392
(3) Unexpended

$

Project

(2) Total

,

(1)

Total Estimated

13,148

21,838
4,075

29,300

6,750

33,640
12,801

20,554
3,610
6,039

1,442

731

124

(4)

(4)

241,325

110,459

213,900

77,698

let

(4)

70,563
71,916

122,378,258

$53,056,625

$17,908,350

$10,466,851

738,500
264,958
304,000
415,000

1 992,960

$ 899,863

337,147

936,962
509,039
66,758

420,764

5,764

5,757

1,742,458

$ 2,351,686

$ 1,518,523

$ 1,454,642

15,000,000

46,500,788

17,265,615

14,458,521

$201,709,099

$36,692,102

Emergency Relief Appropriation Projects

$1,947,449

, 609,226

268,153,021

8,921,943

30,000,000

$10,601,023

$99,608,515

-

$ 3,689,850

133,000

-

315,857
33,147
5,764

273,196

:

Total E.R.A. Projects

, 254,460

521,000

-

Hartford, Conn.

$1,019,951

805,900
577,500
548,000

-

Springfield and West Springfield, Mass.

3 1,758,450

$

Lowell, Mass

600,815

:

Baverhill, Mass

493,375

55,647

Mississippi Rivor and Tributaries authorised by Aota of May 15, 1928 and

June 15, 1936
GRAND TOTAL

(1) Portion of comprehensive project,
includi ng the following units:
Arkport Dan, Whitney Point Dam

Avoca, Liale, oxford, Painted Post,

and Hornell.

(2) Portion of comprehensive project,

consisting of Tionesta and Crooked

Creek Reservoirs, and Johnstown
Channel improvement.
(3)

Portion of comprehensi ve project wi

a total estimated cost of $70,000,000.

(4) Transferred to Department of Agriculture.
Appropriations for fiscal year 1938.

997,000,000
$760,849,967

$296,671.25

$59,120,716

$26,360,014

393

Douglas memo to FDR
3/18

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON

March 18, 1938

OFFICE OF THE CHAIRMAN

MEMORANDUM TO:

THE PRESIDENT

FROM:

WILLIAM O. DOUGLAS, CHAIRMAN

RE:

Flood Control Program

The flood control program which you mentioned
to me seems to me to be sound from the long term as well as
the emergency viewpoint.

A Flood Control Authority could be created to
issue up to one billion dollars of 50-year amortizable bonds,
these bonds to be guaranteed by the federal government as to
interest and principal. Such bonds could probably be sold in
the present market at around 3% and possibly slightly better.
The bonds would run 50 years and would have a straight
amortization of 2% per annum. There would be a 2% sinking
fund to buy the bonds in the open market if they sold below

par or to call the bonds at par if they are selling above par.
The beneficiary state would guarantee to provide the annual
interest (which we assume to be 3%) and the annual amortiza-

tion money (which we assume to be 2%) as well as 3/8% to 1/2%

of additional interest for amortization, (this to be an insur-

ance premium going into a special reserve against the contingency
of some state defaulting, as well as to cover the small expenses

of the Authority). Thus, a state, in whose territory flood

control expenditures are made to the extent of, say, fifty
million dollars will have to pay an annual total of 5%% thereof
or $2,750,000 per annum. The bonds should be callable in full

or in part, in addition to their call for sinking purposes, if

any one state decides to pay up in full or in part the outlays

made in its behalf by the federal government. Some states
might do this, as they might be able to raise money, on account
of the tax exempt feature of their bonds, under proper market
conditions cheaper than the federal government. The calling
of bonds for such purposes might be either at par or par plus
1%.

From the emergency relief angle, I think your
suggestion has great merit. Probably as much as 65% of the

394

395

-2-

3/18/38

total expenditures for flood control work goes directly or

pretty nearly directly into industrial labor. If schedules

are set up with average direct wages along WPA lines to be no

higher than $60 and indirect wages (in the industries supplying material, etc.) are assumed to average about $105 per
month, it will cost the government about $1,500 per year to
give direct or indirect employment to one full time workman.

This compares with an average expenditure of about $950 per
man year in the average of the WPA projects where the propor-

tion of the better paid indirect labor and of non-labor
expenditures is smaller. It may be that if the work is so

set up that people employed in flood control get from three
to four days work a week, it may be possible to give employment
for a year to one and one-half part time workmen for an
expenditure of $1,500, or to put it the other way around, to
employ one man per year at an expense of about $1,000.

At the same time, the program would create

real national wealth.

21

ORIG TO NMC FOR DIARY 3/28/38

March 18, 1938.
9:50 A. M.
Operator:

Chairman Douglas.

H.M.Jr:

Hello.

Douglas:

Morning Mr. Secretary.

H.M.Jr:

How are you?

Douglas:

Fine.

Douglas:

Ah, Douglas, I got your report on that
That's pretty crude.

H.M.Jr:

What?

Douglas:

That's a pretty crude

H.M.Jr:

Ah, well

H.M.Jr:

job, but it's a, it's a starter.

Douglas:

H.M.Jr:

Douglas:

I understand. Well, Oliphant took a look at it
last night and he said at first blush it looked

pretty good.
Yeah - well what I mean by pretty crude is that
there - it has to be fixed up and safeguards and
what nots put in, running through the thing and
I've just been so busy I haven't had a chance to

do it myself, and - ah - I thought that 4fah, ah,
ah - in your hands it would - ah - your staff
would, ah, put a lot of analysis on it and we
could polish it up later. I'm hawing one of my
boys - ah, ah - go through it for the same

H.M.Jr:
Douglas:

objective.
Thank you. Now let me ask you - ah, ah - are you
going to let Jones see this - Jesse?

Well - I don't know. Now, ah, I was about to, ah I had completed the, ah, the ah, errand, so to
speak, that I was running for the boss.

H.M.Jr:

Yeah.

Douglas:

He asked me to see you and Marriner and Jesse.

396

397

-2-

H.M.Jr: I see.
Douglas:

H.M.Jr:

I have now seen, ah, ah, the three of you and I
was just going to report back on that. Now, I
didn't, ah - I hesitated to, to send it to Jesse,
ah, for the reason that, ah, as I talked to him -

this is strictly
resistance
to it.confidentially I felt considerable
I see.

Douglas:

Ahh

H.M.Jr:

Yeah.

Douglas:

Therefore, I didn't think it would be very

H.M.Jr:

Supposing we do this then. Ah, when we're
through, and understand it, and adjusted, let's

productive.

just S. E. c. and the Treasury get together

first.

Douglas: All right.
H.M.Jr:

How would that be?

Douglas:

That'd be swell.

H.M.Jr:

See?

Douglas: Fine.

Douglas:

Then we can decide after that - would that be all
right.
That'd be swell.

H.M.Jr:

But I didn't want to, ah, talk to anybody inasmuch

Douglas:

Well now, you can just, ah, you can just cut me

H.M.Jr:

as it's your work, without first talking to you.
I

out of it completely because this is, ah - I,
was, ah, just reviewing - going over with the
President as a part of the Administration, the, the

problem that lies ahead of us, and passing on
such ideas as, ah, as occurred to me. There's no -

nothing in this thing that - ah - officially
affects us or should officially affect us at all.

-3H.M.Jr:

Well, I understand

Douglas:

It's not my "baby" in that sense.

H.M.Jr:

Douglas:

H.M.Jr:

Douglas:

Well, but anyway, as long as you feel that way
it's, it's - we'11 sit down with you first before
we discuss it with anybody else.

Well we - I'd be very happy - you just call on me
day or night and I - we'll give you all the time
and, and, ah, what not that needs to - needs for
polishing this thing out.
Fine. Now one other thing. Ah, if it would be
agreeable to you, I'd like my Mr. Upham to contact,
in your shop, whoever is doing the investigation
of, ah, Trans-America.
Yeah. The man for him to see is, ah, David
Schenker.

H.M.Jr:

Well, would you send him a little note

Douglas:

I'11 do it.

H.M.Jr:

that he should open up and let Upham have
whatever he could, because Upham is contacting

I

the Comptroller's office for me.

Douglas:
Douglas:

Yep.

H.M.Jr:

See?

Douglas:

Yep.

H.M.Jr:

And, ah, these cross transactions

Douglas:

Yeah.

H.M.Jr:

Douglas:

H.M.Jr:
Douglas:

398

and if we could get available, ah, what
you're doing there, then I'd have the whole
picture.

Fine, That's U - p - h - a - m?
U - P - h - a - m.
Yep. 0. K.

399
-

H.M.Jr:
Douglas:

Thank you

I'll handle that.

H.M.Jr:

Thank you.

Douglas:

Good bye.

4

400

March 18, 1938.
10:27 A. M.

H.M.Jr:

Hello.

Operator:

He'll be right on, Mr. Secretary.

Cordell Hull: Hello.
Hello.
H.M.Jr:
H.

Hello Henry.

H.M.Jr:

Hello Cordell.

H.

How are you feeling?

H.M.Jr:

I'm feeling pretty well. I called

H.

Are you out of town?

H.M.Jr:

What?

H.

Oh, I thought you was out of town.

H.M.Jr:

No, I'm right here.

H.

Yeah.

H.M.Jr:

I called up to extend you my congratulations on

your speech.
H.

H.M.Jr:

Oh, thank you. Thank you. I had a pretty hard
time but I
Well, I'd say you did a, ah, ah, magnificent
job.

H.

I - ah - felt that the time had come for summing
up

H.M.Jr:

Uh.

so that there can't be any misunderstanding.

H.

H.M.Jr:
H.

Yeah.

about where we stand, at least.

H.M.Jr:

Yeah. Well

H.

I, I thank you very much, Henry.

-2H.M.Jr:

401

And, the other thing which - we're sending back
the memorandum that was sent over to us on the

Hungarian Debt and simply saying it's, it's

all right.

Well you ta - uh, I'll - we were trying to feed
this out to you for whatever it was worth.

H.

H.M.Jr:

Well this

My impression then to let you take it on to the

H.

President.

H.M.Jr:
H.

Well, whatever way you want, ah
That is what was intended.

H.M.Jr:

I see.

H.

I told Feis.

H.M.Jr:

Oh you want us to transmit it to the President?

H.

Yeah. That's what I told Feis.

H.M.Jr:

Well, I - he didn't, ah, he didn't, I don't think

H.

He didn't?

H.M.Jr:

I don't think so.

H.

Well, just - you go right ahead with it.

H.M.Jr:

Because Taylor was under the impression that he

he told that to Taylor.

was to send it back to the State Department.

H.M.Jr:

Oh no, we never had any notion of that. I
Now - Tayl- -- uh, ah, but, no - that was the way

H.

Yeah.

H.M.Jr:

I, I'm more than pleased to do it the way you

H.

we got it, but I, I, I'm - hello
suggest.

H.

Yes, that's the, that's the logical way; that's
been my line of ideas you know, all the time.

-3H.M.Jr:
H.

H.M.Jr:

Fine. Well, we'll do it that way.
All right, Henry.
Goodbye.

402

403
March 18, 1938.
10:30 a.m.

RE CEMENT PROGRAM

Mr. Haas

Present:

Mr. Blaisdell

Blaisdell:

There are two or three things, Mr. Secretary. First,
I didn't want you to think that we had forgotten
steel completely. And so I sat down the other night
and just wrote down what I called the beginnings of a
program, and in spite of the fact that this isn't a
very clean document I'm going to show it to you, and
I want to make just one point strongly. "J.L.L." means
John Lewis, of course.

(Secretary reads memorandum entitled

"Beginnings of a Program for Steel

H.M.Jr:

Incidentally, as Acting Attorney General Mr. Robert
Jackson has written me a most enthusiastic letter
supporting me in doing this, see, and it would be the
first task a ssigned to Mr. Thurman Arnold, and he'll
be here. They're not dumb over there. They realize
this is a chance - I mean Robert Jackson realizes this
is a chance to win E case. Christ! they haven't won
one since they've been here on - I mean on this thing.
And with this support, this gives them just a natural,
and Bob Jackson is just crazy about it; wrote me E

very strong letter.
Bleisdell: "ord is not so good from Mr. Hull.
H.M.Jr:
Well, I didn't
Blaisdell:

Doesn't make a great deal of difference.

