Full text of Diaries of Henry Morgenthau, Jr. : Volume 142 : Part 2

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(First Revision)
Compensatory Fiscal Policy
I

The competitive capitalist system under democratic political
forms has come upon evil days.

In spite of increased aggregate production and much larger
potential production, we have acute unemployment, acute shortages

of material goods for many persons; and, more important, we lack a

feeling of security upon which the building of a good life depends.
II

The magnitude of surface symptoms suggests that the causes of

our difficulties must be fundamental. Measures to be constructive
must be correspondingly fundamental.

III
Among soveral important causes, one clearly seems to be that
the relation between purchasing power and production has been in-

completely understood, and, accordingly, the role of the national
state in relation to purchasing power and production has boon
orronoously conceived.

Although this misunderstanding has been general and has existed

for a long time, an acute condition has only recently appeared. That

it has boon 80 long deferred is due to the fact that until recently
governments have been converting national assets (the national domain)

into purchasing power. This purchasing power, supplementing that

arising directly from production, has mitigated somewhat the deplor-

able conditions which have existed since the industrial revolution.
IV

Tho conception of the role of the national state (whother
domocratic or totalitarian), in relati on to purchasing powor and

231

232
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production, is undergoing profound change. This change is based on
two separate but related considerations:

1. Tho operation of a private, competitivo, capitalist system,
basod in part on private debt (crodit) involves nocessarily from time
to timo increasos and decreasos in aggregate purchasing power with

no corresponding increase or doorease in potential production. The
consequenco is unemployment and distorted prico rolationships that

are morally and politically destructive. Therefore, for those changes
in aggregate purchasing power, (arising from the vory nature of
privato entorprise), the national state must compensato in the manage-

ment of its budgot, or otherwise.

2. The effect of the application of science and technology to
production is to increase potential production. This increase in

pot ontial production doos not of itself insure either (a) that there
will bo corresponding increase of purchasing power, or (b) if there
be such increase in purchasing power, that it will be spont on consumption, or invested, in now plant. Unloss and until the increase
in potential production results in increased purchasing power, and
this increased purchasing power spent on consumption or invosted in

new plant, the result will be unemployment, and partially idle plant.
Accordingly, to insure full production, the national stato must be
prepared to insure the necessary purchasing power through the manage-

mont of its budget, or otherwise.
In summary, a private, competitive, capitalist system with
progressivo technological improvement requires on the part of the

national state doliberate action of a componsatory character affecting purchasing power.

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V

The necessary compensatory action is most readily taken by the
national state through the management of the national budget.
Compensatory management of the national budgot requires cor-

relation of policy in handling all national measures affecting money,
crodit, taxation, and expendituro.
VI

The principle of the compensatory budget requires an important
extension of the common concept of the function of taxation.
Tho componsatory effect of the budget is producod, not by the
absoluto level of income or expenditure per se, but by the magnitude

(and method of obtaining) tho not cash deficit or surplus. This
doficit or surplus may be alterod oither by changes in disbursements
or by changes in receipts.

It follows thorefore that taxation, in providing revenues to
the national state, concurrently gives one method of controlling the

size of the deficit or surplus. That is to say, taxation provides
a mechanism whereby purchasing (and investing) power in private hands
can be reduced or increased in amounts and in a manner conforming to

general public policy.
It follows similarly that the expondituros and disbursements
of the national state, in providing for the common sorvices, con-

currontly gives another method of controlling the sizo of the doficit or surplus. That is to say, expenditures and disbursements
provide a mechanism whereby purchasing and investing power in

private hands can be increased or decreased in amounts and in a

manner conforming to general public policy.

234

VII

A number of questions of public policy are involved in the
administration of a compensatory budget.

1. What should be the absolute level of income and disbursement
about which variations take place?

2. What should be the magnitude of the deficit or surplus at
any particular time, and what agency should make this determination?

3. Shall the operation be applied to expenditure, or to income,
or to both, and to what degree?

4. Shall the direction of increased (or reduced) purchasing power
be toward producers, or toward consumors, or toward both, and to what
degree? If toward producers, which? If toward consumers, which?
VIII
The importance of the policy questions raised above may bo

judged by relating the gravity of the present position to the magnitude

of current production possibilities.
We can produce annually with reasonably full employment, ninety

billion dollars worth of goods and services; we are in fact producing
slightly more than sixty. A current deficiency of production and of
purchasing power of about thirty billion dollars annually is indicatod.
If we allow for expenditure or investment to turn three timos a

year, in order to raise purchasing power thirty billion dollars, ten
billion dollars in the aggregate would need to bo addod to current

lovels by public and private enterprise to secure reasonably full
employment and production.

235

-5-

Private onterprise can hardly add more than at the rate of

four billion per year this year. Even this figure assumes high

activity for housing, utilities, railroads, and industrial investment.
This leaves at least six billion dollars per year of production that
the federal government has available to work with this year, this
being at this time the indicated appropriate deficiency of net (cash)
disburs ements over incomo on whatovor absolute level.
TX
The adoption of a compensatory budgot policy raises cortain

difficultios and dangers.

1. The problem of timing is a difficult one at best. Existing
mechanisms for expenditure and for taxation were not devised with such
policy in mind and are clumsy for the purposo.

2. Bottle necks will develop. They will disappear. Foresight
will reduce their number and severity.
3. Unloss a reasonable degroo of competition is maintained, there

is likelihood that the great bonefits of full production will go to
organized groups best ablo to take toll on increased purchasing power.

4. Strikos and lockouts, reducing production, might defeat the
program.

5. Over-emphasis on fiscal policy, particularly in its initial
successful phases, might cause neglect of other measures necessary

and proper for satisfactory restoration of private employment.
6. Public misunderstanding may result in loss of confidence. The

implications of the policy are so foreign to conventional ideas, and
to ideals of private prudence, that great resistance of both an
intellectual and moral nature will be encounterod.

236
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7. The most serious danger is that of congressional interference
with budget planning, of over-appropriating and under-taxing on a

purely political basis. We do not have the tradition of an executive
budget as in England. We neod the item veto provision badly. The
proposed Fiscal Advisory Board will be a protection as it develops
prestige. The dangers hero, though very real, must be faced and

risked for the sake of the bonefits that may result.
X

Although a number of measures are desirable to socure the
benefits which soom attainable, among these measures the adoption and

administration of a compensatory budget policy is indispensible. The
benefits to bo gained are very great. These are:
1. Reasonably full employment, an increase of about 50% in production

and therefore in the material standard of life. Thoro would be a marked
increase in the consumption of agricultural products.
2. Elimination of wide swings in employment and production would
have a marked influence on the stability of employment. No insurance

scheme, though necessary, can substitute for security itself.

3. Fuller use of industrial and agricultural overhead will result
in a reduction of average costs. The saving will be divided botween
profit, wages, and lower prices.
4. With reasonably full employment, adequate purchasing power, and
near capacity production, many problems now appearing to call for

government intervention orcontrol might solve themsolvos. In other
words, tho assuming of control by the national state (the authority
for which is generally conceded) over monetary and contral fiscal
policy in this manner would lesson the demand and nood for central

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-7-

government control in other parts of the economy.

5. An opportunity is provided to diroct the first fruits of this
increased production into socially useful channols, such as public
health, education, old age security, slum clearance, etc.
6. In time it would be possible to rostore to employment many
young pooplo, many older poople, and many womon. Not only would

their contribution in production be of great importance, but presont
onforced loisure is domoralizing to individuals and to the community.
7. Reasonably full employment and production would simplify the

problom of American attitude toward foreign trade. We are in a
position to receive goods and services from abroad on balance for a

long time if we can organize to receive them. This, of course, would

contribute to friendly intornational commercial relations.
Boardsley Ruml

September 26, 1938

238

GRAY
JR

Praha

Dated September 22, 1938
REC'd 1:10 p.m.

Secretary of State,
Washington.
RUSH.

219, September 22, 2 p.m.
Your numbers 62 and 63, SEptEmbEr 15 and 19.

British Legation is informing British inquirers
through the SEVERAL British consulates that the

situation is critical and that they should be
prepared to leave as soon as possible. This they
are doing orally after British subjects have first
been summoned to the Consulates "to complete

registration records" WE cannot follow like method
because of having only one Consulate in the country
and the large number of Americans scattered OVER the
whole of Czechoslovakia.

The Consulate General has confidentially inquired

of the Ministry of Railways as to train facilities
for American citizens in case of Emergency and has

been told that no assurances can be given in such an
EVENT that train transportation from Praha to any

border

239

-2- #469, September 21, 6 p.m., from Berlin.
whether the advocates of diplomatic methods possess

a program of action through which such a goal can be
reached before the bleeding German victims cry out

for other help. Czechs are distributing in the
Sudeten area explosives and poison gas, as well as

gas masks for their own people. The intention
is attributed to the Czechs not only of blowing up
the famous health resorts in this region but also
of wrecking VENGEANCE on Sudeten inhabitants.
The BOERSEN ZEITUNG attacks the American press

for espousing the Czech cause denouncing such tactics

as malicious meddling in violation of the
Wilsonian concept of sElf-determination.
WILSON
PEG:HTM

240
PLAIN

EDA

LONDON

Dated September 22, 1938
RECEIVED 4.30 D.M.

Secretary of State
Washington

996, September 22, 7 p.m. (SECTION ONE).
FOR TREASURY FROM BUTTERWORTH.

British security markets were weak today. There is

a growing realization in the city of the strength of
Germany's diplomatic and military position and of the
fact that Hitler's hand has been greatly strengthened
since his first meeting with Chamberlain. A SENSE of
dejection and foreboding gained ground today but did

not translate itself into market action.
The dollar which opened at 4.82 3/4ths bid has been

supported by the British authorities sporadically throughout the day. As soon as the report of the Czech Cabinct's
resignation came through it moved to 4.81 1/8th and
thereafter has fluctuated around a 1/2. On the whole the
wolume has not been large. 334 bars WERE dealt in at gold

fixing at 143S. lld and it is believed that the British
authorities had to absorb the lot. Lloyds brokers are
pursuing such a cautious policy as regards the SIZE of
shipments to be covered by war risk insurance that most
arbitrageurs are not interested in shipping. (EHD SECTION
ONE).
CSB

KENNEDY

241

REB

GRAY

London

Dated September 22, 1938

Rec'd 4:10 p. m.
Secretary of State,
Washington.

996, September 22, 7 p. m. (SECTION TWO)

The franc was under decided pressure today and a

Bank of England official states in confidence that his
information is that six French Cabinet ministers have
tendered their resignations, to take Effect upon the
termination of the crisis.
(END MESSAGE)

CSB

KENNEDY

242

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

September 22, 1938, 5 p.m.

NO.: 1543
FROM COCHRAN.

Statement of the Bank of France as of the fifteenth
of September showed note circulation up 5.3 billion
francs. Discounts were up 2.4 billion and (?) advances

to State up 3 billion, leaving coverage 43.69 versus
45.89.

At five o'clock I had a conversation with my friend
in the Bank of France. The Statement of the Bank of
France still had had a bad effect on the market today

in spite of the fact that its unsatisfactory character
had been considerably discounted. Today the pressure
on the franc was one-third heavier than it was yesterday,

even with spot rate moving from 178.34 to .50. Three
months sterling premium moved from 4.25 to 5.50.

No new financial plans were being considered, according

to my friend. According to reports of private bankers
to the Bank of France, the Finance Ministry has asked

their advice as to the best way to raise funds. The
report that the Ceechoslovak Government resigned following

the acceptance of the proposals of Great Britain and
France

243

-2France and the news of the Czech moratorium, caused a

weakening in rentes and other securities. The general
uneasiness is increased because of French building and

other strikes, as well as criticism by the left political
groups of French foreign policy.
I had a letter from Governor Rooth of the Swedish
Central Bank at Stockholm, written September 21, which
was as follows:
END SECTION ONE.

BULLITT.

EA:LWW

244

REB

GRAY

Paris

Dated September 22, 1938

Rec'd 2:35 p. m.

Secretary of State,
Washington.

1543, September 22, 5 p. m. (SECTION TWO)

"WE have since the End of August got about six million
pounds which WE have Exchanged for dollars. Formerly most

of this money has COME from abroad. Some of that part,
however, no doubt represents coverings of Swedish Exporters.

The bulk of the sterling amounts now bought is probably -

foreign flight capital. Part of this capital COMES from the
neighboring countries mainly Norway and Finland. Another
part of it COMES through British, Dutch and Swiss banks.
WE have at the same time increased our gold holdings

but WE still hold a very substantial amount in sterling.
I am, however, not yet able to share the great optimism of
the market just now. The demands from Poland and Hungary

to get part of Czechoslovakia as well as the attitude of
the German press last night when they claimed not only
Sudeten Deutschland at ONCE but also the whole of Bohemia

and Moravia have given ME the impression that it will
probably last SOME time before it COMES to a settlement.
I do

245

REB

2-#1543, From Paris, Sept. 22,5p.m.
(SEC. Two)

I do hope that Chamberlain will be able to go to
Godesberg tomorrow, but I very much doubt whether he will

find the other man willing to agree to a general settlement.
It SEEMS to ME as if the latter's willingness to play a very
hazardous game of poker should be increasing."
BULLITT
CSB

246
SECTION THREE, TELEGRAM NO. 1543 of September 22 from Paris

At noon today I had a telephone conversation with
Jacobsson, the Swedish economist of the Bank for Inter-

national Settlements at Basel. Jacoosson said about the
same thing as Rooth, i.e., he was afraid the Germans might

be sufficiently encouraged by their success up to this
tim to press on to acquire sites of important armament
works and iron industries located in Czechoslovakia proper.

This afternoon I was visited by the representative
of the Paris branch 01 the Bank of Italy. My friend told
me that he is confident the Germans will not go further
than to seek absorption of the Sudetens and freeing the
Rumanian and Polish minorities, along the lines which

Mussolini suggested. This representative told me that
many Italians, while they stood by the position of the
Italian Government to date, would be happy to see a
general European agreement to stop Germany lest Italy
be embarrassed by further moves on the part of Germany.
END MESSAGE.

BULLITT.

EA:LWW

247
September 22,1938

My dear Mr. President:

Inclosed is a confidential
report from Mr. Royall Tyler, who
went to Germany at my special request.

Sincerely yours,
(Signed) H. Morgenthan, Jr.

The President,
The White House.

248

September 22,1938

My dear Mr. President:

Inclosed is a confidential
report from Mr. Royall Tyler, who
went to Germany at my special request.

Sincerely yours,
(Signed) H. Morgenthau, Jr.

The President,
The White House.

249
OFFICIAL

SECRETARY OF STATE

DEPARTMENT OF STATE
WASHINGTON

September 22, 1938.

My dear Mr. Secretary:

In accordance with your request, I enclose
a complete second copy of Mr. Royall Tyler's
report. A few minor corrections have been made
on this copy.

Sincerely yours,
Herbert Feis

Herbert Feis,
Adviser on International
Economic Affairs.
Enclosure:

Paraphrase, Sections 1,
2, 3, No. 69 of September 21
from Bern.

The Honorable

Henry Morgenthau, Jr.,

Secretary of the Treasury.

250
PARAPHRASE OF TELEGRAM

From Bern

No. 69, September 21, 9 a.m.

Department's 41, August 30, 6 p.m. For the
Secretary of the Treasury.
I have been handed the following report:

"September 20. I spent in Berlin 5 days, in
Munich 2, Vienna 2, Milan 2. I interviewed diplomats,
military men, professors, bankers, industrialists, and
other persons.

In Germary banking and business circles are under-

going strain of a severe nature on account of preferen-

tial allotment of skilled labor and raw materials for
armaments, also because of the increased costs of

labor and because of uncertainty with regard to the intentions of the Government concerning six months delivery
bills which may not be rediscounted at the Reichsbank

and have been issued since April last to a total amount
of more than three billion marks, to be met, theoretically,
when they mature, either from current budgetary receipts

or from the proceeds of a long term loan. The total
annual budget receipts amount to about 18 billion. There
has not yet been absorbed the last long term issue, and
there was recently required official support in order
to prevent more spectacular declines in the quotations

for state bonds. With regard to the last issue, the

failure

251
-2-

to absorb it impresses general opinion, as issues which
have come out previously were promptly taken up. Business
circles are afraid that delivery bills mean a renewed
growth of floating debt which has not been disclosed

and the failure of the consolidation plane of Schacht,
especially as the prolongation of mobilization results
in severe additional drains on the treasury. According
to current estimates, the indebtedness of the Reich, of
which perhaps a half is undisclosed, is more than 50
billion marks.

A portion, but not all, of the local business people
hold the hope that this amount is manageable and they

even consider that it might become larger without bring-

ing to ruin the prospects of reverting, after a 50% or
more devaluation, to exchange freedom subject to the
proviso that international appeasement comes about and

permits skilled labor and raw materials to go into other
channels than the production of armaments. However, few

1f any deny that the trend at present is downwards. The
more hopeful point to the manner in which the achievements

of the last five years have astonished the world and
declare, for example, that any shortage existing at
present will disappear soon due to a new process of
extracting a substitute for wool from inedible species
of sea fish, of which the supply cannot be exhausted.
However, even the most optimistic opinions are dependent

252
-3-

upon a halt in the race for armaments. I have not
met any bankers or businessmen who believe that the
German 80-called miracle of economics, which has

autarchy as its basis, can keep on working indefinitely.
It is the hope of everyone to see Germany back in
circuit (?) of one of exchange countries before the
system under which she now operates has developed too

far. There is another source of worry in the close relationship between the level of the public debt and prices
with the effect felt with each new demand on the treasury.
Even though paper wages have not gone up, it is said by

the manufacturers that the real cost to business of labor
is, at a rough estimate, 15% greater than several years
ago, that this increase is in various ways disguised,

and that labor is more poorly off than previously for the
cause that the currency's real purchasing power has
dropped more than a proportionate amount through de-

terioration in quality of products. For example, a
suit which formerly would have lasted three or four
years is now only good for one. According to the manufacturers, their profits on staple products have been
reduced to the replacement point or less.

253

SECTION TWO

Employment at the same time, with hundreds and

hundreds of new semi-official and official positions,
is high, relatively well paid, and the restaurants in
Berlin, full to overflowing, remind one of the inflation
years after the war. According to some Germans, small

yields on investments and doubts as to the future of
the currency render people in general careless of their
money and not willing to create savings.
At present the note circulation is around nine
billion and has increased almost two billion over a
year (ago?), and of that increase Austria accounts for
one-half a billion. Since the Nazis came into power
the circulation has almost doubled. The optimistic
ones say, in explanation, that now currency has production as its basis, and since production since 1932 has

increased more than has note circulation the currency
of Germany is at present better covered than it was

formerly. It is pointed out by the critics that the
real purchasing power of the mark is declining. From
a good source come-stories of two Reichsbank notes

having been found with identical series numbers. Also,
there are reports of brand new mark notes being continually
offered

254
-2-

offered in London in Reichsbank wrappings in such quantities
as to cause people to suspect that the German authorities

are exporting them. Such tales as these sap confidence

and tend to drive prices up. In Berlin to purchase a
meal with tourist marks is about twice as expensive in
dollars as the same meal in New York, given restaurants

and food of equal quality. This is true as well in a
number of beer parlors and small hotels. There is no

general shortage of food, but real butter cannot be obtained, the white bread (80-called) is scarce, is just
about edible, and it is reported that eggs and milk
frequently run short, SO that the children are thus not
receiving proper nourishment. According to several sources
rickets are becoming more and more prevalent. The impres-

sion in general is that the situation in Germany is
becoming decidedly worse; in spite of the enormous

ingenuity and the hard work devoted to keeping it running

there are signs of strain in the system. For the future,
hope is conditioned upon improvement in the international

situation. Believing that the chances in their favor are
not sufficiently good, the Army is heavily against war.
The young men are very enthusiastically for the system,
which provides for them a never stopping boy scout jamboree,
but

255
-3-

but the difficulties which beset business, tax burdens,
and the high cost of living are a sobering influence
on those who marry or those who have to earn their living outside of employment by the Army, the Party, or the
State. The presence of Herr Schacht in the Reichsbank

is yet considered to be a guaranty, to a certain extent,

of the will to resist follies of an extreme nature along
production currency lines, but those who are skeptical
note that several times Schacht has sworn to resign if
certain things occurred and then has always swallowed

them. According to these people except to be shot he

will not retire. Speaking generally, the diplomats of
foreign countries appear to be more hopeful for the
future than do the German people other than those who

are officials. Isolation is lamented by numerous Germans.
From a German source comes a report that the Hungarian
Prime Minister gave the Government of Germany a warning

that his country would stay neutral if a war over Czechoslovakia should come.

I have an impression that by far the majority of Germans,

even at the height of the crisis, did not believe in war. I
found the people courteous as a rule, indeed to an extent
contrasting with Americans, they were always ready
to

256
-4-

to talk, frequently in an outspoken manner. The opinion
was heard that should there be war Germany would again

be left in the lurch by Italy, and this was contrasted
with the Italian conviction that Italy would be drawn
in at once because Germany has such a hold over Mussolini.

The personal prestige of Hitler is as great as always

and there will be a further increase in his prestige if
the Sudeten land is annexed, but all the other Nazi

leaders are openly criticized, there being statements,
for example, that they had to take away the management
of Department Funds from Goering and give them to General

Keitel. It is feared by some that an attempt to capture
control of the Army is being planned by Himmler. There
are stories about the removal of Beck, the Chief of the
General Staff, who is considered to be a bulwark against
interference with the Army by the Nazis. In the civilian
world there is no indication of any organized resistance
directed against the regime of the Nazia. (End of Section Two)

257
PARAPHRASE OF SECTION THREE OF TELEGRAM NO. 69
OF SEPTEMBER 21, 1938, FROM BERN.

A sad impression is produced by Vienna. There is
a prevailing sense of insecurity and many shops are shut,
although open outrages are not occurring. For the
Austrians the result of the schilling-mark conversion

has been a substantial increase in the cost of living.
The laboring classes of Austria have without doubt
been pleased by the enormous effort made by the German

Government to take care of the unemployed; on the other

hand, the rise in living costs has left some of them
no better off than they were before on the dole, but now
they are having to work, which is not to the taste of all
Austrians. There is dissatisfaction among many Austrian
Nazis, out of the sense that preferential treatment has been
given the Prussians in the matter of jobs. You would
still find in Vienna comic stories, for example, that
about Buerckel, who is the present chief of the Nazis
in charge of Austria, to the effect that upon visiting
Schussnigg, who is now confined in the Hotel Metropole,
and offering to Schussnigg a free pass abroad and a
substantial amount of dollars on condition that Schussnigg
would reveal to him, Buerckel, how he managed to get

along with the Austrian Nazis for elmost four years. Great
efforts are being made by Germany to conciliate the

Austrians, for example, in Vienna the white bread is

far better than it is in Berlin, and genuine butter is

258

-2obtainable, and food is cheaper.

A good general impression is left by Munich. The

display of Aryan signs is infrequent. There is a welcome
in the beer houses to Americans, and there is irrepressibly

anxious discussion of affairs, indulging in free criticism
of the system, but for Hitler, even in Munich, universal
respect. There is something impressive in the calm of
the people. Great admiration was expressed for Chamberlain

at the height of the crisis. Anti-Semitic measures met
almost universal disapproval in Germany.

In Milan I found striking deterioration compared with
the six months past. Anti-Semitic measures are highly
unpopular, and there is astonishing outspokenness on the
part of the non-Jewish Italians marked by resentment

and humiliation at having to witness events. According
to the businessmen of Milan, this is the universal attitude
throughout Italy, Jews being regarded as patriotic and
good citizens. 17 gold medals of gallantry, the highest

Italian military distinction, were won by Jews out of
a total number of 40 awards. It is said that Fascist
prestige suffered a bigger blow from the anti-Jewish
measures than was caused by the Anschlus. The regime

is now detested by all classes, including many who

live on it, and Mussolini personally is hated. I found
a general belief that the purpose of the anti-Jewish
measures was to make trouble for England and France

-3-

259

in the Mohammedan countries and that the truckling to
Germany under whose control the Italians say they now

are, even to the extent of having to renounce South
Tyrol and Trieste when called on and condemned to go

to war with Germany [sic.]. The raw materials are
exhausted in Italy and business is dead. I am informed
that the debt of Italy to Germany for metals is now 80
great that further deliveries to Italy by Germany on credit
are refused. There is a stoppage of building and
civilian motor construction and even military airplane
production and a great slowing down on armaments. Collec-

tion is taking place of every available scrap of metal,
including garden railings and gates, as also in Germany.
There is still plenty of food and it is good, but the
prices are beyond most persons, and many workers are

being laid off from their employment. Stories of this
character are told even to foreigners, and hostile comment
on current affairs in public places can be heard. That the
whole affair will end up as in Spain is open talk. As
for the King, he is regarded as having sold out to I1
Duce. There is an expectation that before the end of
October the King will sign the repeal of the Italian
Constitution, replacing it by a cooperative state and
accepting the appointment of the Grand Council of the Fas-

cisti. There is also a rumor that decrees are soon to
be published which will abolish private inheritance.

260

-4As a matter of fact, the State is already taking land
without compensation from private owners. Some think that

the Prince of Piedmont may attempt to get control

with army support against the Fascist party, with the
knowledge that otherwise he will be discharged and that
Aosta will be declared the Crown Prince. The question
of succession of the throne is now being decided by the

Grand Council of the Fascisti. There is cordial detestati on throughout the country of the policy of the
German axis. Those newspapers which with bombastic

captions are claiming that Mussolini is dictating the
solution of the Czech crisis are greeted with contemptuous
shoulder shrugs. I heard one passerby observe that Chamber-

lain could do that but not a Mussolini or a Hitler. A
condensation of the general impression received in the
land may be conveyed by the reply of a Milan policeman

on his beat. I asked him what Mussolini said in Trieste,
and he answered "welcome to parole parole" [sic.]. He
then asked where I came from, and when I informed him

I came from the United States he said "you are lucky,
I only wish I could go to America or anywhere else to
get out of here".

EA:HF:LWW

261

MOFFICIAL

THE RE ESTARY OF STATE

DEPARTMENT OF STATE
WASHINGTON

September 23, 1938.

The Secretary of State presents his compliments

to the Honorable the Secretary of the Treasury, and
encloses one copy of telegram No. 220 of September 22
from Praha.

262
GRAY
JR

Praha

Dated September 22, 1938

Rec'd 1 p.m.

Secretary of State,
Washington.

220, September 22, 4 p.m.

Trading in securities suspended September 21 until
further notice but foreign Exchange market continued
to function. Skoda debentures in London remained at
48 but the Czech loan and Praha bonds WERE not

quoted. Government decree dated and Effective

September 21 seriously limits bank deposit
withdrawals. On demand accounts as of that that
date
deposits may not EXCEED 3% per month EXCEpt/600 crowns

may be withdrawn on accounts under 20,000 crowns.

Enterprises may withdraw 25% Equally restrictive
measures on savings deposits. Old Austro-Hungai

banknotes included in the banknote circulation figure

of National Bank are Excluded from sight liabilities
in order that gold COVER might remain above legal
minimum of 25% NEW legal measure provides higher

fines and longer terms of improvement for persons
smuggling currency and Engaging in unauthorized Exchange

transactions.
Repeat to Commerce.
KLP

CARR

263
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE: September 22, 1938
TO

Secretary Morgenthau

FROM

A. Lochhead

Close SEPT. 22, 1938
GOLD HELD IN LONDON

$152,000,000

Insurance arranged for following ships:
Sailing

Steamship

Sept. 23

Manhattan

Sept. 24

Paris

Amount

$11,300,000
11,000,000
$22,300,000

AM
JR A portion of

this telegram must be
closely paraphrased before being communicated

to anyone. (c)

Berlin (part air)
Dated September 22, 1938

Rec'd 8:50 a.m., 23rd.

Secretary of State,
Washington.

475, September 22, 5 p.m.
14. FOR TREASURY FROM HEATH.

(GRAY) Despite the general apprehension of war the

decline of the stock market during the first two WEEKS
of the month was not great and following the announcement

of Chamberlain's visit there has been a steady moderate
improvement. Any tendency to unload Government bonds

during the scare was presumably largely checked by

the fear of the sellers being regarded as "unpatriotic".
There was, however, an increased liquidation of short
term credits under the Standstill Agreement by American,
British and Dutch interests. As a result the registered
mark rate fell a WEEK ago to SOME 6.50 to the dollar the

lowest on record. It is to be noted that in recent
months there has been very little liquidation of the
remaining Eritish and Dutch standstill credits these
holders prefering to wait for better days rather than
sacrifice half the value of their credits. A large part
of

264

265
-2-

of the registered marks recently sold to travellers
were furnished by the German Government itself through
the Gold Discount Bank.

It is also reported that in spite of the severe
penalties attaching to such operations, there is a
recurrence of the "black market". I have been informed

that at one time the rate fell to a figure as low as
six percent of the reichsmark's normal value.
When, on the other hand, the war scare was highest,
the Reichabank was persuaded by an American banker to

make a payment of $1,000,000 subject to the usual rate
of discount although the payment was not due for ten
months. Evidently the Reichsbank had not been ordered

to conserve exchange resources in anticipation of the

possible outbreak of hostilities. The occurrence is
the more remarkable since the transfer consisted of
a Jewish emigré's fortune of 35,000,000 marks which he
held in the Osram Electric Light Globe company, and for

which he was permitted to transfer the sum of $4,000,000.

It is possible that this unusual concession by the Government was made because the emigré might have brought

suits against Osram export shipments to countries outside
of Germany.

There has undoubtedly been a very great strain
on Government finance in connection with accelerated

western

266

-3- #475, September 22, 5 p.m., from Berlin (part air).
western fortifications and armaments and the recent
large maneuvers (SEE my number 13). However, to a

considerable extent, these Expenditures were compensated

for by postponing or curtailing work on other Government

projects. The rumors of unusually heavy issuance of
"delivery bills" were not supported by the composite
statement for August of German banks which purchase

most of the Treasury bill issues. The statement shows
that the banks acquired only reichmarks 417,000,000
of Treasury bills during August as compared with
rEichmarks 450 million in June.
Recently the Government has been issuing about

rEichmarks 500 million monthly of Treasury bills a
figure which is more than 40% of monthly tax revenues.
Tax revenues for the five months of the fiscal year
Ending July 31 total reichmarks 6,291 million (March
July 1937, 5,320 million reichmarks).
While there were other factors the monetary strain
occasioned by the military preparations was undoubtedly

largely responsible for the feet that in mid-September
only 36% of the fresh credits of the Reichabank had
been repaid 0.8 compared with 60% for the first two
WEEKS in August and 80% repayment during first half of

September 1937. It is significant also that security
loans

267

-4- #475, September 22, 5 p.m., from Berlin (part air).
loans advanced slightly, usually at the middle of the
month there is a decrease.