H.M.Jr:

Doesn't make a - we got enough w eapons. And if we have

to get it, I'll go to the President. Incidentally,

can't the President - I don't know what you say - reduce

the tariff automatically on some of it? Does it have to

be a trade agreement?
Has:

That's the cost thing, which Fox says might give the
opposite of what we want, figuring the way they figure

H.M.Jr:

cost under that statute.
It doesn't matter.

Haes:

It doesn't mean much anyway.

404
-2H.M.Jr:

This is what I want. This is good as a start.

Blaisdell:

It's just a start.

H.N.Jr:

Well, this is what I want to say. I think the cement
thing will be in such shape by Monday that we
can go.
President
I hope to get away, unless something
leaves on the 22nd; I hope to go away on the 25th for

two weeks. Before I go, I'll have that cement thing
well started. I doubt whether the racket boys will
nave anything before I leave, but they certainly will
by the time I come back. See? This thing - once we
And then this thing could
get the cement thing
be studied, but - I mean you'd have plenty of - in
other words, it won't be one of these day and night
things we've been doing. After you're through cement,
you can take two weeks' work on steel. But before I
even talk to Lewis, I want to talk to the President,
and I don't want to talk to the President about steel
until ne comes back, see?

Binisdell: There is just one point in that connection that I

want to make, and that is that the railroad business

Blaisdell:

Well, I'm in on that, and
... is hot.

H.M.Jr:

And don't worry.

phaisdell:

I wanted you to have that one thing in your mind as
one of your elements, one of your tools possibly.

H.M.Jr:

That's all right. But he's asked for a report by

Jr:

Thursday. That report will nave to go down to Warm
Springs, and if he does something - we've got lots

of time. It's a very good idea, it's a peach of an
idea, but - I mean I sat in at both those railroad

meetings, and I'm not worried they'11 get the jump
on us, because that'sthe most terrible mess I've ever

listened to, bar none. It's almost incredible what a
mess that is. But that's a very good idea.

And the President knows all about steel rails, because he used to ride up to Albany with a vice president but
New York Central would give them a private car, to them.
they'd always put a vice president on to talk And the President - I don't know - would see these

405
-3-

what's a very heavy rail? Blaisdell: 110, 120.
on the siding. "What you got those big rails
H.M.Jr:
for? Why don't you use a 75-pound rail on the siding
instead of 110?" And ne finally wangled it out that something like this: that the Steel directors of the
New York Central, who are on the New York Central

board, sold them 110-pound rails for sidings, whereas,
let's say, a 75-pound rail would have done just as
well. "Then," he says, "you talk to me about not
being able to make things meet."

So this would get a very sympathetic response. I've
got the advantage - I've been longer with him than
anybody else in this town. I came up through Albany.
I know what he's interested in, and this would hit him
just right, see? He'll love that. But don't forget
plaster.

So my thought is this. This is fine, but until -

I won't be back, unless things crack wide open, until
the tenth of April, so you can be working on steel
while I'm gone. But I do hope that the boys will
have something - I'm not very hopeful - by Monday one thing on a racket that we can say, "All right,
that's the thing." Barton has asked to see me. I
can't see Barton. I've got too much and I'm too tired.
So Barton will have to wait.
Now, I'm not worrying about - I'm not worrying about

the tariff end of the thing.

Blaisdell: Well, that was the second one, so that's clear.
Now, the third thing is a matter that Mr. Hinrichs
talked to me about yesterday. He is a little bit
worried. He is worried that we're going to go on

a punitive expedition against cement, and that we
are not considering a whole problem of whether we're
going to cooperate with industry or whether we're
going to punish industry.
Now, personally, I'm not very much worried about that.

I think as long as we stick to sound lines of policy

406
-4H.M.Jr:

Oh, I'm not worried. In the first place, the cement
thing went over because - as a matter of fact, the
President has been laying for six months to do something about monopolies. Well, when he hears about

this - this is a natural for him. And he's been here
for five years and we haven't done any monopolies in
the manufacturing - nothing.

Now, the normal thing is - what we'll do is, we'll
simply transfer the authority to Procurement to buy
all the cement for the Government. Then they come
in with a tie bid. Then we'll have to send for the
industry and sit down with them. Now, there is nothing
punitive about that. You see, I've been all through
this thing again and again with the President. And
for your strict personal information, to get the
background, the reason I made all those remarks is
the Department of Justice has never backed us up, see?
They've never backed us up on this question of tie

bids, and they sit there and they've been waiting for
a grandstand play. But they have never backed us up
in what we've done in Procurement. every time we want
something - "Oh, it takes too many lawyers," so forth
and so on.

But this thing fits into the President's whole
philosophy on monopoly, and the chances are nine out
of ten that the Department of Justice will grab this
thing and run with this ball, which is all right.
And in the big public works program that we have,
we're going to get cement cheaper. Now, I'm not

worried, but - I mean this fits into his whole

program.

And Jackson's been groping and groping to find something

to do this thing with, and it's just - I don't know how

you feel about NRA, but NRA froze those things and gave
them the excuses and from that date down to now, Mr. -

what's the lawyer for NRA? -

Blaisdell: Richberg.
H.M.Jr:
Richberg - I mean he's trying to continue that whole
thing. Now, everybody in the Treasury is opposed to
it, the new crowd in Justice are opposed to it, the
President is opposed to that sort of thing - giving
these industries a chance to freeze their prices. Huh?

407
-5-

Blaisdell: That's the whole thing.
H.M.Jr:

What?

Blaisdell: I sat on the consumer end over there, so
H.M.Jr:
I mean you work the way I want you to. I want you
to point these things out. But looking at the thing
in - the answer to Mr. Hinrichs is that, looking at
the thing - What's the President's policy? This fits
one
hundred
percent into what the President is trying
to drive
at. Check?
Blaisdell: Check. George and I said the thing we wanted to do

was just bring his point of view to you, and we felt
that you had already

Yes, that's all right.
daas:

He feels happier that we've told you about it.

H.A.Jr:

That's all right, but he just - he's got a little piece

Blaisdell:

of the picture. And I don't want to be personal, but
he's talking like Roper's advisory council. You know
That's all right, I understand perfectly. Now, this
letter just came to me.

H.M.Jr:

That's all right.

Haas:

There was one other point, Tom, they mentioned, which

I'm sure the Secretary has very well in mind, but just
for his information you might tell him about the
broader attack.

Blaisdell:

You go ahead, George.

Hass:

This is the thing. I'm just repeating. He, Hinrichs,

wanted - he said, "It doesn't do any good to go at one
commodity; you have to go at a large group.' And I
told him that was your original idea and you're working
on it, and this is the way you're proceeding on that.
And I told him too that Walker had worked out this
committee proposition, that you asked me to look up

the British thing, you started that whole thing, so I

I.M.Jr:

was sure you have that well in mind.
Well - and I have a man in mind whom I invited to come.
Did you ever work with Westerfeld?

408
-6-

Blaisdell: Yes, I worked with him in AAA.
H.M.Jr:

How did you like him?

blaisdell:

Personally I was very, very fond of him.

H.M.Jr:

Why do you say "personally"?

Blaisdell:

Because I have one hesitation on him as a negotiator.
AS a technical man in the materials field, he knows

the thing from A to Z scientifically. Now, whether
he has the bargaining point of view or not, I don't
know.

H.M.

I see.

Blaisdell:

So on that I just haven't any judgment.
Excuse me. (Looks at ticker clippings)
Just got another weak spot in the bond market.

H.M.Jr:

Blaisdell:
H.M.Jr:

I was just saying, on that I don't have any judgment.
As to the bargaining power.

Blaisdell: AS to his ability as a bargainer.
H.M.Jr:
Well, let's put it this way - as to his brain.
Binisdell: No question there at all.
H.M.Jr:

Able?

Blaisdell: Very.
H.M.Jr:

And open-minded?

Blaisdell: Very.
H.M.Jr:

Has he any social sense?

blaisdell: Very high.
H.M.Jr:

Very high. Humanitarian?

Plaisdell: Very.
H.M.Jr:

Huh?

409

-7-

Blaisdell: Very.
Very. How about as to work with others under great
H.M.Jr:
pressure?

Blaisdell: Pretty good.
Pretty good. Does he fly off the handle?
H.M.Jr:
Blaisdell: Occasionally. Wayne knows him pretty well.
Well, Wayne thinks he's swell.
H.M.Jr:
Blaisdell: And Wayne worked more closely with him than did.
H.M.Jr:

And Henry Wallace is crazy about him. He's crazy
about him.

But is he a man of ideals?
H.M.Jr:

Very high ideals. Highest.
And how about his capacity for work? I mean is he

Blaisdell:

Well, ne is a man 65.

H.M.Jr:

Just 60.

Blaisdell:

Just retiring.

H.M.Jr:

60.

Blaisdell:

I think he probably is O.K.
I mean is he 60 as far as his attitude towards work

Blaisdell:

H.M.Jr:

is concerned?

Blaisdell: I would say he probably works all hours.
H.M.Jr:

Blaisdell:
H.M.Jr:

I see. Well, he sounds like The only question you

got is whether he's a negotiator.
Yes, I just don't know.
Well, you can't tell. I say if he worked for Sears
he ought to be a pretty good negotiator.

410
-8-

Heas:

Walker mentioned - said he was a diplomat - been

H.M.Jr:

Sounds pretty good.

Blaisdell:

I just don't know, so I withhold any judgment. This
just came from Sears, and one of the things that I've
been playing with for some months is lumber. And one
of the things that I couldn't explain in the whole
lumber picture was the rise of prices that took place
there in the first half of '37, which was very, very
sharp, and I studied all the figures there were and
it didn't make any sense at all. Well, I got this
after several tries through Mr. Walker. (Hands to
Secretary) You didn't see this, George.
(After reading paper) In other words, we added to it,

H.M.JT:

some kind of attache militaire.

huh?

Binisdell: Apparently. Now, that's his judgment, of course, and
as I say, I've been trying to get somebody in the
industry who knew the situation, who would have the
judgment, and I thought that you'd be interested in
seeing that.
I.M.Jr:

Very.

Blaisdell: Now, the last thing that I've got in mind is again a
personal question.

H.M.Jr:

Yes.

Blaisdell: Because in one sense I'm in a little of an embarrassing
position, the reason being that part of my job over at
National Resources is a confidential report every
Saturday to the Advisory Committee; that's Ruml, Henry
Dennison, Charles Merriam, and Mr. Delano.

H.M.Jr:

Yes.

Bloisdell: And I told them I was doing this kind of work and they
said, "That's swell. But then the question is, how
much do I say to them about what I'm doing? And so
far I've just stalled and told them we're working on
prices.

H.M.Jr:

Could you stall another week?

411
-9-

Blaisdell: I think so.
H.M.Jr:

Until
we get week.
this to the President Monday. I'd
stall another

Blaisdell: Sure.
H.M.Jr:

If there's any trouble, let me know. I'll call Mr.

Delano myself.

Blaisdell: Well, I just wanted you to know.
E.M.Jr:

who's Chairman?

Blaisdell: Mr. Delano.
H.M.Jr:
"hy don't I tell Mr. Delano now much I appreciate
your services?

Blaisdell:
H.M.Jr:

Blaisdell:

Well, that's
would that help at this time?
Nothing of that sort necessary. It is purely a
matter of the confidential nature of the work
that I'm doing here, plus the confidential nature
of the work that I'm doing there, and trying to
keep two confidential things separate.

R.M.Jr:

I'd stall another week. How big a staff have you

Blaisdell:

I haven't got any staff.

H.M.Jr:

who is there besides yourself?

got over there?

Blaisdell: I mean on my job all I've got is a secretary.

H.M.Jr: I see.
blaisdell: Of course, Means is working - he's got his staff and

his secretary. He's got a small staff. But I've got
no staff at all. So that what I do is to try to keep
myself informed of what's going on in a dozen different this

places, and that's how I happen to know about

H.M.Jr:

railroad situation.
All right. That's a swell idea.

412
-10-

Blaisdell:

Working on Mr. Delano there.

H.M.Jr:

Well, if you don't mind, I'd stall one more Saturday,
and then maybe by next Saturday you can tell him the
whole story, see?

Blaisdell: Right.
H.M.Jr:
Because I hope, if the President likes the idea, to
get Westerfeld to take this thing and create this
board and set up regional boards, and set up the

whole business.