The total currency circulation reported September 15
was reichmarks 8,708 million as compared with
reichmarks 8,744 million the WEEK before and rEichmarks

8,935 million on August 31. Normally during the second
WEEK there is a marked decrease of both currency

circulation and Reichsbank credits.
There is no indication as to whether the new bond

issue will be floated and bankers consulted are of the
opinion that sizeable issue cannot be gotten out now
without great increase of the usual pressure on banks,
concerns and individuals. Rumors are persistent

that the banks have not been able to get rid of all the
April loan. On the other hand the great issuance and
demand for Gold Discount Bank single bills during
August would SEEM to indicate that a new long term

offering could be made provided the usual pressure is
applied.

Voluntary saving apparently continues at about the
same rate. The net increase in savings accounts in
August was 107 million rEichmarks as compared with

108 million in August 1937. The figure of 17 billion
reichmarks total savings deposits attained at the End
of

208

-5- #475, September 22, 5 p.m., from Berlin (part air).
of August 1938 was 1.9 billion higher than that of
August 1937. This rate of such savings is, however,
still below that of 1928 when savings accounts registered

2 net increase of 2.36 billion.
At the End of July the total disclosed debt of the
Government was 22,936 million an increase of 491 million
reichmarks over June 30 and 6 billion reichmarks OVER

July 31, 1937. The increase is mainly accounted for in
short term debt which augmented by 486 million

reichmarks during the month. The foreign debt was carried
03 1,304 million reichmarks as compared with 1,390 million

reichmarks at the End of July 1937. It is to be
remembered, however, that there has been an offset to the
recent increase in the disclosed debt through the

retirement of an unknown amount of the special bills
forming the "undisclosed debt". . Thus in June when
German banks showed an increase of 450 million

reichmarks in Trensury bill holdings there was a nearly
corresponding decrease of ordinary bill holdings (Wechsel)

of 400 million reichmarks. The "special bills" are
included in the bank statements with ordinary bills.
There was no decrease in ordinary bill holdings shown

for July and August, in fact there was a slight increase.
On

269

-6- #475, September 22, 5 p.m., from Berlin (part air).
On the other hand the banks acquired large amounts

of Gold Discount Bank single bills (in August 400
million r Eichmarks) without showing a corresponding

increase in their bill holdings, therefore it would
SEEM that SOME retirement of special bills must also
have occurred during July and August.
WILSON
KLP

270

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Berlin, Germany

M

DATE: September 22, 1938, 2 p.m. (By part air:
received 6:30 a.m., Sept. 23.)
NO.:

473

FOR TREASURY FROM HEATH. No. 13.

I had a conversation with Schacht yesterday. He
denied the rumors that because of financial stringency
the Government would have to abandon its new policy of

ceasing to issue inflationary special bills, and that
from now on Government expenditures would be met from

invested revenues, loans and public issues of Treasury

bills, or that it would secure further extension of
non-renewable "delivery bills" for discount.
There was tacit admission by Schacht of the present

strain on Government finances. He stated that there

was nothing wrong with the "delivery bills" except that
they had issued too many, and that the Government would

simply have to cut down on expenditures. Schacht also

said that possibly another president for the Reichsbank

could resort to inflationary methods, but that in view
of his record he could not do so; he would give up his
position at once. However, Schacht admitted that there
had been an unavoidable measure of inflation through his
program of "putting Germany to work" through credit

creation, but he asserted that this had not gone 80
far

271

-2far as to be dangerous.

The projects of the Government, he admitted, call
on the German people for increased savings. He said that
the German Government would force increased rigorousness

if they found that voluntary savings were not sufficient.
Schacht expressed the hope that real peace would

follow the present Hitler-Chamberlain negotiations, which
would permit reaching an understanding on international
economic and monetary affairs. Should there be peace in
Europe, he said that France, England and the United States
would conclude a durable monetary agreement with gold as
a basis. Germany would join such an agreement the minute

that was done, he said, and they would be ready to make
a readjustment of the mark's gold value. He asserted that
the United States would have to accept lower interest

rates on its foreign indebtedness as a necessary factor
in the success of such an arrangement.

Schacht declared that his country was in a position
where over night he could put exchange restrictions on
payments for commodities. However, it would be necessary

for some time to come to keep the restrictions on capital

inactivity. Of course, after a monetary settlement there
would have to be a trade understanding which would enable

a departure from bilateralism, he said. Schacht was in
thorough agreement with the views of Secretary Hull on

272

-3on international trade; however, Germany dissolved trade

with our country on American terms until there had been

readjustment of the debt interest burden, and a postponement and extension of amortization. The exchange for

payment of the contractual interest on Germany's long
term dollar debts dihescuss
insisted was not at Germany's command.

Schacht did not/ the failure of Germany to keep
up payments on the Austrian dollar obligations, but he
did say that a debt had never been repudiated by his
Government, and that on this matter it would be possible
to come to some agreement after peace was assured. At

the present time he asserted that they did not have available any extra funds for resuming interest payments on
the Austrian indebtedness.
While talking about trade, Schacht mentioned the
numerous treaties of Germany of the 1890's as models,

since customs tariffs were fixed for a period of twelve
years under these treaties.
Schacht asserted that he was in favor of giving full
publicity to the budgetary and debt situation of Germany,
and that he had stated 80 in his speech last spring.
He added that the debt situation of Germany is bad, but

that it is not nearly as bad as people abroad say it is.
Schacht

273

-4 Schacht told me that he had quit his position as Minister
of Economics because he did not want to accept the respon-

sibility for measures taken without full authority; he
expected to continue as president of the Reichsbank, and

believed that he might eventually be given additional

responsibilities, since it was worth something after all
to have experience.

Throughout the conversation Schacht spoke with his
usual confidence and decision about the monetary and

financial plans of Germany. However, it is to be remembered

that he is not in authority any more, although his counsel
is sought. The Minister of Economics, Goering, has the
real control of Germany's financial and commercial policy.
WILSON.

EA:LWW

274
Friday
September 23, 1938
8:50 a.m.
H.M.Jr:

Hello.

Operator:

Dr. Feis.

H.M.Jr:

Yes.

0:

Go ahead, please.

H.M.Jr:

Herbert -

Herbert
Feis:

Yes, sir.

H.M.Jr:

Good morning.

F:

Good morning.

H.M.Jr:

Archie Lochhead is sitting here with me, see?

F:

Yes.

H.M.Jr:

And we're getting awfully fed up on these cables
coming up from Pierson on Brazil - talking about
stuff which he doesn't seem to know anything about -

F:

Yes.

H.M.Jr:

And it's perfectly assininel

F:

Yes.

H.M.Jr:

Now Archie tells me that a couple of weeks ago
we sent word down through the Federal Reserve to

the Bank of Brazil on this very thing and we've

been waiting to hear from them. Now, Pierson
just doesn't seem to know about this arrangement we
made a year or two ago, you see? And we've - both
Archie Lochhead and I are very much disturbed because he seems to be - just gumming up the works.
F:

H.M.Jr:
F:

H.M.Jr:

He does know about - or he should.
Well, now this I know the fellow This is the suggestion that we have -

275

-2Right.

F:

H.M.Jr:
F:

H.M.Jr:

F:

H.M.Jr:
F:

H.M.Jr:

F:

Archie knows all about this.
Right.

My suggestion is that we tell the Brazillian
people here that of course we're interested
and that we suggest that they send up on an
aeroplane a representative of the Brazillian
Treasury, - and then we'll talk to them here.
Ah - sure - sure, - ah I mean I'm just As for working out the form of it,
you see? - Just what to say to them and whether
to say it to them here or down there - I imagine
down there is the place to say it.
No, well I don't think so, because - if you
don't mind my saying that - I think they've been
very stupid about it down there.

Well, I don't think that's - I don't think that's
the Brazillian Government.

H.M.Jr:

I don't think it is either.

F:

No.

H.M.Jr:
F:

I think it's our people.
Well - yes, exactly.

H.M.Jr:

So that's why I think we could - ought to handle

F:

Ah - the Ambassador isn't here, is he? Is

it up here. I mean -

Brandao here?

H.M.Jr:

Who?

F:

Brandao, the Ambassador?

H.M.Jr:

I don't - I don't know. No, my thought was if

you fixed up some cable with Lochhead and sent
word down reviewing the situation and say ing that

if they want to complete this suggestion of theirs
we'd be very glad to have - ah - them send up a

-3-

276

representative of their Treasury with 0. K.

F:

H.M.Jr:

Could Archie come over, say at ten o'clock?

Sure.

F:

Bringing along the record of your original arrange-

H.M.Jr:

Sure. But the way - that's just what I want -

F:

Then we'll work it out and submit it to you.

H.M.Jr:

I know how anxious you people are, and we're just

F:

Pierson; he's doing the same thing in Uraguay.
He is so eager -

H.M.Jr:

Yeah.

ments with them?
I mean -

as anxious and I think it - I can't understand

F:

- to develop that shop of his -

H.M.Jr:

Yes.

F:

H.M.Jr:

And everything else goes by.

F:

Well, and in doing that he's gumming the works.
if Archie'11 come over at ten Well - ah -

H.M.Jr:

He will.

F:

We'11 work out a message -

H.M.Jr:

Yes.

F:

And I'll talk with Larry Dunnigan about this
question of whether to do it up here or down
there.

H.M.Jr:

Well, my -

F:

And have something ready to submit to you.

H.M.Jr:

Right. Well now, my feeling is unless you people
have some good - they!ve tried to do it down
there and they - they've just got it all mixed
up. Therefore I'm suggesting that we do it here.

277

-4I understand.

F:

H.M.Jr:

Right.

Hello.

I'll have a report -

F:

H.M.Jr:

And Archie'11 be over there at ten o'clock.

F:

Right.

H.M.Jr:

And all I felt was that if the Brazillians or the

Uruguay people would send a Treasury representative

to Washington - ah - we could explain it to them

very quickly and - ah - if there's anything to be

done we could do it.
F:

Right. Now, our man may be suggesting something

beyond what falls into the limits of your other
arrangements.

H.M.Jr:

to

Well, what Archie wants/explain to you - that either
Pierson does or doesn't know and he'11 call up
Wayne Taylor before he comes over to see you.

Ah - what - ah - we've got all of the machinery
there if Brazil wants to use it.

F:

For doing everything that Pierson has in mind?

H.M.Jr:

Yes.

F:

All right. Let's get that down.

H.M.Jr:

See?

F:

H.M.Jr:
F:

H.M.Jr:
F:

H.M.Jr:

All right.
and we've And - and of course -/ and all that stuff went
out two weeks ago.

I know and I remember the cable.

All right, Herbert.
Right, sir.
Thank you.

Friday
September 23, 1938
8:58 a.m.
Admiral
Leahy:

H.M.Jr:

L:

Admiral Leahy speaking.

Good morning. Well, I guess the Nashville got
off without any trouble.
Ah - we saw in the paper that she sailed yesterday.
I have no report of her departure - she should have
reported; we haven't got it yet, but I have no
doubt that she has sailed from - from Portsmouth
and she's on her way.

H.M.Jr:

Well, following out your suggestion - I wanted to
sort of put the Navy on notice that Monday I may
ask for another cruiser or some - sort of a something anyway to take the place the Honolulu.

L:

Uh huh. Well, I tell you -

H.M.Jr:

Because -

L:

- Mr. Secretary, I'd like to - well, it will

H.M.Jr:

require about ten days for the ship to get over
there - it may take a day more than that.
Well, couldn't you get them to get her
ready?

L:

Yes, we've already told her to be ready to sail
on notice.

H.M.Jr:
L:

Yes.

But it's - the way - the speed they make it's
about - well, I'd say eight days to get over
there.

H.M.Jr:

Well, could you get a clearance from the - ah White House - to ah - ah - have her go as soon
as possible?

L:

Well, I don't think we need to get a clearance

from the White House, Mr. Secretary, but we do
have to get permission from the State Department

for the ship to go there but that will not be

difficult.
H.M.Jr:

278

Right.

279

-2Do
you want me to send her now - to start right
away?

L:

H.M.Jr:

I think so because the worst that can happen is

that - ah - I take it you want the Honolulu to
come back anyway.

L:

H.M.Jr:

Well, I don't care very much about when the
Honolulu comes back -

Well, the way I feel is this, Admiral, the
situation looks very much worse.

L:

Uh huh.

H.M.Jr:

It's anybody's guess -

L:

Yes.

H.M.Jr:

And we have so much at stake that - ah - unless

it's - ah - you tell me it's difficult for you

to handle it I would appreciate it if you would
send another cruiser out there.

L:

Well, would it be worth my time to send a cruiser
and a big destroyer so we'd have two ships there?

H.M.Jr:

Well, that's that much better.

L:

Well, I'll do it. I'll send - I'll give them
orders now and they ought to be there in the
course of ten or eleven days from now.

H.M.Jr:
L:

H.M.Jr:

Well, if it takes that long I think I'd do it.
All right, sir.
And if everything is peaceful in Europe in ten
days I'll be delighted to have you give me the
laugh.

L:

H.M.Jr:

Well, I won't give you the laugh but whenever
you make up your mind, Mr. Secretary, that you
don't need them any more, if you'11 let me know

I can stop it before it gets there you see.
All right. Well, I'm say ing today with the
situation as it is I think it's serious enough
and I'm going to ask you to send additional
ships over there.

280

-3L:

All right, sir. I'11 send a cruiser and a big

H.M.Jr:

All right.

L:

And either one will be able to take one of thos e

H.M.Jr:

Fine. And I hope that you'll be able to give me

L:

Well, that's fine. I - that would be a pleasure;
I've never been able to do it yet, Mr. Secretary.

H.M.Jr:

Well, I hope so.

L:

destroyer -

shipments.

the laugh.

(Laughs)

H.M.Jr:

Thank you so much.

L:

All right, sir. We'11 get it right away and it'11
be there ready for-you in the course of ten or

eleven days.
H.M.Jr:

Thank you so much.

L:

You're welcome, sir.

H.M.Jr:

All right.

L:

Goodbye.

CONFIDENTIAT

G-2

JM

280A

WAR DEPARTMENT
WAR DEPARTMENT GENERAL STAFF

G-2/2657-II-90

MILITARY INTELLIGENCE DIVISION, G-2

WASHINGTON D. c.

war

September 23, 1938.

MEMORANDUM NO. 19 FOR THE CHIEF OF STAFF,

Subject: The present European situation to
10,00 A.M., September 23, 1938.

General Situation. The immediate European situation has

entered another extremely critical stage. As this is being writ-

ten, the negotiations at Godesberg have been interrupted by the
expedition of P. letter to Hitler in which presumably Chamberlain

has asked for guarantees that Germany will not enter Czechoslovakien

territory while negotiations are still in progress. This seems to

have created a postponement in the conversations and consternation

in the German camp. Hitler's subordinates are reported by the
press as saying that such a guarantee cannot be given in the
present situation.

Meanwhile, conditions everywhere are greatly confused.

The official Polish and Hungarian demands for a treatment of their
minorities similar to that of the Sudetens have been coldly re-

ceived, if not refused at this time, by the British Government. In
Poland great anti-Czech demonstrations are being staged demanding
the return of Teschen. These demonstrations are not believed to

be entirely spontaneous. It is not unlikely that the populace is
being officially diverted from unwholesome internal affairs to an
external national cause. No recent information has been received

of Hungarian activities in respect to the minority claims. A responsible Hungarian official in Washington has said that if the

present Hungarian Government does not soon recover the terri-

tories lost to Czechoslovakia, a Nazi Government will.

An unconfirmed press report from Moscow states that So-

viet Russia has issued a warning to Poland that if the latter

enters Czechoslovakia, Russia will cancel the Polish-Soviet nonaggression pact.

During the last 24 hours the tension in Czechoslovakia
has not abated. Amid tremendous demonstrations of patriotic

CONFIDENTIAL

280B
CONFIDENTIAL
enthusiasm Premier Hodza's "oapitulation government" resigned yesterday morning. A new government of "national concentration and
defense" has been formed in Czechoslovakia. General Syrovy, Inspector General of the Army, becomes Premier and Minister of Na-

tional Defense. Another General, Frantisek Nosal, Chief of
Transportation and Supply in the War Ministry, is Minister of Public
Works. (The report of yesterday that General Syrovy was to be
Minister of the Interior proved to be erroneous.) The press oontinues to report minor clashes between Sudeten Germans and Czech

police along the border.

Military Situation.
Great Britain - Plans for air raid precautions were
accelerated. These include opening of 14 stations for fitting gas

masks in London and definite plans for the evacuation of sick in
hospitals.

France - No change reported.

Italy - No change reported.
Germany - An Embassy cable dated September 22, 4:00

P.M. states in effect:

The War Office informed the Military Attache
that no Frei Corps have crossed the frontier except
possibly some individuals. Army movements presumably

will await Hitler's orders depending upon results of
Godesberg negotiations. At present Army units are
held at least ten kilometers from the Czech border.
Some desultory firing between Czech and German po-

lice but not between military units.

The Embassy also reports in effect as of 7:00 P.M.,
September 22, as follows:
That British and American Consular Officials
in Munich report having observed movements of troops

in that vicinity and that orders had been issued to

march this P.M. The Military Attache however doubts
if any definite orders have been issued.

Czechoslovakia - No known change. It is the opinion
of a local Czech official, with military experience, that the Czech
troops have not withdrawn from the fortified lines along the frontier.
Poland - The Military Attache in Warsaw reports as of
3:46 P.M., September 22:

-2CONFIDENTIAL

2806
CONFIDENTIAL
Aggressive action in connection with the
minority problem is being prepared by Poland. Have
confirmed troop movements in unknown numbers to
Katowice and Cieszyn.

CONFIDENTIAL
-3-

281
FEDERAL RESERVE BANK
OF NEW YORK

DATE September 23, 1938.

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

SUBJECT: TELEPHONE CONVERSATION WITH
DE NEDERLANDSCHE BANK.

FROM L. W. Knoke

Mr. de Jongh called at 10:30 and stated that he planned
to make another gold shipment of $10,000,000 on the steamship
Noordam scheduled to leave Rotterdam on Wednesday, September 28.

He wanted to find out whether it would be possible for us to insure
this gold for his account in our market.
I replied that I was hopeful that something could be done
here although our market was thin and that for limited amounts, at

least, insurance including war risk was being placed here at 17.
I told him I would get busy and cable him tonight what, if anything,
I had been able to do. He left the firm order with me for $10,000,000
at a premium not exceeding 17 1/24.

I warned him that in all his shipments he should be sure

to send us bars .995 fine or better, or in case of coin bars, bars
whose fineness ranged from .899 to .917. If he sent other bars I
pointed out that extra charges would be incurred as set forth in
the Mint's tariff of which we had sent him a copy before.
today

He had sold $3, 500,000/ and he was going to ask us to

release gold. The tension in Europe was great; everybody was awaiting

the results of the meeting at Godesberg. On the whole things looked
pretty serious.
LWK:KW

282

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: September 23, 1938, noon

NO.: 1551
FROM COCHRAN.

This morning at half-past eleven I visited at the
Bank of France. The French stabilization fund had lost
720,000 pounds spot at from 178.53 to 178.55 by that

hour; also, with three months sterling premium at six
francs, it had lost 100,000 pounds forward. The growing
pressure on the franc has been increased by a number of

factors - the tense international situation, rumors that
there is dissension in the French Cabinet, increased
criticism by Frenchmen of the French foreign policy, and
the revelations in the statement just released by the
Bank of France.

At the Bank of France my friend does not know of

any plans for new French financing, other than to pursue
the present course. He realizes, however, that unless

conditions improve, it will be futile to follow this
indefinitely. As yet there are no figures available from
London, but there sterling was also under pressure, especially when it was reported on the ticker that Chamberlain
had not kept his appointment this morning with Hitler,
and that there had been more Sucletens killed.

END ONE-AND-PHO
BULLITT.

283
FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

DATE September 23, 1938.
SUBJECT TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

I called Bolton at 12:55. Things weren't so good, he
said; today's course of events, as far as he could make out, had
been about as follows: the conversations between the Prime Minister
and Hitler had not commenced as was originally planned and instead

a letter had been sent by Chamberlain to Hitler; it was believed
that a reply had been received by Chamberlain but the conversation
had not been taken up anew. Rumors were flying thick in Europe
to the effect that the German demands had been greatly increased,
that their minimum demands now included the evacuation of all

minority territory in Csech slovakia by midnight tonight and the
demobilisation of the Czech army under the supervision of a German

military commission sitting in Prague. Another affair which was
causing a lot of consternation in Europe was the Russian ultimatum
to Poland. Meanwhile it was reported from various European sources
that the Czechs were now determined to fight, that the Sudeten Frei
Corps with the German 88 and 8A men had invaded the Sudetenland

and were being resisted by the Czechs. Chamberlain might return

tonight and if he did a state of emergency might be declared in
England tomorrow. If Chamberlain did return one might take it for
granted that it was due to the news not being good.
With all these rumors and counter-rumors there inevitably

had prevailed a great state of alara in all markets. He had supported

sterling all day and had so far sold $84,000,000 plus fairly big lines

284
FEDERAL RESERVE BANK
OF NEW YORK

DATE September 23, 1988.
OFFICE CORRESPONDENCE
SUBJECT

CONFIDENTIAL FILES

TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

L. W. Knoke
2

of gold to the Dutch, Swedes, and others. His total losses for the
day he figured at between £7,000,000 or £8,000,000 but he wasn't

through yet. I told Bolton that the market here was also under
pressure but that we had so far bought only about £25,000 at
4.79 18/16. We had been hesitant, I added, to go in on a larger
scale because we didn't know whether it was his intention to leave

today's gold prices to us unchanged. Bolton replied that he didn't
of gold

want to encourage speculative purchases/and that, therefore, he had

gradually raised his selling price for gold to 144s 9d from today's
fixing of 144s 6d. The gold price, however, was no longer a good
guide and it was practically impossible to give the market any

relief by selling. He was planning to send us a range of sterling
rates today of about 4.79 1/2 to 4.81 and would be very grateful
if we would deal here either against his sterling order OF his gold

price. I told him that he could rest assured that we would do that.
I stated that according to an evening paper last night
the Nashville had sailed from Portsmouth for home waters but that
no reference had been made to gold. In reply to my question
whether he had found it necessary to substitute packed gold for our
earmarked gold, he stated that they had managed in the course of

one night to pack all of our gold that was needed to complete the

shipment on the Nashville. I hoped, I stated, that he would not

285
FEDERAL RESERVE BANK
OF NEW YORK

DATE September 23, 1938.

OFFICE CORRESPONDENCE

SUBJECT: TELEPHONE CONVERSATION WITH

CONFIDENTIAL FILES

BANK OF EROLAND.

L. W. Knoke
8

hesitate to bill us for any extra labor made necessary by shortness

of time. Bolton didn't think they would want to make a charge but
nevertheless he would pass my comments on to the directors who had
to make the decision.

I then asked him to get started with the packing of another
$25,000,000 of our gold and explained that the Treasury was considering making a second shipment on the Honolulu although nothing had

as yet been definitely decided upon. My request was therefore made
simply in order to be ready in case something should develop.

Bolton asked how much time we would give him. I replied that all
I knew was that the Honolulu would not sail until another boat had

arrived, which I thought was surely a question of 3, 4 or 5 days.
I suggested that when packing the second lot of $25,000,000 he be

sure that he wouldn't send us fine bars of a fineness below .995

or, if coin bars, of net less than .899 and net more than .917.

LWK:KW

286

PLAIN
JR

London

Dated September 23, 1938
REC'D 2:35 p.m.

Secretary of State,
Washington.

1007, September 23, 6 p.m.
FOR TREASURY FROM BUTTERWORTH.

The state of mind of the British Treasury this
afternoon was indescribably low. They offered to get
in touch with ME should EVENTS CAUSE them to take any
emergency steps. SEE my 922, SEptEmbEr 14, 5 p.m.

The City was nervous and gloomy but again

its state of mind was not fully reflected in market
operations.

The dollar which opened at 4.81-1/4 bid was

supported by the British contol sporadically but broke
the 4.80 level, In the circumstances the volume of
trading was not large. The pressure on the franc was
heavy and although the rate was held firmly the three
months forward rate moved out to 6-1/4 discount with the
French authorities apparently taking no steps to hold

it in.
The

287

-2- #1007, September 23, 6 p.m., , from London.

The average Treasury bill rate for today's issue
was 19S 7D this compares with 18S 10 3/4D last WEEK.

The full STLG 40 million offered were allotted the
total applications being STLG 58 million.
KENNEDY
KLP

288

GRAY
EG

Praha

Dated September 23, 1938

Rec'd 4:42 p.m.

Secretary of State,
Washington.

227, September 23, 7 p.m.

Drafts on foreign currency continued to bE drawn
but the supply of foreign Exchange has been completely

Exhausted. Instructions of the National Bank require

all rail tickets for international travel issued by
tourist bureaus or railway office to be paid for in
foreign Exchange. No statement has been issued as to
the Exact gold COVER percentage obtaining currently but

it is rumored in WELL informed financial circles that
Czechoslovak bank notes of hundred crown denomination

may be Excluded from the gold provisions. This type of
manipulation is regarded with concern by the banking
community.

It is reported from the linen textile center in the
Sudetic area that a sharp and large increase in shipments

of linen for Export markets, primarily the United States,
has taken place during the past two WEEKS. This is interpreted as a move on the part of producers in those
areas

289

-2- #227, September 23, 7 p.m. from Praha

areas to reduce the factory stocks of linen before any
political change in that area is consummated. I understand that the bulk of these shipments are going to NEW

York but are not shipped against actual orders. It is
likely that they will be held as bonded goods for future
sale in the United States.
WE have also been informed by important forwarding

agents in Praha that inquiries and requests r'or transport
SERVICES received from firms in the Sudeten areas have

been very heavy. Apparently the inquiring firms including factories, industries, stores, Et CETERA are
doing Everything possible to have their physical assets
removed from the Sudeten area as soon as possible. WE

have been informed that the available transport facilities in the hands of forwarders are not sufficient to
meet the demands from that area.
CARR

EMB:ROW

290
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

September 23, 1938, 6 p.m.

NO.: 1558
FROM COCHRAN.

At a quarter of six I had a talk with the Bank of
France.

This afternoon there was somewhat of a lessening of
the pressure which I described in my telegram No. 1551

of noon today. This was especially 80 after it was reported that at twenty-five minutes past three Hitler
sent an answer to the letter which Chamberlain had sent

him this morning. Therefore, the French stabilization
fund on the whole had a better day today than it had
yesterday. There is weakness in French rentes and shares.

The British equalization fund had lost the equiva-

lent of twenty-five million dollars by five o'clock.
This amount does not include gold bars offered by the

fund. Flight from sterling has therefore begun again.
BULLITT.

EA:LWW

BK 142
291

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE September 23, 1938
TO

FROM

Mr. Oliphant
Mr. Manning

Annexed is a copy of a memorandum which was given to Head by

Admiral Peoples in connection with industrial mobilization. Head informs me that this memorandum was prepared by representatives of the
Navy Department as being the ideas of the Army-Navy-Procurement group.

The Admiral told Head that he intended adopting this as his idea and

was going to send it forward to the Attorney General as his report. The
Admiral has been out of town and no further action which has been taken
has come to our attention.

Jawy
Attachment

I

292

FOREWORD

Shortness of time has prevented a comprehensive analysis of this

very important subject, and has confined the scope of this approach to the

immediate field of price control itself - without perhaps giving proper
weight to the numerous other cross sections of our National economy from

which the immediate field of price control should not and can not be
divorced.

The following suggested approach to this problem is not submitted

as the only means of reaching a solution thereof. It is hoped that it will
serve as a springboard from which to leap.

A. The Objectives The directive received from Admiral Peoples

defines the objective. Stated briefly, it is the drafting of a plan of
price control, for peacetime application, which will prevent skyrocketing
of prices.

The necessity for drafting such a plan immediately arises by
reason of the present critical European situation. Should war break out
in Europe, European belligerents would undoubtedly endeavor to obtain in

large quantities a great variety of products from this country. These
products would comprise not only items required directly and indirectly
for war purposes, but also a great many that they normally produce themselves but which they would cease to produce because of the diversion of
normal producing capacity to the manufacture of munitions indispensable

to their war efforts. Such a situation developed rapidly during the

0

293

period, 1914 to 1916. The resulting expansion of our foreign market
caused violent increases in demand for our products, resulted in a

skyrocketing of prices, and a disruption of not only our price structure,
but of our entire national economy. The international situation now may
prove to be identical to that of the summer of 1914.
The orders of European belligerents, as well as of those who

normally are supplied by those belligerents, may again flood this country
to such an extent as to exceed our present normal capacity to produce.
In any such eventuality we must be prepared to avert a disruption of our

national price structure, with its inevitable ill effects upon our whole
national economy. The plan below is an attempt to suggest a means to
this end.

B. Postulates:

1. In the event of immediate war in Europe, this country will
assume a status of neutrality.
2. Any system of price control which may now be installed must

be of such a character to be sufficiently flexible for immediate and
smooth conversion to wartime application.

3. Any system of price control imposed must be such as to

merit the wholehearted cooperation of industry, labor, and the public.
C. Principless
1. When inventories and capacity to produce exceed demand, a

system of minimum price control is applicable, 1.0., a figure below which

the price of a given commodity is not permitted to fall. The application
of this principle is suited to periods of depression. Outstanding examples

0

294

of it are embodied in the functioning of the N.R.A. and of the adminis-

tration of the present agricultural surpluses. This principle is not
applicable to the present problem, as it pertains to the control of skyrocketing of prices with its attendant disruption of the national economy.
2. When demand exceeds inventories and capacity to produce,

price control of another nature is required. Under these conditions one

of at least two means of control are available. First, for a given
commodity, a definite fixed price must be set, or second, a maximum price
must be established above which the price of that commodity would not be

permitted to climb. This is the objective with which the present problem
is concerned.

(a) The second of the alternatives just cited, namely, the
maximum price beyond which the price of a given commodity would not be

permitted to rise, is to be preferred for the following reasons:
(1) A definite fixed price is in effect a minimum as
well as a maximum price and, as shown above, the minimum price principle

is not applicable to the problem before us.
(2) Fixation of definite fixed prices presumes a

fineness or perfection of administration not practically attainable.
(3) The establishment of workable fixed prices would
require an army of administrative accountants, which in turn would make
the method too unwieldy for prompt and effective administration.

(4) Lack of flexibility in price range below an
upper limit would favor the low-cost, large-scale producer, and would

tend to prevent the full cooperation of the small and marginal producers.
-3-

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295

(5) Any tendency toward discouraging the small-volume
producer would make the Government's position in peacetime extremely

vulnerable to attack by unsympathetic elements - which in turn would tend

to impair the effectiveness of the means of attaining the prescribed
objective.

On the other hand, a system of maximum price controls

(1) allows the forces of supply and demand to function

elastically below upper limits.
(2) provides elastic means of control with upper

limits established through trial and error, bringing in all production
considered desirable and consistent with the prescribed objective, 1.0.,
the prevention of sky-rocketing of prices.
(3) was tried and found effective during the World War.
D. Soope of Applications
The volume of work necessary and the staff required to extend

price control to all materials and commodities make such a plan impracti-

cable of application. For this reason alone price control should be

restricted as much as possible. It is likely that control of the prices
of basic materials and commodities at source of production will suffice.
In any case, unnecessary control must be avoided.

It is believed that peacetime price control, at least initially,
should be further restricted to items involved in foreign trade. If
sufficient control can be exercised by our Government over the volume and

distribution to American producers of foreign orders, it may be practicable to permit an upward price differential for foreign orders over and

0

296

above that prescribed for domestic consumption. With properly vested
authority, this may even comprise a strong weapon for keeping prices in

proper bounds. In any case, however, large volumes of foreign orders
would make mandatory the imposition of price control over the items involved. Large foreign demand for these items would create domestic

scarcity, and if uncontrolled, prices would rise rapidly.
It may be necessary soon to extend price control to items other

than those involved in foreign trade. The effect of large volume foreign
business would soon be reflected in increased public purchasing power,

which of itself would create additional demand and hence tend to raise

the general level of prices.

Incidentally, it must be borne in mind that the existing neutrality legislation limits the scope of products that may be exported to
nations at war or to nations declared by the President to be belligerents.

A further limiting factor is the prohibition against credit or loans which
may be granted domestically to finance sales to nations now in debt to
the United States.

The extent to which foreign orders should be encouraged by price
differentials or otherwise is debatable. Rapid productive expansion beyond
domestic peacetime needs would be desirable if we were drawn into the

conflict; World Far experience has proved that it would have disastrous
repercussions if we were not.

As has already been indicated, one of the sources of foreign
orders may be expected to be those for whom belligerents or potential
belligerents have acted as suppliers, but whose productive capacity is
now or may be proepted for war production.

so

297

Expansion of our own productive capacity over and above our
normal peacetime ability to consume should be gauged to a considerable

degree by our probable ability to hold a substantial amount of this newly
acquired foreign trade with neutrals.
Some measure of aggressive action might even be desirable as a

means of utilising present idle capacity and of furnishing useful work for
the present millions of our unemployed.

It must be borne in mind, however, that the peace time mission
of price control is the maintenance of stable domestic prices and that
only in war time or when war is imminent does the paramount consideration

become one of bringing into production the last indispensable unit required

for the war effort and for essential civilian consumption. Until it is evident that we will ourselves become a belligerent, and subject to the above

reference to increased foreign trade possibilities, production to meet
maxisum peace time requirements should be the happy medium for which to

strive in the system of price control adopted.
E. Type of Control

Price control should be constructed primarily upon the principle
of voluntary cooperation of all concerned. Arbitrary measures of duress

normally are distasteful to American standards. In view of the limited
direct means of enforcement at present available, control of a voluntary
cooperative nature is mandatory in peacetime. In wartime, such cooperation

is indispensable for the maintenance of public support of the war effort,
without which maximum prosecution thereof cannot be attained.
F. Means of Control:

1. Agricultural Products Governmental agencies now in being are,

in effect, at the present time

-

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298

the controlling the prices of a number of agricultural products.
This control is of the minimum price type, since supply of these products
considerably exceeds the demand for them. War abroad undoubtedly would

create a market for the present surpluses, would likely eliminate these
surpluses, and render unnecessary the type of control now exercised. The
Government thereupon would be relieved of the necessity of acting in its
present capacity as a corporation to buy and sell these products, but

might continue to utilize its existing machinery to set upper limits of
agricultural prices as the emphasis is shifted from minimum to maximum

price control.

2. Industrial Controls Control of the prices of industrial
output, both extractive and manufacturing, is quite another matter. It
is believed that the normal means of doing business should here also be

adhered to as closely as possible. The setting up of a governmental
corporation to buy industrial products from the producer and to sell them
to a foreign belligerent, however, is not recommended. Such a departure
from the normal means of conducting international trade appears entirely
unnecessary and, in all likelihood, would entail most undesirable
repercussions. It would set up an expensive temporary bureaucracy diffi-

cult subsequently to eliminate, and its administration might involve us

politically from an international standpoint.

Here again it is believed desirable to utilise for price control
purposes the franework which is now actually in existence, augmented as
say be found necessary - such augmentations being made in a manner to fit

into the projected wartime organisation for the mobilisation of American
Industry.
-7-

0

299

Here also must be considered the fact that at present compulsory means of enforcement are now largely non-existent, and that

voluntary cooperation of industry must be relied upon.

The following means of price control in peacetime is therefore
suggested:

(a) Direct Means :

(1) Trade Associations: We have at present trade associations

for nearly all industries. The potential value of these associations in
policing the members within their own organizations was demonstrated during
the World War. It was again demonstrated during the days of the NRA, which,

incidentally served to revitalise and expand these associations as com-

ponent parts of our industrial structure. Their framework is now available
for peacetime and wartime application of price control.
(2) Commodity Committees: Commodity Committees composed

of representatives of industry, of the Government, and of the public, could
be set up in each industry to parallel trade association alignments. These
Commodity Committees could be used to determine fair maximum prices for

the voluntary application of the trade associations. One policy forming
Price Control Authority to coordinate the work of the commodity committees
could be established in Washington.

(3) Foreign Purchasing Agenta: It is believed that the
State Department through diplomatic negotiations could induce each foreign

belligerent to establish within the United States a centralized purchasing
agent. The J. P. Morgan Company acted in this capacity before we entered

the World War. The desire of foreign belligerents to obtain and maintain

-

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300

the good-will of our National Administration, and the fact that otherwise
inevitable high prices and other ill effects of unrestricted competition
could thereby be avoided, should furnish the incentive to accomplish this
end. Our Government could appoint advisor-observers to act as limison
agents among the foreign belligerent purchasing agents, our own government,

commodity committees and trade associations, thus making available full

information to the policy forming committee in Washington and to the

Administration for the determination of price control policies. Any
additional administrative or legislative measures necessary to make price
control measures more effective would thereby be brought to light.
(4) Export Quotage Export quotas could be used as a brake

by the Administration on excessive exports. The records of our various
fact-finding agencies, such as embodied in the Departments of Commerce,

Labor and Interior, could be used to determine when the brakes should
be applied.

(b) Indirect Means

(1) Financials It is a well recognised economic fact that
the contraction and expansion of credit have a very definite indirect
effect upon business activity, and hence upon the national price structure.
Such a means of control is now exercised by such Government or Government
controled agencies as the Securities and Exchange Commission, the Recon-

struction Finance Corporation, and the Federal Reserve System and even the

Treasury Department itself. The Securities and Exchange Commission, for
example, controls the issuance of commercial securities; the Federal
Reserve System sets rediscount rates, prescribes reserve balance requirements

9

301

of member banks, and enters into open market transactions to stabilise

credit; the structure of the Reconstruction Finance Corporation is available to make loans to prevent undesirable business failures; and the
Treasury Department regulates the issuance of long and short term public

securities. All of the functions of these agencies can be coordinated

indirectly to support the direct means of controlling prices.
(2) Numerous other indirect but nevertheless powerful means

of enlisting the comperation of industry in a price control program are

available. Wages of labor, for instance, constitute a great portion of the
costsof production, which, together with a reasonable profit, comprise the
base upon which the price structure must be constructed. The Government
has assumed an important position in the determination of labor wages.
The determination of export quotas by the Government, previously mentioned,

comprise another indirect method of enlisting the cooperation of industry

in price control matters. Excess profit taxes now imposed and the threat
of increasing them could also be employed for this purpose. The power of

the purse in public grants of money is still another potent weapon for
obtaining industrial cooperation. In fact, the Government now has so
much of our national economy under review and so many indirect means of

compelling the cooperation of industry with its policies that it can
exercise powers tantamount to coercive action in making price control
measures effective.

G. Application of the Means of Controls
The fact that the Government has adequate direct and indirect
means of enlisting national compliance in a system of peacetime price

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302

control is of little consequence if a proper organization is not set up
for the timely application of control. Only when such powers are at the

disposal of one authority can control become effective. It is for this
reason that the above organisation, with the central Price Control Code
Authority superimposed upon all of the organization's component parts,
is suggested.

It can be safely forecasted that the proposed organisation will
prove to be imperfect, and that mistakes will be made in constructing and

in administering it. This is the price one must pay for any new undertaking. The really important consideration, however, if disturbed conditions
abroad should culminate in a European war, is to get this price control
mechanism functioning, and, through trial and error during the initial
period of peacetime experimentation, discover its weaknesses and take

remedial action to correct them. The remedial action required may prove

to be either administrative or legislative in nature, but if the organization is non-existent when prices begin to skyrocket, the damage to our
national economy will be incurred before the mechanism to control it can

be made operative. To maintain the stability of our price structure,
timely action by a control agency is imperative. Almost anyone knows when

prices get out of line. The important factor is to have the organisation
to control them ready to function before prices become exhorbitant.
In placing any price control mechanism in operation, we must

not lose sight of the force of public opinion. The temper of the people
is in times of peace different from the attitude of the public in times
of war. In wartime emergency measures are expected. In peacetime the
people must be educated to recognise the necessity for such measures as

-12

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303

price control. To this end appropriate publicitypeople
must be used to explain
the necessity for price control measures, and the must understand that
price control, in the event of European war, is not only necessary to
maintain our own economic stability, but may even be a means, properly

controlled, for helping us to avoid being drawn into the conflict.
H. Transition from Peace to Wars This organization suggested can be

readily adapted to wartime use. The Trade associations can be used as

war service committees now projected in the Industrial Mobilisation Plan,
the Commodity Committees can be employed in identical capacities as a

part of the projected War Resources Administration; the Advisor-Observers to
the foreign belligerent purchasing agents can form the nucleus of the
projected War Trade Board; export quotas can be supplemented by export

licenses, and the Federal Reserve System, the R. F. C. and the S.E.C. can

continue to perform in wartime the identical functions they perform in
times of peace.

-12-

has seen
ack'd
FEDERAL RESERVE BANK
OF NEW YORK

September 23, 1938.

Dear Mr. Secretary:

The one sizable corporate security issue scheduled for this
week ($42,000,000 of Michigan Consolidated Gas Company bonds and notes)

is reported to have been postponed, temporarily, because of market un-

certainties growing out of the situation in Europe. This is perhaps the
first direct evidence of the retarding effect of European war scares upon
the new issues market, but so far the effect appears to be in terms of
postponement for a week or two, rather than of complete withdrawal. The
Michigan Consolidated Gas Company issue mentioned above may be marketed

on short notice, and the registration of two or three other large issues
is still expected within a week or two.
With the exception of $5,000,000 of common stock of the Chesapeake and Potomac Telephone Company, to be purchased by American Telephone

and Telegraph Company about September 30, there are no important additions

to be made to the prospective issues which have been mentioned in previous
reports.

Stockholders of the Commonwealth Edison Company subscrited to 97

per cent of the offering of $39,467,900 convertible debenture 3 1/2s of 1958,

rights to which expired September 21. This flotation was, accordingly, fully
as successful as the similar one in June. The syndicate for $30,000,000
Youngstown Sheet and Tube Company convertible debenture 48 of 1948, offered

on September 8, was closed Tuesday, while about $5,000,000 was still in the

304

FEDERAL RESERVE BANK OF NEW YORK

2.

Secretary Morgenthau,

9/23/38

hands of the underwriters. Market quotations fell three or four points and the
debentures are now quoted at about 96. This $5,000,000 is the largest amount
left unsold in the hands of dealers since the Bethlehem Steel issue a year ago,
when over $45,000,000 of a total issue of $48,000,000, fell back on the underwriters, but does not now present a serious problem. It does serve to emphasize,

however, the selective character of the market; corporate securities of highest
quality are in excellent demand, but anything below top quality tends to drag

a little.
In the municipal bond field, about $13,200,000 was awarded this week.
The few issues on which information is available seem to have been fairly well
received. The largest issue was $6,120,000 of Cuyahoga County, Ohio, 3 3/48 and

3 1/2s of 1940-49, the bulk of which was sold on the day of issue.
Last week, I neglected to mention the temporary borrowing of $36,000,000

by New York City, the interest rates on which you may wish to know. The loans,
which were allotted as usual to 26 banks, were for about 1 1/2 and 4 months at
0.40 per cent and for 10 months at 0.80 per cent. On the same day Massachusetts
borrowed $4,000,000 due in 2 1/3 months at 0.14 per cent.

Yours faithfully,

Mian Sproul,
First Vice President.
Hon. Henry Morgenthau, Jr.,
Secretary of the Treasury,
Treasury Department,
Washington, D.C.

305

306

GRAY
EG

Bombay

Dated September 24, 1938
REC'D 6:38 a.m.

Secretary of State,
Washington.

September 24, 11 a.m.
FOR THE SECRETARY OF THE TREASURY.

Opening steady the silver market Eased according

to the European political news. Ready opened at rupees

52 per hundred tolas declined to 50-13 closed at 51-1.
Stocks Estimated at 3500 bars average daily offtake 25
bars. Silver valued at 2500 pounds En route to Bombay.

Price of gold declined steadily owing to rise in
war risk insurance rates. Ready opened at rupees 36-6

per tola closed at 35-15-9.
WATERMAN
CSB

307
FEDERAL RESERVE BANK
OF NEW YORK

DATE September 24, 1988.

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

SUBJECT:

TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

Mr. Bolton called at 9:30 this morning. They had had a
very bad time, he stated. It had taken them nearly half an hour
to get the market under control and altogether they had had to sell

$35,000,000, starting at 4.78, pushing it up to 4.78 3/4, and
finally closing at 4.78 1/4. There had been such a tremendous
demand for dollars at times that all sorts of rates had been quoted.
Selling had been of a panick stricken nature and had originated
everywhere but particularly in Switzerland. Forward dollars had
at one time been up to 1# for one month and 24 for three months
and he had had to step in and knock these rates down.
As far as the New York market was concerned, Bolton was

very anxious that we shouldn't let the rate go below 4.77 1/4,
where he thought it might quite possibly open here, and that if

at all possible we try and push it up from that figure. I explained that although trading had not started here yet we had

thought it best to put in a buying order at 4.78 and that in view
of what he had just told me we would gradually reduce it if selling
became too heavy but would make a stand at 4.77 1/4 as suggested
by him.

General news had been at their worst, Bolton said, when

the London market opened. at that time it was understood that
Chamberlain was returning home and the general impression was

that negotiations had been broken off. Hence the heavy demand

MISC SCM-6-38

308

FEDERAL RESERVE BANK
OF NEW YORK

DATE September 24, 1938.

FFICE CORRESPONDENCE
SUBJECT:

CONFIDENTIAL FILES

L. W. Knoke

TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

2

for dollars. However, at around 11 o'clock news had been received
of Chamberlain's message to press representatives at the airport in
Cologne which on the whole was a little more reassuring. Reports
from Europe in general were not very hopeful except that there was
noticeable a general stiffening up of opinion against Germany

(France's declared intention to maintain the terms of the FrancoCzech alliance and the limited mobilisation and requisitioning of

supplies; tentative mobilisation in Belgium, etc.)
The French fund had not operated at all during the morning

and he had had no difficulty holding the rate at 1.78 1/2, Bolton
said.

I asked him whether our sterling operations yesterday had
been satisfactory to him and he replied that we had done a very
good piece of work and that they had been very much pleased. He

asked whether it would be all right if they finished packing the
$25,000,000, which I had requested yesterday, by Monday night, I

replied that as far as I know that would be in ample time; that
the whole scheme was tentative.

LWK:KW

CONFIDENTIAL

G-2

JM

308A

WAR DEPARTMENT

G=2/2657-II-90

WAR DEPARTMENT GENERAL STAFF
MILITARY INTELLIGENCE DIVISION, G-2

WASHINGTON,

September 24, 1938.

MEMORANDUM NO. 20 FOR THE CHIEF OF STAFF:

Subject: The present European situation to
10,00 A.M., September 24, 1938.

General Situation. After a day of extreme anxiety, from
which scarcely an informed individual in the world was spared, there
emerged from the meeting at Godesberg a respite from the tension.
The length of this respite depends upon a number of highly inflammable conditions, the aggravation of any one of which could quickly

precipitate another aoute crisis.

The Godesberg conversations resulted in a compromise which

was reached only in the early hours of Saturday. Without this
compromise, due almost entirely to the patient efforts of Sir Neville
Chamberlain, it seems probable that German and Czech troops would by

now have clashed on the frontier. The negotiations had almost broken
down, due to reported movements of German troops, but were renewed

through the intermediaries of Hitler and Chamberlain after an assurance by Hitler that he would not attack until the termination of
negotiations. Then was produced a German memorandum giving the oon-

ditions of their "final offer" requisite to a peaceful solution.

These conditions, possibly modified in the course of a three-hour

conversation between Hitler and Chamberlain, were then accepted for
transmission to the Czech Government by the British Premier. The
memorandum is reliably reported to be a detailed soheme for "progressive evacuation of Sudeten land by Czech troops and its progressive occupation by German troops.
The terms of the ultimate German demands were a compromise,

certainly with respect to the time limit set by Hitler for the transfor of the Sudeten areas. This compromise now appears to have post-

poned the date of the beginning of the transfer to October 1. It

was a viotory for Chamberlain, and possibly may prove to be of
incalculable benefit in the cause of European peace.

While the tension has been relieved, the general situation
created by the events of Friday is far from reassuring. The day of

CONFIDENTIAL

CONFIDENTIAL

308B

anxiety accelerated military precautions in every European country.
The Czech mobilization, whether or not in answer to the concentrations of German troops near the frontier, was a pronounced development in the situation. Germany, partially mobilized, and Czechoslovalia, mobilized, face each other over a no man's land populated by

civilians in the throes of war psychosis. The same is true along the
frontiers touching Poland and Hungary.

The old Czech Government accepted the loss of the Sudeten

areas in principle, and fell before public disapproval. It is not

certain that the new semi-military Government will accede to the
German demands, particularly in view of growing sentiment in their
favor in the democracies, and governmental stiffening in Britain
and France aroused by German intransigence. The general deterioration created by the Polish and Hungarian demands also forces Britain,
France and Russia to a reconsideration of the whole issue. While
Hitler's attituce toward these demands is not known, it is believed
that he supports their claims at least to the same extent as the
German ones. In any event, it seems evident that Germany refuses to
give any guarantees as to the integrity of what remains of the Czech
State after the German amputation. Mussolini has left no doubt that
Italy favors the virtual dismemberment of Czechoslovakia.

Military Situation.
Great Britain - Official statements disclose a general
speeding up of military precautions, but no specific measures are
announced. A.A. guns are being hastily installed at the naval base
at Alexandria. No reserves are known to have been called.

France - Following is the substance of a cable from

the Ambassador in Paris dated 8,00 A.M., September 24,

At 4:00 A.M. this morning an order was published

calling to active duty N.C.O.'s and soldiers of the two

classes most recently released from the army, totalling
250,000 men, to report to assembly points at once. The
Military Attache informs me that these orders bring all

units on the Maginot Line to war strength, to a total
of 400,000 men. Also that 10 divisions in rear of

Maginot Line have been alerted with certain elements
occupying advanced positions.

The Military Attache in Paris cabled as of 9:00 A.M.,
September 24, in substance:

Mobilization partially ordered. Maginot Line
now held at war strength. There are 10 divisions
alerted and some cover positions being occupied.

CONFIDENTIAL
-2-

CONFIDENTIAL

3086

The German divisions along the Czech frontier
number approximately 31 infantry, 2 motorized and 3
mechanised. Along former Austrian frontier facing

Moravian corridor is a concentration of 7 to 8 in-

fantry divisions, one mechanised and one motorized
division.

The press reports that garrisons along the Belgian,
Italian and Spanish frontiers have been alerted and frontier guards
increased.

Belgium - The Government has called to active duty

reservist specialists assigned to fortification and frontier covering units. Part of the 1937 Class of artillery reservists has also

been called.

Germany - The American Military Attache reported yesterday:

That there was continuous movement of troops

south from Berlin, and that the A.A. defenses of Berlin were manned on the night of September 22. The

Assistant Military Attache traveling along the fron-

tier between Dresden and Goerlitz saw police and members of the Frei Corps, including some wounded. No

troops or military activities apparent near the border.

Czechoslovakia - General mobilization was ordered at
about 10:20 P.M. Except for the small district around Eger and Asoh,
the press reports that all Frei Corps seem to have been withdrawn into
Germany.

A cable from the Minister in Prague dated noon, September 24 states in substance:
Mobilisation proceeded during night with haste
but without disorder and showing fine organization.
Boy scouts and civil guards used largely to replace
police. All types of transportation commandeered for
movements. Men up to age of 40 were called, most of
them were at their posts within 6 hours. They are a

fine type of soldier, strong, obedient, ready to

fight. There were 37 border incidents yesterday and
this situation is serious. To date 250 Csech police
have been either killed or taken prisoner. A blackout was held in Prague during the night with a praotice alarm at 3:00 A.M. The populace is calm, orderly and glad of the mobilization order. War Office
records were removed during the night. It is estimated there are 1,000,000 men in the field.

CONFIDENTIAL
-3-

308D
CONFIDENTIAL

Hungary - The press reports the calling of numerous reservists and general military activity, including the formation of a Frei Corps.
Poland - No known change.
Russia - No known change.

CONFIDENTIAL
-4-

309

ir

PLAIN

London

Dated Sept. 24, 1938
Rec'd 10:10 a.m.

Secretary of State
Washington.

1010-September 24, 1938
FOR TREASURY FROM BUTTERVORTI.

For the first time in years the City is fully manned
on a Saturday. The atmosphere, of course, is one of
grave tension and full explanation from the Prime
Minister is anxiously awaited. It is noteworthy the
manner in which City opinion has attempted to withhold
judgment pending a full British Government statement.

Dollar dealings have been particularly large for
a Saturday. The dollar opened at 4-781/2 bid and the
Control has operated sporadically throughout the
morning. The dollar closed at 4-773/4. The one months
forward is 5/8 three months 2 gold fixing was 279 bars
at 145s with the British authorities taking most if not

all of the offerings.
Board of Trade announced last night that if a

major war occurred involving Great Britian the British
Government would establish a war risk insurance office for
cargo carried in British or neutral VESSELS on the general

lines of the scheme in force at the End of the last War.
ALC

KENNEDY

310

3.2 60M-6-38

FEDERAL RESERVE BANK
OF NEW YORK

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

DATE

September 24, 1938.

SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF FRANCE.

Mr. Cariguel called at 10:10 and wanted to know how the
franc was quoted here, also whether we had done anything against

his orders. I replied that we had sold 1,000,000 at 2.67 7/8 but
had pulled the order out when his call came in. Would it be all

right for us to continue selling? Cariguel replied that he wanted
us to operate against his orders but if we were offered a large
amount of francs would we please let him know at once. They

wouldn't mind our selling but 1f we had to buy francs he would like
to be advised at once.

I asked him how the whole situation looked to him and

Cariguel replied that so long as the world was gaining time it was
all to the good.

LWK:KW

Cariguel called again at 12:05 to find out what we had
done in the market and I told him we had sold 9,350,000 which he
thought was splendid. (It was quite obvious that he had expected
we would have to buy rather than sell and that he was considerably
relieved.)

311
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Rio de Janeiro
DATE:

September 24, noon

NO.:

222

My 215, September 17, noon.

I am informed by the Director of Exchange that the
Bank is unable at this time to allocate any exchange on
account of entire absence of export bills in the market.
The director is hopeful that exchange may be available
by next week. The situation in Europe is responsible

for this situation, he explained, and added that although
Germany is in the market for coffee the Bank of Brazil
has suspended all sales of coffee in compensation marks.
STRICTLY CONFIDENTIAL. According to the Director

of Exchange, the shipment of gold referred to in my telegram under reference did not materialize as reported
but will go forwarded on the 29th of September.
Please inform Commerce.
CAFFERY

EA:DJW

312

MISC 1.2 60M-6-38

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
To

CONFIDENTIAL FILES

FROM

L. W. Knoke

DATE September 24, 1988.
SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

I called Bolton at 1 o' clock and told him that sterling
here had been up to 4.78 8/8 on best buying orders from Europe but

that after these had been filled the market had eased to 4.77 5/8
where it stood at the moment with business very small. I added

that we had an order in to support it at 4.77 7/16 against his
gold points but so far we had not done anything at all.

LWK:KW

313

Sunday, Sept. 25, 1938
6:45 p. m.
Present:

Dr. Feis
Mr. Moffett

Mr. Lochhead

Mrs. Klotz

The Secretary flew down from the Farm and came

directly to his office. He had asked Dr. Feis and

Mr. Moffett, from the State Department, to be present
and they were on hand when the Secretary reached his
office.
Mr. Moffett brought with him the summary of a
message which was received just as he was leaving the
State Department, reading as follows:

"1020 Sept. 25. 11 p.m.
Please deliver immediately for Secretary of the Treasury from Butterworth.
I have not yet been able to get
through to Cochran but I had a word with
Phillips who had not yet heard from the
British Financial Attache in Paris. Phillips
expressed appreciation for the information
that such a note had been delivered and said

that naturally he did not know what the tomorrow might bring forth but that looking at
the position locally he did not see why any
such French action should produce any un-

usual action here. I will of course see

him tomorrow.

Kennedy.' #

The Secretary told the group that Mr. Cochran
telephoned him on the Farm this afternoon and reported
that just after Deladier left Rueff, Rueff phoned and
asked Coohran to come to the French Treasury. When
Coohran arrived at the French Treasury the British
Financial Attache went out and, therefore, Cochran

314
-2-

assumed that the British had gotten the same message.
The message given to Coohran and reported by him

to the Secretary over the phone was as follows:

"In the present situation the Govern-

ment could not permit an important

diminution (loss) of its metallic reserve indispensible to the defense of

the country.

"It hopes that in the course of the
coming days the exchange market will
remain sufficiently in equilibrium so
that important losses will not have
to be envisaged. Nevertheless, in
case an important movement of exportation of capital should appear the Gov-

ernment would be obliged to take without
delay measures capable of stopping it.
"To this end it would give instructions to the exchange equalization fund
and would ask the principal intermedi-

aries to participate in the exchange
market not to give exchange except on
justification of commercial needs and
to refuse every demand not justified
by commercial or tourist reasons. If
the necessity of such a decision should

arise, the French Government would inform the Government of the United States

without delay. It hopes that in this

case the latter would undertake to support its action through requesting the
banks which intervene on the American
market to yield foreign exchange against
francs only on the same condition.
The Secretary said he told Cochran to get in
touch with Butterworth and also to give the story to

Ambassador Bullitt because up to that time Cochran

had not notified Mr. Bullitt.

At 4:20, the Secretary said,he telephoned to Mr.

Butterworth and told him to get in touch with Phillips,
of the British Treasury, as he, the Secretary, did not
think that we should give any answer to the French until we had consulted with our partner in the Tripartite
Agreement - the British. Mr. Butterworth said that he

315
-3-

doubted whether the English would take the measures

requested by the French Treasury at this time.

Mr. Moffett let the Secretary read the cables

from Ambassadors Kennedy and Bullitt, referring to the
note of Hitler to the Czechoslovakians which had been

transmitted through Mr. Chamberlain. Neither of these
notes contained the exact text of the message. Mr.
Moffett explained that that was just starting to come

into the State Department as he was leaving to come to
the Treasury and that it probably would not be completed
for several hours.

He said that Mr. Hull was with the President at

this moment. The Secretary telephoned the White House

usher to get a message to the President that he, the
Secretary, was at his desk.
HM,Jr inquired of Mr. Moffett, "Just what is the

situation tonight?" Mr. Moffett replied, "The British

and French have received these new proposals. They
have submitted them to Prague without recommendation

pro or con. Chamberlain has returned to London. He
18 in favor of accepting them in toto because he feels

that they cannot make a dent in Germany in case of war.'
Continuing he said, "France -- there has been a
strong feeling of war. Even Chautemps has deserted
and gone over into the war party. Bonnet alone is
standing for peace on any basis.
"The British Government," he said, "is working

very hard to try and bring labor to the point where
it does not do more than fight politically. I think
it looks very probable that the Czechs would reject
Hitler's terms. Then the French and British will have
a new problem to face. The Poles are getting more and
more anxious to profit by the action. They say that
Benes 18 a tool of Moscow.

At this point, HM,Jr asked, "Is the October first
date correct," and Moffett answered, "Until I get the

full text, I do not know." Moffett further said, "Bullitt
saw the French this morning and Bonnet said 'The mere

fact that the British called us over 18 an indication
that they have not rejected this plan'.
"It looks now," Mr. Moffett added, "as if the

318
-4-

British will try and compromise by making a new proposal somewhere between the first and second proposals."
The Secretary then said to the group, "Every time
the French have put us on notice like this, they have
gone through and taken the road of least resistance.

Saturday it took the British a long time to fix the

market. I have not given the French any answer, but
I do not see how we can refuse what they ask us to do.'
Dr. Feis remarked, "I agree. The Secretary added,
"When I see the press tomorrow they will ask me whether

the Tripartite Agreement is still on.

Mr. Morgenthau then asked Dr. Feis and Mr. Moffett

if they thought we should try to meet the request of the
French and they both agreed that it would be well to do
so, if possible. Feis commented, "This would not be
competitive devaluation.
At this point the usher at the White House telephoned and said the President wished to see the Secretary
He left at once for the White House.
immediately.

HM, Jr returned from the White House at ten minutes

of eight. He said the President had told him that anything he did was O. k. with the President.