Confidential
mulet 18,1938
Beginnings of a Program for Steel
413
1. JLL should negotiate his contract on the basis of no increased labor
costs in the steel industry but with the maintenance of wage rates.
In view of the character of the industry and the modernization of

plant now going on this is easily possible.
2. Any loans made to railroads in the course of the railroad program

should be used as the basis for bringing down the cost of steel rails.

public would

3. The Maritime Commission, the Army and Navy purchases of steel should

be used as a basis for similar negotiations.
4. Development of data necessary for action by the Department of Justice

in an anti-trust suit.
5. Possibilities of tariff reduction in United Kingdom agreement.
6. The order of procedure would be somewhat as follows:
a. White House conference with JLL.

Prelin

b. White House conference with steel executivos.
C. Simultaneous operations under reciprocal trade agreement,
railroad loans, government purchases and Department of

Justice and/or Federal Trade.
7. Steel has long been convinced that lower prices do not mean more business.

This is true as long as purchasers regard the price of steel as going

siel

no lower. Hence it is desirable that any out made be sharp and sizeable.

It is possible to take the approach that a cut in the price of steel
at this time would be a patriotic action based on the public price
policy instead of a purely private price policy although it probably
would result in increasing business for steel manufacturers as a result
adequate
of more accurate general buying.

414
March 18, 1938.
MEMORANDUM:

The State Department drafted a proposed Presidential
message to the Congress relating to the Hungarian proposal for
a new debt arrangement and submitted the same to the Treasury.
Messrs. Taylor, Bell and Bernstein went over the proposed
message and at a conference with Mr. Livesey of the State Department suggested certain changes, and also prepared a covering

letter from the Secretary of the Treasury to the President.

Mr. Livesey was to submit the changed message and the proposed

letter to the Secretary of State for his approval. Thereafter

Mr. Taylor was advised that the changed message and proposed

letter would not be submitted to Secretary Hull, but that
Mr. Feis would take full responsibility for the same meeting
with the approval of the State Department, and Mr. Feis was to
give the Treasury a memorandum to that effect.

March 18, 1938.
11:46 A. M.
H.M.Jr:

Hello.

Operator:

Nathan Straus.

H.M.Jr:

Hello.

Operator:

Go ahead.

415

Nathan Straus: Good morning Henry.
H.M.Jr:

Hello Nathan. I just want to congratulate you

on making your first commitment.
S.

Thanks. It's awfully nice of you.

H.M.Jr:

I was delighted.

S.

That's swell. Henry, the boss seemed very much
pleased yesterday.

H.M.Jr:
S.

Well that's fine.
He said he thought we'd gotten going quickly and
he was pleased with the geographical distribution.

H.M.Jr:

Well that's fine.

S.

I, I think we're going to get going on it. It
ought to run along pretty smoothly; we'll have

another bunch soon. And always remember, my

boy that I never could have done it if it hadn't
been the encouragement and assistance that you
gave me in the beginning.

H.M.Jr:

Well

S.

Well that's a fact.

H.M.Jr:

Anyway, ah, I; I'm glad to see it, and all that;
right now it all helps, and I, I don't think you
could have gotten very much faster than you did.

S.

I don't either.

H.M.Jr:

No.

S.

Unfortunately.

-2418
H.M.Jr:

No. Well, that's all I had.

S.

Fine.
Remember
me here.
to your father. I was glad
to hear
he was down

H.M.Jr:

Right.

S.

Right.

H.M.Jr:

Goodbye Nathan.

S.

Good luck Henry.

March 18, 1938.
1:53 P. M.

H.M.Jr:
Fandolph Burgess:

H.M.Jr:
B.

H.M.Jr:
B.

417

Hello.

It's about 1 to 4/32 off. We've bought
seventeen and a half million today.
Seventeen and a half million?
Seventeen and a half, yes.

Well,
I think considering today, that isn't so
bad.
No I don't think it's bad. Your partners over
there at the Board, ah, want to spend a lot of
money.

H.M.Jr:
B.

H.M.Jr:

Well I - I only talked to them a few minutes at
about five o'clock last night.
Yeah.

And, ah, when I said I was satisfied, ah, I
gathered from the inflection of their voices
that they seemed surprised.

B.

H.M.Jr:

B.

H.M.Jr:

They didn't seem satisfied. They thought it
was terrible to show - show prices a quarter of
a point off in some things.
Well I, I, I'm, I get - I've had so much that
when I'm satisfied, I, I, I don't - I haven't
got time to argue about it.
(Laughs) That's right, yes.
I mean I thought you carried out the thought that
I had in mind.

B.

Well I thought I was, yes.

H.M.Jr:

And when you do that what's the use of picking

B.

That's right.

at you?

-2H.M.Jr:

Huh?

B.

That's
right. Well, one has to get along with
everybody.

H.M.Jr:

Well what's the trouble over at the Board?

B.

418

Oh, they were disappointed that it showed any
visualize what's going on over the world.

drop last night, but I don't think they quite
H.M.Jr:
B.

I don't either.
And how you can hold a market absolutely steady

in the face of that, it just doesn't sound

reasonable to me, but - never mind, we'll get
along with them the best we can.
H.M.Jr:

No. When I'm not satisfied you know I don't
hesitate to say so.

B.

I hope that's right. (Laughs) I always thought so.

H.M.Jr:

No.

B.

Well, then I'm glad you are; we'll try to keep the
other fellows satisfied too.

H.M.Jr:

0. K.

B.

Very good.

H.M.Jr:

All right.

B.

Goodbye.

419

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE March 19, 1938.
TO

FROM

Secretary Morgenthau
Mr. White

Attached is a review which you requested of the book
"How Sweden Overcame the Depression", by Arthur Montgomery.

The review was prepared by Mr. . Adler, of this Division.

The review is a brief summary of the author's views.
Our own evaluation of what the Swedish Government

did to bring about recovery and what we can learn from
the Swedish experience is the subject of another memorandum now in preparation.

March 18, 1938.
419-A

Review of "How Sweden Overcame the Depression", by Arthur

Montgomery. Translated from the Swedish by Mr. L. B. Eyre,
Published in Stockholm, 1938.

This book is a brief study of economic development in
Sweden from 1931 to the end of 1936. It begins with & historical survey of the main trends in the economic evolution
of Sweden and then proceeds to analyze the process of recovery
in the monetary, financial and industrial spheres. It evaluetes the contributions made toward recovery by the Government's

monetary policy and by its public works policy. Its conclusions are:

1. The monetary policy adopted by Sweden, i.e.,
the devaluation of the krona, and its pegging in
terms of sterling, was of fundamental importance
in Sweden's economic revival.

2. Next to monetary policy the international
economic trend and its effects on the revivel
and expansion of Sweden's exports was the most
important factor.
3. The Swedish Government's unemployment and

public works policy was of only secondary importance

in this respect. Nevertheless, it did help reduce
the pressure of the crisis.
4. The extent and rapidity of recovery was due in
a large measure to the favorable competitive industry in the international market.
The author is careful not to claim too much credit for

Swedish governmental policy and actions. It has been fashionable in many quarters to point to the Swedish Government as a
model of monetary and economic wisdom and to attribute the recovery which the Swedish Government experienced to its policy

and actions alone, the implication being that we would do well

to study, profit by and imitate its example. The book hardly
lends support to this fascile advice.

S. Adler

(Reediary
entry
03-26)

3-18-38. 420

dear Mr. Presidents

I am enclosing for your consideration
a draft of a proposed message from you to the
Congress, prepared by the State and Treasury

Departments, relating to the Hungarian proposal
for a new debt arrangement.
The Secretary of State and I recommend

that you submit the matter to the Congress in

this namer.
Faithfully yours,

Amergenthang
Secretary of the Treasury.

The President,

I

The White House.

Inclusion

3/19/38

also att do

and memorie

of 2-7-38
signed by
Pelemyi

OFFICIAL COMMUNICATIONS TO

421

THE SECRETARY OF STATE
WASHINGTON

ty

DEPARTMENT OF STATE
WASHINGTON

O

no

In reply refer to

My dear Mr. Taylor:
I have looked over the changes made in the Treasury

this morning from the State Department draft of the
President's message on the Hungarian debt, which Mr. Hull

had initialled. The changes are merely the insertion of
the word "original" before"indebtedness at the beginning
of the third paragraph and the deletion of a paragraph
describing the debt settlements which Hungary is making

with other creditors.
I am sure that Mr. Hull would not expect me to submit
these two changes for his personal consideration and that

his approval of the draft may be regarded as sufficient
without my bothering him with these details.
I have therefore sent you the drafts as rewritten
with these changes.

-

Sincerely yours,
The Honorable

Wayne 0. Taylor,

Herbert tell
Herbert Feis,

Adviser on International
Economic Affairs.

Assistant Secretary of the Treasury.

422

TO THE CONGRESS OF THE UNITED STATES:

I transmit herewith, for the consideration of the
Congress, a communication from the Minister of Hungary

on the relief indebtedness of Hungary to the United
States, in which the Hungarian Government tentatively
formulates for the consideration of the American Government a possible basis for a new debt arrangement

between the two countries to replace completely the
Debt Agreement of 1994 and accruals thereunder.
The indebtedness of the Government of Hungary to

the Government of the United States is not a war debt

but is properly designated as a relief debt, having
been contracted in May, 1920, under the authority of
the Act of March 30, 1990, which authorized the United

States Grain Corporation, with the approval of the

Secretary of the Treasury, to sell or dispose of flour
in its possession for cash or on credit at such prices

423

-2-

and on such terms or conditions as considered necessary

to relieve the populations in the countries of Europe or
countries contiguous thereto suffering for the want of
food. The American Relief Administration acted as the
Fiscal Agent of the United States Grain Corporation in

dispensing this relief.
The original indebtedness, the principal amount of
which was $1,685,835.61, with interest accrued thereon
from May 1920 to December 1923, at the rate of four and
one-fourth percent per annum, was funded as of the latter
date, by agreement made in April 1924, into bonds of
Hungary in the aggregate principal amount of $1,939,000,

maturing serially in the succeeding years for sixty-two

years, bearing three percent for the first ten years
and thereafter at the rate of three and one-half percent
per annum. In approving this debt settlement, the Congress
authorised the Secretary of the Treasury to subordinate
the

424

the lion of the bonds taken under 11 to the lien of the
Hungarian Reconstruction Loan, which was about to be

issued and sold in numerous countries, including the
United States. In May 1924 the Secretary, acting upon
this authorization, formally subordinated the American
Government's lien to the lien of the Reconstruction bond
issue.

On December 23, 1931, the Hungarian Government pro-

claimed a transfer moratorium suspending payment in foreign

currencies of all Hungarian foreign obligations, public
and private, except the aforesaid Reconstruction Loan of
1924. Payments on the latter loan were subsequently suepended in part. During 1937, the Hungarian Government

began liquidating the transfer moratorium by negotiating
agreements with the foreign holders of Hungarian obliga-

tions for the acceptance of reduced payments in full

satisfaction of existing indebtedness. It is in this connection that the Hungarian Government has now come forward

of its own initiative in an effort to reach an agreement
with

425

of
with the United States Government under which the relief

indebtedness can also be discharged in full.
No readjustment of the terms of payment of the Hungarian indebtedness to the United States can be made
except pursuant to Act of Congress. The Hungarian Govern-

ment is seeking a definitive readjustment of the terms of
payment of this indebtedness on the basis of full payment

over a period of years of the total original amount
borrowed, without interest.
The Hungarian Government calls attention to the

similarity between its suggested basis for payment and
that accepted by the United States in the Austrian Debt
Agreement of May 8, 1930, which provided that a sum very

slightly in excess of the original Austrian indebtodness
incurred in 1920 should be repaid without interest in

forty annuities. The Congress of the United States, after
full consideration of the nature of the Austrian indebtednoss, voted by a large majority in the House of Representatives and by a unanimous procedure in the Senate, to
authorize the signature of the draft agreement which had

428
-Bo

been prepared by the Treasury Department and the repre-

sentatives of the Austrian Government. The Hungarian

debt is a relief debt like the Austrian one.
The Hungarian Minister also suggests that the terms

compare favorably with those in several other debt settlements, and that in announcing the signature of the Debt

Agreement with Austria in 1930, the Secretary of the
Treasury, Mr. Mellon, said:
"The settlement compares favorably with the settlements made by the United States with the Governments

of Greece, Italy and Yugoslavia.
It has of course been the consistent policy of the
United States to consider each debt in the light of the
circumstances of the debtor government, and it is with
this in view that the Hungarian communication is trane-

sitted to the Congress.
I believe the proposals of the Hungarian Government

should receive the most careful consideration of the
Congress. They represent a noteworthy wish and effort
of

427

of the Hungarian Government to meet its obligations to
this Government.

Enclosures

Aide Memoire on Hungary's

relief debt to the United
States, February 7, 1938.

THE WHITE HOUSE,

EA:FL:DJW

2-28
3-18

428

March 18, 1938

My dear Mr. President:

Mr. Magill opens the public
hearings on the tax bill before the

Senate Finance Committee on Monday.

He and I are most anxious to
have a chance to confer with you before

Monday. We will greatly appreciate it
1f you could see us sometime Saturday
as Hagill will be on the Hill all day
today.

Faithfully yours,

The President,
The White House.

429
March 18, 1938

At 11:45 a.m. Mr. Diggs and Mr. Upham were in Mr.
Morgenthau's office.

The First Wisconsin National Bank of Milwaukee, prin-

cipal unit in the isconsin Bank Shares Corporation had
made application to the Comptroller of the Currency for
permission to consolidate into the First Wisconsin National
Bank another Milwaukee unit of the Wisconsin Bank Shares

Corporation, namely, the Badger State Bank and operate it
as a branch.

In view of the recent occurrences in connection with
additional branches for the Central Bank of Oakland, a unit
of the Transamerica Corporation, Mr. Diggs and I were agreed

that the Secretary should be consulted before this application were granted.

It was pointed out to the Secretary that the Badger
State Bank had been owned by the Wisconsin Bank Shares

Corporation many months, that it is located within the city
of Milwaukee and that city-wide branches are permitted by

Wisconsin law, and that permission to the First Wisconsin
National Bank to operate it as a branch would be moving in
a direction away from holding companies and toward branch

430

-2banking. Moreover, it meant the absorption of a state bank
by a national bank.
Mr. Diggs and Mr. Upham both recommended the granting

of the application and Mr. Morgenthau said he saw no objec-

tion to it but asked that it be checked with Assistant
Secretary Taylor. Mr. Taylor said that he was "enthusiastic"
for such action.

Upm

431
MEMORANDUM OF THE DAY'S ACTIVITIES

March 18, 1938
To:

The Secretary

From:

Mr. Magill
Bank holding company bill

Senator Herring of Iowa called this morning to ask what is the
President's present position regarding the abolition of bank holding
companies. He said that he understood that the President had originally
wished to abolish such companies; had later approved of the Glass bill
to freeze the present situation; and now was returning to his original
view. I told him that I had not been in touch with the bank holding
company situation. He asked me to find out what I could in the Treasury

and let him know. After a talk with Mr. Taylor, I told the Senator

that all I knew was the President had the subject under advisement at

the present time, but I did not know his attitude.
Processing taxes

Mr. Doughton called to inquire whether the Treasury was recommending the processing taxes which he understood Senator Pope was formu-

lating. I told him that Senator Pope had asked us to furnish some
administrative information and that we had done so; but that we had not

been asked to make any recommendations with respect to processing taxes.

I told him that I understood that Senator Pope was actively working on
such legislation.
Mr. Doughton inquired whether we had heard anything further from

the President regarding the tax bill, and I told him that I had not had

any conference with him since the House passed the bill.
,

Liquor taxes

Mr. Fred Lee, representing the Distillers Institute, called on the me
to present information in opposition to the proposed increase in

tax on distilled spirits and to inquire what the Treasury's position
would be with respect to it. I told him that I had not yet formulated
any recommendation on the subject. Lee said that his people thought
that the increase in tax would not produce as much additional revenue

even as the Treasury estimated, since liquor revenues are already liquor falling

off and the increase in tax would necessarily result in higher

prices. He said the increase in tax would also mean an additional in
investment of about $7 millions in inventories of liquore the process distillers
of movement from the distillers to the consumer; and that bankers.

would be hard put to it to obtain this amount from their

--

432

Do you want me to take any formal position on the subject; or
shall I say that it is simply up to the Committee to decide what

excise taxes shall be imposed and at what rates?

Rm

433

March 18, 1938

HM,Jr suggested to White and Lochhead today

that they begin to think about our stopping all de-

sterilization.

434

March 18, 1938.
4:35 P. M.

H.M.Jr:

Hello.

Operator:
H.M.Jr:

Mr. Walker at Chicago.
0. K.

Operator:

Go ahead.

H.M.Jr:

Hello. Hello Mr. Walker.

L. R. Walker:

Hello Henry.

H.M.Jr:

Walker?

W.

Yes.

H.M.Jr:

This is Morgenthau.

Yes. Listen Henry, say, General Woods spoke to
me this morning about your request on cement a man to talk to you about cement.

W.

H.M.Jr:
W.

H.M.Jr:
W.

H.M.Jr:
W.

H.M.Jr:

That's right.
And, ah, I know just exactly the man that I think

you'd like to talk to.
Good.

His name is, ah, McQueen. M - c - Q - u - double e - n.
Just a minute. M - c
Q - u - double e - n.

Q-u-e-e- - n. Yeah, McQueen. Yes.

W.

Yeah, McQueen, he lives in Pittsburgh.

H.M.Jr:

Pittsburgh.

W.

Now if you would care to, I'd be glad to call him
up and explain the situation to him before you see
him.

-2-

435 435

H.M.Jr:

All right. What's his business?

W.

Why, he has been the, ah, head of the National
Building
Materials Association for a number of
years.

H.M.Jr:

Yeah.

W.

And that has now been dissolved

H.M.Jr:

Yeah.

and he's the counselor for the large cement

W.

H.M.Jr:

distributor of the country.
Distributor?

W.

Yes.

H.M.Jr:
W.

Now that wouldn't be in conflict with the, with
the, with the, with the mills, would it?
Well, of course, he, he - having been in that
business for years he, he understands both
manufacturer and, and distribution, you see.

H.M.Jr:

But I mean would he - would it be to his interest

W.

Oh yes.

H.M.Jr:

It would be?

W.

Oh yes.

H.M.Jr:
W.

to break the, ah, the monopoly?

It would be.

And it's also to his interest to - he knows - you
see, there's quite a duplication of costs in
distribution.

H.M.Jr:

Yeah.

W.

And if they had their own way and would do their
own distributing and, and - in the cement industry

H.M.Jr:

Yeah.

-3 -

436 438

Being cement manufacturers theyacknowledge

W.

there's a twenty-five cent a barrel cost. See?

H.M.Jr:

I see.
A necessary cost, and he, he, he, he knows those
figures; he can give you a very complete picture

W.

of the thing.

H.M.Jr:

Well see if you can get him to come here Tuesday.

W.

Tuesday?

H.M.Jr:

Yeah.

W.

All right, I will.

H.M.Jr:
W.

Will you send me a wire?
Yes sir.

H.M.Jr:

How's your business?

W.

Oh, things are coming along very nicely, I reckon.

H.M.Jr:
W.

Colonel Woods says your department's the only one

that's showing a gain.

(Laughs) Well, not quite that, but we - we're
very fortunate.

All right, sir, I, I'll send you a wire.
H.M.Jr:

Thank you, thank you.

W.

You bet.

437

GRAY
JR

Berlin
Dated March 18, 1938
REC'd 9 a.m.

Secretary of State,
Washington.

133, March 18, 11 a.m.

The following measures with respect to Austria were
enacted in laws signed yesterday which go into force
immediately.

One. The Reichsmark is made legal tender in Austria

beside the schilling at the rate of one mark Equal 1.5
schillings.
Two. Reich Minister of Economics is authorized to
amend all existing payment restrictions between Germany

and Austria or to cancel them wholly or partially.
Three. Reich Minister of Finance is authorized to

declare partially or entirely duty free goods of Austrian
origin.
Four. The management of the Austrian National Bank
is given over to the Reichsbank and the National Bank will

be liquidated by the latter for the account of the Reich.
The entire personnel of the Austrian National Bank is
likewise taken OVER,

Five.

/

438

-2- #133, March 18, 11 a.m., from Berlin.
Five. The German railroads take over the Austrian
Federal Railroads both as to capital and operation.
WILSON

TEG:RR

439
COPY

Paris
March 18, 1938.

Rec'd 9:05 a.m.

Secretary of State
Washington.

427, March 18, 9 a.m.

The Government last night received a vote of confidence 369 against 196 on the demand that interpellations
on foreign policy be postponed until next Tuesday and

that other interpellations be postponed until a later
date.
WILSON.

FEDERAL RESERVE BANK
OF NEW YORK
DATE

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

March 18, 1936.

440

SUBJECT TELEPHONE CONVERSATION

WITH BANK OF ENGLAND.

Mr. Bolton called me at 1 o'clock. They had had a very
bad day today, the further complication in the Polish and
Lithuanian situation causing an enormous demand for dollars. They
had supportedthe market on the way down to about 4.95 1/4 where it

stood at the time of closing. They had sold $14,000,000 today for
their own account and, in addition, they had given the Belgians,
who were "in a pretty bad way as well, another $5,000,000. That
put him right over our 700,000 ounce order and left him short at
the moment of 7 or 8 million dollars. He wondered, he said, if we
could help.him out and give him something to work on tomorrow. I
promised that I would get busy right away.
Making it amply clear that I was thinking out loud and
anxious to clear my own mind in the matter, I asked Bolton what he
thought would happen if Washington, in renewing the order, lowered

the price to, say 34.76 or 34.75, for instance. Did he feel that
that step would be advisable if the demand for gold increased fur-

ther and further? Bolton replied in that case the depreciation of
sterling would probably proceed with greater speed which, in turn,
would add to the state of uncertainty. Since wewere in the midst of
an emergency, greater uncertainty did not seem desirable. From a

technical viewpoint, a change in the gold price of 34.77, up or down,
would make management of the London gold market more difficult as they

would then have to contend with three uncertain factors; the sterling-

dollar rate, the gold price in terms of sterling and the gold price
in terms of the dollar. The price of $4.77 had, as a result of

FEDERAL RESERVE BANK
OF NEW YORK

DATE March 18, 1938.

OFFICE CORRESPONDENCE

SUBJECT: TELEPHONE CONVERSATION

CONFIDENTIAL FILES

L. W. Knoke

4

-2-

WITH BANK OF ENGLAND.

experience, by now acquired the reputation of being the export point
and arbitrageurs were automatically guided by it. The present prac-

tice for the British monetary authorities, when fixing the London
gold price every morning, was to calculate the equivalent of 34.77

at the then current sterling rate and, after fixing, the gold price
would move in complete relation to the dollar-sterling rate. If
Washington changed the 84.77 price, the fixing in London would here-

after have to be based on such changed price. This might well lead
to more pronounced sharp fluctuations which would probably disturb

the market even more than it is disturbed now. If a change in
Washington's price were the result of changes in the freight rate or
the insurance cost, everybody would, of course, understand that and
accept the change without comment. But a mysterious, unexpected

change in the gold price, not connected with higher or lower freight
or insurance rates, would cause comment and more uncertainty.

I asked whether hoarding of gold was still in evidence and

Bolton was quite emphatic in his insistence that it was. They had
sold £500,000, today for instance, to the market at prices much too

high to make profitable shipment to New York possible. I inquired as
to the total now hoarded in London and he thought 120 to 130 million
pounds were a fair figure.
With reference to the internal situation in France, Bolton
said things 01 were CAM pretty steady. Although the political parties had
not as TH3MTRA936 yet come to an agreement, he understood that everybody in Paris

felt certain that such an agreement was bound to come sooner or later.
LWK:KMC

COPY

442

Vienna

Dated March 18, 1938
Rec' d 1;50 p.m.

Secretary of State,
Washington.

114, March 18, 5 p.m.
FOR COMMERCE FROM COMMERCIAL ATTACHE.