Mr. Morgenthau then telephoned to George Harrison

and the following is a record of their conversation:

HM,Jr: We have a suggestion from the French that
they may put on more or less of an exchange control in

that they will examine all foreign exchange operations.
If they do that -- they have not yet decided definitely
they want us to cooperate and ask our banks to do the
same thing. It will depend on whether they have a good
or a bad day tomorrow.

If you remember, when the Tripartite Agreement
went through, I think you got busy about midnight and
asked the various bank presidents to do something like
that. Are you at home now?
Gov. Harrison: Yes.

317
-5-

HM,Jr: Are you going to be home tonight? What

1s your telephone number?

Gov. Harrison: Yes. My telephone number is
Butterfield 8-0618.

HM,Jr: If this thing should come, I think our

banks should let through only legitimate transactions.
I have not gotten that request yet, but they have put
us on notice. I am going to send word back to them
that if they do make that request, we will cooperate
with them.

Gov. Harrison: I will do anything you want me

to do, but the last time we did it the banks thought
it was sort of silly. They felt it could have waited
until the morning.
HM,Jr: All right. Let's see how things go.
Gov. Harrison: Unless I hear something more from

you, I will do nothing.
HM,Jr: The British do not yet know what is in
the Hitler note.
00o-o0o

318

1020 Sept LT " per

Please delin immunity
for See. Leas. to Biller t

I ham not yet

been able to 8th thigh
to Cochan but D has a

wnd with Philippo
who had no ut was
for the Br. francial

deschi - Pain Rell

expressed appreciate

fn the
thatdelime
such
note infth
has been
a and sand that maturally

he old un kun

what The Inumo light
thing faith has that
looking of The position
broath he did not see

why an such Inch

action should proofice

is immoral action

here any in . I mill of cm

one his Im mo

K

319

In the present satuation

the gar. could not
hernitan important
dimuntern (Grs) of

its metalic

reserve inderestenate

to the defense of

will remain

the country
If hopes that in sufficiently in
equillibrium
so
the course of the
coming days the that important
exchange market losses will not
have to be enrisiaged

Mether the lis

in case an

inputant movement
of expertation of

capitol should

offear the gir.

would be obliged

to take without

delay measures and would ask
the principal
capable of stoffing inter medianies

it.

To this end it

to harti if ate
in the ex change have

market not

would give instructins to the exchange
equality ation fund
to give exchange

except on

justification
commericial of

needs and to
refuse every
demand not
justified commercial or by

tourist reasons,
If the me disdity
of such a descrim

should airse

french gn.

would inform
the gov of ul.

without delay
It hifes that in
this case the
later would
undertake to

support its action
through requesting

the fanles which

intervene on the

american market
to yield foreign lagainst

ex change w fiances
only on the same
condition.

323

PLAIN
MJD

London

Dated September 25, 1938.

Rec'd. 5:10 p. m.
Secretary of State,
Washington.

1020, September 25, 11 p. m.
PLEASE DELIVER IMMEDIATELY FOR THE SECRETARY OF THE
TREASURY FROM BUTTERWORTH.

I have not yet been able to get through to Cochran but
I had a word with Phillips who had not yet heard from the

British financial attache in Paris. Phillips Expressed appreciation for the information that such a note hid been delivered and said that naturally he did not know what the
tomorrow might bring forth but that looking at the position
broadly he did not SEE why any such French action should pro-

duce "any unusual action here". I will of course SEE him
tomorrow.
KENNEDY

EMB

m
324

GRAY
ML

Paris

Dated September 25, 1938

Rec'd 8:03 p.m.

Secretary of State
Washington

1582, September 25, 9 p. m.
FROM COCHRAN. (SECTION ONE,

Rueff called ME to Ministry : Finance at 7:30
this evening. HE delivered a memorandum dated September

25, if which the following is a translation:
"In the present situation the Government could

not permit an important diminution of its metallic
reserves indispensable to the defense of the country.
It hopes that in the course of the coming days
the exchange market will remain sufficiently in equilibrium SC that important losses will not have to be
envisaged.

Nevertheless, in case an important m VEMENT of

Exportati n of capital should appear, the Government
would be bliged t: take without delay measures capable

of stopping it.
Tc this End it would give instructions to the EXchange equalization fund and would ask the principal
intermediariEs who participate ( n the Exchange market
not

325

ML -2- #1582, Sept. 25,1938 8:03 p. m. fr m Paris. SEC.1
not to give Exchange EXCEPT on justifications of commercial needs and to refuse EVERY demand not justified by

a immercial r tourist reasons,
If the necessity for such a decision should arise
the g vernment would inform the Government of the United

States with ut delay. It hopes that in this case the
latter would undertake to support its action through
requesting the banks which intervene in the American
market to yield Exchange against franc only on the same
condition".
(END OF SECTION ONE).
BULLITT
RGC:EMB

326
PARAPHRASE OF SECTION TWO OF TELEGRAM NO. 1582

of SEPTEMBER 25, 1938, FROM PARIS.

I was told by Rueff that this is only a strictly
confidential warning. However, he insisted that the
French Government must be prepared to act, in view of the

present serious international situation. Action will
not be taken if the Paris market is not too bad tomorrow.
However, if losses on the market tomorrow should be

too heavy, or at any time in the near future, notice
will be given to us by Rueff, and the French will follow
the procedure given above.

I asked Rueff if the French in such a situation

would maintain a rate of 179. His reply was that for
such exchange as was yielded by the stabilization fund,

that rate would be maintained. But he remarked that if
the demand should be far in excess of this amount, presumably there would be developed a black market and a

second rate. The stabilization fund still has a considerable amount of gold, Rueff assured me.

A similar message was given by Rueff to the Financial

Counselor of the British Embassy in a separate interview this evening.
END OF MESSAGE.

BULLITT.

03/13038

-

EA:LWW
1419734930

327

My
PLAIN

EG

London

Dated September 26, 1938

Rec'd 7:50 a.m.

Secretary of State,
Washington.

1022, September 26, noon.
FOR TREASURY FROM BUTTERWORTH.

The following short Editorial in today's FINANCIAL
NEWS is as much a reflection of the sudden hardening of

attitude which the KEY individuals who give the initial
impetus to city opinion, have arrived at OVER the WEEK-

End, as it is a lead to the city community:
"After all Mr. Chamberlain did not reach EVEN the
shadow of an agreement with Herr Hitler at Godesberg.

And of negotiation in the ordinary SENSE of the term,
by letter or by word of mouth, there was none for the
two principals confined thems Elves chiefly to protestation on the one side and protest on the other.
No one has yet succeeded in negotiating with the

Fuehrer. It is his unalterable custom to treat his
visitors not as plenipotentiaries with whom in the
give-and-take of serious argument he can arrive at a
constructive compromise, but as an audience called to
receive

328

-2- #1022, September 26, noon, from London

receive the progressive revelation of his mental
workings. And the unfortunate CzEchoslovakians have

learned to their cost as Dr. Schuschnigg learned before them not only that Herr Hitler's is a one-way

mind but that as the full text of the Fuehrer's final
demands shows, where concessions to Germany's ambition

are concerned, increase of appEtite grows by what it
feeds on. Small wonder is it that Mr. Chamberlain at
Godesberg declined to act as a selling broker for the
Fuehrer's new terms and consented merely to be a post-

man. After the sacrifice offered on the altar of EXpediency by the British and French cabinets sorely

against their will and against the weight of a large
section of public opinion in their countries; after
the two governments had wrung CzEchoslovakia's re-

luctant consent to terms less appropriate to a
sovereign state than to a defeated adversary; after a
British Prime Minister had Envisaged the far-reaching
change in his country's policy involved by the proposed

guarantee of a central European frontier - after all that
the formulation of newer and still more draconian terms
by the Fuehrer was more than lamentable, it was unpardonable.

It

329

-3- #1022, September 26, noon, from London

It is hard to ESCAPE the conclusion Either that

Herr Hitler is deliberately courting the possibility
of a conflict or that he is recklessly playing with
fire with criminal disregard of the possible consequences.
HE may SEEK PEACE but his actions do not ENSUE it. ThE

policy which Great Britain should follow during the next
few trying days is clear. Firmness on the Government's
part offers the best hope of convincing Herr Hitler before he has irrevocably committed himself that this

country is Earnest in its desire for peace. Investors
and all who do business in the city of London can
strengthen the Government's hand and SERVE their own

best interests by standing steady. That the strain of
EVENTS will find a certain Expression in the markets
and the Exchanges is indeed probable. But as WE show
Elsewhere all available EVIDENCE suggests that the under-

lying technical position is as sound as it can well DE.
There is EVERY reason why the financial community should

maintain the admirable stlf=possession it has Evinced
hitherto through EVERY phase of a protracted crisis."
The opening of the dollar was given out as 4.77 1/2
but the first Effective business was done at 4.76 1/4

at which point the British authorities gave dollars. It
was

330

-4- #1022, September 26, noon, from London

was held there until about gold fixing time and then
went to 4.75 3/4. The buying pressure has been heavy.
Gold fixing was 365 bars at 145S 7D of which 95 WERE

married and the remainder taken by the British fund

this price gave a dollar parity of 34.63. Franc
dealings are not large, the Bank of France buying

sterling at 178 1/2 and selling at 179. Dealings
are limited by the fact that most Paris offices are
being denuded of a substantial part of their staffs
and the Bank of France is to a great Extent already
supervising foreign Exchange transactions.
London security markets are weak but the volume of

trading is thus far minute. 3 1/2 percent war loan
bonds for Example are quoted 92-95.
KENNEDY
RR

I repeat was 365 bars at 145S 7D. of which 95 WERE

married and the Etc rept WERE married confirmed.

331

September 26, 1938

I spoke to Cochran in Paris at about 8:15 and
told him to place call Mr. Rueff, French Treasury, and
advise him that if the French decided to go ahead with

modified exchange control we would glad to cooperate
with them on the basis of the long memorandum which
Cochran phoned me at four o'clock yesterday at the Farm.

332
Monday

September 26, 1938
8:50 a.m.
Admiral
Leahy:

Admiral Leahy speaking.

H.M.Jr:

Good morning. How are you?

L:

Very well, thank you sir.

H.M.Jr:

L:

H.M.Jr:

Admiral, now - ah - in regard to the Honolulu, ah - we do want to load another twenty-five million
worth of gold on her Yes, sir
But, one - should we load that gold on her until
she is about ready to shove off? I mean it might
prove to be embarrassing for you to have twentyfive million dollars worth of gold on the Honolulu

and then have her possibly go on some other mission.

L:

H.M.Jr:
L:

H.M.Jr:

She won't go on any other mission, Mr. Secretary,

unless you - she won't go on any other mission.
But I think it would be wise to load it when you
want her to depart - she can depart at any time.
Well, how about this understanding that you want to
keep a war ship in English waters?

Well, ah - the Ambassador to Great Britain wants to

keep a ship there. We're not interested in that.
You're not? Have you anything else that you could ah - could you put the gold on - have you got any
large destroyer?

L:

There's a destroyer on the way over there now; it

H.M.Jr:

Saturday?

L:

sailed - it sailed Saturday.

And it will be there in about - well, I'd say give
it five or six days more. I mean - are you in that
much of a hurry to get out?

H.M.Jr:

Well, I feel less comfortable this morning than I

L:

Well, I know, it's pretty bad.
And - ah - we've got all this gold and we have no
way of getting it out. But I just - it takes some
time to load it.

H.M.Jr:

have any morning so far.

-2L:

Ah -

H.M.Jr:

And -

L:

Yes.

H.M.Jr:

333

And I just wanted - I mean, if we told them today
I doubt whether they could have it loaded before
Wednesday or Thursday.

L:

Well, why not go ahead and do that? They can keep
it there all right; they can put a guard on it.
Of course, I don't see how anybody can bother them.
They'11 have - naturally they'11 have a guard on
it and they don't allow anybody on the ship but

we'll - we'll tell her to sail as soon as they

report that they have it on board - if you think
that would be by Thursday?

H.M.Jr:

I should think so.

L:

Well that's all right, sir.

H.M.Jr:

Well then why don't Itell them to load it - ah begin - give them orders to load it as soon as it's
convenient, see? Hello?

L:

Hello.

H.M.Jr:

As soon as they can get it packed. You see it takes
them quite a while.

L:

Yes.

H.M.Jr:

And then she wouldn't leave, let's say, until - ah that destroyer gets there.
That'11 be all right.

L:

L:

Now what destroyer will that be?
It's the Summers.

H.M.Jr:

The Summers? Well then - ah -

H.M.Jr:

L:

H.M.Jr:

Wait a minute -

/Let me make sure of that. Let me make sure - if

you want to know. I - I'll get that in a second.
Well - no, that doesn't make - ah -

334

-3L:

H.M.Jr:
L:

Yes. I'm pretty sure it's the Summers.
Right. Well Does the Summers go to Europe? (Sounds as if

the Admiral is speaking to someone in his office)

Yes, sir, that's right. (Spoken to the Secretary)
H.M.Jr:
L:

The Summers?

It's a big destroyer and it can carry twenty-five

tons for you.
H.M.Jr:

Well now, will she go to South- ah - will she
go to - ah - where is she going in England?

L:

She's ordered to go to Portsmouth, the same as
the Honolulu.

H.M.Jr:

Well there you are.

L:

Yeah.

H.M.Jr:

Well, that - well in an emergency that would
take care of the Ambassador.

L:

That'11 take care of another - yes, it'11 take

care of an emergency. And then we have another
ship under orders to go there, which is supposed

to be sailing today -

H.M.Jr:

Yes.

L:

And that'll be there in ten days, - a cruiser.

H.M.Jr:

A cruiser? Now, let me ask you this, - ah - how

would you feel if - ah - ah - I tried to send

over a - one of our two-thousand ton Coast Guard
Cutters,-would that help any?

L:

Well, ah - it depends. You see we've got - yes,

it'11 help if you're going to keep this up. We

have now the Honolulu H.M.Jr:

Yes.

L:

That'11 bring home a consignment for you - sailing
sometime the end of this week.

H.M.Jr:

That's right.

-4- -

335

L:

Then we have the Summers which can bring over another consignment.

H.M.Jr:

Yeah.

L:

Then we have another cruiser going over there

which can bring over the third.
H.M.Jr:

Well I don't need any more then I don't believe.

L:

So if you need any more than that it would help

to send a - a Cutter over.

H.M.Jr:

Well - at that - that would be, let's see after the Honolulu there's the Summers and then a

cruiser -

L:

Yes, sir. Then of course the cruiser can bring

a very much larger consignment if you want it to.

H.M.Jr:

Yeah.

L:

And, in a pinch I can send more ships over. That
is I can send the Honolulu back.

H.M.Jr:

I see.

L:

I don't like to do it - it costs a lot of money for me.

H.M.Jr:

Yeah. Well, ah - it costs - it will cost us to
transport twenty-five million of gold - it will

cost us a little over a hundred thousand dollars.

L:

Yeah.

H.M.Jr:

How much does it cost you to make a round trip?

L:

Well I don't know - it probably - it probably
isn't that much though.

H.M.Jr:

No.

L:

It's fuel - only fuel, that's all.

H.M.Jr:

Yeah. Well, I tell you, what I'm going tc do, if
it's agreeable to you, I expect to see the President
at one o'clock. Ah - this thing gets worse all the
time; and I'm going to suggest that just in case - ah that we do send over a Cutter just to have her there.

-5L:

All right, sir.

H.M.Jr:

On
this gold - if that's entirely agreeable
to you?

L:

Well that's entirely agreeable to me - yes, sir.
We don't - we don't care, but we'll handle it
for you with these cruisers as rapidly as we can
if you want us to do it.

H.M.Jr:

Well
thenand
I think
I'll leave
with you
I won't
dividethe
it. responsibility
All right, sir. Now you're going to order a

L:

338

load put on now, are you?

H.M.Jr:

I'm going to tell them today to put twenty-five
million on the Honolulu as soon as they can comfortably. I mean I'm not going to show any ah - fright, you see?

L:

Yes.

H.M.Jr:

But I do want to load it.

L:

Yes.

H.M.Jr:

And then the understanding will be that after the
Summers gets there - or whatever the destroyer is that the Honolulu will shove off.

L:

Yes. I'll tell them then after they get - after

they get a consignment put on board by - consigned
to you and after the Summers arrives they'11 come

back.

H.M.Jr:

But I think you'd better be thinking of getting

L:

Well, I don't think we can do that.

H.M.Jr:

You don't?

L:

another cruiser over there sooner than ten days.

Because it takes about - it takes about eight days
to get over unless we speed them up pretty fast -

H.M.Jr:

Yes.

L:

And the ship is sailing today.

337

-6H.M.Jr:
L:

H.M.Jr:

The cruiser is sailing today?
The cruiser is sailing today.
Well it could get over there in four days if
necessary.

L:

Ah - well hardly four.

H.M.Jr:

Five.

L:

Five - yes. Well, will you let me know if you
see any - any need for that; I can speed it up

of course.
H.M.Jr:
L:

H.M.Jr:

But you've got the Summers on the way and what -

what cruiser will that be?

(Speaks to someone in his office: What's the name
of that cruiser?)
It's the Savannah.

Well I think I'11 leave the responsibility to the Navy as long as you are willing to
take it.
Savannah?

H.M.Jr:

All right, sir. We'11 do that then. And I- without any further instructions from you will I
tell the - ah - ? (conversat ion breaks off)
Hello.
Hello. Hello.

L:

Hello.

H.M.Jr:

Yes.

L:

L:

I say, will I tell the Honolulu now that they're

going to get a shipment without any further word
from you?

H.M.Jr:

Please.

L:

I'll do that.

H.M.Jr:

Thank you very much.

L:

You're welcome, S ir.

H.M.Jr:

Thank you.

L:

Goodbye.

338
September 26, 1938

9:15 a. m.
Present:

Mr. Lochhead

Dr. White

Mrs. Klotz

Mr. Lochhead: The President Roosevelt sails on

Friday. Of course, we can't get war risk insurance
on it, but I would advocate putting $10,000,000 on.
HM,Jr: Sold! Done!
do it.

Mr. Lochhead: If I can cover marine risk, I will

HM,Jr: All right. What else?
Mr. Lochhead: Things seem to be getting better

in the market. Since opening, in better shape. Went
to 4.75 and is coming back rather well. Back to
4.77 right now. The French rate has held steady.
Was down. Is now 178.62. Rather interesting, the

bankers have not made any special comment. Seems to
be going through without too much concern over there,

80 I think it's all right. We are just sitting.

A cable came from Kennedy, came over for your

information. It's in regard to the Chinese situation.

You have an appointment at 11 o'clock. If you want to
see them and you are going to see the President, I think
it is a cable you should read.
HM,Jr: What else?

Mr. Lochhead: That's all.
HM,Jr: Harry?

Dr. White: One thing that is somewhat new that
thought you might consider is in order to prevent, or
to discourage, further acquisition of dollars without
in any way interfering with the flow of gold here, and

I

possibly to put yourself in a position to defend yourself

339
-2-

against sterling should you wish to, because it looks
to me at the slightest opportunity they are going down
and if there is war that's one thing and 1f there is
not it may end up 4.75, so the suggestion I would like to
make for your consideration is to maintain your buying
price for gold, but announce that you will increase your
charge for selling gold from 1/4 of one percent to, for
purposes of discussion, 5%

The effect of that will be to introduce a risk

of exchange on the part of those who want dollars which

will act as a discouraging factor and in the event also
of war, it will also be a discouraging factor in causing
people to liquidate securities to get their dollars out,
although less so.

And then I think that if you don't want to use
it, if later on things are such that you feel you want
to maintain whatever rate of sterling you want, all you

have to do is put back -- eithergo from 5% to 5% or 2%

or eliminate it. It would sort of serve notice that

you are putting yourself in a position to protect yourself against exchange rates.

I

HM,Jr: I disagree with you. And the reason
disagree with you, as of this morning -- two things.
The fundamental thing, I have announced and the papers
have carried and I get great satisfaction out of it,
"Morgenthau says business as usual.' I sounded that
keynote. Told it to the President and it's gone through
everywhere. Everybody has picked it up. I think it's
most important.

Dr. White: Sure.
HM,Jr: This would not be "business as usual".
This would not be "business as usual". And the President read this article in the Times yesterday, somebody,
about raising the whole question of gold and the President said, Remember, I raised the question of what's
going to happen when we get 80% or 90% of all the gold,'
and 80 I said, 'Mr. President, so what! Who has a
better suggestion?"

I don't want to do anything, as of today, to
cast any doubt in anybody's mind as to the fact that
we have grown up; we are the monetary center; we are
conducting business as usual, and there is nothing in

340
-3-

the world which makes me believe I have to worry.
Again, as of today, where I disagree with you, and

I think Archie can or cannot (Secretary hesitated a
long time here) -- never mind, I won't be facetious.
Dr. White: You can be if it is at my expense.
HM,Jr: No.

The English have given every indication that they are trying to keep the pound -they have gone the limit and they have taken the brunt.
Am I right, Archie?

Mr. Lochhead: Oh, yes; they have taken the
brunt on this.

HM,Jr: No indication that they are using this

as an opportunity
Dr. White:

This would help them in such a

move.

HM,Jr: All I can say 18 I want all the suggestions I can get and I am going to do it like this

and I will have to take my chance on instinct based on
four years' experience.
Dr. White: The suggestion I made is clear?

HM,Jr: I got the idea.
Dr. White: No change in the buying price.
HM,Jr: I understand. Do you agree?
Mr. Lochhead: I agree with you. Two reasons.

I won't go into it.

Dr. White: Just wanted to make the suggestion.

HM,Jr: You can bring it up twice a day.
Dr. White: Just wanted to plant the idea.
HM,Jr: Anything else?
Dr. White: The others relate to China and Japan
and Germany.

HM,Jr: That sounds like commodities - Customs.
Herman Oliphant spoke to me about that Saturday and I

341
-4-

thought we would get on this thing right after the

9:30 meeting.

Dr. White: At last, French exchange control

has come.

Mr. Lochhead: The cable is in from France con-

firming Cochran's plan.

HM,Jr: Did either of you read the President's
message? Mr. Hull went over there at midnight and it

was agreed on and the President went on the air at 3
o'clock this morning.

The thing I can't make up my mind, putting eco-

nomic pressure on Germany right now, what would the
effect be?

Dr. White: All to the good.
Mr. Lochhead: Decisions are being made by the

Commissioner.

HM,Jr: Last Monday the President told me about

his idea. He was going to hint to England -- this 18
terribly confidential -- of an economic blockade. He
did, I find out last night, make that suggestion to
Sir Ronald Lindsey and I also know General Craig was
against it. He had that last Monday and he said he

had no answer. We come along and suggest that we declare Italy, Germany and Japan are dumping, all by our-

selves. I don't know. I don't know what the effect

would be .

That's my thought. I think this might be smart:
that we try it out on Japan first, who are not in the
European arena.

Yesterday, in talking with the President, I got

over to him, I said, "The Chinese have 20,000,000 ounces
is

of silver which is free. The rest of the stuff
tied up. That's all they have got.' And I said,
"You have got to make up your mind whether you want

to give them $100,000,000 credit, knowing the minute

342
-5-

you give it to them it's 8 gone. Mr. President, that's
what you have to make up your mind." He said, "I want
to wait and see what happens in Europe. If there is
war in Europe, I will definitely give them credit. He
waited a minute and he sort of gave a mental somersault
and he said, "If there 18 no war in Europe, maybe I will
do it anyway.

"But," I said, "it's boiling it right down. We

have been given nothing but misinformation. The YunanFoo road to Burma is not complete. If He said, "Well,

Wang said it was complete. I said, "That's the kind
of information you have been getting.about
Boiling
I
all.it down,
they are down to $10,000,000. That's
said, "It's just a question of whether we want to do
something. I think with the thing 80 (makes gesture
of up and down) this way and the President very anxious
to get in and stop this war in Europe, we make a move

like this

"And that note I saw was emasulated by Mr. Hull.

It's a typical Hull note. And we go along and declare

the Germans and Italians are dumping and increase their
duties by 50%

Dr. White: Or put on new duties.

bility.

HM,Jr: At this time, I don't want the responsi-

Dr. White: In Italy?
HM,Jr: Or Germany. The responsibility is too

great to recommend it, but I might consider doing it
with Japan where the situation of my doing it or not
doing it is not going to change whether Hankow falls or not.
The die 18 cast. Supposing, Harry, you advise me and
then subsequently somebody said the Treasury doing that
was the deciding factor for world war.

Dr. White: I will grant it's safer, less risk

involved, in doing it against Japan at this moment.
HM,Jr: And this other thing is not going to make

Germany fight or not fight. If you said to me, Mr. Mor-

genthau, your doing this 18 a chance to keep Germany from
going into Czechoslovakia.

Dr. White: I think the decision will rest on

343
-6-

other things.

HM,Jr: It will rest on other things. There-

fore, postponement of one week won't make any difference.

Putting it in might give him the handle to take a blast
at us. 'I have to fight because those American bolshevike, that Jewish Secretary of the Treasury, 18 trying
to strangle me economically and I have got to fight that.'

And he might hang the whole thing on me.

If you said, 'You are doing it -- you have to

have courage and maybe this will stop them from going

in, I will take that chance, but I don't believe it.
test it.

On the other hand, I am wibling to do it with Japan and

I have had two days clearly to think this thing
through.

While this is going on, this note comes out this
morning. And I think the reason the President showed
it to me, he knew I would not approve of it. The only
thing that I can't understand is why the Treasury has
not pushed this forcibly with a definite recommendion

during the past year. You have all flirted with it.
000-000

344

September 26, 1938.
9:30 A. M.

GROUP MEETING

Present:

Mr. Oliphant
Mr. Gaston

Mr. Haas
Mr. Hanes
Mr. Lochhead

Mr. White

Mr. Upham

Mrs. Klotz

H.M.Jr:

I've got to kind of mix this thing up; I can't

go ... Cy, what's the latest word on Stewart,

of San Francisco?
Upham:

I have heard nothing more than when I talked to
you last. Mr. Ransom was going to tell me, as
soon as he talked with Marriner, but I haven't
heard from him.

H.M.Jr:

All right, before one o'clock
(Dowling comes in.

H.M.Jr: Some cigarettes, please.
Dowling: They're in the drawer.
H.M.Jr: No one knows it.)
I want to know - better write this down;

I don't want it - I really want it - the so-called

what, April or June report they made for the Bank
of America; what is that one?
Gaston:

April 20 it was finished up - April 20th examina-

H.M.Jr:

All right. That - I want you to take out of that
all references to Stewart, and criticisms of

tion.

Stewart, see? I want to know who, in the Federal
Reserve Bank of San Francisco - to whom was that

given, and when, and was it given to anybody in
the Federal Reserve in Washington? Now, the so-

called April examination - the one before that, was
there any reference to Stewart? How many times,
in other words, when they examined the Bank of

America, did they find that Stewart had this land;
how many times did they criticize it; when did they

-2-

345

begin to criticize it; was it, each time, shown to
the Bank in San Francisco and the Board here?
In other words, start right from the beginning,
see?
When
didtothey
begin
did
they
begin
show
it? to criticize, and when

(To Mr. Oliphant:) And then anything you have out

Oliphant:
H.M.Jr:

of my diary, will you please return it before noon
to Mrs. Klotz; anything on Giannini, and everything.
It's all in your hands.
I want everything back to Mrs. Klotz before noon.
You've had it over a week now; if it's ready please
send it back. I'll give you to five o'clock. I
don't want my diary floating around.
And you (Mr. Upham) have got some stuff.

Upham:

I have returned them all to Foley and Sherbondy.

Klotz:

We've made a record of everything we've given them.

H.M.Jr:

Everything out, I want it back by five o'clock.
You've had it at least a week.

Upham:

H.M.Jr:

I had it a couple of days.
Now, what I am thinking about is this; I hope I
am wrong: I don't think they are going to do anything about Stewart, see? I don't know whether I
got this from you (Upham) or from Ransom, but maybe I got it from Ransom - I don't think that Eccles is just going to talk and, as a result of
that, will simply say, "You'll have to see the
Treasury." Now what I want to do is to get ready
for that, and sort of giving the Board here a date
on which, if they don't give us a satisfactory
explanation of Mr. Stewart's extended position,
why, then I would get another bank to represent us
in San Francisco.

And then would you also look up the first state-

ment I brought to Mr. Ransom's attention, you see,
and the day we sat and pulled those things out and
had them photostated and gave them to him.

Upham:

The thirteenth, I think.

H.M.Jr:

What?

-3Upham:

The thirteenth.

H.M.Jr:

Well ...

Upham:

I'll look it up. You want this by one o'clock?

H.M.Jr:

Is that asking too much?

Upham:

Oh no; no, indeed. Of course, they would have no

346

interest in it until the date of his appointment,

which only goes back two or three years.
H.M.Jr:
Upham:

My God, you're going to start joking this morning?
And the references go back at least ten years.
See, the criticisms go back in the reports at
least ten years.

H.M.Jr:

How long has he been a Class C Director, and how
long has he been a Director?

Oliphant:

And what kind of a man did they pick when they

H.M.Jr:

What?

Oliphant:

What kind of a man did they pick, when they picked

H.M.Jr:

picked him for a Director?

him, for a Director?
If these records go back ten years, didn't they
know, at that time, that he had a - what do you

call it?

Oliphant:
H.M.Jr:

A line?

- A line of credit?

Upham:

Yes.

H.M.Jr:

What?

Upham:

Surely.

H.M.Jr:

In other words, I am just not, in these difficult

times - I've got so much to do - things coming so

fast, I can't go around; I can't talk to Ransom
or Eccles; I oughtn't to have to draw this to
their attention but once. We were all here last
night, and things are just coming too fast; I
can't do these things more than once; I oughtn't
to have to.

-4-

347

If I were in their position, I wouldn't let more
than twenty-four
straightened
out. hours go without having this

Upham:

Was there something on this last night?

H.M.Jr:

No, no; the European.

Upham:

I'll probably
hear
from Mr. Ransom this morning
on
what Eccles
did.

H.M.Jr:

We got word last night on the farm that the French
were serving us notice that if they had another bad
day they'd put on a modified exchange control, and
when Butterworth spoke to Sir Frederick Phillips,
he had heard nothing about it.
I saw the President between seven and eight last
night.

The other thing, which the President asked us to
do, which we are doing, is, Waesche's watching the
Italian and German liners to see if there is any
change in their regular movements, and up to date
there haven't been any.