"24. Reichsbank absorbed Austrian National Bank

March 17, Austrian Bank in liquidation assets including
$46,000,000 gold $34,000,000 foreign exchange taken by

Reichabank. Effective March 17 exchange rate fixed one

mark equals 1.50 schillings. German Minister of Finance
authorized admit goods Austrian origin into Germany

entirely or partly duty free, eliminate or reduce present
restrictions, financial transfers between the two countries. Austrian Federal Railways absorbed by German
Railways March 18. Complete absorption Austria proceed-

ing at a rapid rate."
WILEY

443

PLAIN

MB

London

Dated March 18, 1938

Rec'd 3:05 p.m.
Secretary of State,
Washington.
RUSIL.

229, March 18, 7 p.m.
FOR TREASURY FROM BUTTERFORTH.

Sterling was decidedly offered today particularly
against the dollar. There was an incessant demand for
dollars. This flight into the dollar has EVERY appearance
of becoming a formidable movement since it is due both to
fear of war in Europe and to C. growing appreciation of the

potential Economic and financial difficulties which face
England. There are not a few in the city who today are

predicting that the rate willgo to say 4.80 in the not
distant future.
The franc moved from 1601 with hardly any dealings

to 163. Following a report that Blum would resign OVER
the WEEK End it strengthened and most dealings took place

one-half Either side 161.
The trend in British security markets was mixed due

to the Polish-Lithuanian news and the fact that today
Ends

444

2- No. 229, March 18, from London.
Ends on account. With reference to the second paragraph
of my 200, March 10, 7 p.m. and the third paragraph of my
178, March 3, 6 p.m. it is noteworthy that the Expansion
continues. This WEEK'S Bank of England return shows
bankero deposits higher by 4,766,000 pounds at the un-

usucl figure of 119,046,000 pounds, this despite a drop
of almost 4,000,000 pounds in the other securities item

of the benk return. The cause of the substantial growth
in the market resources WC.S an addition of almost 7,000,000
pounds in Government securities which at 112,206,164 pounds

are at their highest level for many WEEKS. The total of
bankers' deposits is more than 25,000,000 pounds in EXCESS

of its level of C year ago; moreover despite a drop of

11.7 million in public deposits the total d eposit liabilities of the bank which are the real basis of credit are
nearly 12,000,000 pounds above their figure of C. year ago

at 165.3 million.
KENNEDY

SMS:

445
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: March 18, 1938, 4 p.m.

NO.: 431
STRICTLY CONFIDENTIAL.

This morning I had a talk with Bonnet. Bonnet
summarized the political situation as given below:
A National Union Government is wanted by 90% of the

Parliament and of the country; however to form one serious

difficulties will have to be overcome. There is first
the unalterable opposition on the part of the Moderates
and the Right to having a Union Government headed by Blum.

Blum, they feel, has been the leader of the Popular Front
which is now defunct, and he has been too closely asso-

ciated with the extreme Leftists. He is also responsible
for the extreme measures of social legislation which
have resulted in French economic and financial deterioration.
Likewise, Blum is too susceptible to extreme influences

in policy on foreign affairs. In addition Blum is Jewish,
and anti-Semitic feeling is growing in France without a
doubt - a number of impartial sources have confirmed this.

The Moderates are in the difficult position of not being
able to state publicly that they are opposed to Blum himself.
Thus when they declined last week and again yesterday to
accept the offer which Blum made for a National Union
based
Government, their refusal to in take this offer has been

446

(446)

-2based on the ground that Blum had insisted that the Communists be included in such a Government.

As for Communist participation, Bonnet told me that

this was a difficult problem in itself. If a Communist
Minister such as Cachin were to be included in a National
Union Government, the Moderates state they would have no

objection. They are afraid, on the other hand, that
the Russian tieup of the Communists in France would exert

a strong pull toward dangerous foreign policies on the
part of any Government in which they were included.

They are especially fearful lest the British would be
alarmed by the inclusion of the Communists, and thus

the close relation between the French and the British
might be weakened. Not only did the last Moscow trial publicly
reveal again the foul condition of Russia, but,Bonnet said,
information had come to him that Vorochiloff himself might
be included in the next group of Soviet military leaders

to go on trial. Should this be true, it would be impossible
to include the Communists in the Union Government.

Bonnet said that despite these difficulties it would
be absolutely necessary to form a National Union Government

shortly; he made reference to international dangers, and

stated also that the financial state of France is such that
the/Government present will have to resign in a few days,opinion.
in his

447

-3opinion. Ten days ago, he said, Chautemps had staked his
Government's existence upon getting full powers from Parliament 80 that the Government could successfully float an
urgently needed national defense loan. Nothing has been

done about the financial situation since that time, and
matters had been allowed to drift into their present state.
Since January the Government had been continuing on reserves

which were built up when he, Bonnet, had been Finance

Minister; at that time he had said that the Treasury had
sufficient funds to meet obligations during the first
three months of 1938, which term is now drawing to a close

and the Treasury will be without funds or is already in
that condition.
During the conversation I asked Bonnet for his opinion
as to who would head the Government of National Union.

Most people, he said, were thinking of Herriot but because
of Herriot's relationship with the Communists he would
endounter serious difficulty. There were better prospects
for Daladier, Bonnet believed. When I asked Bonnet whether
he himself might not be asked to form such a Government

he said it was not impossible that this would happen.
He believed that he would be able to form such a Government at once if he were asked to do 80. He believed that
since his failure to form a Government two months ago

there had been a change in the situation. The Socialists
had

--

448

had been hostile to him then because he had taken a strong
position against increased expenditures by the Government
when he was Finance Minister. Bonnet said he thought he
could depend on the support of the majority of the Social-

ists now, as well as the support of his own party, the
Radical Socialists, and the support of the Moderates.
I have spoken to others about Bonnet's chances, and they

do not seem to be as optimistic as it seems Bonnet is.
I asked Bonnet for his own opinion whether France
would come to the aid of Czechoslovakia if the Germans

attacked that country. In answer he said that France
would certainly do so if Great Britain promised to support
alonehe felt it would
France; if they did not give such promise,
be suicidal for the French to start in/on a war with the

Germans and Italians with merely the hope that some
aeroplanes would be sent by the Russians. France had to

face the facts, he said. France would find enemies on
three frontiers in such a war, he said, and to attack the
German counterpart of the Maginot line would be all the
French could do to help Czechoslovakia. Bonnet said again

that if the British did not promise to help France, France
could not help Czechoslovakia; this was his personal and

confidential belief. He would have to state the opposite
publicly

443

-5publicly just as the opposite has been stated by those

now in office. In his opinion most of them agreed with
his conviction that under present circumstances a prudent
policy for France is the only conceivable policy to follow.
In Bonnet's opinion there was not much danger that
the French Government would intervene in Spain, which would

be a dangerous adventure. The war in Spain is rapidly
coming to an end, and even if the present Government wanted
to send enough men and munitions to save the Spanish

Government, there is not enough time left to do so.
END OF MESSAGE.
WILSON.

EA:LWW

45
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: March 18, 1938, 5 p.m.

NO.: 432
FROM COCHRAN.

Although Blum Government won formal vote last night

market does not expect it to survive the first Senate

debate on a financial question even if it lasts until
such time. Consequently operators today were not inclined

to sell france and forward rate improved.

This morning the French control sold a little sterling but by 5 p.m. this evening had bought most of it back.
The contact with whom I spoke expects no week-end financial

or monetary developments in this country. Next Thursday's
statement by the Bank of France (omission) further Treasury
withdrawals of 1,600,000,000 francs.
WILSON.

EA:LWW

451

GRAY

JR

Amsterdam (part air)
Dated March 19, 1938

Rec'd 6 a.m., 21st.

Secretary of State,
Washington.

March 19, 1 p.m.

Department' instruction of February 23, 1938,
regarding control of figurehead money.
Reliably informed no agreement Exists. Control
EXERCISED by (one) unusually low interest rates and

international position Amsterdom which facilitates
purchasing of foreign Exchange thus depressing relative
florin value, and (two) reported USE if necessary by the
central bank of the Equalization fund.
Central European situation is not viewed with anxiety

as to influx of foreign money at the moment. Report by
mail follows.
LEE

RR

04/10/18

452
GRAY

FS

London

Dated March 19, 1938

Rec'd 8:40 a.m.

Secretary of State,
Washington.

230, March 19, noon.
FOR TREASURY FROM BUTTERWORTH.

The dollar opened at 4.95 1/6 but immediately after

gold fixing and upon receipt of a Reuter report indicating
Lithuanian-Polish dispute would be peacefully settled,
strengthened to 4.95

It later weakened somewhat when

validity of this report was brought into question but on
balance the pressure on the dollar has been negligible
today. Likewise, although gold was up at fixing to 149
shillings 51/2 pence, it later came on offer at below fixing prices.
The franc movements were without significance and

the volume of dealings not large.
KENNEDY

RR:CSB

453
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: March 19, 1938, noon

NO.: 451 436
FROM COCHRAN

With Paris banks closed and with French parliamentary
debate on foreign affairs scheduled for Tuesday now can-

celed, franc was slightly weaker in London but trading was

dull.
This morning up to half-past eleven, on the London
market there had been no intervention by French control.

This morning Pennachio of the Bank of Italy returned after
having been in Rome for a week. His people he told me

had "swallowed hard" after the affair in Austria. They
had logically taken the result as having been inevitable.
There had been an immediate warming in the Italian attitude towards Great Britain. The Anglo-Italian paying and
trade agreements negotiated by d'Agostini and signed yes-

terday are satisfactory to the Italians. Trade will be
increased and commercial credits eased thereby, in their

opinion. At the present time a French delegation of commercial and clearing experts is in Rome for somewhat similar
negotiations. My friend says they have made an aggressive
approach which has been repulsed by the Italians, and con-

sequently Franco-Italian relations have not 80 far been
improved.

I had a visit from Kano, the Japanese director of
the

454

-2the BIS and London manager of the Yokohama Specie Bank.

Kano said he believes that the United States will begin
experiencing a boom in certain raw materials and commodities
such as was witnessed from 1914 to 1917, the War years.
WILSON.

455

m
March 19. 1938

to

Secy

R.

14/30/10

MYMORANDUM FOR THE PRESIDENT:

pee

aneward

Attached herete are the three separate amoranda which you PO-

questeds (1) A proposed meesage on tax examptions (2) a wief dis-

cussion of the basic principles of the undistributed profite tax
and the tax on capital gains as embodied in the House bill; and (3) a

brief commentary on the need for a special undistributed profite tax
on closely hold corporations.

Note:

Regarding the three attachments, at the White House conference

3/19/38 A. M. - the President told Mr. Magill he would appreciate
receiving copies of each. On same day, 2:30 P.M., Mr. Magill carried
to the White House (with the above covering memo) an original of each.

(without attach
withing
March 4, 1936
To:

The Secretary

From:

Mr. Magill
Attached is a draft of a massage regarding the pending

tax bill. The draft was prepared by Mr. Gaston on the basis of
morania submitted by Messre. Shoup, Tarloau, Uphasa and Zacker.

The present draft has been checked only by Mr. Gaston and myself.

I should like to submit it to Mesers. and Uphan
if time permits.

Attachment.

requiredly
submitted to Security 3/7/08
with this attachment.
(Run took white to House)

RM/mr1

457

Discussion basic principles the

u.d.p.tax and the cap. gains tax
as embodied in the House bill (1H39682)

3/4438

The revenue bill submitted by the Committee on Ways and

Means on March 2 is another notable step in the improvement of

the Federal tax system. The important principles of tax justice
that were made a part of the system by the Revenue Ast of 1936

are here refined in the light of the experience under that Ast.
At the same time, the tax strutter is in several places simplified,
and some of the undesigable emiss taxes are repealed. Careful
study of the economic effects of the tax system has made it possible
to lesson the dampening effect on business enterprise that must always,

to some degree, attach to any tax system. Individual tax rates have
not been increased, nor has the total tax burden on corporate enterprice been made beavier. All this has been achieved without materially decreasing the revenue that would otherwise be obtained under

existing conditions. Obviously, the resulting program not only is
a technical achievement of a high order, but also expresses a farsighted policy based on fundamental seache of taxation.