And then we're going to load, as soon as possible,

the Honolulu with another twenty-five million

dollars worth of gold, and she'll sail - (words

misunderstood) - and the Summers arrives, which

ought to be Wednesday or Thursday.

Today we got a hundred thirty-seven million dollars

worth of gold. All right.
Lochhead:

And then, Mr. Secretary, I spoke to you about

putting ten million of gold on the President
Roosevelt, sailing on Thursday, if you want. And
we might take up the question of the American
Export Line, which is also sailing direct from
London.

H.M.Jr:

Now, I want to ask whether either Haas or White are
making a study of when did the Allies, during
the World War, begin to borrow money? I mean, when

did they begin to get it, from what sources, and
how fast? Are there any records?

White:

No, I was just taking the period of the outbreak
of the war, which wouldn't include that, but we

-5-

348

can easily put somebody on it.
Haas:

I've got a diary on that.

Lochhead:

Except immediately after the war.

H.M.Jr:

Supposing George and Harry get together; this is
what I have on my mind: I want you to take the
important things, George, the commodities - you

Haas:

H.M.Jr:

do these things. I'd like to take wheat, cotton,
the important ones, and then sort of - you say
you've got a list of the important events?
That's right.
This is what's in the back of my mind: The President's
asked at Cabinet, two or three times now, for us to
make a study of what authority the administration
has to keep the system going. He did it when Hanes

was there Friday; he did it the week before, and
two weeks before. The last time he did it, I was
bold enough to say, "Well, Mr. President, what I'd

like to see is a nice healthy rise, first."

Now they are worrying so much about that, and there

are so many other important things, which I think
are much more important - now what I've got in the
back of my mind is this: Have the so-called - England
and France got the money to buy this stuff with,
you see? This one thing, when they bought it in
fourteen, fifteen, and sixteen, with the money we
loaned

Haas:

Uh huh.

H.M.Jr:

But aren't we talking about something which wouldn't
happen because they haven't got the money to buy it?
Now the President is so worried about two- and

three-dollar wheat, what I'd like you two fellows
to get together - to see when wheat - for instance

when wheat went to two dollars, was there any
correlation when they began to borrow the money. See?
I am just talking now. Maybe you can explode my

theory, but if these fellows can't borrow a couple
of billion dollars from us, they can't put wheat into

it.

Haas:

What I am afraid of, Mr. Secretary

-6H.M.Jr:

349

And then also, take wheat, for example; wheat was
supposed to go up and cotton to go down; why did

cotton go down? And the other thing - take a look
at world stocks. How long was there a lag before
these things went on? See? I just - it's all
very nice; let the Department of Justice and the
Treasury's
General Counsel's office study all the
things we have done.
I am again going to make a guess: When they get

all through and done, they have no direct legal

method they can use; they may be able to go through
four or five corporations and do something, but
when they get down to the direct method

That's one of the things the President wants to

do.

Oliphant:

I'd like to make this statement: All the methods

which Justice and Commerce had suggested were

shotgunned and designed to be just as hard on

wheat and cotton, for instance, as they were on
copper, and the methods we have been working on
are discriminating methods that would allow the
wheat and cotton, and that sort of thing, to go
up, without an unnécessary run on it.
H.M.Jr:

We ought to take

Oliphant:

That is the important difference. We are thinking

H.M.Jr:

in the run of building materials?
I don't want to see that run up.

about, fundamentally, wheat and cotton, and that

sort of thing. You wouldn't be particularly interested

Oliphant:

There are methods of discriminating against the
building materials and leave the wheat and cotton
run up.

H.M.Jr:

I still want to see you go ahead and follow that;

I still want to see, lacking lending them a lot of

money, have they the wherewithal to drive this
thing up?

Gaston:

I just question it. My reaction is that wheat

didn't shoot up until 1917 when the United States
Government began to make the outright loans, and

after the United States entered the war; that is

when wheat began to shoot up.

350

-7H.M.Jr:

Maybe we're right, and maybe not. This thing is
important; that's why the President is concerned.
Nothing is -- (words misunderstood). It killed
Herbert Hoover.
They always said there were certain justifications;
if the bricklayer could get eighteen and twentyfour dollars a day for his work, and the riveter
the same, why shouldn't the farmer get two dollars
and twenty cents for his wheat.

Gaston:

Wheat was three dollars and sixteen cents the day
they slapped that control on.

H.M.Jr:

You see, it's very interesting; I may be all wrong,
but there may be something to it.
I think you are all right when you talk about
wheat and cotton, etc., and I think it's a different
story when you talk about building material.
The Allies are going to buy copper; they are going
to buy steel, and all the rest.

Oliphant:

H.M.Jr:

Oliphant:

Those are different from wheat and cotton.

H.M.Jr:

I don't think anybody's studied this. You know
of anybody, Hanes, looking that up from that
angle?

H.M.Jr:

I don't, no sir.
Don't you think it's interesting?

Hanes:

The Attorney General had a report on what might be

H.M.Jr:

Does anybody know that that particular angle is

White:

(Nods "No.") None.

H.M.Jr:

You work fairly fast on it, boys; if you're ninety
per cent right, it's all right. Don't forget, in

Hanes:

done, legally, without calling Congress, but I
don't think he took it up from the angle you are
talking about.
being explored?

Miss Diamond you've got a very good librarian.
Give me a shotgun opinion, and follow it up.

-8-

351

Haas:

When would you like the shotgun?

H.M.Jr:

Oh, I'd like it in twenty-four hours, see?

Haas:

We will give you some rough charts in that length

Oliphant:

of time, too.
Obviously the only source of funds are their
securities here, naturally.
They are going to hustle (?) those.
They can't get a hold of them.

H.M.Jr:

Well, I am worried about when the President has

Oliphant:
H.M.Jr:

Haas:

H.M.Jr:

this one idea, and just that.
That isn't an immediate thing to worry about.
I don't think so.

What have you (Lochhead) got?
Lochhead:

The market is quite erratic, running down to again to about 4.75 3/4 against 4.77 at the opening.
Now the Bank of England cable said they had done
twenty-six million dollars in gold up to the time
the cable was sent. They made no mention of the

franc at all.
H.M.Jr:
Lochhead:

Did we get any of that Saturday?
Two hundred thousand dollars is all. We operated
later on in the market - four thousand pounds.

All the stuff they are doing, they are doing
themselves, now. It's just a call-in from the
Dutch bank. You recall, in the beginning they
asked us to take gold, and we said we'd take up to
twenty-five million; we took twenty-three. They
turned around and have done twenty millions themselves; they're coming back and saying they are

pretty well tied up, will we do some more over there?

It is under the Tripartite. They have to ship it

over and guarantee the insurance, so we don't have

to worry about that. We have to worry about getting
insurance, but they have to pay all the costs, and
guarantee laying it down.

H.M.Jr:

How'd you put that over on the Dutch?

352
- -9 Lochhead:

We gave them a little help on the way it was
worked So out, but they should take that responsibility.

five? shall I tell them it's all right for twenty-

H.M.Jr:

Yes - sure.

(To Mr. Upham:) Why don't you go in Mrs. Klotz'

room and call up Ronald Ransom, and come back.
Lochhead:

Is it all right for me to run now?

H.M.Jr:

Wait a minute. I'm unburdening myself so you
people will know what I am thinking about. I had
a chance to talk to the President about the

Chinese situation. Incidentally, you're
(Mr. Hanes) going to sit in on the Chinese situation, and I told him roughly, this. I understand
I am not correct: I said, "Mr. President," I said,
"as far as Europe is concerned, I guess you might as
well make up your mind that the Nazis will control

Europe from now on. We've got a slight chance to do
something in the Pacific. When you boil everything

down, as far as Chen and the rest tell me, they'v
got about ten million dollars of silver free that
they can put their hands on. Archie gives me the
bad news this morning that before they can reach
the twenty million ounces of silver which they have
as equity in their loans made in Europe, they've

got to sell seventy-five million dollars

Lochhead:

H.M.Jr:

Seventy-five million ounces.

"seventy-five million ounces. It's just a

chance, Mr. President, whether you want to give

them a credit of seventy-five million dollars and

write it off at the beginning - a little more than
the cost of one battle-ship - there is a slight
chance of keeping peace in the Pacific. That's the
position." He says, "Well, if there's war in Europe
we'll give them the credit," and then he thought a
few minutes and he said, "And if there isn't maybe
we'll do it anyway."
Now I told him how Jones felt. Jones wanted to

go along on this thing. Now what I told White, and
I don't want to go into a long lengthy explanation but I don't want to take the risk now; we've waited
a year or two years to say that the Germans or
Italians are dumping; why take that risk and do
it this week? I - then if they are dumping or they

353

- 10 are breaking any of our agreements, it's too bad

we didn't do it before, but I am not going to do
it this week, and give Mr. Hitler a chance to say
that the United States is strangulating Germany
and that's why they've got to go into Czechoslovakia
in order to get their necessary supplies. I don't
believe if we did announce Germany was dumping, it
would keep Mr. Hitler from an announcement of that

Words

some

kind. There's nothing to be lost by waiting a week,
inasmuch as we've waited a year, but I don't feel
that way about Japan, because whether we do or
don't isn't going to make Japan change her tactics
in regard to Hankow, and if it's successful in
connection with Japan, and then this thing whatever happens in connection with this thing "It worked with Japan; let's do it with Germany
and Italy," provided we have the facts. (But to do
this thing would give this fellow what he's looking
for - every excuse to do it in Germany.) It would
be - Hitler would say, "America is strangulating
me; they won't let us do any business, and, therefore, I've got to fight." And I'm not going to
stick my neck out.

White:

H.M.Jr:

Oliphant:

You feel the same way about your original plan,

that if they did, you might
No, no. I don't want to have anything about that;
I don't want to do anything about that this week.
Until this thing clears up - I can't give all the
reasons, but I don't want to do anything on it.
You don't want, this week, to get into those
negotiations, but the Japanese thing is clear clean.

H.M.Jr:

If it worked in Japan, and we could say to the
President and Mr. Hull, "It worked in Japan, why
not do it wherever the law dictates we should do
it?" And, therefore, what can you fellows give
me to show the President, by one o'clock, in connection with Japan?

Oliphant:

By one?

H.M.Jr:

By one. Now what I am saying is fairly important,
and if anybody disagrees with me, please talk up,
because I've been talking about pretty important
things. Herman?

- 11 Oliphant:

354

I agree with you, perfectly. I think - I don't

know what it will look like a week from Monday, so
far as Germany is concerned, but this week we ought

to stay out of that "horse-biting" and all the
rest in Europe. The Japan thing is entirely
separate; we have apparently got a perfectly
clear
therecase
first. there, and I think it ought to be tried

H.M.Jr:

Have you got a clear case?

Oliphant:

I think we have.

White:

You're satisfied?

Oliphant:

If we can get the rest of that stuff out of the
State Department, I think it will be clear enough.
I'll have to check with Johnson on how much he was

able to get Saturday.
H.M.Jr:

Well, Herman, in this case I've got to be ninetynine per cent sure, Herman.

Oliphant:

I know that. I understand.

H.M.Jr:

And if it can't be perfect by one o'clock, let it

Oliphant:

It will go over until we are.

H.M.Jr:

I want a perfect, polished document.

Oliphant:

Well, we don't go out on the end of a limb on a

go over.

H.M.Jr:

thing like that.
And in this case, if we are going to do it, is

White:

I would suggest somebody.

H.M.Jr:

Who?

White:

Mr. Fox, of the Tariff Commission.

H.M.Jr:

Good.

Oliphant:

I am not going to bring it to you until it is safe,
perfectly; until you've got solid earth under your

there anybody we might show it to - have on there
as consultant?

feet.

- 12 H.M.Jr:

355

I want somebody like Fox, and some other people

you think of, on it, and, "We've read this thing
and we agree with the Treasury findings."

White:

See, it's their function to keep the President

informed of just this thing. It's their duty,

by law.
H.M.Jr:

John Fox is a former economist for Federal Trade;

White:

Tariff Commission.

H.M.Jr:

Well, I'd like to have a memorandum as to where
our responsibility begins and ends, and where the
Tariff Commission's begins and ends. And,
incidentally, Herman, if it could be done, that
the Tariff Commission could serve notice on the

he's a Commissioner of Trade?

President

White:

H.M.Jr:

He said - I mentioned, talking something about that
the other day, and he said it usually takes so

long, but if circumstances were such that, in their
opinion, speed was warranted, he thinks they
could do it quickly.
It would be nicer for me if it came from them, if
it's their responsibility; if it's ours, I won't
duck it.

White:

It's theirs.

H.M.Jr:

What?

White:

Legally, it's theirs.

Oliphant:

It isn't true; you are responsible for the administration of the tariff laws.

H.M.Jr:

Well, you boys get together.

White:

Well, I think we're both right.

H.M.Jr:

Well, I still say, let's get together.

Oliphant:

Well, you've got to talk fast; he makes a statement
about what the law is, and I

H.M.Jr:

I am not getting in it, because you fellows go
right outside and kiss each other.

- 13 Oliphant:

That's what we always do, darn it.

H.M.Jr:

Far
be it from me to get between Oliphant and
White.

356

Well, get together anyway. Anything else, Herman?
Oliphant:
H.M.Jr:

No.
Now, onTariff
this thing, assuming, for instance,
the Federal

I didn't get so far - I started to call you Dr.

Oliphant and Dr. White.

Gaston:

Yeah,
but they are just a bunch of "Yes, but - "
liberals.
(Laughter)

Klotz:

What?

H.M.Jr:

"Yes, but - " liberals.

Oliphant:

On this thing, let's assume that the Tariff Commission would go along on the thing, and the only
howl that's liable to be raised around that time
is liable to come from Henry.

H.M.Jr:

Who?

Oliphant:

Henry.

H.M.Jr:

Who?

Oliphant:

Henry - Wallace - the effect on the export of

H.M.Jr:

Oh.

Oliphant:

I don't know whether you want us to canvass that

H.M.Jr:

You'd better first let me see a polished document,

Oliphant:

Would you want to know, in advance, what the effect

H.M.Jr:

Sure.

White:

The case is not so clear as Germany, but you might
be able to make a satisfactory case.

cotton.

in advance

and then

would be on cotton?

- 14 -

357

Oliphant:

But the effect of the export of cotton - I don't

H.M.Jr:

All right. What else, Herman; anything else?

Oliphant:

Nothing else, now.

H.M.Jr:

Nothing else now - that goes for an hour?

Oliphant:

Well, I've got five minutes, some of these days.

H.M.Jr:

All right. Herbert?

Gaston:

I suppose the President's note raises the possibility
that we might get into direct negotiations with

think there would be any other kickback on it.

Germany on this thing, and I wondered whether you'd
want to have the President and Hull informed as to
just what we might be able to do toward Germany
H.M.Jr:

in case we don't like their action and in a way of
interpretation of our laws, as a trading point.
The President has had that; we've argued it all out;

Gaston:

On this question of dumping, etc. we could take

H.M.Jr:

He's had that for weeks. Say, listen; I don't
think Hitler will even read Roosevelt's note.

Gaston:

No.

H.M.Jr:

I don't think he will even read it.

Haas:

He's preparing his own speech.

Gaston:

I wonder whether the British asked us
talking

H.M.Jr:

he knows that.

a much more drastic stand on our law.

I am/strictly in this room. I don't know

White:

Ask me.

Gaston:

Never mind.

H.M.Jr:

Reminds me of Jesse Willard.

Gaston:

I - will we have a press conference at four?

H.M.Jr:

Sure. We'll again say that the Tripartite Treaty
is functioning.

358

- 15 Oliphant:

I read, somewhere, a pretty elaborate memorandum

on the effect of partial exchange control
(words inaudible)

Klotz:
H.M.Jr:

Can't hear a word you're saying.

Herman, whatever happens this week, it is still

working.
Oliphant:

That's what the memorandum said; it's effective.

Gaston:

If they haven't announced exchange control by

Gaston:

four o'clock, then that answer will be all right.
I didn't write it yesterday.
All right. What else?
That's all.

H.M.Jr:

George?

Haas:

I have nothing new. I've got this book for you.

H.M.Jr:

Put it on my desk.

Haas:

We're working up a memorandum for you about-along

H.M.Jr:

You want to hear this? I'm rather pleased about

Oliphant:
H.M.Jr:

the same lines you indicated on wheat here, only
the Government bond market is the subject.

this. We went fifty-fifty with the Federal Reserve,
last week, and bought up, each of us, about thirtyseven million dollars worth of bonds, so when the
bonds began to gain a point, they began to sell.
I said I didn't want to sell, but they began to
sell, and sold about thirty-four million, and
cleaned up. And last week - and Saturday morning
they began to go bad, and Ransom said, "What shall

I do?" I said to Archie Lochhead, "Call up Ransom
and tell them inasmuch as they sold thirty-four

million dollars worth of bonds, we won't go fiftyfifty with them until they bought back thirty-four
million dollars worth of bonds." And they said,
"All right," so they've got to buy back the thirty-

four they sold before I go fifty-fifty. They said,
"All right." I think that's pretty good, myself;
I think that's a good day's work. Wouldn't you?

They were so tickledAnd
theynow
made
quarter
of
theabout
thingsaare
consider-

a point profit

- 16 -

359

ably below, and they asked me what to do, and I

said, "Well, you buy back what you sold and I'll

go fifty-fifty." They said, "All right."

Gaston:

They
all. thought they'd make a little profit, that's

H.M.Jr:

I think it was rather neat; I thought it was
good. I never said a word until they got all
through. They are going to take care of the

first thirty-four million.
(Points to Mr. Haas.)

Haas:

That's all.

H.M.Jr:

I think, in the papers, that the preliminary

Haas:

information on the Federal Reserve Index is ninety.
Eighty-eight.

H.M.Jr:

They are September's.

Haas:

September, they are estimating now. It was
running about ninety, but the September isn't out.
When are you going to have a new trial balloon chart
for us to go on?

H.M.Jr:
Haas:

I've got one estimate that came in the first of
September, and the next one will be the first of
October. In other words, I've got one you haven't
seen.

H.M.Jr:

Have you?

Haas:

Uh huh, though they canged it slightly.

H.M.Jr:

Nothing much?

Haas:

Nothing much.

H.M.Jr:

No use talking to the President now; I think as

Haas:

October.

H.M.Jr:

soon as you have the October

October 1 in, let us know and we'll take a

look at it.

- 17 Haas:

All right.

H.M.Jr:

(Nods to Mr. Hanes) Is that all, George?

Haas:

(Nods "Yes.")

Hanes:

I made an engagement with Harris for tomorrow at

H.M.Jr:

one o'clock. Is this going to change here?
What's his first name?

Hanes:

Basil.

360

(H.M.Jr. and Mrs. Klotz writing, and speaking in
low tone.)

H.M.Jr:

Yes.

Hanes:

That's all.

H.M.Jr:

I didn't mention that following your directions,
oil.
Mr. Hanes told me. Perfect coordination.

Oliphant:

You're coming in today, aren't you?

Hanes:

Ten o'clock. Yes.

Oliphant:

White:

Hanes was helping us get in touch with the tung

The time is approaching when you, at one time,
indicated you might want to release some figures

in the stabilization fund for October first. We

have drawn up something tentatively, but you - I
don't know whether you want to pass that over.
H.M.Jr:

No, I want to do it in connection with the quarterly

White:

Gaston:

Well, they are coming out the first of the month.
Well, Herbert has got to hold it until I pass on
the figures. Does that register?
That's right.

White:

Mr. Chen was here; he might come back. He wanted

H.M.Jr:

Eleven.

H.M.Jr:

figures on the balance of the Treasury.

to postpone it.

- 18 White:

361

He was here about half an hour ago. You don't
want to give any more thought to that
German thing; you've made up your mind?

H.M.Jr:

Definitely.

Klotz:

Oliphant:

He's said twice that very thing.
I think it would be very unwise.
This week, it would.

H.M.Jr:

I think it would be plain foolhardy. If anybody

H.M.Jr:

can show me -- (words misunderstood; notes jumbled)

doing anything on German customs -- I am willing
to risk my neck.
White:

Just say, "She's confronted with the knowledge
that if they go into Czechoslovakia she can not
export goods to the United States.'

H.M.Jr:

She knows it.

White:

She knows it now.

H.M.Jr:

something Signature

Upham:

It gives them a chance to say to their people,
the reason they are going into Czechoslovakia "the United States is choking us out."
Look, Harry, please. Now I think you're wrong.
Ronald has heard nothing from Marriner since six

o'clock, our time, this morning. Marriner is
probably in Ogden this morning.

H.M.Jr:

Would you convey this message to Ronald Ransom,

Upham:

Uh huh.

H.M.Jr:

You think that's unwise, anybody?

Hanes:

I think that's putting it pretty mildly.

H.M.Jr:

All right. Slightly.

Upham:

He thinks if the European situation gets any worse

that Mr. Morgenthau is getting slightly impatient
in regard to the decision with regard to Stewart.

Marriner will be back here at once; he is quite
worried about it.

- 19 Klotz:

Slightly worried.

H.M.Jr:

That's another reason why we should have peace.
What else?

362

(Laughter)

Upham:

That's all.

H.M.Jr:

Well then, we are all clear until eleven, when we

Oliphant:

It's eleven?

H.M.Jr:

Eleven. Now, let's see, Mr. Oliphant will be here,

do China.

Oliphant:

Mr. White and Mr. Hanes, and Mr. Lochhead.
And the Chinese won't.

White:

The Chinese will.

H.M.Jr:

The Chinese will.
0. K.

CONFIDENTIAL

G-2
M

362A

WAR DEPARTMENT
WAR DEPARTMENT GENERAL STAFF

G=2/2657-II-90

MILITARY INTELLIGENCE DIVISION, G-2

WASHINGTON, D.C.

September 26, 1938.

ml 3, &

MEMORANDUM NO. 21 FOR THE CHIEF OF STAFF:

Subject: The present European situation to
10:00 A.M., September 26, 1938.

General Situation. The details of events which occurred
over the week-end are well covered in the press and radio. An
interpretation of these events leads only to the conclusion that

war between Germany and Czechoslovakia is inevitable unless Hitler
makes unexpected concessions, or Prague accepts in toto the German
demands under British and French pressure. In the event of a German attack, the war would tend to become general if Britain and
France desist from applying this pressure.

Warlike preparations have already proceeded so far on the

continent that it is difficult to see how, at the expiration of the
German ultimatum, the clash can be avoided. The most optimistic
hope only that it may be immediately avoided. Even the optimists
seem to accept the inevitability sooner or later of a showdown between the totalitarian states and the democracies. From the active
defensive measures already undertaken, particularly with respect to
defense against aircraft, the presumption in responsible circles

in all countries involved seems to be that the crisis is imminent.
Military Situation.

Great Britain - Following are paraphrases of messages
received from the Military Attache, London, at times shown:
1:05 P.M., September 24.

British Navy taking every precaution short of
calling reserves to active duty. Press has been ad-

vised by Admiralty to make no mention of naval move-

ments. The Director of Military Intelligence stated
at 1:00 P.M. to-day that mobilization not ordered and

no movement troops initiated by War Office except pre-

CONFIDENTIAL

362 B
CONFIDENTIAL
liminary measures by unit commanders. He assured me
that he would give me prompt and accurate information

as near that given the French as practicable. The
Government is extremely anxious that the United States
understand clearly the present issues and events.
On emerging from conference with Chief of Imperial General Staff General Ironside (commanding
Eastern Command) said, "Hitler is now up against it.

He will be beaten before this is over."

Everything depends on the meeting of the
Cabinet to-day.
1:45 P.M., September 25.

Royal Air Force preparations remain as stated
in cablegram September 15. Army preparations unchanged. Home Fleet left Invergordon for unknown

destination. Air Ministry building protected with
sandbags against air attack. Stretchers issued to

all first aid stations afternoon 24th. Air raid

shelters now being staked out in public parks, with
construction to start 26th. Two shelters in Hyde

Park to have capacity of 5,000 and 2,000 respectively. Others in Eaton Square, Regent Park, etc.
France -

Received from M/A, 10:57 A.M., September 25.

No change noted in the French-German military

situation. Total number of reservists mobilized by

France to date estimated at 450,000.
Czechoslovakia, as a result of complete mobili-

zation, will have approximately 30 divisions within one
week.

From the Press:

General Gamelin goes to London to-day to join

the French Prime Minister in conferences with British
authorities.
Additional measures for increasing the air
raid protection of Paris have been taken, including
preparations for wholesale evacuation of population,
arrangements for extinguishing lights, setting up of
150 warning sirens, increase of fire brigades by over
6,000 volunteers, marking of locations of air raid
refuges and roads for evacuation of civilians from
the city. Forty-three thousand refugees are said to
be available.

CONFIDENTIAL
-2-

CONFIDENTIAL
Holland -

Sent to State Dept., 7:00 P.M., September 24.
An order has been issued cancelling all leaves
for officers and enlisted men of the Army and Navy.
Portugal -

Sent to State Dept., 4:00 P.M., September 24.
Popular sentiment in Portugal is pro-England in

present crisis.

Czechoslovakia Received from W/A, 5:23 P.M., September 24.

Military Intelligence here reports general dis-

tribution all around Czechoslovak border of German infantry regiments and brigades with artillery regiments

and air units. This is in addition to troops mentioned

September 20 and 2 divisions in Glatzneisse area.
South from Berlin some important movements. It is not

believed that troops are as yet in position for major

attack. The heavy troop movement east through Munich
reported yesterday may be in preparation for such an

attack. Along the northern frontier of Hungary 7
brigades are reported as being located.
Germany -

Received from M/A, 10:25 A.M., September 25.

Troops stationed in and about Berlin given normal week-end furloughs. Gradually and quietly reser-

vists are being called to active duty. Between

Leobschutz and Cosel in upper Silesia on September 24th
the 8th division was observed moving south in three
columns. Aerial reconnaissance reveals widespread air

defense measures in vicinity of Berlin with concentration of 400 bombers but no evidence of pursuit. Air
fornes apparently in full readiness.
Received from M/A, 9:15 A.M., September 26.

An increase in Germany's military preparations

this week is indicated. There is no change in the military situation.
Hungary -

Sent to State Dept., 5:00 P.M., September 24.
Baron Apor (Undersecretary of State for Foreign

Affairs) informed the U.S. Minister that regardless of

CONFIDENTIAL

362C

CONFIDENTIAL

362 D

rumors, no military alliance between Hungary-PolandGermany for attack of Czech existed, Hungary will remain neutral if Germany attacks Czech.
Sent to State Dept., 2,00 P.M., September 25.
The Imredy Government has taken measures to

prevent Hungarian Nazi from forming a free corps and invading Czechoslovakia. 4500 members were disarmed.

Air raid practice is planned to take place on a
large soale in Budapest Sept. 26th. The air defense is

pitifully lacking.
Poland -

Received from M/A (?) September 24.

It is estimated that units of the Krakov Corps
motorized regiment and infantry division are concentrated at Cieszyn. Poland will protect the Teschen
district inhabitants but otherwise will probably not
take any further steps at the present time.
From the Press:

Prague accepts Polish demand as parley basis.
Poland denounces Polish-Czech minority treaty of 1925.

Polish-Czech border closed to all normal traffic. No
further military preparations reported in last 48 hours.

Yugoslavia and Rumania - Unconfirmed press reports
state that Hungary has been informed by Yugoslavia and Rumania that
they will come to Czechoslovakia's aid in case of Hungary's unprovoked attack in accordance with the Little Entente agreement.

Soviet Russia - No information.

CONFIDENTIAL
-4-

363
Monday

September 26, 1938
10:11 a.m.
H.M.Jr:
Preston

Hello.

Delano:

Hello, there.

H.M.Jr:

Good morning, Mr. Comptroller. How are you?

D:

H.M.Jr:
D:

H.M.Jr:
D:

(Laughs) I'm a little weak. (Laughs)
A little weak?
(Laughs)

Ah'- well, the - ah - what do you know?
Well, so far it's been - I think - rather
gratifying.

H.M.Jr:

Yeah.

D:

Kiplinger and Whaley-Eaton were all right.

Ah - most of the press was pretty fair I
thought.

H.M.Jr:

I thought so.

D:

And Tom K. Smith called up from St. Louis and

said there was a little badgering out there
about this about this relationship thing.
And I think the Baltimore Sun took a fall out

of it.

H.M.Jr:
D:

Uh huh.

But generally speaking - ah - in New York and
around everywhere I thought we had very - exceptionally

fair treatment.

H.M.Jr:

Well now, when are you ready to go to work?

D:

Oh, goshi- I'm sunk here. Do you want to modify
those terms?

H.M.Jr:
D:

Ah - well, I'm a farmer and I come from New England and -

(Laughs)

-2
H.M.Jr:

I wouldn't take on a Massachusetts Yankee but

I'm willing - ah -

D:

(Laughs)

H.M.Jr:

- ah - to try.

D:

Well,
here - what I had in mind was that I'd clean up

H.M.Jr:

Yes.

D:

You remember we talked about thirty days.

H.M.Jr:
D:

H.M.Jr:

I know.

I'11 cut that if I possibly can, Mr. Secretary.
Well, I tell you - ah - this is question number
one: I think a great deal depends on what's
happened on the Pacific coast.

D:

Yes.

H.M.Jr:

Ah - I'm sending - where are you now?

D:

I'm in my office.

H.M.Jr:
D:

H.M.Jr:

I'm sending word through Cy Upham to Ronald

Ransom that I am getting slightly impatient -Uh huh.

-- with the fact that I have had no word from
the boys about what action they're going to take
in connection with that one Class B director out
there.

D:

H.M.Jr:
D:

H.M.Jr:

Yeah. Yeah.

It's exactly two weeks since I brought it to
their attention.
Uh huh.

And of course they've known all about it and
I don't see why they need two weeks so I am

sending them - I'm getting slightly impatient,
see?

384

-3D:

H.M.Jr:

Uh huh.

Now - because, with that man in the saddle
out there it makes our job very much more
difficult.

D:

Yeah.

H.M.Jr:

Now - ah -

D:

I appreciate that.

H.M.Jr:

Ransom's had no word from Eccles since Friday.

D:

Uh huh.

H.M.Jr:

And - ah - so he doesn't know.

D:

Uh huh.

H.M.Jr:

Now, the other thing which bothers me as much

as anything is - ah - what your idea is -

D:

H.M.Jr:

what we should do about Diggs.
Yeah. Uh huh.

And I wish you'd think about it and I'd like
to talk to you about it as soon as you've got
an idea.

D:

All right, sir.

H.M.Jr:

See? I mean, I think that's the next move.

D:

Uh huh.

H.M.Jr:

So the minute you can see through that - ah and I'm going to tell Cy to talk openly to you
and tell you anything that I am doing in connection
with the banks -

D:

of course.

H.M.Jr:

- from now on.

D:

I appreciate that.

H.M.Jr:

So you can talk openly to him.

365

-4D:

H.M.Jr:
D:

II do want your advice on the Diggs matter.

Well, I - I suppose we can do this, Mr.
Secretary. I promised these fellows here
that I would stay - enough to clean up this

thing and I did make the commitment of thirty

days.
H.M.Jr:
D:

H.M.Jr:
D:

I understand.

In the meantime what I want to do is to be free
to talk to Cy and come over there and visit and
take so much of your time as I think is essential.
Well, you can have all that's necessary.

Well, I appreciate that. I want to keep - ah -

I do want to give you the benefit of any judgment

I may have.
H.M.Jr:
D:

Yeah. Well -

And I do want to study a little bit - the thing.I've just been digging myself out from - telegrams and all that sort of business and in a day
or two, if that isn't too late, I would like to
come over and talk to you.

H.M.Jr:

Well I think - I think that the sooner you and Cy
can advise me what we should do about Diggs, the

better.
D:

H.M.Jr:
D:

Right.

I think that that's the first move.
Right, sir.

H.M.Jr:

And - ah - so whenever you're ready on that -

D:

Yes.

H.M.Jr:

Now, just for my own - did the White House

D:

let Mr. Fahey know?

Well now, I'm just simply appalled by that,
because I can't find out.

366

367

-5H.M.Jr:

Uh huh.

D:

Ah - when Frederic Delano called up the President
and the
Fahey
- President said he would talk to John

H.M.Jr:

Uh huh.

D:

Ah.- I haven't a word from Mr. Fahey at all
and I was just simply - I didn't want to be

convicted, you know, of bad manners in the matter -

H.M.Jr:

Yes.

D:

And I wrote him a letter explaining how this whole
thing happened and how urgent the appointment
became because of pressures.

H.M.Jr:

Uh huh.

D:

And I told him I hoped he understood. Now - you we
to get
him
andtried
the next
day
- on the telephone all that day

H.M.Jr:

Yes.

D:

And
the storm
couldn't
talk.had blown everything out so we

H.M.Jr:
D:

I see. I see.
Now, I - it's at rest that way - that I have
a letter up there and there's a letter from this -

from my board up there - ah - telling him the same

thing.
H.M.Jr:

Yes.

D:

We haven't gotten through and I'm just simply sick
about it. I was wondering - you have lunch with
him today, don't you? - With the President?
As far as I know; I haven't heard.

H.M.Jr:
D:

H.M.Jr:

Would you - would you be willing to just ask him
if he did talk to Mr. Fahey?
Sure. Sure.

-6-

368

D:

And if he hasn't will he please take - I appreciate

H.M.Jr:

Yes.

D:

- but I don't want to be - I don't want to leave a

H.M.Jr:

his tremendous responsibilities at the moment -

place with a bad taste, you know?

I understand. Ah - and then you will give this
other matter - because that's really - what I am
thinking of is supposing something happens, see?

D:

H.M.Jr:
D:

H.M.Jr:
D:

H.M.Jr:
D:

Right away.

And then what are we going to do about Diggs?
Do we want to put Cy in there right away, you see?

I think we should - just off hand, but I would like
to think about it.
I want you to think about it carefully.

I will.
And then I think - ah - what are we going to do
about Diggs and all the rest - ?

Yes. Well, I - just - just as soon as I a couple of days is all right at it, isn't it?

H.M.Jr:

Well, I'll leave it this way, - when you've got

D:

Right, sir. I'll do that.

H.M.Jr:

Thank you.

D:

Goodbye.

an idea give me a ring.

369

September 26, 1938

11:00 a. m.
Present:
Mr. Chen
Mr. Mou
Mr. Hanes

Mr. Oliphant

Mr. Lochhead

Dr. White

Mrs. Klotz

HM,Jr: I asked Mr. Hanes to come in. He is
the new Assistant Secretary of the Treasury. He will
be in here in a couple of minutes.
Mr. Chen: In last meeting you talked about forming American corporation and in the meantime made a few
observations. I have a memorandum on it. This is very

brief sketch. (Exhibit I)
HM,Jr:
Mr.

Fine!

Chen: It's only suggestions from us.

HM,Jr:

Fine!

Mr. Chen: But no plans. No organization. And
if this should meet with some of your approval, we will
have discussion about it.
HM,Jr: Have you people seen this memorandum?

Dr. White: No. We were going over other figures.
HM,Jr: I will road it out loud. (Memorandum on

Formation of American Corporation, attached hereto.)

Well, that's a very good memorandum and, without

getting down to details, I think it would be along those
lines.

Mr. Chen: Yes.

370

-2-

HM,Jr: To my mind.
this.

Mr. Chen: I have not cabled back to Kung about

I thought I would wait. In the course of the

next few days we have plans and under discussion, we will
see.

HM,Jr: Now, Mr. Chen, have you had time to give
me the picture on silver?
Mr. Chen: Yes, we have; this morning.
HM,Jr: Fine!
Mr. Lochhead: Here is a memorandum on the silver.

HM,Jr: (Reading) (Exhibit II)
"Washington, D. C., September 24th, 1938.Memo-

randum on silver!

Did you have this on the 24th?

Mr. Lochhead: On the 20th. We had it in the
same terms. This has been brought up to date.
(Secretary reading as follows:)
"The Chinese Government is deeply grateful for
the action of the U. S. Treasury in purchasing
Chinese silver and also greatly appreciate the

kind help in having an advance bid made yesterday under the current Purchase Agreement which
18 thus completed.

(To Mr. Hanes) To bring you up to date, we had another
10 million ounces which we would have normally bought on the

30th of September. Instead of that we advanced it 7 days in

order to facilitate that. So that completed on the 23rd the

last of the silver which we were under an agreement to purchase
from them.

(Continued reading)

"After shipment of 10,000,000 ounces in pursuance of this advanced bid, there will be
84,560,000 ounces of silver available for

371

-3-

"sale, of which 19,360,000 are unpledged
and 65,000,000 ounces pledged as follows:
A. Unpledged
In London
In Hongkong

10,360,000 oz.

9,000,000 OZ. 19,360,000 OZ.

B. Pledged

H'kong & S'ha1 Bk 30,000,000 OZ.

French United Group 11,100,000 OZ.
Mendelssohn
16,700,000 oz.
7,400,000 OZ.
Chase (ex-Swiss)
Total

65,200,000 OZ

84,560,000 OZ.

HM,Jr: The French United Group?
so on.

Mr. Mou: Group of four banks, Lazard Brothers and

HM,Jr: Now, the Hong Kong-Shanghai Bank, 30,000,000 oz.,
where is that?

Mr. Mou: In London. All in London.
HM,Jr: All of this 18 in London?
Mr. Lochhead: All of the pledged ailver is in London.
HM,Jr: And the 65,000,000 pledged, they advanced you
money?

Mr. Mou: Yes.
HM,Jr: How much?

Dr. White: If they sold it, it would be $81 millions
free if they sold it at 43d.
HM,Jr: (concluding the reading) "The sale of the
aforementioned pledged silver held in London

under lien to various lenders would necessitate the making of arrangements first satisfactory to the Treasury and then to the lenders.

372

-4-

"The cooperation of the Treasury in

effecting such arrangements would be
greatly appreciated bythe Chinese
Government."

Mr. Lochhead: The French group, for instance, have
silver pledged in London. Under ordinary circumstances

when we buy silver, we only pay for it when it is delivered
here.
The French won't give up silver until it is paid
for.
We don't pay for it until it gets over here.
HM,Jr: That's that much that I asked for. What
about what Governments they owe? (Exhibit III)
Dr. White: This 18 what the Government owes on the

purchases of armaments, except it does not include all their
liabilities. They bought new gasoline and some other things
and we have asked, this morning, to get those and it does
not include dollar debts the Chinese Nationals have.
Mr. Lochhead: This is a summary right down here and
this figure is a breakdown.
HM,Jr: Well, they owe us $21,000,000.

Mr. Lochhead: No, they don't owe us; they owe

various people $21,000,000.

HM,Jr: But for 1938 they owe us $1,300,000.

Mr. Lochhead: That's right.
HM,Jr: They owe England, $1,800,000; Germany,

$2,000,000; Italy, $430,000; Switzerland, $410,000;
Austria, $10,000; Findland, $80,000; France, $1,600,000.
This is all 1938. Belgium, $2,000,000; Czechoslovakia,
$1,000,000; Denmark, $940,000.
You have not totaled up the 1938 debts, have you?

(Concluded reading) "Total amount to be
paid including all countries about US$

21,800,000. For 1938.
"For further reference Minister approved
budget for year 1939 armanent replenishment for purchase of airplanes, T.N.T. and

373

-5-

"gunpowder, etc., amounting to US$15,340,000;
year 1938 being US $31,170,000.

Dr. White: 1938,1939,1940 18 $38,000,000.
HM,Jr: How much for 1938? Let me cross-examine you

fellows and I get it in my brain.
Let's first do it on the silver thing, because I
started to talk, last night, to President Roosevelt about
this thing.
They've got 84,000,000 ouncez, total silver, of which,
as I told him, 20,000,000 ounces is free. But I don't see
where your statement holds water that they can't sell that
20,000,000.

Dr. White: There was a misunderstanding.

Mr. Lochhead: We thought it was all tied in. So

the 20,000,000 is free.

HM,Jr: Well, what I told the President is correct?
Mr. Lochhead: Is correct. That in addition to the

other silver would mean an additional $8,000,000.

HM,Jr: What I told the President, last night, was
roughly they had 20,000,000 of free silver which they could
sell us and the rest of the silver was pledged. That's
correct?

Mr. Lochhead: That's right.

HM,Jr: Now, as I understand it -- let's just run
through this -- on the $1,800,000 to England they have defaulted on the interest?
Mr. Chen: No. This is the purchase of armament.

HM,Jr: That's all munitions. That's all to private

contractors.

Mr. Chen: Private contractors.
HM,Jr: This is not Government?
Mr. Chen: No.

374
-6-

Mr. Lochhead: In other words, we call this the

extra-ordinary budget.

HM,Jr: But this sheet is for the purchase of war

materials?

Mr. Mou: Yes.
HM,Jr: And that's the money you owe?
Mr. Mou: Yes.

HM, Jr: And I take it you got that money by pledging that 65,000,000 ounces of silver?
Mr. Mou: The proceeds of the 65,000,000 ounces
are already used.

HM,Jr: What did you use it for?
Mr. Mou: Various uses. We showed you in one
memorandum. Maintenance of the currency and against the

payment of five million United States dollars, war materials,
and then loan payments; covered everything almost.

HM,Jr: I see.
haven't got this thing yet. We will go through
I

this thing once more.
They have, roughly, 20,000,000 ounces they could

sell today, which would give them $9,000,000. That's all
that they have got.

Dr. White: $81 million equity in the other.
HM,Jr: But in order to help them on that, I would

have to buy 65,000,000 ounces.
Dr. White: Which would give them $8,500,000.

HM,Jr: That's a big order.
Mr. Chen: It's going to be a big help to us.
HM,Jr: But it's also a big order, Mr. Chen. Have

you told my men when those pledges -- how long they run?

Mr. Lochhead: We have absolute details. One will

375

-7-

run out September 30th.
HM,Jr: Which one?
Mr. Lochhead: The Hong Kong-Shanghai Bank. On

the others, there is Chase Bank with three installments
and
one reduced.
installment ran out on the 20th. Presumably
has been
HM,Jr: How much is Chase?

Mr. Lochhead: Chase has loaned 500,000 b. (Exhibit IV)

HM,Jr: Against silver?
Mr. Lochhead: Against silver.
HM,Jr: Do these people figure about the same amount

of velvet? Is that evenly divided among the four groups?
Mr. Lochhead: Yes, roughly. In each case, roughly,
it's
about the same. Apparently all working about on the
same basis.

HM,Jr: Well, there isn't going to be much difficulty
about the silver which is not pledged, but on the 65,000,000
ounces which is all pledged, that's an awful lot of silver
even for me, Mr. Chen.

Mr. Chen: I am afraid we are appealing to you for
assistance in this matter.
HM,Jr: I have a gold-lined stomach that sometimes
gets indigestion from too much silver.

Well, let's say for the moment that that's that. Put

that aside for a minute.
Mr. Oliphant: You get the picture of bills payable
by years?

HM,Jr: Yes, I have it.
Dr. White: Is it certain that those do not include
your service on the foreign debts? It does not include

376
-8-

that, Mr. Chen?

Mr. Chen: No. It does not.
Mr. Lochhead: This is what I call the extraordinary budget, which does not appear in their regular
budget.

am

HM,Jr: Let me ask you this, Mr. Chen. I
trying to get the whole picture. I am like the doctor.

I want all the symptoms.
Mr. Chen: Please.

HM,Jr: I would take it that from this picture

right now that 1f your Government wanted to buy any additional war materials, you have not got the money.
Mr. Chen: Have not got the money.

HM,Jr: Is that right?
Mr. Chen: That is right.
HM,Jr: And I also told the President that you had

pledged all your tea on barter.

Mr. Chen: Just for this year.
HM,Jr: But you have pledged it to Russia.
Mr. Chen: I have memorandum on that. (Exhibit V)
HM,Jr: Have you a memorandum on barter with the
Germans?

Mr. Chen: I cabled for full particulars.
This is just working memorandum on giving up tea

to Russian Government.

HM,Jr: Thank you. I don't think I will read that

just now, but I do want to add it.

Then we are right back where we were before, and

that's in connection with tung oil.

377
-9-

Mr. Chen: Tung oil is not mortgaged. Tin is
not mortgaged, but is Provincial monopoly. They are
conducting negotiations between the two Governments.
Antimony and tungsten are not mortgaged.

HM,Jr: On any of those commodities are you prepared to talk today? Have you any more information?
Mr. Chen: We have some information, Sir. We

can finish the figures on yearly production. And the
question 18 the price. We have not found out price yet.
HM.Jr: On tung oil?
Mr. Chen: Tung oil is about 11 cents. Tin and
antimony and tungsten, we have not the price.
HM,Jr: Eleven cents? Where delivered?
Mr. Chen: Delivered f. O. b. New York.

HM,Jr: Are our Treasury people -- have you made

progress, anybody, on tung oil? Are we ready to talk?
Mr. Hanes: We have made some progress. I don't

think we are ready to talk. We had our first conference
this morning.

HM,Jr: I see.
Well, going on the theory that we want to help as
rapidly as possible, the only other thing we could do -I am having lunch with the President today -- would be to
draw his attention to that 19,000,000 ounces and I will
recommend that we give you a buying order on that right
away.

Mr. Chen: Yes.

HM,Jr: What I am trying to do is, if I may ask -I don' like to push too hard -- supposing we bought that

19,000,000 ounces of silver which 18 free, would you tell

me what you would do with that money? What use you would
make of that money?

Mr. Mou: The proceeds would go from Federal Reserve
Bank to Chase, with which we keep all our accounts both

378
-10-

England and New York, and from Chase we draw on instruc-

tions of Government for various war activities.

HM,Jr: Would it go towards payment of these
materials already bought?

Mr. Mou: Most likely, Sir.
HM,Jr: You wouldn't use that for any new materials?

You wouldn't use the $9,000,000 to buy new war materials?

Mr. Mou: Unless they are pressed for certain aviation supplies, such as gasoline, they must buy at the moment.
Then they may use it. Otherwise, I think it would apply to

the old contracts first.

HM,Jr: Let me ask this: do you have -- who decides,

for instance, if you have $9,000,000 new money, who decides
how that will be spent?
Mr. Mou: Minister of Finance, Dr. Kung.

HM,Jr: That's entirely with him?
Mr. Mou: Yes.

HM,Jr: Because what we are doing is -- with the

10,000,000 we bought Friday and this 20,000,000 is roughly

$14,000,000 which you would be getting, which is a lot of
money. And you don't know what Dr. Kung would do with it?

Mr. Chen: I think most likely pay off old contracts.

We hope to use this money to finance payment of war materials.
Mr. Oliphant: How do they do business with these

countries from which they buy munitions? Is that done on
a sort of open running account? If you paid one off now,
would they advance you more munitions without cash?

Mr. Mou: Usually the first payment is by letter

of credit and the subsequent ones by promissory notes and
this would be made on promissory notes which are presented
for payment when they are due.

HM,Jr: Have you a list of their external debts and

to whom they owe and what the payments are and all
Dr. White: We have some which we did not get from

379
-11-

them; a little old.
Mr. Lochhead: But you have a list of the yearly

details.

Dr. White: But they can easily give it to us.
HM,Jr: Would you get to work on that? How much

does the Chinese Government owe as a Government debt in
war materials?

Mr. Lochhead: We have a figure which was meant

to cover the ordinary budget and this is the extraordinary.
HM,Jr: How much interest do they have to pay for
the balance of this year and what are their interest
charges for 1939?

Dr. White: We can get it.
HM,Jr: Balance of this year and 1939 -- in other

words, external.

Dr. White: One of their difficulties is, was, that

they need certain items, to continue to purchase certain
items and there is not the certainty that those items are
available in the United States.
HM,Jr: What do you mean?

Dr. White: Ammunition, etc. So what proportion
of their total new assets they could devote to American
purchases depends, in part at least, on whether or not
they can buy whatever they need.

HM,Jr: Well there is, for instance, in the United

States we have no private factories that manufactures guns.
Mr. Chen: No. Suppose war breaks out in Europe,
we have to depend on this country to get munitions for

continuation of the war. What are possibilities?
HM,Jr: I am talking about big guns. I don't know

know what Winchester and those people makes, but big guns -because the question came up of putting guns on those war-

ships we sold to Brazil and when it came to getting the
guns there was no place they could get the guns. The Navy
had to lend them guns. There 18 no big naval gun factory
in the United States privatelooned, 80 we don't have any

380
-12-

munition makers bringing pressure on us to go to war,
which 18 very nice.

I don't know what the answer is, Mr. Chen, to your
question. I don't know what the answer 1s.

All I could do today would be this: I had a chance

to talk to the President about this last night. I will
talk to him about the 20,000,000 ounces and see how he

feels about it and I won't waste any time and 1f it is all
right, will try to give you an answer by tomorrow. This
other stuff, we will have to have time to think about.
Do you (Mr. Hanes) think of anything you want to
ask?

Mr. Hanes: No.

HM,Jr: I just want to ask Mr. Chen something.
will you (Mr. Chen) come with me in the otner room? Excuse
me a minute.

(Mr. Chen and the Secretary left, but returned in

a minute or two.)

Well, I think, Mr. Chen, what we will do, I will

have a chance to see the President and we will get in touch
with you tomorrow.
Mr. Chen: Thank you.

HM,Jr: Just as soon as I know. Anything you people

want to know?

Dr. White: We asked for some things this morning.
HM,Jr: Where do you want to see Mr. Chen, because
I want to see you gentlemen.
Mr. Lochhead: They can drop into my room.
HM,Jr: Where do you see them?
Mr. Lochhead: In Room 296.

HM,Jr: Why not have Mr. Kiley take them down to

301
-13-

These gentlemen will be here five minutes.
(Mr. Chen and Mr. Mou left the Secretary's office.)
HM.Jr: What I said to him outside was that Ambassador
Wang has been trying to see me and I did not want to see
him because I did not know what he wanted. So he said
all he wants to see me about 18 to say good-bye. So 1f
you (Mrs. Klotz) will make an appointment for 10:30 tomorrow.

296.

I said, What shall I say to him? And he said, Just say
good-bye. I said, That's all I wanted to know.

I don't see, gentlemen -- unless you have something

else, I am going to say to the President, Buy this 19 million
plus and then wait, and I don't think we ought to surround
it with too many strings.
Dr. White: Except there should be a point made
clear -- about collateral.
Mr. Lochhead: The point about collaterla -- Chase
is loaning $2,500,000 against silver in London. The
loan runs out and they don't pay it. They put it on a
poat and bring it over here, so they liquidate the loan
by selling in the market. So we have to be prepared to
take the silver anyway or drop the price.
HM,Jr: That goes for Chase?

Mr. Hanes: 500,000 b.
ounces.

HM,Jr: About $2,500,000. That's roughly 6,000,000
What about the 65,000,000 ounces?

Mr. Lochhead: That's the same way.

HM,Jr: Hongkong? Will they do the same?

Mr. Lochhead: Certainly. It is in London.
HM,Jr: They have been doing that?

Mr. Lochhead: As long as they are not called on

for collateral, it's a good loan, but if they are turned

down they would:have to liquidate and this is the market
they would have to liquidate in.
Dr. White: But they would not liquidate unless

382

-14-

it is turned down and they will not be turned down if
they can pay the interest and they can continue to pay
the interest if they getsome assistance here.
HM,Jr: What I am thinking about, gentlemen, is
this: we have a situation as bad as any I have faced
for another country; could not be any more desperate
than these poor fellows. What I told the President,
there is about $9,000,000 left and that's about all and
that, I guess, they owe. Now, the other stuff, before
I make it too easy, maybe by withholding a little bit
any action, maybe we can help them get an extension or
something or do a little trading. Take the Hong KongShanghai Bank. Some of these boys. I don't know, but
maybe we could help them get an extension.

Mr. Lochhead: The two big ones, they don't need
an extension. The French United does not come due until
1939; the Mendelasohn group, March 1939. It's Hong KongShanghai and Chase.

HM,Jr: Chase would have to take care of ours first.

When do they come due?

Mr. Lochhead: September 20th, October 20th and

November 20th.

HM,Jr: All this year?
Mr. Lochhead. All this year. Hong Kong-Shanghai

18 due now. September 30th.

Dr. White: Another reason why it is the best policy,
because if you were to offer to take this whole 64,000,000
ounces and make it possible for them to pay, it might stand
in the way of doing something that's S more important for
them because it will be doing something by taking the

64,000,000. If, on the other hand, you don't take it,

it still makes something you might do.
Mr. Oliphant: From our standpoint it's burdensome
and not 80 much for them. Might save our energies for
something else.

HM,Jr: What I was thinking about, I want to give
the President this picture, no worse than it 18, but he

has got to sell it to Mr. Hull. I can't. I have tried

383
-15-

And I said to the President last
since last July.
night, it', 8 correct now, I said, Mr. President, here's

all they have got. We will buy this tomorrow. The
rest of the stuff is all pledged and you just have to

make up your mind, do you want to give these fellows
$100,000,000 credit and the minute you give it just charge

it off? But you have got to sell it to Mr. Hull. I
can't sell it. I have tried to since last July.'

Dr. White: I think it is highly desirable to make
the issue just as clear as that.
HM,Jr: Then we take that. Everything else they
have is all tied up.
Mr. Oliphant: Very complicated. Lot of fussing
trying to work it out.
HM,Jr: And look at the amount of silver it costs
us!

Doesn't help anybody. Helps them to the extent

of $8,000,000.
Mr. Hanes: They have free 20,000,000 ounces, which
is

about $9,000,000, and equit in their loans of about

$8,000,000, which is $17,000,000.
HM,Jr: What I want to recommend is, the 19,300,000

we buy that right away. All of that gives this fellow

additional standing at home. Great jealousy about his
coming over and I am doing this to build him up, and also
he says anything we can do soothes their most shattered
nerves at this time, and I want to build him up as the
light haired boy, 80 when he demands certain things he

can get it, plus the fact that when he came here it helped
their foreign exchange, after he got on the clipper. The
inside group knows how desperate they are. And, as I
said to the President, does he want, as a last straw, to
save the Pacific from the domination of the Japanese?

Dr. White: Look what happens if he doesn't. They
are not going to get anything from England.
HM,Jr: Has Hanes seen that? (cable from Kennedy)
Mr. Lochhead: No.

HM,Jr: Has Oliphant:
Mr. Lochhead: No.

384
-16-

HM,Jr: A cable from Kennedy giving the British
viewpoint on the Chinese. (Cable #995, Exhibit VI)
Dr. White: The alternative seems almost as desperate.

Mr. Oliphant: Desperate from our standpoint.
Mr. Hanes: I should think if we made a trade on

tung oil, it might be well to hold back a trade on the
second purchase.

HM,Jr: When you say 'second purchase', what do

you mean?

Mr. Hanes: After you have taken the 19,000,000

ounces and

HM,Jr: I made a purchase Friday and I call the

20,000,000 the second.

Mr. Hanes: I am talking about the third -- hold

back a trade on the third until we have completed the
trade on this wood oil.

HM,Jr: I would like to go slowly on the third any-

I want to see more what's going to happen in Europe.
Mr. Hanes: Did I understand him that he had set
a price of 11 cents?
HM,J- F.o.b. New York.

way.

Mr. Hanes: That's all right. That's a good price.
Mr. Oliphant: The reason I am hopeless about tung

oil -- for instance, whether or not it would get them
real money. Throws us back on the $100,000,000 credit.
All this tung oil, which is a Japanese objective, dumped
on the world market. In addition to that, if they get
tied up on the transportation. The big substitute 18
perilla oil, which the Japanese control.
HM,Jr: Where does that grow?

Mr. Oliphant: Japan. All comes to us from Japan.
HM,Jr: I don't quite get your thinking.

385
-17-

Mr. Oliphant: If the Japanese get the 25,000
tons of tung oil now at Hankow, that will all redound
to the benefit of the Japanese and completely break
the market here for such of the Chinese oil that does
come here.

Dr. White: If they don't destroy it.
HM,Jr: He means if the Chinese don't destroy it.
How many thousand tongs of tung oil would take

care of the needs of the United States in a year.
Dr. White: About $18,000,000 worth. The con-

sumption of tung oil 18 97,000,000 pounds in the United

States.

Mr. Hanes: This is not a drop in the bucket.

25,000 tons is not very much.
Mr. Oliphant: I agree we must go ahead and get
out of these commodities everything we can. And we are

right now up to the $100,000,000 credit. All this other
stuff is chicken feed.
Mr. Hanes: Three years' supply would not be chicken
feed if there $30, 000,000 -- $10,000,000 a year and three
years supply would go a long way on your $100,000,000.

HM,Jr: John, are the paint and varnish people at
all interested?

Mr. Hanes: Yes; I should say yes. This is the

first conference we have had. Two men here now are Delancey
Kountze and Elliott Phillips, of Devol and Reynolds Co.,
and we are going back now to the fellows who bring the
material in, really the importers. They are just the
manufacturers and converters. And we are going to talk
to Archer Daniels and Spencer Kellogg. Importers have
large investments in China.

HM,Jr: Do they use it for soap?
Mr. Hanes: No; as a base for paint.
HM,Jr: As of today, does anybody see why I should
O.K.
No.719,300,000
not recommend to the President that we buy this
ounces that they have free and unpledged?
Sold!

This is a sad story.

386
-18-

Mr. Oliphant: Isn't it!

Even hocked their

last scraps.

000-00o

kugh

Exhibit I
MEMORANDUM ON FORMATION OF AMERICAN CORPORATION

387 Syet to 193
11.am.

Supposing that some loan or credit arrangement is made involving future
delivery of Chinese export commodities and purchasing of military supplies and mat-

erials in America, it is thought advisable to have an American Corporation formed
which will co-operate with the Chinese Government.

The American Corporation will act as the purchasing agency of the Chines e

Government in this Country and will be the exclusive distributor here for the chin ese export commodities involved. It shall maintain a branch at Hongkong, and, if

necessary, several branches in the interior of China to effect close co-operation
with the Chinese Government. It shall see to it that all commodities deliverable
under the agreement shall be delivered in accordance with it. It shall supervise
or effect the purchases in America on behalf of the Chinese Government directly
with the manufacturers and at the most advantageous terms.

As transportation is an important problem in China and especially so
in case of Hankow and the Canton-Hankow Railway being involved in war operations,

the American Corporation should maintain an efficient shipping organization,
and in co-operation with the Chinese Government work out solutions for future

transportation difficulties. In case it is necessary to transport goods entirely
by motor routes, a large fleet of say, 1000 trucks will have to be equipped,
operated and maintained in order to insure continuous flow of goods both outward
and inward.

The Chinese Government will create a Control Board whose function will

be to acquire the required commodities from all producing districts in sufficient
quantities and transport them to concentration points to be shipped via the main

routes for the port of export. Place of delivery may be arranged between the
Corporation and the Board from time to time according to changing circumstances.

For the purpose of supervising the proper fulfillment of the loan contract terms 8.0 appointee by the U.S. Government or by the Corporation may sit on
the Chinese Board of Control.
view

This brief memorandum serves to convey our suggestion of an idea with a

to insure close co-operation and satisfactory working on both sides. If acceptable, details have to be worked out jointly.

388

Exhibit II
WASHINGTON, D.C.

24th September, 1938
MEMORANDUM ON SILVER

The Chinese Government is deeply grateful for the action of the
U.S. Treasury in purchasing Chinese silver and also greatly appreciate
the kind help in having an advance bid made yesterday under the current
Purchase Agreement which is thus completed.

After shipment of 10,000,000 ounces in pursuance of this advanced

bid, there will be 84,560,000 ounces of silver available for sale, of which
19,360,000 are unpledged and 65,000,000 ounces pledged as follows:-

A. Unpledged:
In London
In Hongkong

10,360,000 Oz.
9,000,000 Oz.

19,360,000 Oz.

30,000,000 Oz.
11,100,000 Oz.
16,700,000 Oz.
7,400,000 Oz.

65,200,000 Oz.

B. Pledged:
H'kong & S'hai Bank
French United Group
Mendelssohn

Chase (ex-Swiss)
Total

84,560,000 Oz.

The sale of the aforementioned pledged silver held in London under

lien to various lenders would necessitate the making of arrangements first

satisfactory to the Treasury and then to the lenders. The cooperation of
the Treasury in effecting such arrangements would be greatly appreciated by
the Chinese Government.