The next important changes proposed by the bill are in the
taxes on corporations and the tax on capital gains. The Revenue Ast

of 1936 introduced a new principle in the taxtion of corporate in-

come in the form of a surtax on that portion of the net profite of a
corporation which was not currently distributed in dividends to stockhelders. The purpose of this tax was to correct an inequity in our
tax system which constituted a very serious loophole of escape from

(her Shoup prepared)

-8-

458

the surtame on individual income which are based on the principle
of capacity to pay.

The principle of the undistributed profits tax has been the
subject of so much misrepresentation that it is appropriate here to

state consisely the real question at issue. That question is this:
To what extent shall corporate earnings be allowed to escape the in-

dividual surtax rates that apply to all other forms of income -- to
partnership and proprietership profits, to interest from bonds, to
salaries, mages, and foost Sheltered behind the corporate well, the
corporation prefite may accumulate, free of individual surtax. Sometimes they are ultimately brought to account, when they are finally
declared out as dividends or when the stockholder, selling his shares,
obtains a capital gain - but menwhile the Government has had to
obtain money from other sources instead. Sometimes these corporation

profits essays entirely, as when the stockholder keeps his shares

until his death. The estate tax is no answer to this problem, for the
estate tax applies also to the savings from salaries, individual busimasses, and other income. The capital stock and excess profits taxes
are no answer, for they do not distinguish between income that is

retained and income that is paid out. We are driven back to the income tax and must find there a way to components for this tax-postponsment

or tax-essays privilege inherent in the corporate form.
IS is not a question of discouraging or encouraging business

as such - is is simply a question of eliminating an unfair tax

-3.
differential that favors corporate profits over other income.
When corporate profits do not pay their fair share, the missing
amounts must be made - by added taxes - other sources. *Helier"
to one taxpayer spelle "burden" to another. "Ensouraging" corporate
business means "discouraging" unincorporated business and other

forms of income. Traning a tax system is a process of weighing the

advantages in one place against the disabvaltages in another. It
will not & to FUN away from the problem by simply demanding onconsegement, relief, and oven total essage at some one point and

letting the a rest there.
The corporate form does not, however, ast, as a shield against

the personal surtex if the corporation is small and the stockholder's
income from other sources is small. Consequently there is logis
in the Committee . refinement whereby small corporations - those
with income under 825,000 - are excepted from any form of the

undistributed profits tax. These corporations will be able, under

this bill, to retain all or a substantial part of their earnings
and pay less tax than under the existing law.
Mareover, is is never acvicable to push so far in outting off
tax escape as to create an unite number of hardship cases. Some

such cases will always be found under any tax law, but in its bill
the Committee has emply eared for practically all these instances by
mining the burden widesyread and light rather than by passing on

added process and then attempting to eliminate hardships by a long

459

-

4

series of complicated exceptions. Even so, the Committee has added
some notable relief features.
For corporations having more than $25,000 incoue and subject

to taxation under the general rule in the bill, not only are hardship cases minimized, but any complaints that might otherwise attach

to the economic repressussions of the undistributed profits tax are
deprived of force. A few hundred closely-held corporations with
more than $75,000 not income are subject to somewhat more pressure,

but here a number of provisions relieve the pressure in the partion-

larly difficult cases.
The bill as reported by the Committee on Ways and Means thus

accords with the experience of the Treasury Department in the oper-

ation of the existing law. It was discovered that two types of corperations generally have found it expedient to retain and not to

distribute a large portion of their not earnings. One type is the
closely held corporation whose few stockholders find a tax saving

in causing the corporation to retain a large part or all of its
profits, subjecting itself to a high surtax, which noverth&less is
materially less than the controlling stockholders would have to pay

on the - income distributed to them as individuals. The other
and more measous type is the small corporationwatch balances the

cost and difficulty of getting now capital from the outside against

the undistributed profits surtax and finds 10 as - to pay the
tax.

This points, is seems to no, to a defect in our anchinery for
providing capital to relatively small thought profitable business.

460

-5-

461

Other than tax remedies should certainly be sought, but tax relief

can, and I think should, be applied.

It is clear to - that considerations of tax equity justify
the complete examption of the mall corporations from the application

of any undistributed prefits tax. It is equally clear to - that the
principle should be retained as to larger corporations generally and
that a special rule should apply to those large corporations whose

stock is closely held, permitting the few principal stockholders to
direct dividend policy so as to accomplish reduction of their individual income tame. Such a provision of law is an absolute requi-

site if we are to apply with reasonable fairness the principle of taxation according to capacity to pay, which is an integral part of our
system.

The taxation of capital gains has, like the undistributed
profits tax, suffered in public discussion by a tendency for the dispatents to take an all-er-nom stand. The severest crities would

have us believe that no substantial relief is possible short of outright repeal or outting capital gains loose from the personal income

tax structure and subjecting them to a low, flat rate. Actually, the
treatment of capital gains and lesses is a very complex problem in
inconclusive texation that must be emained in detail and discussed in detail.

Time the Committee bill gives abbotantial relief to the taxpayer and
increases the liquidity of the capital market by a series of change
that (1) affect the breakets governing the amount of gain or less to

- 6.
be taken into account, (2) fix a maximum Sex rate applicable to
the gains after they have been reduced by the breaket percentages,

(3) allow a carry-over of lesses of one year to reduce gains of a
subsequent year, (4) improve the definition of a capital asset.
The caseful thought that such refinements reflect, compared
with the casualness of the other suggestions noted above, is evident,
We may be some distance yet from the one best treatment of capital

gains and lessee, but whatever it may prove to be, it will scareely
be as simple as those other suggestions would load us to believe.
We may sumarise the discussion of the undistributed profits
tax principle and of capital gains and losses by asking what would
happen if the former principle were entirely abandoned and the gains

were exempted, or taxed at a low flat rate. The answer is obvious.
Everyone would be given a powerful indusement to make his income come

to him in the form of capital gains rather than in other forms. One
may would be to invest in the kind of corporations that would pay

out little or nothing in cash dividends. The stockholder could
then realise this accumulated inconclusive at such times as he chose by

selling for a capital gain, or by indusing the corporation to distribute earnings is the form of non-taxable dividends in stock. with
no undistributed profits tax to counterest a withholding tendency

that would be strengthened by the favoritism shown to
capital gains, the Government would be faced with a serious loss is
revenue and with the bister complaints of these taxpayers who did

462

-7-

463

not have the opportunities to transmitte their increase into the

capital-gaine form. It is simply impossible to see how such a
tax system could be justified on the basis of equity. Furthermore,
the unfair ensouragement that would be given to hasardous and some-

time rockless speculation compared with sober eash-dividends and
interest-paying investment is an economic consequence of great isportance.

I trust that the Senate will bear these considerations in
mind in its deliverations on the pending revenue bill. The problem

is one of a fair distribution of the tax burden in the public interest. The productivity of the tax structure must be preserved.
Relief ean not be afforded to one class of taxpayers without burden-

ing another class, and if the relief is not equitable an inequitable
burden is imposed. Our whole revenue structure will be imperilled

if - permit gress exceptions to the principle of capacity to pay.
Gross exceptions will be created if the principle of the undistributed
profite tax is abamioned or a too lonient system of taxation of in-

- from capital gaine is adopted.

3/11/38
The undistributed profite tax imposed on closely held corporations by Title 13 of the bill submitted w the Ways and Means Committee

has been orrenously called a "punitive" tax. Actually, " is the
direct opposite of such a tax. It is a tax on a special privilege
enjoyed only by well-to-do taxpayers who have investments in closely-

held corporations. The privilege is one of escaping immediate tax
tion at the rate that applies to income from other sources, such as

salaries, profite of miscorporated concerns, interest, and rents.
For example, If a taspayer with a surtax not income of $100,000

also has a share in the year's earnings of a closely-held corporation,
and this share amounts to $10,000, he saves $6,200 is personal income

tax for the year If none of that $10,000 is paid out in dividends.
This 10 a 62 percent saving. what did the Committee Bill ask his cor-

poration to pay under Title 18 in return for this saving Not more
than 20 percent of a part of that $10,000. Indeed, if the corporation
happens to have a total not income of less than about $75,000. our

hypothetical taxpayer is not asked to pay anything. directly OF in-

directly. under Title 13, for his tax saving.
The 20 percent rate is thus a decidedly moderate price for that
taxpayer to most. It was made moderate, in view of the normal tax
ranging from 16 to 20 percent, which the corporation has to pay.
If the hypothetical taxpayer has other income, not of $100,000.
but $50,000, his tax saving because of failure to declare dividends

is still exbstantial - $3,660, or about 37 percent. Finally. 11 must
be reseated that If at these or lower levels the taxpayer feels the
Note: prepared by Mr. Shoup. Mrs.Lucas gave the
original to the Secretary at noon, March 11,1938

(ree took
t
white Hoursel

464

-2price for the privilege is too great, he can always forego the privilage w having Me corporation declare taxable dividends. This
divided many. loss the tax paid, can w agreement be put back into
the corporation at ease If 18 is needed for expension.
Other factore enter the problem. the withheld earnings my be
paid out is future years and taxed then. They may also be realised

in the form of capital gains when the taxpayer selle his stock. But
even with such qualifications, the privilege of avoiding personal our
taxes on current earnings is a valuable one, for which the reasonable

price imposed w Title 13 - well be asked. To call this price for
a privilege a "penalty" is completely to misunderstand the situation.

465

468

March 19. 1938

MEMORANDUM FOR THE PRESIDENT:

Attached herete are the three separate amoranda which you requesteds (1) A proposed message on tax exemptions; (2) a brief dis-

cussion of the busic principles of the undistributed profite tax
and the tax on capital gains as embodied in the House bill; and (3) a
brief commentary on the need for a special undistributed profite tax
on closely hold corporations.

RM: 00

467
The undistributed profite tax imposed on closely held corporations by Title 13 of the bill submitted by the Ways and Means Committee

has been erroneously called a "punitive" tax. Actually, 11 is the

direct opposite of such a tax. It is a tax on a special privilege
enjoyed only by well-to-do taxpayers who have investments in closely-

held corporations. The privilege is one of escaping immediate taxation at the rate that applies to income from other sources, such as
salaries, profite of unincorporated concerns, interest, and reats.
For example, if a taxpayer with a surtax not income of $100,000

also has a share in the year's earnings of a closely-held corporation,
and this share amounts to $10,000, he saves $6,200 in personal income

tax for the year if none of that $10,000 is paid out in dividends.
This is a 62 percent saving. What did the Committee Bill ask his cor-

peration to pay under Title 13 in return for this saving! Not more
than 20 percent of a part of that $10,000. Indeed, if the corporation
happene to have a total not income of less than about $75,000. our

hypothetical taxpayer is not asked to pay anything, directly OF in-

directly. under Title 13, for his tax saving.
The 20 percent rate is thus a decidedly moderate price for that
taxpayer to meet. It was sade moderate, is view of the normal tax
ranging from 16 to 20 percent, which the corporation has to pay.
If the hypothetical taxpayer has other income, not of $100,000,
but $50,000, his tax saving because of failure to declare dividends

is still substantial - $3.660. or about 37 percent. Finally, ss must
be remembered that if at these or lower levels the taxpayer feels the

-2price for the privilege is tee great, he can always forego the privilage wby having his corporation doclare taxable dividends. This
divided money, less the tax paid, can by agreement be put back into
the corporation as ence if 11 is needed for expansion.
Other factors enter the problem. The withheld earnings may be
paid out in future years and taxed then. They may also be realised

is the form of capital gains when the taxpayer sells his stock. But
even with such qualifications, the privilege of avoiding personal ourtaxes on current earnings is a valuable one. for which the reasonable

price imposed by Title 13 may well be asked. To call this price for
a privilege a "penalty" is completely to misunderstand the situation.

468

469

The revenue bill submitted by the Committee on Ways and
Means on March 2 is another notable step in the improvement of

the Federal tax system. The important principles of tax justice
that were made a part of the system by the Revenue Act of 1936

are here refined in the light of the experience under that Ast.

At the same tim, the tax strustro is in several places simplified,
and some of the undesigable exise taxes are repealed. Careful
study of the economic effects of the tax system has made it possible
to lesson the damponing effect on business enterprise that must always,

to some degree, attach to any tax system. Individual tax rates have
not been increased, nor has the total tax burden on corporate enterprise been made heavier. All this has been achieved without materially decreasing the revenue that would otherwise be obtained under

existing conditions. Obviously, the resulting program not only is
a technical achievement of a high order, but also expresses a farsighted policy based on fundamental samons of taxation.