UNITED STATES
US$

Year

1,300,000

1938

US$ 1,300,000

1939 onward no payment
ENGLAND

1,820,000

1938

1939 1st half US$ 40,000
2nd half

60,000

100,000

1,920,000

1940 onward no payment
GERMANY

2,040,000

1938

1939 1st half US$330,000

2nd half 250,000

1940 1st half US$ 50,000
2nd half

580,000
50,000

2,670,000

ITALY

430,000

1938

1939 1st half US$170,000

2nd half 120,000

1940 1st half US$ 80,000

2nd half 80,000

1941 1st half US$ 70,000

2nd half 40,000

1942 1st half US$ 70,000

2nd half 110,000

290,000
160,000
110,000
180,000

1,170,000

SWITZERLAND

410,000

1938

1939 1st half US$ 5,000
--2nd half

5,000

415,000

10,000

10,000

AUSTRIA

1938

FINLAND
1938

1939 1st half US$260,000

80,000
260,000

340,000

FRANCE

Year

US$

1938

1,660,000

1939

1940

1941

1942

1943

1st half

US$200,000
190,000

390,000

1st half

US$180,000
180,000

360,000

1st half

US$180,000
180,000

360,000

1st half

US$180,000
180,000

360,000

1st half

US$180,000
90,000

270,000

2nd half
2nd half

2nd half
2nd half
2nd hal f

US$

3,400,000

BELGIUM

1938
1939

2,090,000

US$

1st half US$770,000
2nd half
180,000

950,000

1st half

US$ 80,000
80,000

160,000

1st half

US$ 30,000
30,000

60,000

1942

1st half

US$ 30,000
30,000

60,000

1943

1st half

US$ 30,000
10,000

40,000

1940

1941

2nd half

2nd half
2nd half

2nd half

3,360,000

CZECHOSLOVAKIA

1,390,000

1938

1939 1st half US$1,400,000
2nd half

1940

1941

1942

270,000 1,670,000

1st half

US$270,000
270,000

540,000

1st half

US$270,000
270,000

540,000

1st half

US$270,000
270,000

540,000

2nd half

2nd half

2nd half

1943 1st half US$230,000
2nd half

230,000

4,910,000

391
DENMARK

Year

US$

940,000

1938

1939 1st half US$780,000
2nd half

570,000

GRAND TOTAL

1,350,000

2,290,000
US$21,785,000

Total amount to be paid including all countries
about US$21, 800,000.

For your further reference Minister approved
budget for year 1939 armament replenishment for purchase

of airplanes, T.N.T. and gunpowder etc. amounting to
US$15,340,000; year 1938 being US$31,170,000.

392

WASHINGTON, D.C.

24th September, 1938

Memorandum

Payments to be made in respect of Purchases of Arms,
Ammunitions and Airplanes.
(Equivalents in US$ based on The Central

Bank of China's official rate of 29-1/2)

1938

US$13,640,000

1939

3,600,000

1940

1,310,000

1941 )

2,880,000

1942

1943 5

US$21,430,000

Besides the above, orders

placed for other materials
for military use and
airplane parts amount to
Total

US$29,000,000

US$50,430,000

It is estimated that the stock of arms and ammunitions,

including those arriving within this year, will be sufficient
for six months according to the past twelve months' experience.

20 Sapi 193.0
Amount of silver left over after completion of Current Purchase
talment of 50,000,000 ounces expiring 30th September, 1938, will be
follows:
In London:
Unrefined
Refined

Ounces

Ounces

22,500,000
53,060,000

75,560,000

9,000,000

9,000,000

In Hongkong:

Unrefined
Total

84,560,000

of which 65,200,000 ounces were pledged as per attached statement

and, if valued at 42 cents per ounce, is equivalent to US$27, 710,000.
The debt secured thereby is as follows:Amount

Brench United Group .Fcs. 100,000,000
Fls.
8,757,460
Mendelssohn
H. & S. B. C.
2,000,000
b

Chase Bank

b

500,000

Total

There is thus a margin of US$7,000,000.

Equivalent at rates
of Sept.7th, 1938
U.S.$ 2,709,000
4,738,000
9,663,000
2,416,000

U.S.$19,526,000

Various Credits and Advances against Deposit of Silver

vilvate & Confidential

Hongkong,

September 4th 1938.

-

-

12,000,000

Std Oz.925 fine

Refined

US$ 4,777.778

of Credit

-

Prench United Group

@ 19 d.

Total
amount

Refined

& 950.000-

Equiv. in
e. Stg.

Amount

Withdrawn

-

Sing Banking Corp.

C 43 ota.

Form of Silver
Refined or not

-

-

deposited

Equivalent in US$ or £.Stg.

F.Fcs.

F.Fos.

100,000.000

100,000.000

G 178.31 (1)
£560.821.-

Due date

Date
of

of

Repayment

Nov.26,1939

35

Dis.

a

= US$2,800,000

Indalaschn & Co.

18,000,000

Std 0z.925 fine

US$7,166.667

Refined

£1,425.000-

Guilders
10,000.000

Guilders
8,757,459.60

1

US$12,900,000

£2,565.000-

5 m.oz.refined

£2,000,000:

Net

7,973,028.64
Std 10s.925 fine

US$ 3,174,447

£ 631.198-

25m.Oz.un-

Refined

coods of drawings under credit
2466,273. and an additional F.Fes. 10,000.000
which is at predent deposited with Banque Franco-Chinoise, Paris.
£949,977.-

£2,000,000:-

£2,000,000

refined

Chase National Bank

Mch.18,1939

E 500,000

quarterly 1/2%.
Sep.30,1938

3%

5=

E 500,000
US$2,500,000

agreement

Plus Commission

US$10,000,000

E 500,000:-

5/8
An additional
oredit of P.Fos.
under subsequent

38%

US$4,898,000

T

30,000,000 Oz.
999 fine

Plus quarterly

commission of

be availed of

a

& S'hai Bk

Retired

100,000.000 may

e 8.93.7/8 (2)
£979,719.

Remarks

Int.

-

Silver

-

Amount of
Kamo

1/3 Sep.20
1/3 Oct.20
1/3 Nov.19

3%

394A

Exhibit V
MEMORANDUM ON TEA AGAINST BARTER

AGREEMENT WITH U.S.S.R.

In order to fulfill a barter agreement with U.S.S.R. which
calls for delivery of all kinds of tea produced in the various
provinces, the Chinese Government has authorized the Foreign Trade
Commission to control the purchase, transportation and export of

teas from China. All teas suitable for exportation must be sold to
the Commission and exported in its name. The Fu Hua Trading Company,

a subsidiary company created by the Foreign Trade Commission, offers

the teas to the market and the Exporthleb selects the teas for U.S.S.R.

to fulfill the contracted grades and quantities. Other tea exporters
buy the balance in the usual manner. The operation is now being carried
on at Hongkong very smoothly.

The kinds, quantities and approximate value of teas to be delivered
to U.S.S.R. during the tea season of 1938/1939 are as follows:
KINDS OF TEA

QUANTITY IN PICULS

of 133-1/3 lbs.

1. Keemun tea

16,000

2. Ninchow tea

3,900

3. Foochow tea

24,000

4. Hankow tea

30,000

5. Original tea dust

42,500

6. Chun-Mee tea

58,000

7. Hyson tea
8. Pingsuey & Imperials
teas

9. Green brick tea

VALUE IN
CHINESE CURRENCY

$ 1,606,000
169,000

1,475,000
1,401,400
1,022,500
3,817,500
612,500

9,000

1,284,000

30,000

205,000 baskets

Chinese Dollars

2,995,000
14,382,900

394.8
-2-

In each kind of these teas specific quantity of each grade
and price differentials are also provided. In case the tea crop
is plentiful larger quantities may be delivered by mutual agreement.
In addition to the above the Foreign Trade Commission has under~

taken to purchase for the account of the Exporthleb the following teas:
KINDS OF TEA

QUANTITIES

VALUE IN CHINESE
CURRENCY

1. Green Leaf tea (Loachar)
2. Green Leaf tea (Sarmien &
Sardi)

1,000 Metric tons
200 Metric tons

$ 270,000
80,000

3. Green Brick tea (Tsutsan) 48,165 baskets

669,460

4. Black Brick tea

403,200

(Approx. 2400 Metric tons)

9,600 baskets

(about 768 Metric tons)

Chinese Dollarl, , 422, 660

Delivery of the above items have been practically completed and
all payments are applied against the barter agreement.
As to the terms and conditions under which the contracted teas

are to be delivered a copy of covering letter written by the Foreign
Trade Commission to the Exporthleb under date of June 15, 1938 is
attached hereto for reference.

385

COPY
File No. FB 258

June 15, 1938

U.S.S.R. All Union Association
"Exporthleb"

Hankow

Dear Sirs:

We hereby agree to sell to you various kinds of China Tea
of the 1938 crop in the quantities, assortments and at the prices
specified in the list enclosed in your letter No. 2/C under the date
of
Junel, 1938. The terms and conditions stated hereunder supercede
previous correspondence exchanged between us.

QUANTITY: Tt is agreed that you order for the highest quality
Keemun is reduced from 800 to 500 piculs, while the medium quality is
increased from 2,400 to 2,700 piculs. It is understood that you shall
have the right to increase the quantities over the figures, shown in your
list, for these teas, which you have ordered in quantities less than those
offered by us with our letter of May 28th, 1938. It is further understood that your increases shall be proportional for the various grades.
QUALITY: In no case shall the higher grades of teas be substituted with those of lower grades; for example, Highest with Good

Medium, Good Medium
with Medium,
Likewise,
ordered
in higheretc.
grades
no in these of

behave
allowed.
case
of short
of teas, lower which grades
shall beenIn
any
only, delivery
substitution groups of

higher grades of teas, you shall be allowed to decrease the quantity

of lower grades proportionally. You shall have the right to reject
any artificially colored teas having defects.
PRICES: All prices appearing the above mentioned list of
purchased teas are understood to be strictly F.O.B. Hongkong, with the
exception of that part of original Tea Dust, which you may find it
necessary to leave in China for pressing into Black Brick Tea for you.
In the latter case, we shall absorb the transportation charges for the
Tea Dust from the place of production to the place of pressing.
SELECTION & INSPECTION: Upon appearance of the market of

samples of first and subsequent lots of teas, produced in the new season,
we submit the same to you in places suitable to you, for selection of
quality by your Tea Testers. The selected chops shall be considered as
approved by you and supplied towards the execution of your order.
Upon delivery of the selected chops to the godowns for shipment, your testers shall be allowed to make a second inspection to establish the identity of the delivered lot with the sample selected.
Your testers shall be given access to the purchased goods at any place
where they may be stored, and at any reasonable hour from the time of
approval to the time of loading on the out-going steamer at Hongkong.

396
-2-

All Teas are to be packed according to the usual standards
for each particular kind;

Packing:

(a) Leaf Teas and Dust: In wooden half chests, lined with lead

and covered by gunny cloth with three iron straps.
(b) Brick Teas In bamboo baskets with hoops.
It is understood that the cost of packing is included in the
F.O.B. Hongkong prices as specified in the list.
DELIVERY : All teas ordered by you shall be delivered in Hongkong

on following dates:

(a) Black Brick Tea & Original Tea Dust: In separate lots during

the five months from June to October, 1938.

(b) Green Leaf Tea: In separate lots from July to November 1938.

(c) Green Brick Tea: In separate lots during the period from

September 1938 to March 1939.

It is distinctly understood that prompt and actual deliveries shall
be entirely contingent upon transport facilities. We shall not be responsible for delays or non-delivery occasioned by circumstances beyond our
control.

Acceptance: Upon the second inspection, your representative shall
issue certificate of acceptance, whereby we shall be relieved of all
responsibilities in respect of the quality. It is understood that you
shall have the privilege to store the cargo in our godowns free of charge
for a period of not longer than one month from the date of acceptance.
Should you find it necessary to store for longer periods, the customary
storage charges have to be borne by you as follows: for any length less
than half, half of the monthly rate; over half month, the regular monthly

rate.

In addition to the above terms and conditions, we shall exert our
utmost to do the following:
(1) We shall keep you informed as to the appearance on the market
of Keemun and Hankow Black Leaf Teas or any other kind of teas in excess
of the quantities ordered by you, particularly the Green Leaf Tea "Hyson"
of which you are prepared to place an additional order.

(2) We shall keep you informed as to the actual date of shipment to
and arrival at Hongkong of every lot of tea.
(3) We shall, as far as circumstances permit, execute your order
first with the first chops appearing on the market.
We thank you for your good order and shall appreciate your confirmation
by signing the duplicate copy and returning the same to us.

Yours faithfully,
Foreign Trade Commission

397
Monday

September 26, 1938
11:52 a.m.
H.M.Jr:

Hello.

Operator:

Mr. Messersmith. Go ahead.

H.M.Jr:

Hello. Hello.

George

Messersmith:

Good morning, Mr. Secretary.

H.M.Jr:

How are you?

M:

This is George Messersmith.

H.M.Jr:

All right.

M:

I'm sorry I haven't had a chance to see you
since you came back. Ah - Mr. Secretary, we
were talking this morning - we had a number of
calls from abroad you know - the last few days -

H.M.Jr:

Yes.

M:

And we have difficulty in recording them. And -

ah - it was mentioned to the Secretary about
your arrangement over there and we're thinking
of having the same thing installed here, but
the Secretary wanted to know whether you found

H.M.Jr:

it entirely satisfactory.
Ah yes.

M:

Yes?

H.M.Jr:

Yes.

M:

All right.

H.M.Jr:

Ah - do you know - do you know what the system

M:

H.M.Jr:

is we have?

No, I really don't. I was awfully glad to hear
about it and I thought I'd - if you would permit
me I'll get in touch with one of your people to
find out where you got it, et cetera.

Well, I think - ah - I don't know - we - I

don't know which of our engineers supervised it
but supposing I find out and have him get in

touch with you directly -

398

-2M:

H.M.Jr:
M:

H.M.Jr:
M:

Will you do that?

Because
- ah - frankly, I don't advertise that
I have this.
No. Quite.
And I'd like it kept as confidential as possible.
Yes. Well, we - ah - we're finding difficulty
in recording the conversations you know.

H.M.Jr:
M:

H.M.Jr:

Uh huh.

And we thought we wanted to use your system if
it was

Well, I - I'll tell you what I'll do - I'll have
Lieutenant McKay - Lieutenant McKay -

M:

Yes.

H.M.Jr:

United States Coast Guard -

M:

Yes.

H.M.Jr:

Ah - who is a very confidential - I mean he's
my Aide -

M:

Yes.

H.M.Jr:

And I'll have him get in touch with you right
away.

M:

H.M.Jr:
M:

H.M.Jr:

Thank you very much.

Now just another -will
I have kept it very secret Well, I mean, no one/know about it here - I mean
we - I mean we're going to do the same thing.

Right. Well, I'll have Lieutenant McKay get in
touch with you - do you want to set a time now
and I'll tell him to be over there?

H.M.Jr:

Oh, any time. I'm - I can't leave here, you see.
Well, I'll have him come over - McKay.

M:

Thanks a lot.

H.M.Jr:

Righto.

M:

Goodbye.

M:

MISC 1.1

399

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

DATE

SUBJECT:

September 28, 1988.

TELEPHONE CONVERSATION WITH
BANK OF ENGLAND

Mr. Bolton called at 9:45. They had had a fairly hectic
day today, with the same atmosphere as that which prevailed in the
beginning of August 1914. There had been a great deal of nervous

ness in all centers including London. The British people seemed

to favor definite intervention in Czechoslovakia if Hitler insisted
on his terms. Much the same could be said about France. The

British and French military people had been in touch with each other.

*That's the sort of situation we are living in."
The demand for dollars had been at almost any price. He
had sold $27,000,000 up to noon when a sudden and extraordinary

change took place and dollars weakened two cents to 4.78, presunably

on rumors that Hitler was not going to make his speech tonight.
Shortly after the market had turned again and they were once more

selling dollars at such a pace that he was afraid he would have to
use our gold order which he had looked upon as a last resort.
He wanted to know whether the Britannie, the Normandie

and the Franconia shipments had come in yet. I replied that as
far as I understood the Normandie would arrive too late for his

gold to go through today. In that case, Bolton said, he would be
short about $3,000,000 for which he would make prompt arrangements.

He then referred to our telephone conversation of Saturday

and stated that the $25,000,000 of gold was packed and ready. I

400
FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE

DATE September 26, 1988.

CONFIDENTIAL FILES

SUBJECT

L. W. Knoke

TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

2

replied that the Treasury had decided to make the shipment, that

instructions were being given to the commanding officer of the
Honolulu the same as in the case of the Nashville, that I understood
the boat was in Portsmouth now and ready to take the shipment, and

that loading by Thursday would be perfectly all right. Bolton
replied that they would go ahead with arrangements which would take

a little time as they were doing their best to keep this shipment

quiet just as they had done for the Nashville shipment. I told
him that we would send him tonight the same kind of cables that
we had sent for the previous shipment which Bolton said would be

satisfactory to them.
I asked him to arrange space for us for $10,000,000
worth of gold on the Roosevelt sailing on September 30, at the
unchanged rate of 1/4 per cent and to cable us as soon as he had
succeeded. We were considering here the question of insurance.
Bolton requested that in the future whenever a boat
carrying gold for them was delayed we cable them to that effect

if at all possible. I promised that we would do our best.
LWK:KW

or 401
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

All

September 26, 1938, noon

NO.: 1585
RUSH

FROM COCHRAN.

At 11 o'clock this morning I had a talk with my
friend in the Bank of France. At a rate of 178.50 the
French control had by that hour gained 35,000 pounds.

This turn in the Paris market delighted my friend; he
referred appreciatively to the peace appeal made by
President Roosevelt which had been coming in over

the news ticker. This morning by 11 o'clock my friend
said that London had sold $10,000,000; on Saturday
London had given 36,000,000.

I had a telephone call from Rueff at 12 o'clock
this morning. He said that (omission) was better this
morning, and that as yet there had been no move to

put into effect the plan which was transmitted in my
telegram No. 1582 of yesterday.
BULLITT.

EA:LWW

402

60M-6-38

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
TO

CONFIDENTIAL FILES

FROM

L. W. Knoke

DATE September 26, 1938.
SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF FRANCE.

Cariguel called at 12:30. I quoted him the market here
for sterling and francs and added that we had done nothing against
his orders.

They had had a fairly good day, Cariguel said, having
bought £832,000. Very confidentially, he added that they had had
an appalling day with regard to discounts having been called upon

to rediscount francs 5 billion. Their note circulation was also
going up by leaps and bounds and they found it difficult to cope

with the situation.
If there was a pronounced change in the tone of the

franc here would I let him know.

LWK1KW

7038

VAUSENT

/

y

H

403

MJD

GRAY

London

Dated Sept ember 26, 1938.

Rec'd. 3:35 p. m.

Secretary of State,
Washington.

1032, September 26, 5 p. m.
FOR TREASURY FROM BUTTERYORTH.

The British Treasury confirmed the receipt of the French
note referred to in my 1020, September 25, 11 p. m. Phillips

said that in the circumstances they proposed "to let it ride",
HE went on to say that he understood that the French
Treasury was drawing heavily on the Bank of France which was
inevitable in view of the added EXPENSE arising out of the
military measures. HE also commented on the heavy character
of the withdrawals from French banks which however WERE

merely an inconvenience as long as the public did not rush

to turn the resulting cash into goods.
As regards war preparations WE went OVER again somewhat

the same ground covered in my 922, September 14, 5 p. M.

Phillips said if war should COME they would obtain from Par-

liament powers in Effect to do "whatEver WE like". But they
propose to USE these powers at any rate at first with restraint. They would not declare a general moratorium as was
done

404

MJD -2- No. 1032. September 25, 5 p. m. from London

done in 1914 and they would not close the banks for three

days as was then done but for a few hours if at all in
this connection it was mentioned that due to the branch banking
system individuals could without much delay arrange to have
their checks cashed at one or more branches. They would start

by appenling to British banking institutions and British
residents not to apply for foreign Exchange EXCEPT for bona

fide purposes; later they might have to undertake more rigorous
measures. They would rather quickly ask British subjects to

declare their foreign assets. As regards the rate of Exchange
Phillips said that the situation would have to be dealt with
at the moment and that sterling would doubtless depreciate in

terms of gold if for no other reason than that it would be
difficult to get gold out fast Enough. Incidentally he implied that C. differentiation would be made between non-resident
aliens and those normally resident in the United Kingdom along

the lines of the 1931 legislation and he also implied that
such non-resident cliens would be permitted to take their gold
out of the country "whan and C.S they are oble to do 00". In
point of practice this SEEMS to ME unlikely.
Bolton telephoned ME to say that he understood a further
shipment of gold on the HONOLULU would be mode and that the
gold

405

MJD -3- No. 1032, SEPTEMBER 26, 5 p. m. from London.

gold is being made rendy today in the Bank of England.
In the afternoon the doller suddenly moved on a rumor that

Hitler was to postpone his speech from 4.75-3/4 to 4.77-3/4

few takers of dollars available. But in the absence of any
confirmation the rate quickly moved back and closed at

4.75 The pressure has been fairly heavy.
KENNEDY
HPD

03413039

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

406
DATE September 26, 1938.

SUBJECT TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

I called Bolton at 4:50 p.m. We had done nothing in

sterling I told him; prior to Hitler's speech the rate had been
up to 4.76 1/2 then dropped to 4.75 8/8, where it was now on
the offered side.
I thanked him for booking space on the President

Roosevelt and requested that if it all possible for them to
handle this matter he book space for $5,000,000 each on the
American Shipper and the American Merchant both scheduled to

sail on September 30 from Liverpool and from London respectively.

Bolton replied that they always wanted to do everything they

possibly could and that he would get busy the first thing in
the morning.

LWK:KW

406 A

COPY
FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

DATESeptember 26, 1938.
SUBJECT TELEPHONE CONVERSATION WITH
DE NEDERLANDSCHE BANK

Mr. de Jongh called at 9:20 this morning. Having
released during the last two weeks or so a little over $20,000,000
of their gold in New York, they were wondering what we would think
if they asked us now to earmark some gold in Amsterdam. He also

mentioned that all of the gold which they had earmarked for us on
September 8 had now reached New York. I asked him what amount he

had in mind and he replied about $10,000,000 and added that his

dollar sales today approximated $5,000,000; they would not, of
course, earmark the full amount of $10,000,000 at once but do that

gradually, according to their needs, as they sold dollars. I told
him that naturally, particularly under prevailing conditions, I
would have to discuss this matter with Washington and that I would
telephone or cable our reply before the day was over.
I inquired how things looked in Europe at present and
de Jongh thought not SO very bright but it may all come out all
right yet.
de Jongh wanted to know whether we could cover more

insurance for him on the Noordam and said what we had done so far

was altogether satisfactory. I replied that we were hopeful we
could increase the amount and would let him know before the day

was over. I asked him whether we had made it sufficiently clear
in our cable that war risk insurance, as now written, covered only
from the moment the gold was aboard steamer but not on land, de Jongh

replied that he appreciated that.
LWK:KW

407
Monday

September 26, 1938
4:55 p.m.
H.M.Jr:

Hello.

Operator:

Governor Ransom.

H.M.Jr:

Hello.

Ronald
Ransom:

Hello. How are you this afternoon?

H.M.Jr:

Well, I've been through two keyholes.
That's too bad.

R:

H.M.Jr:

But I just called up to say I appreciate the

way you took care of the government bond market

today. I think it was fine.

R:

Well I think the New York bank handled that all

right, don't you?

H.M.Jr:
R:

H.M.Jr:

Fine.

It suited me and I'm glad it suits you.
Well, I haven't talked to anybody else, but Archie
is in here and told me that / went along fine.
everything

R:

Yes. Well it seemed to me to be all right. I

watched it all day and I didn't think we had to
buy much - there doesn't seem to be much pressure.
I thought you'd be interested in knowing that John

McKee was over in Wheeling, West Virginia today
on - attending some meeting of bankers of some
kind there, and he called in and - ah - to see
what the state of the Nation and the world was
and told me that there had been some - ah - feeling
apparently on the part of some of the bankers that
European conditions might make the bond market weak

and he said he thought he'd just speak out for once he said, "Well, I don't know why it would be weak,

we'd just buy all you've got to sell." And he said

they seemed perfectly satisfied and he heard no more

about it. said, (Laughs) "Well, that's quick
propaganda."

H.M.Jr:

Yes.

408

-2-

Well
I think
Secretary
- that's got to be the attitude, Mr.

R:

I.M.Jr:

Oh yes.

- for the time being.

R:

H.M.Jr:

Oh, we've got to have backbone now.

R:

Right now. We'll never need it more.

H.M.Jr:

That's right.

R:

Ah - on the other matter that Cy spoke to me about on the western front this morning - I just got word
that Marriner will not get to Ogden until quite late
this evening our time, so that indicates he stayed
out there probably a day longer than he intended
and I have a call for him in the morning.

H.M.Jr:

And you got my message?

R:

Yes. Ah - Cy told you what I said, didn't he?

I know. But I - I - I'm still - a little restless.

H.M.Jr:

All right. I think you and I'll work that one out.
Well, ah - ah - after you've talked to Marriner

R:

H.M.Jr:

I'd like to talk -

.

R:

Surely.

H.M.Jr:

- to you about it.
Surely. I'd be glad to.

R:

H.M.Jr:

Because I - I - I, frankly, -

R:

He is or isn't.

H.M.Jr:

He either does or doesn't.

R:

H.M.Jr:

does - ah - owe -

either the fellow

That's right.
And I don't see why it takes so long - either he

and his - he's on - he owes fourteen million
or he doesn't.

409

-3R:

That's right. Well, you wait -

H.M.Jr:

And -

R:

You wait until I get some information about it
from that side as well as this side -

H.M.Jr:

Yes.

R:

And then I'll surely talk to you.

H.M.Jr:

Well, as soon as you talk to Marriner - and and there are lots of collateral reasons -

R:

Yes.

H.M.Jr:

- why that ought to be done.

R:

I'll come over and talk to you, if I may.

H.M.Jr:

Please.

R:

Thanks.

H.M.Jr:

Goodnight.

410

PARAPHRASE OF TELEGRAM RECEIVED

At

FROM: American Embassy, Paris, France
DATE:

September 26, 1938, 7 p.m.

NO.: 1598
RUSH

FROM COCHRAN.

At 6:40 p.m. I had a talk with the Bank of
France. The stabilization fund gained 830,000 pounds

on balance for the day. It also gained a few dollars.
Sterling closed at around 178.45 to 178.50. For the
day London lost 7,000,000 pounds of foreign exchange.

Very weak Paris bourse, with losses up to 10 percent.
However, the bourse closed above the worst. The

banks report that there were considerable withdrawals,

but everything was entirely orderly.
BULLITT.

EA:LWW

COPY
411
NEWS LETTER ON BRAZIL

FROM Charles A. Thomson

Foreign Policy Association
Confidential

Not for publication.

Buenos Aires,
September 26, 1938

On the night before I ended If month's stay in Brasil, I
met with a group of some twenty university professors, industrialists,
writers and economists. One of the questions we discussed referred

to Brazil's foreign policy, in the case of a European war. "Brazil

will never fight on the side of Germany," declared one member of the
group, and his statement found unanimous support The talk brought
out -- what is always so striking to anyone who has known the hostility to Yankee imperialism in many Spanish-American countries -- Brazil's

strong tradition of close friendship with the United States. These

Brazilians hoped that the American states could keep out of a European
war, but, come what may, they held that the nations of the New World
should adopt and follow a common policy.

While realists tend to view President Vargas as a political
opportunist par excellence, no Brazilians I talked with seriously believed that Vargas would -- no matter what flirtations he may have considered in the past - attempt to carry Brazil away from its century-

old alignment with the United States. In the field of trade Brazil
has been willing to talk business with all customers. In the new rearmament program (to which I want to refer later), Germany won the

right to provide the bulk of supplies for the army. But geography,
historical tradition and economics are to be counted in the balance
on the side of the United States.
Moreover, internal factors influence Brazil's attitude toward Germany. Brazilians have followed the negotiations on the Sudeten question with close attention. The arguments advanced for a
plebiscite and for the minority rights of German residents in Czechoslovakia could theoretically be urged also in favor of the German

colonies in Brazil. One journalist in a recent article opposed the
principle of plebiscites, suggesting that if one were held in Brazil,

the Germans and their sympathizers might win a majority in the three
southern states of Parana, Santa Catharina and Rio Grande do Sul.
While this is an exaggerated statement, informed observers do not

minimize the threat of German penetration. They believe that the
Nasis have been disposed to go just as far as they were permitted by
counter forces.

Representatives of one Brazilian party told me that within

the last six months they had been approached by certain Germans high
in the business world, who asked what their attitude would be should
the State of Rio Grande do Sul separate from Brasil to become a German colony or protectorate. The Germans offered this party, in return for a pledge not to oppose such a move, war materials, troops
and other assistance to enable them to overwurn the Vargas government

412

-2and take power in Rio. It was intimated that Italy would support the
German move. But the baited hook failed to bring a nibble.
There is great need for a thorough study -- it would take
six months or a year -- on the number and activities of Germans,
Italians and Japanese in Brasil. Accurate facts are disappointingly
scarce. The last national census was taken in 1920, and the next
one is not due until 1940. Immigration statistics are an unsafe
guide, for no one knows to what degree their totals have been modified by emigration, deaths and other factors. The most recent government estimates place the number of Italians in the country at 770,000;
of Japanese at 134,000; and of Germans at 73,000. This latter figure
seems incredibly low, since Sao Paulo State alone estimates its German population at 27,000; and the colonies resident in the other southern states of Parana, Santa Catharina and Rio Grande do Sul are larger
in all probability. But the Germans in Brazil have been significant
not alone for their number, but also for their close-knit organization, and their aggressive seal within recent years for spreading Nazi
doctrines and influence. This crusade finally became an open threat
to Brazilian unity; and the Vargas regime took steps to scotch the
danger. On April 19 last a decree barred foreigners and foreign organ-

isations from engaging in any political activity in Brazil, and also

forbade propaganda favoring political parties in the immigrants' home
lands. This measure was supplemented by laws in the States of Santa
Catharina and Rio Grande do Sul, requiring that teachers in German
and other foreign schools be Brazilians and classes be conducted in
Portuguese. Such was German resentment at these measures that the

Nasi "cultural attache" in the Rio embassy, who was reported to have

made even the German Ambassador play second fiddle -- the attache was

a Nasi, while the Ambassador was not -- left for Berlin by special

plane. It is not yet clear to what degree this political set-back will

affect the German trade drive. For the first four months of 1938,

Germany retained the lead over the United States in Brazilian imports
it had won in 1936 and 1937.
At the same time President Vargas has eliminated from the

political scene Brazil's domestic fascists, the Integralists. When

on November 10, 1937 he made himself absolute dictator of Brazil,
scrapped the 1934 constitution and proclaimed a more authoritarian
document, he had the active support of this strong, nation-wide par-

ty. The Integralists were led to expect they would play a prominent
role in the new set-up, with one or more cabinet positions. (Leaders
of other Brazilian parties, experienced in the ways of local politics,
firmly believe the Integralists were receiving financial aid from Ger-

many and Italy; they were spending far more money than could reasonably be secured from sources in Brasil). But once Vargas had consolidated his position, the Integralists were thrown into the discard and

-3-

413 *

their party dissolved. After the abortive coup of last May, many of

their members were jailed. The party is now underground; some observ-

ers believe it effectively crushed and its principal leaders discredited: others recall that it included numerous army and navy officers

among its supporters and hold that it still retains sufficient force
for a come-back should a favorable opportunity arise.