The meet important changes proposed by the bill are in the
taxes on corporations and the tax on capital gains. The Revenue Ast

of 1936 introduced a new principle in the taxation of corporate in-

come in the form of a surtex on that portion of the net profits of a
corporation which was not currently distributed is dividends to stock-

holders. The purpose of this tax was to correct as inequity is our
tax system which constituted a very serious loophele of essays from

470

-2the surtame on individual income which are based on the principle
of capacity to pay.
The principle of the undistributed profite tax has been the
subject of se much misrepresentation that it is appropriate here to

state consisely the real question at issue. That question is this:
To what extent shall corporate earnings be allowed to escape the in-

dividual surtax rates that apply to all other forms of income -- to
partnership and proprietorship profits, to interest from bonds, to
salaries, wages, and foost Sheltered behind the corporate veil, the
corporation profits may accumulate, free of individual surtax. Sometimes they are ultimately brought to account, when they are finally
declared out as dividends or when the stockholder, selling his shares,
obtains a capital gain - but menwhile the Government has had to
obtain money from other sources instead. Southers these corporation
profite essays entirely, as when the stockholder keeps his shares

until his death. The estate tax is no answer to this problem, for the
estate tax applies also to the savings from salaries, individual businesses, and other incomes. The capital stock and excess profits taxes
are no answer, for they do not distinguish between income that is

retained and income that is paid out. We are driven back to the income tax and must find there a way to components for this tax-postponement

or tax-essage privilege inherent in the corporate form.
IS is not a question of discouraging or encouraging business

as such - 10 is simply a question of eliminating as unfair tax

47

-3differential that favers corporate profits over other income.
When corporate profits do not pay their fair share, the missing
amounts must be made w by added taxes on other sources. *Relief*

to one taxpayer spells "burden" to another. *Ensouraging" corporate
business means "discouraging" unincorporated business and other

forms of income. Traning a tax system is a process of weighing the

advantages in one place against the disadvastages in another. It
will not do to FUN away from the problem by simply demanding oncouragement, relief, and even total essays at some one point and

letting the matter rest there.
The corporate form does not, however, ast, as a shield against

the personal surtax if the corporation is small and the stockholder's
income from other sources is small. Consequently there is logic
in the Committee's refinement whereby small corporations - those
with income under $85,000 - are exempted from any form of the

undistributed profits tax. These corporations will be able, under

this bill, to retain all or a substantial part of their earnings
and pay less tax than under the existing law.
Moreover, 19 is never advisable to push so far in outting off
tax essays as to create an unite member of hardship cases. Some

such cases will always be found under any tax law, but in its bill
the Committee has amply eared for meetically all these instances by
making the burden widespread and light sather than by passing on
added pressure and then attempting to eliminate hardships by a long

472

series of complicated exeptions. Even no, the Committee has added
some notable relief features.
For corporations having more than $25,000 income and subject

to taxtion under the general rule in the bill, not only are hardship cases minimized, but any complaints that night otherwise attach

to the economic repercussions of the undistributed profits tax are
deprived of force. A few hundred clessly-held corporations with
more than $75,000 not income are subject to somewhat more pressure,

but here a number of provisions relieve the pressure in the partiou-

larly difficult cases.
The bill as reported by the Committee on Mays and Means thus

accords with the experience of the Treasury Department in the oper-

ation of the existing law. It was discovered that two types of corperations generally have found it expedient to retain and not to

distribute a large portion of their net earnings. One type is the
closely hold corporation whose few stockholders find a tax saving

in causing the corporation to retain a large part or all of its
profits, subjecting itself to a high surtex, which noverth&less is
materially less than the controlling stockholders would have to pay

on the - income distributed to them as individuals. The other
and more sumorous type is the small corporationwithich balances the

cost and difficulty of getting new capital from the outside against
the undistributed profits surtax and finds 18 an economy to pay the
tax.

This points, is seems to mo, to a defect in our machinery for

providing capital to relatively small thought profitable business.

-5-

473

other than tax remedies should certainly be sought, but tax relief

can, and I think should, be applied.

It is clear to - that considerations of tax equity justify
the complete exemption of the small corporations from the application

of any undistributed profits tax. It is equally clear to me that the
principle should be retained as to larger corporations generally and
that a special rule should apply to those large corporations whose

stock is closely held, permitting the few principal stockholders to
direct dividend policy so as to accomplish reduction of their individual income taxes. Such a provision of law is an absolute requi-

site if we are to apply with reasonable fairness the principle of taxation according to capacity to pay, which is an integral part of our
system.

The taxation of capital gains has, like the undistributed
profits tax, suffered in public discussion by a tendency for the disputents to take an all-or-none stand. The severest critics would

have us believe that no_substantial relief is possible short of outright repeal or cutting capital gains loose from the personal income

tax structure and subjecting them to a low, flat rate. Actually, the
treatment of capital gains and lesses is a very complex problem in
inconclusive taxation that must be examined in detail and discussed in detail.

Thus the Committee bill gives substantial relief to the taxpayer and
increases the liquidity of the capital market by a series of changes
that (1) affect the brackets governing the amount of gain or loss to

- 6- -

474

be taken into account, (2) fix a maximum Sex rate applicable to
the gains after they have been reduced by the bracket percentages,

(3) allow a carry-over of losses of one year to reduce gains of a
subsequent year, (4) improve the definition of a capital asset.
The careful thought that such refinements reflect, compared
with the casualness of the other suggestions noted above, is evident,
We may be some distance yet from the one best treatment of capital

gains and lesses, but whatever it may prove to be, it will scareely
be as simple as those other suggestions would lead us to believe.
We may summariae the discussion of the undistributed profits

tax principle and of capital gains and losses by asking what would
happen if the former principle were entirely abandoned and the gains

were exempted, or taxed at a low flat rate. The answer is obvious.
Everyone would be given a powerful indusement to make his income come

to him in the form of capital gains rather than in other forms. One
way would be to invest in the kind of corporations that would pay

out little or nothing in cash dividends. The stockholder could
then realise this accumulated inconclusive at such times as he chose by

selling for a capital gain, or by inducing the corporation to distribute earnings is the form of non-taxable dividends in stock. with
no undistributed profits tax to counterest a withholding tendency
that would be immunably strengthened by the favoritism shown to
capital gains, the Government would be faced with a serious loss is
revenue and with the bigter complaints of these taxpayers who aid

-7-

475

not have the opportunities to transmite their inconce into the
capital-gaine form. It is simply impossible to see how such a
tax system could be justified on the basis of equity. Furthermore,
the unfair encouragement that would be given to hasardous and some-

time rockless speculation compared with sober each-dividents and
interest-paying investment is an economic consequence of great inportance.

I trust that the Senate will bear these considerations in
mind in its deliberations on the pending revenue bill. The problem

is one of a fair distribution of the tax burden in the public interest. The productivity of the tax structure must be preserved.
Relief can not be afforded to one class of taxpayers without burden-

ing another class, and if the relief is not equitable an inequitable
burden is imposed. our whole revenue structure will be imperilled
if we permit gross exceptions to the principle of capacity to pay.

Gross exeptions will be created if the principle of the undistributed
profite tax is shanioned or a too lonient system of taxation of in-

- from capital gaine is adopted.

478
Proposed Message on Tax Exemptions

In a series of cases culminating in the Pollock decision
more than 40 years ago, the Supreme Court established the

doctrine that the interest on state and municipal bonds and

the salaries of state and municipal officials are not subject
to the general Federal income tax. Similarly, the interest
on Federal bonds and the salaries of Federal officials are not
subject to state taxation.
The Sixteenth Amendment to the Constitution of the United
States, finally approved in 1913, was proposed and adopted

in order to put to rest any question of the power of the
Congress to tax incomes without apportionment among the several
States. The Amendment in terms gave the Congress the power

"to lay and collect taxes on incomes, from whatever source

derived." Literally, this broad language is sufficient to
embrace all interest, including interest on state and local
bonds; and all salaries, including salaries of state and
local officials. Nevertheless, it has been persistently
asserted that the exemptions considered to exist prior to the
Sixteenth Amendment are still in existence despite the plain
language of the Amendment. Consequently, the power there

granted has never been fully exercised. The income tax
acts themselves exclude from tax the interest on state and

sunicipal bonds. There is no statutory exemption of official

-2-

477

salaries, but court decisions have granted exemptions in
some cases out of the great number which have been litigated.
On the other hand, various limitations on the exemption have
been expressed by the Supreme Court, and several Justices

have strongly urged that it should be eliminated entirely.
Such exemptions, whether expressed or implied, tend to

defeat the equity of the Federal and State taxing systems, by
establishing a class of recipients of income, which is not
subject to the burdens of taxation borne by other citizens

similarly situated.
The development of Federal and State taxation in recent

years and the increased volume of wholly or partially taxexempt securities have transformed what was once an inequity

of relatively slight importance into a most serious defect
in both Federal and State systems. In the Federal system,
the income tax has been the major single source of revenue

for more than twenty years. About two-thirds of the States
also make use of the progressive-rate income tax. The progressive sur-tax rates can hardly be made to o, rate fairly or
effectively so long as tax-exempt securities provide a ready
means of escape from income taxation.

The subject of tax-exemptions for bond interest has
been so thoroughly discussed that it need not be elaborated

here. I shall merely use one illustration to show how

-,-

478

widespread its effects may be. An investor whose surtax
net income is 850,000 is taxed at 31 percent on the last

$6,000 of this income, under the Federal tax. In the present
state of the investment market, he can get about 3 percent
interest if he invests in moderately long-term highest grade
bonds of private corporations. Since the income from such

bonds is fully taxable, this investor receives, after tax,
about 2 percent on his investment. By purchasing a State
bond of the highest grade, with the same maturity date, he

can obtain a yield of 2.5 percent, against which no Federal

income tax is due. This illustration shows that, even for
those who are only moderately wealthy, the saving by Federal
tax exemption more than counterbalances the low yield of the

tax-exempt bond, and therefore tends to make ineffective the
progressive tax rates. At higher income levels the tendency

is of course even more pronounced. A fair and effective
progressive income tax and a huge, perpetual reservoir of
tax-exempt bonds cannot exist side by side.

Not only are the ends of tax justice impaired; taxexempt bonds also have serious economic implications. They
absorb money, much of which night otherwise be available for
many kinds of business investment. These more hazardous

types of investment, often so beneficial to society at large
in the long run, are thereby ourtailed. Those who can best

.4-

479

afford to take those chances - the wealthy investors - are
precisely those who instead are most attracted to tax-exempt
bonds.

The exemption of governmental salaries likewise tends

to defeat the aims of a progressive-rate tax system. This
exemption is of particular importance to the States, since
many of their income taxes strike more heavily and with a
sharper graduation of rates, than the Federal tax, in the
lower income brackets where governmental salaries usually

fall.
Exemption of salaries has the further disadvantage that

it produces an apparently endless stream of litigation in
attempts to discover whether a given case falls within the
tax-exempt area as defined by the Supreme Court.

I, therefore, recommend to the Congress that effective

action be promptly taken, either by statute or by constitutional
amendment, to terminate these exemptions for the future.
The legislation or amendment should confer the same powers

on the States, with respect to the taxation of Federal bonds
and Federal salaries, as is granted to the Federal Government

with respect to state and local bonds and salaries.

Beel Maylor road
TREASURY DEPARTMENT

the

480

INTER OFFICE COMMUNICATION

DATE March 19, 1938

Secretary Morgenthau

TO

DA
Subject: Comparison of the Budget estimate of the corporate

FROM

Mr. Haas

net income for calendar year 1937 with the corporate
income for that period indicated by the published

reports of corporations.

Published corporate earnings for calendar year 1937 indicate
that 1937 statutory net income of all corporations subject to
income tax will be from $100 millions to $200 millions in excess
of the $8,100 millions statutory net income used in making the
Budget estimate.

The National City Bank has tabulated corporate profits of
1,020 industrial companies for the full year 1937 which figures
indicate an 8.5 percent increase over 1936. The earnings index
of the Standard Statistics Company, which includes rails and

utilities in addition to industrials, shows an increase of 8 percent for the comparable period.

A table is attached showing the earnings for the fourth
quarter of 1937 of 100 of the 168 corporations which comprise our
earnings index. The earnings of these 100 corporations for the
fourth quarter of 1937 were 69 percent of their earnings for the
fourth quarter of 1936 and 71 percent of their earnings for the
third quarter of 1937. A second table shows the earnings of these
corporations for the full years 1936 and 1937, together with the
earnings of the General Motors Corporation using the 1937 earnings
figure mentioned by Mr. Knudsen in a recent Senate hearings. The
combined earnings of these 101 corporations for the full year 1937
indicate an increase of 8.2 percent over 1936.

If all corporations in our earnings index show approximately
the increase indicated by the three records of earnings referred
to above, the statutory net income of all corporations subject
to the income tax will be about $8.3 billions as contrasted to
$8.1 billions of the Budget estimate.

481

Earnings of 100 industrial corporations for fourth quarters 1936
and 1937 with third quarter for 1937, as reported in
Wall Street Journal through March 9, 1938
(3)

(4)

1937

quarter
1936

(Thousands of dollars)
20,455

30,544

30

302

578

118

255

80

57

180

345

10,305

12,968

20,136

427

432

554

1,025

866

1,503

Gabriel Co.

-5

-21

Mack Trucks, Inc.

20

Jarlin-Rockwell Corp.
Midland Steel Products Co.
Motor Wheel Corp.

15

Bohn Aluminum & Brass Corp.

Briggs and Stratton Corp.
Campbell Wyant and Cannon
Foundry

Chrysler Corporation
Eaton Mfg.

electric tuto Lite Co.

Mullins Mfg. Corp.

Packard Motor Car Co.

Mfg. Co.
emicals

10

Atlas Powder Co.
Commercial Solvents Corp.
Dupont de Nemours & Co.
Hercules Powder Co.
Lambert Co.

Matheson Alkali Works, Inc.
Monsanto Chemical Co.

Texas Gulf Sulphur Co.
United Carbon Co.

Westvaco Chlorine Products
Corp.

ood Products and Beverages
Beechnut Packing Co.
Coco Cola

Continental Baking Corp.
Corn Products Refining Co.

First National Stores, Inc.
Grand Union Co.

National Distillers Products
Corp.

12

76.80
9.93
46.27
31.67
79.46
98.84
118.36

51.43
5.19

147.50
16.52
51.18

77.08
68.20

-34

-

324

565

6.17

582

569

609

757

351

860

202

439

413

102.28
215.67
46.01

-7

170

160

-

3.54
95.57
88.02
48.91

1,506

2,325

3,490

64.77

43.15

-5

-3

-15

-

-

697

1,298

1,300

53.70

53.62

31,225

30,892

34,478

170

396

316

485

240

565

25,232
156

22,963
1,247

27,227
1,353

69

431

249

194

477

426

1,763
2,566

1,224
3,146

1,377
2,130

433

552

628

101.08
42.93
202.08
109.88
12.51
16.01
40.67
144.04
81.56
78.44

90.56
53.80
85.84
92.67
11.53
27.71
45.54
128.03
120.47
68.95

157

216

207

72.69

75.85

16,758

16,429

18,943

768

879

896

4,314
1,477
2,998

8,492
1,202
661

4,134
1,114
3,152

632

708

870

97

104

88.47
85.71
104.35
132.59
95.11
72.64
93.27

96

102.00
87.37
50.80
122.88
453.56
89.27
101.04

3,768

3,672

289.62

102.61

1,301

Transue and Williams Steel
Forging Corp.
Yellow Truck & Coach

(1) + (2) (1) + (3)

:

15,709

tos, parts and accessories

Percents

:

:

:

: reported:

1937

quarter

:

:

:companies:

:

Company

quarter

:

of

:

: Number : Fourth : Third : Fourth

(5)
:

(2)

:

(1)

-

-

482

Earnings of 100 industrial corporations for fourth quarters 1936
and 1937 with third quarter for 1937, as reported in
Wall Street Journal through March 9, 1938
(continued)

(2)

:

quarter

: quarter

1937

:

:

(Thousands

1936

dollars)

of

(5)

Percents
(1)

+ (2) (1) + (3)
:

: Fourth

:
:

Third

:

: reported:

(4)
:

Company

(3)

:

: Fourth
of
: quarter
:companies: 1937

: Number

:

(1)

bod Products and Beverages
(continued)

Purity Bakeries Corp.
Shattuck, F. G. Co.
Standard Brands, Inc.
Waldorf System, Inc.
Ward Baking Corp.

50

213

433

404

48

601

1,818

2,326

3,434

204
228

129

230

374

303

6,862
1,033

10,441
2,833

10,073
2,818

195

420

360

1,510

2,195

1,815

67

92

117

23.47
841.67
78.16
158.14
60.96

11.55
67.22
52.94
88.70
75.25

65.72
36.46
46.43

68.12
36.66
54.17

68.79
72.83
73.32
53.65
46.18
67.39
293.75
97.06
189.59

83.20
57.26
75.53
54.50
105.02
88.54

100.00
90.37

schinery and Machine
Manufacturers

13

Caterpillar Tractor Co.
Chicago Pneumatic Tool Co.

International Business
Machines Co.

Intertype Corp.

Tink-Belt Co.
ytag Co.
National Acme Corp.

632

862

839

345

643

633

230

498

219

1,244

1,846

1,405

Seagrave Corp.

47

16

-11

Telautograph Corp.

33

34

33

1,530

807

1,693

-91

116

27

-

87

79

125

110.13

69.60

3,977
1,261

5,669
1,081

4,981

70.15
116.65

79.84
149.41

41

525

374

Hanna, M. A. Co.

685

972

1,315

Howe Sound Co.

653

1,044
2,172

803

7.81
70.47
62.55
62.06

10.96
52.09
81.32
81.35

National Supply Co.

Underwood-Elliott-Fisher
U. S. Hoffman Machinery
White Sewing Machine

tals and Mining

7

American Metal Co.
Calumet and Hecla Cons.
Copper Co.

4

Atlantic Refining Co.
Barnsdall Corp.

Houston Oil

Union oil Co.

-2

-

5,657
2,456
-330

9,003
4,049

3,648
1,181

62.83
60.66

155.07
207.96

976

543

320

528

191

3,211

3,650

1,733

97.56
87.97

185.29

-2

Virginia Iron Coal & Coke

-

-10

-13

Pennsylvania Coal and Coke

-

-95
-30

1,348

New Jersey Zinc

844

-

1,657

-

-

167. 54

483

Earnings of 100 industrial corporations for fourth quarters 1936
and 1937 with third quarter for 1937, as reported in
Wall Street Journal through March 9, 1938
(continued)

(4)

: Fourth
Third
: Fourth
quarter
quarter : quarter
1937
: companies: 1937
1936
: reported: (Thousands of dollars)
: Number

:

:

:

:

39,117
5,291

72

243

163

-43

20

63

868

-1,396

4,433
1,751

4,241
2,077

Ludlum Steel Co.

-81

302

336

Superior Steel Corp.
U. S. Steel
Wheeling Steel Corp.

-71

103

257

4,578
-764
1,696

30,618
1,230
3,586

20,924
2,046
3,719

30,856 1/

37,644

Eastern Rolling Mill Co.

Inland Steel Co.
Jones & Laughlin Steel Corp.

Youngstown Sheet & Tube
iscellaneous

Airway Electrical Appliance
Co.

are Bank Note
American Hide & Leather
American Safety Razor
American Seating Co.

American Steel Foundries
American Writing Paper
Artloom Corp.
Barker Bros.

Bayuk Cigars, Inc.
Blumenthal, S. and Co.
Bon Ami

Brillo Mfg. Co.
Century Ribbon Mills
Consolidated Cigar
Container Corp.
General Cigar

General Electric
General Outdoor Advertising
General Railway Signal
Harbison-Walker Refractories
Industrial Rayon Corp.

International Silver Co.

Johns-Manville Corp.
McGraw-Hill Publishing

29

35,210 V
-138

:

51,536
9,250

Bethlehem Steel Corp.
Castle, A. M. & Co.

(1) + (2) (1) + (3)

:

:

9,112
4,253

10

Steel

(5)

Percents

:

of

:

Company

(3)

:

(2)

:

(1)

17.68
45.98
29.63

19.58
14.95
-

23.29
80.38
44.17

-

20.47

21.88
-

47.30

45.60

114.11

93.53

-143

-

-

111.59

-

1,040.00

173.73
37.22
4.78

87.38
48.96
3.08

260

233

25

-226

46

86

443

255

507

118

317

241

-

1,150

1,785

1/

-

-

-115
-48

201

257

-

279

315

313

88.57

89.14

-397

64

339

-

368

344

324

113.58

41

47

48

106.98
87.23

85.42

-45

31

46

-

370

184

369

100.27

38

426

429

688

513

621

23,883

13,370

17,413

344

433

291

89

245

144

337

782

1,030

64

17

437

219

168

505

860

1,781

1,280

175

312

210

201.09
8.92
134.11
178.63
79.45
36.33
43.09
376.47
130.36
48.29
56.09

55

-85

8

-

-

8.96

110.79
137.16
118.21
61.81
32.72
14.65
43.37
67.19
83.33

484

Earnings of 100 industrial corporations for fourth quarters 1956
and 1937 with third quarter for 1937, as reported in
Wall Street Journal through March 9, 1938
(continued)

1937

:

:

:

:

:

1936

(Thousands of dollars)

(1) + (2):(1) + (3)

:

:

: reported:

1937

Percents

:

: Fourth : Third : Fourth
quarter
quarter
quarter

(5)

(4)
:

:companies:

(3)

:

Company

(2)

:

(1)

Number
of

Iscellaneous (continued)
124.28

-

73.32

82.34
431.03

-37

-

119.42
378.79

3,399

1,847
5,395

5,045
3,975

22.47
63.00

13.63
85.51

124,510

175,281

179,428

71.03

69.59

2,426
-225

1,952
-112

3,309

289

351

242

1,000

232

264

Webster Eisenlohr Bros.

-11

-43

Westinghouse Air Brake

415

Westinghouse Electric

Radio Corp.

Reliance Mfg. Co.
Scott Paper
Talworth Co.

rand Total

100

reasury Department, Division of Research and Statistics.

146

-

-

March 10, 1938.

Airway Electrical Appliance, Artloom Corporation and American Writing Paper omitted
from total.

485

Quarterly Earnings of 100 Industrial Corporations Classified by
Industrial Groups as Recorded in the Wall Street Journal to March 9, 1938
(money figures in $000)

:. quarter
1937

: quarter

:

: third

:

1936

: 1937 to
fourth
1936
51.43%

:

:
:

:

:

:
:

:

:
:
:

:

:

$ 30,544

10

31,225

30,892

34,478

101.08

90.56

12

16,758

16,429

18,943

102.00

88.47

10,441
5,669
9,003
51,536
30,856

10,073
4,981
3,648
39,117
37,644

65.72
70.15
62.83
17.68
114.11

68.12
79.84
155.07
23.29
93.53

$175,281

$179,428

10

Miscellaneous

29

100

$124,510

13
7

4

Total

1937

: quarter

$ 20,455

Steel

Oil

: quarter

1937 to

$ 15,709

6,862
3,977
5,657
9,112
35,210

iletals and mining

quarter

: quarter

:

:

Machinery and machine
manufacturers

: Fourth

fourth

15

Food products and
beverages

1937

:
:
:

micals

: quarter

Third

:

: pora-

Fourth

:

: cor-

: tions

O parts and accessories

:

Industrial classification

: Number :
of

Ratio of : Ratio of

: fourth

Treasury Department, Division of
Research and Statistics

76.80%

71.03%

69.39%

March 10, 1938

48G

Earnings of 100 industrial corporations and of
General Motors Corporation, calendar years 1957 and 1956

: Increase (+) or
: decrease (-),

:

:

:

1937

1936

1957 over 1936
(percent)
(thousands of dollars)
:

:
:

100 Industrial Corporations

656,940

536,215

+ 18.8

General Motors Corporation

201,000 1

238,482

- 15.7

837,940

774,695

+ 8.2

Total

Treasury Department,

March 17, 1938.

Division of Research and Statistics.

1 Testimony of William Knudsen, President of General Motors,
Senate Committee Hearings, January 6, 1938.