Thus President Vargas has taken action against both foreign

and domestic fascists, and has made clear that his rule is dictator-

ship. Brasilian style. If you don't mind, I should like to put in

here a few words as to how Brazil, with its Portuguese tradition, language and culture differs from Spanish-American countries. For Var-

gas is only to be understood in connection with his milieu. One of
the lessons which a visit to Brazil teaches is that Brazilian conditions must necessarily be defined in Brazilian terms.
The Brazilian largely lacks the Spanish sense of personal

dignity; he cares little for "front" or ceremony He is informal,

casual. At time he is unbelievably casual. Witness the Integralist attack on the Presidential Palace on May 11. The rebels did not
trouble to post guards at the gates of the palace grounds; people
drove in and out to see the fighting which was going on only twentyfive yards away. The Brazilian is tolerant, not fanatical. He
makes no fetish of abstract principle. He lacks the cruelty of the
Spaniard. He does not like to kill. The leader of the May revolt
was not shot, but given only a ten-year sentence. The Brazilian has
a genius for compromise; he does not recognize sharp lines of division; he does not make permanent enemies. Brazil does not have a

color line, but rather a color zone -- though the transition from

white to black ranges by almost imperceptible stages. The same char-

acteristic may be applied to social and political alignments. Brazil
lacks a clear-cut Left and a clear-cut Right. The men who today are
Vargas' enemies may be in his cabinet tomorrow. It is largely true
that because President Vargas corresponds to this medium -- and also

to a certain transitional stage in Brazil's political development -

he has been successful in holding power.

His government is of course a dictatorship. Talk of the
plebiscite which was to ratify the November 1937 constitution is
seldom heard. President Vargas and his associates are reported to
feel they need not trouble with it. They apparently find it more
convenient to govern directly by decree, than bother with a legislature. Interventors or federal commissioners, named by Vargas to re-

place former governors, rule all states except one. Civil liberties
are at the whim of the authorities. Censorship mussles the press:

414
-

there is no freedom of speech. One American remarked: "I never at
tempt to discuss politics, except in small groups at private houses;

I don't write about it in letters, for you never know when they will
be opened." Arrests are arbitrary. Just before I left Sao Paulo,

some twenty of the most important leaders in the Salles de Oliveira
party were seised at the order of the Interventor, and told they
could choose between imprisonment and exile from the city of Sao Paulo.
I talked to men who had been imprisoned on suspicion for long periods.
They left no doubt in my mind as to the fact of extensive police bru-

tality. It was not "respectable" politicians who suffered, but al-

leged communists and to a lesser degree Integralists arrested after
the attempted coup of last May.
The Vargas regime rests primarily on the support of the ar-

my and navy. It is a.military dictatorship; but it is more than that,
for it commands considerable popular support, due to Vargas' virtuo-

sity at political juggling and cenciliation, and to his courting of

the masses through social legislation and other means. The president's supreme political astuteness is accorded universal recognition.
Vargas does not talk; no one apparently knows what is in his mind, or
what he will do next. He does not hold grudges; if he needs a man,
he will use him, no matter if that man has fought against him in the
past; but the discard awaits any man or party whose usefulness is
ended. The president balances the power of one political leader with
another, one state with a second, one general with his rival. A
foreign observer remarked: "Vargas has been double-crossing the
generals so fast, that he has them all dizzy; no one of them knows
how long he can stay on his horse." The president is careful to see
that no member of his administration achieves too great power or
position. Francisco Campos, Minister of the Interior and author of
the 1937 constitution, has seen his personal star wax and wane. His
reported admiration for fascist ideals is balanced by the democratic
sentiments of Dr. Oswaldo Aranha, Foreign Minister, former Ambassa-

dor at Washington and friend of the United States. In the army,
General Goes Monteiro, Chief of Staff, is played off against General
Dutra, Minister of War. These two men, formerly friendly, are now
reported to be at odds. Goes Monteiro is considered the more able and

intelligent of the two, and is rated Brazil's best strategist; he was

the star pupil of General Gamelin, when the latter -- now France's
Chief of Staff -- was head of the French military mission in Brazil.
Gossip has it that Aranha and Goes Monteiro favor holding the constitutional plebiscite and a gradual return to democratic norma, while
Dutra opposes the plebiscite, and is suspected by some of ambitions
to set himself up as the head of a neo-fascist regime. Talk of Vargas' possible overthrow turns most frequently on the Dutra-Goes Mon-

teiro rivalry and friction.

415
-

President Vargas announced with his November 1937 coup the

establishment of a New State in Brasil. Democracy had failed; Brazil henceforth was to have an authoritarian regime, which would uni-

fy the country in the face of a chaotic international situation, sup-

press subversive influences, and put new efficiency and drive into
government.
But what in practice, as distinguished from theory, does
the New State stand for?

1. Direct government, that is, personal dictatorship. Vargas has
ruled Brazil since the revolution of 1930, but there is some truth
in the contention that events have limited his opportunities for constructive achievement. Between 1930 and 1934, attention necessarily
centered first on consolidation of the new regime, then its defense
against the 1932 Paulista revolt, and finally on the drafting of the
1934 constitution. The first Congress under this constitution was
characterised by one foreign resident as "worse than a Ladies Aid
Society": talk blocked action. But with Congress out of the way after November 1937, governmental machinery began to hum. Office-

holders were forbidden to hold more than one job; and the efficiency
of the bureaucracy was stepped up. Some of the worst grafters were
eliminated. (In this connection Vargas is generally credited with
entire personal honesty.) The president and his advisers turned out
decrees much more swiftly than Congress had produced laws. Since
November 1937 it is stated that 500 laws and 3000 decrees have been

issued. But much of this legislation is hastily and carelessly

drafted. Formerly debate in Congress served to iron out defects.
but now that chance is lost.
2. Centralized government, as opposed to the former emphasis on state's

rights, which in Brazil has been carried farther than in the United
States. To use a word coined by Foreign Minister Aranha in an interview, the tendency was to "Chinafy" Brazil. In several cases the

state militias were armies in all but name; and some were equipped
with tanks and bombing planes. Brazil's only anti-aircraft guns were
ordered by Governor Flores da Cunha for the state forces of Rio
Grande do Sul, but arrived after he had been ousted. States had the
power to levy export duties. Now President Vargas has reduced the

power of the militias, particularly in those states where they might
be used against him; and also decreed progressive elimination of the

state export duties. Opposition to this trend toward centralisation
is strongest in Sao Paulo, Brazil's richest and most productive state,
which seeks as far as possible to run its own affairs.

3. Nationalism. I have already mentioned the legislation against foreign organizations, and the quietus pat on German activities. In addition the November 1937 constitution required the shareholders of

-6-

416

banks and insurance companies to be Brazilians (a provision not yet
enforced) and pointed toward the progressive nationalization of
mines and waterpower. Last April a decree excluded foreign interests
from the petroleum industry, just at the time when a large refinery
of Standard 011 of New Jersey was about to begin operations.
4. Rearmament. Along with the nationalistic emphasis has gone a program to strengthen the armed forces. This had been under discussion
for years, but the November coup freed Vargas' hands for immediate
action. Brasil plans to spend some $100,000,000 on this program during the next five years. According to an agreement concluded befor e
the President fell out with the Nazis, Germany is to provide the bulk

of material for the army - heavy artillery, light artillery, anti-

aircraft guns, etc. Brazil is scheduled to receive from Germany each
year for the next five years 50,000,000 marks worth of supplies, or
a total of 250,000,000 marks. Of this sum, approximately five-sixths
can be paid in compensated marks, and the balance in free exchange.

(Thus in spite of Washington's efforts to discourage Brazil's experiments in barter trade, the country -- barring a European war -- is committed by this arms agreement to compensated marks for at least five
years. A high military authority told me he considered the dependence
of Brazil's army on German supplies a great mistake; should a European conflict break, Brazil would be cut off from Germany, would have
to turn to the United States for munitions, and would be handicapped
by a confusing variety of models in its armament.) For the navy
three submarines were bought from Italy, and negotiations are reported

under way for three more. Three cruisers were ordered from England,

and three others are to be built in Brazil, using fabricated material
from the United States. In this way Brazil plans to secure the
cruisers which it originally proposed to lease from the United States.

Some observers view Brazil's failure to obtain those cruisers as a crucial event profoundly influencing the recent trend toward dictatorship. According to this theory, the success of Argentina in blocking the proposed deal spread consternation among Brazilian leaders. Brasil had believed it enjoyed a favored position in
American friendship. But Argentina, its most feared rival, had been
able to ruin its prospects. President Vargas is reported to have
called together army and navy chiefs and pledged them his support in
building up Brazil's armed strength against this threatening development. Thus was born the alliance which made possible the November
1937 coup. For only Vargas could give the military leaders the money
they wanted. Both of the leading candidates in the presidential cam-

paign of that year had obligations to various interests and supporters; neither would be strong enough to take the step which alone could

417

make possible the enlarged expenditures for the armament program suspension of service on the foreign debt. So the elections were
called off, and Vargas with the backing of the army and navy made himself absolute dictator. Now the armed forces are getting what they
want, and resumption of service on the foreign debt is a dead issue.

5. A"mixed" economic policy. While the 1937 constitution pointed
Brazil toward the "corporative organization of national economy,"

the most important recent shift in policy -- that relating to coffee

exports in the fall of 1937 -- was away from regimentation and in the
direction of liberalism and free trade. The government abandoned
price defense, and the coffee export tax was reduced from 45 to 12
milreis a bag. But in May of this year over-production again threatened, and a decree required each grower to turn over to the government
a "sacrifice quota" of 30% of his production (15% in the case of the
finer coffees). However, coffee experts with whom I talked believe
that Brazil is approaching an equilibrium between production and market demand. In the state of Sao Paulo alone between 300,000,000 and
400,000,000 trees have been cut down; the coffee borer has reduced
output; there seems to be growing recognition that future emphasis

must be on improvement of quality rather than increase of quantity.
Hopes are expressed that the quota provision may be removed early in

1939, and future reestablishment of control avoided.

The fall in the world price of coffee has been compensated

in the case of Brazil by a quantitative increase in exports. Nonetheless Brasil has suffered a recent recession; internal trade is
estimated at about 25% below last year, but the decline has been
less severe than in the United States.
The Brazilian government railroads have under consideration purchase of 26 locomotives and 1000 freight cars, worth some
$6,000,000. The Germans are after the order, and are reported to

have offered four-year credits, but are unable to promise prompt
delivery. Americans in Brazil, in view of the country's great need
for improved and more extensive communications, argue that it is of
strategic importance for the United States to secure this order. At
the time of my stay, decision promised to hinge on the ability of the
Export-Import Bank to offer credit terms which might compete with
those of the Germans.

6. Social legislation. The Vargas regime since 1930 has been respon-

sible for a large mass of social legislation, including the 8-hour
day, one day's rest in seven, special protection for women and children, and now a minimum-wage law which is soon to go into effect.

While labor supporters deny that this legislation has been very offective, employers report that it is enforced to an uncomfortable degree. Labor organization is under government control. Unions are

-8-

418

organized by the government, protected by the government and subor-

dinate to the government. Strikes are forbidden. In Sao Paulo city
the cost of living index rose from 100 in 1934 to 161 in 1938, the
chief increases being in food items: but in other parts of Brasil,
particularly the rural districts, the rise was less marked. Studies
made in Sao Paulo estimate 10 milreis (about fifty cents in U. S.
currency) to be the minimum living wage, to provide bare necessities

for a family of five; but the great bulk of the wage-earners are reported to receive less than this minimum figure.
7. President Vargas has yet to show achievement in a field where a

dictator usually makes his greatest claims - that of public works.

One of the most frequently repeated charges made against him is that

he is not a builder. Brazilian cities, such as Rio de Janeiro, Sao

Paulo and Bello Horisonte, have been going through a construction
boom, and many new government edifices have been erected. But

Brazil has almost no paved roads, outside of a ten-mile stretch
south of the city of Sao Paulo, and the section connecting the
summer capital at Petropolis with Rio. Vargas has promised to initiate shortly paving of the road between Rio and Sao Paulo. Engineers also have under survey the route of a railroad across the
northern edge of the Chaco to link the Brasilian city of Puerto Esperanca with Santa Crus in Bolivia. But these developments are still
substantially in the project stage.
Discussion is again under way on plans to exploit Brazil's
vast ore deposits in Minas Geraes, much of which run 60% pure iron.
The lack of good coal has handicapped development of heavy industry,
but a number of blast furnaces and mills are now operating with charcoal and petroleum; this year Brazil exported some steel to Argentina.

Optimism is expressed in certain circles at the possibilities of a

new process for smelting at low temperatures. Some of Brazil's
present leaders argue that if the country is to escape from a colonial status, where it exports raw materials and competes with plantation
countries with low economic and social levels, it must industrialise,
and should exhaust all efforts to that end.
How long can Vargas stay in power? No one in Brazil will
answer this question, for no one knows. The President's wizardry at

political juggling is an essential element in his success. But it

also makes for almost a daily shift in guesses and for continuing uncertainty concerning the eventual trend of Brazilian politics. No
one knows when Vargas' hand may slip and some one of the many balls
in the air may escape his grasp. The most experienced observers

419
take refuge in the assertion that practically anything can happen.
There are some who believe that opposition to the present regime is
gradually coalescing. Yet this opposition may lack opportunity to
strike, unless Vargas suffers defection on the part of his military

associates, or the economic curve takes an actite turn downward.

Should he hold on indefinitely, the continuance of dictatorship or
gradual return to democratic processes is likely to be determined by
the relative
the
various
domestic and international pressures
whichstrength
play on of
the
"fox
of Cattete.
a

I don't want to close without at least a brief reference to
the matter of cultural relations. This is not the time for any detailed analysis or definite recommendations. But my whole visit to

Brazil only served to underline the words of Foreign Minister Aranha

that "it is terribly important for our two peoples to understand each
other." It is substantially true that we in the United States know

least about the country in South America which is most important to

us.

Let me limit myself here to two or three items which bear

on this subject. First, Brasilians reveal to a unique degree a

widespread desire, a genuine eagerness for closer ties of understanding with the people of the United States. One American diplomatic
officer remarked, "We official representatives usually have to work
very hard to develop interest in our country; here we have that in-

terest served to us on a silver platter." Yet many Brasilians feel
that we have come to take their friendship for granted; and that we

believe no particular effort is necessary to retain it. One writer

told me: "The United States has abandoned us; we are a nation of
40,000,000 people; we play an important role in South America; but
you pay no attention to us. Italy and Germany are doing their best
to win us for fascism. They furnish material to our newspapers;
they have our journalists in their pay. They send us professors and
lecturers. They give us radio broadcasts in Portuguese. But the
United States is losing us. You need not copy fascist methods. But
we need your active interest and support."
The situation in Sao Paulo University may serve as a case

in point on the present situation. On its arts faculty are ten Ital-

ian professors and eight French. In addition to their Brasilian
salary (which is low in comparison with foreign standards of living),
their home salary is continued, their time in Brasil is considered
double for a retirement allowance, and they are granted travelling
expenses to return home once a year. The only American professor on

the faculty is without any of these perquisites, which actually do
not rank as luxuries, but serve to balance up the debit items involved

420
- 10 in

working abroad. His role is not that of propagandist -- certainly
not, in the narrow and derogatory sense of the word. He is trying
to do a sound and scholarly job of teaching American history. In

addition, his command of Portuguese has opened to him newspaper

column. which have given his interpretations of American life a
wide audience. Yet he has no support from his home land. In a situation which is complex and unstable he stands alone.

I cite this particular instance only because it illustrates

a definite problem, on which we have yet to make any effective attack.

COPY
421
NEWS LETTER ON PARAGUAY

Charles A. Thomson

Foreign Policy Association
Confidential

Not for Publication.

Buenos Aires
October 10. 1938

Thanks to the kindness of Ambassador Spruille Braden, I have

just witnessed the signing of the Chaco arbitral award, which definitely fixes the boundary between Bolivia and Paraguay. The

ceremony was held under the white and gold magnificence of the

"salon de honor" in the Argentine Foreign Office. Thus, the road
to the long-sought peace is finally free of the last serious
hurdle. In passing, I might say that informed opinion generally
accords Spruille Braden major credit for the successful conclusion
which has happily crowned three years of delicate and arduous
negotiations.

During my recent visit to Paraguay, I found that country ready
to welcome the Chaco peace. The overwhelmingly favorable majority
in the plebiscite of August 10 surprised even the most experienced

political observers. Geronimo Zubizarreta, the Liberal leader who
had refused to sign the pact, found no support for his intransigent position. The voting in the plebiscite seems to have been
essentially fair; it is reported that the government was prepared
to use pressure to secure a favorable result, but found that such
intervention would be superfluous. Opponents of the peace terms
had criticised most the failure to give Paraguay any share in the
alleged petroleum wealth along the western edge of the Chaco.

Their chief complaint against the plebiscite was that its phrasing
was loaded in favor of an affirmative vote. But they now appear
willing to accept the popular decision, and declare that Paraguay
will loyally abide by the peace terms and that no subsequent govern-

ment will question their validity.

The war has made the army the dominant factor in the country.

In the past, two major parties disputed control of Paraguay. At
the end of the disastrous Five Year's War with Argentina, Brazil
and Uruguay. a group of generals organized the Partido Nacional
Republicano, known as the Colorados. This party ruled for 34 years.
from 1870 to 1904. Meanwhile, civilian elements had formed the

Liberal Party, and this group. although plagued at times by factional strife, dominated the political scene from 1904 to 1936.
Foreign observers report that the Liberals are more blessed with
able and intelligent leaders than their traditional opponents.
In February 1936 the Liberal president, Dr. Eusebio Ayala,
had served throughout the war, was overthrown by Colonel
who Rafael Franco. The Franco movement was backed by restive ex-

service men - demobilized after fighting ended with the armistice
of June 1935 - by labor unions and by some students. These
elements considered the old parties discredited and sought a new

political and economic alignment. Moreover, Ayala's position

had been weakened, due to fears that he sought a second term,

422

-2and to the jealousy excited among military leaders by the special
favors heaped on General Estigarribia. Franco's regime made some

efforts at land distribution and put on the books several pieces
of social legislation, including establishment of a National Department of Labor, with power to settle industrial disputes. But
politically his administration was a hybrid. Juan Stefanich, the
leading figure in the cabinet, was credited with semi-fascist
ideas and a nationalism which would return Paraguay to the dicta-

torial traditions of its first half century as a nation. Labor

and the students, on the other hand, had been influenced by com-

munist and socialist ideas. Franco failed to get his dissident
supporters to pull together, despite efforts to unite them in a

new party. He also proved unable to hold the entire support of
the army - whose war-time leader, General Estigarribia, he had
imprisoned - or to enlist the backing of the more solid and conservative civilian leaders. His government was overturned in
August 1937 by certain army officers, in alliance with the Liberal
politicians.
A provisional regime, headed by Felix Paiva, a professor,
was set up. But the civilians in the present government are described as substantially "messenger boys" for the army officers,
who hold the actual reins of power. Four men particularly stand
out: Colonel Ramon Paredes, a shrewd politician in uniform who

occupies the ranking cabinet post of Minister of the Interior:

Colonel Antola, commander-in-chief of the army; Major Arturo Bray.

half-English in blood, who fought with Britain's forces during the
World War, and who now is Chief of Police of Asuncion: and Major
Sosa Valdes, commander of three cavalry regiments. All of these

men are under 45 years of age. Their rule is in effect a military dictatorship, which justifies itself on the ground that
Paraguay needs above all order and tranquility. The press is

closely censured, and offending newspapers suspended. Many of

the most important opposition leaders are in exile. The relation
of this reigning quartette to General Estigarribia is not entirely
clear. Some observers believe that the "Four Horsemen" prefer to

keep Estigarribia in his present post in Washington, fearing sentiment that

if he returns to Paraguay, they will be eclipsed. Some
exists in the country for establishment of A strong national

government, with Estigarribia at the head. On the other hand. take it

is reported that Eatigarribia himself would prefer not to
office during this transitional period.

leaders declare that Paraguay is fundamentally a democratic Army country, and that their rule is temporary. Congressional withdrew

elections were held on September 25th. The Colorados and
from the contest on August 31. charging lack of guarantees

official pressure in favor of the liberals. In consequence, both houses. the

Liberals had no opposition and captured all seats in blank
has a compulsory voting law. so the Colorados cast

ballots Paraguay at the polls, whose number was reported to approximate

423

-330% of the total 125,000 votes cast. Despite this none too encouraging venture toward democratic "normalcy", hopes are expressed

that the convening of congress will permit civilian influences
gradually to reassert themselves, and that the process will be
continued by presidential elections next March. On the other hand,
some military leader may upset the apple-cart by another attempt
at dictatorship. The army, which is believed to number around

15,000 men, still consumes from 60 to 80 percent of the government
budget. The country's economic situation may decide the issue
between democracy and dictatorship.

Paraguay came out of the Chaco conflict with increased eco-

nomic strains; and this despite the fact that it fought the modern
world's most economical war. Paraguay ended the struggle without

any major increase in its foreign debt, which now stands at
600,000 pounds sterling - for a nation of less than 1,000,000
people. Bankers estimate that the internal debt does not exceed
13,000,000 gold pesos (or about $9,000,000.). Service on the
foreign debt was suspended during the conflict, but both interest
and amortization payments have since been resumed. Food was not

rationed; agricultural production was markedly increased. Paraguay
now imposes no quotas on imports and only partial exchange control.
Government salaries are paid up to date. During the struggle the
common soldier was paid at the rate of one Paraguayan peso a day,
and the total per diem cost per man, including supplies and food
as well as pay, did not exceed, according to the Minister of War,
nine Paraguayan pesos. (The Paraguayan peso is now quoted at 70

to the Argentine peso, or approximately 280 to the dollar.)

How did Paraguay carry on its war-time financing, In addi-

tion to using its small gold reserve, it requisitioned the great

bulk of foreign exchange accruing from exports, paying exporters
its equivalent in paper pesos. With this exchange it purchased
what supplies were imported. The paper pesos were of course the

product of the printing press, and the result was serious inflation, the peso declining from 19 to the Argentine peso to a ratio
of 90, before recovering to the present ratio of 70. Moreover,
the Government requisitioned annually from cattle-growers some

seven or eight percent of their herds, paying them in script,

which subsequently has been exchanged for gold peso bonds, and

was included in the figure for the internal debt just mentioned.

Local banks and business houses also made relatively small loand,
which in great part are reported to have been repaid.
Outside purchases of military supplies were cut to a minimum.
Paraguayan leaders declare that the country started the war with
an army of 3,000 men, of whom only 1,000 were in the Chaco. (Some

424

informed sources, however, raise the 3,000 figure to 8,000.) It

had at the finish 80,000 to 100,000 men, but never any more than

25,000 in the front line. Officials state that foreign purchases

were principally rifle and machine-gun ammunition, some artillery
ammunition, and a few planes, with ten the maximum number in active
service at any one time. They assert that Paraguay imported no

artillery, no hand-grenades, no airplane bombs. Supplies of the
last two items were supplied by a domestic war industry. The

hand-grenade became a very important weapon, the soldier often

preferring it to the rifle: production started at the rate of 30

a day and finished at the rate of 130 an hour. Truck bodies at
the start were turned out at the rate of one every seven days: at
the end seven per hour. But the Paraguayans assert that their
best source of supplies was Bolivia, and that at the end of the
war 80 percent of their armament had been captured from the enemy,

including 40,000 rifles. They started the war with 44 pieces of
artillery and finished with 66; yet, General Estigarribia told me
that for months at a time the artillery was silent for lack of
ammunition.

Paraguayan leaders are also united in denying that they received any large-scale aid from Argentina. They assert that the
Buenos Aires government facilitated them no loan (although there
were some short-terms transaction with Argentine banks). or supplied them with any munitions. However, when the League embargo

was on, Argentine officials are reported to have shut their eyes
to transit of European shipments up the Parana River. The Paraguayan army included a so-called Argentine regiment. but this was

recruited in the Argentine province of Formosa, which is largely

populated by Paraguayans. An Argentine military mission was stationed at Asuncion when the war broke out, but this was promptly
withdrawn. The Paraguayan army had the help of a few foreign
officers, including a number of White Russians, but only a handful
of Argentines. These Paraguayan denials, however, have not served
to convince some foreign observers of the entire absence of Argen-

tine assistance. Proof of this cooperation is lacking, but suspicion lingers. I pass these facts and figures on to you, for
what they are worth in our present state of knowledge.

It is largely true that Paraguay is a country of no statistics

and few definite facts. What you learn is always approximate,

nate of menos. more or less. Written sources are few, and verbal take
statements need to be checked and re-checked. For example,

the rise in the cost of living which the Chaco War and inflation
have brought to Paraguay. A leading lawyer told me that since
1932 it had gone up three times, reporting that he had to send 200. his
servant to market with 600 Paraguayan pesos now instead of

425
- -5- -

Then I came upon the manager of a foreign bank wrestling in his
office with a sheet of prices: the salary of his Paraguayan employees

shifts with the price level. He ventured with some caution that

the cost of living had gone up between 300 and 400 percent. Then
I talked with a group at the National Confederation of Labor who

asserted that the rise was 600 percent. I put it down as a
Paraguayan fact that the increase had been at least three-fold.

But wages have lagged behind, and consequently there is some
ground for discontent. The common laborer in town makes about 150
Paraguayan pesos a day, in the country about 100 (respectively

50 and 35 cents in U.S. currency). Tage figures furnished by labor
leaders indicate a general rise of from 200 to 250 percent from
1932 to the present. The labor movement claims some 25,000 members.

The strongest unions are found among the port workers and in building construction, packing houses, textile and shoe factories. and
on the railroads and street-cars. In 1931 the labor unions were
dissolved by the Guggiari government, but with the accession of
Colonel Franco in 1936, they came out again into the open; the
National Confederation of Labor was formed, and some gains were
made. Leaders now advocate a moderate policy and "democratic"
tendencies, and play down socialist and communist ideas, which in
the past had won some ground.

None theless, the danger of "communism" is cited by the military

as justification for the present dictatorial government. It

serves equally well those Paraguayans - chiefly army officers and
war veterans - who think of themselves as fascist, and who organized the "Frente de Guerra". One colonel told me, "The officers
are fascist principally because they are opposed to communism,
which is the worst type of dictatorship; and in the past communist
ideas have been strong among the masses." The "Frente de Guerra"
has attacked both old parties, criticises "sloppy" democracy. and

argues for nationalism and dictatorship. Opinions differ widely
as to how much real influence it has. Aside from the "Frente,"
it does not appear that Nasi and fascist influences have made much

dent. Some of the newspapers carry Italian and German propaganda;

both nationalities run schools in Asuncion, but chiefly or their
own children, rather than the Paraguayans. The Franco government

ordered 36 airplanes from Italy - Caproni bombers and Fiat fighters. The first shipment recently reached Asuncion, but has been

held in the customs until Paraguay was ready to make payment.
But now that the Chaco war is over, the government/does not need

the planes, and is reported to be shopping around to find a

customer for these unwanted goods.

The most interesting foreign influence in Paraguay is that of
Argentina. There is no doubt that this "backwoods" republic,
which has been frontier country for three centuries, falls within
Argentina's economic empire. But this is not due primarily to

426

-6heavy investments of Buenos Aires capital. Argentines are the

largest landholders in the Chaco. but at that the worth of their

vast tracts probably does not exceed $5,000,000. Argentine capi-

tal is also reported in the railroads, and in the street-care of
the capital. It also controls the Mihanovitch line, owning the

most important steamer fleet which links Asuncion with Buenos

Aires. And it is through control of communications that Argentina

has what some Paraguayans feels is a strangle-hold on their economic

life. For most of Paraguay's foreign trade goes down the river,
the greater part of it on Mihanovitch boats, and much of it is
transshipped at Buenos Aires. If Argentina closes its ports, as
happened a year ago when yellow fever was reported in Paraguay.

this inland republic is cut off from the world. Hence, the au-

thorities at Asunction are playing with the idea of an outlet
through Brazil, either by road via Iguassu to open up to tourist
traffic the famous falls there: or by extending the ConcepcionHorqueta railroad line to the northeast to meet a similar projected line on the Brazilian side. But appealing as these projects
look on the map, their economic utility is highly dubious. I must,

however, say a word for the Iguassu Falls, which the guidebook
reports are higher than Niagara and half again as wide. I flew
over them on my way from Sao Paulo to Asuncion, and they are worth
going a long way to see.
In addition to military dominance and some economic dislocation. the war has bequeathed Paraguay a new outlook on the future.
Captain Bozzano, Minister of War and graduate of M.I.T. at Boston

said to me: "Now a shadow of thirty years has been lifted. In

the past we have had our thoughts centered on a war which we knew
we would have to fight sometime. But now we can look ahead to

constructive endeavors." A professor reviewing the results of the
war declared: "It changed our national morale from that of a defeated nation which believed it could do nothing - the heritage
of the Five Years War - to that of a victorious people with growing assurance and self-confidence." Paraguay is talking of recon- In

struction. It recognizes it has to start almost from scratch.

a conversation with ex-President Ayala here in Buenos Aires, he
told me that a 1935 survey of Paraguay's 130,000 farmers revealed
that they possessed only 5,000 steel plows. The seed commonly
used is old and run down. New seed, new implements would multiply
production and economic wealth. Given peace and the help of a

little foreign capital, Paraguay's leaders hope that they face
toward a future of growth and promise.

427

September 26, 1938

The President called me at 10:30 last night and
asked me to find out whether there was any change in
the movements of any Italian or German liners out of
the ordinary.
Called Admiral Waesche and he reports, this morning, that there are no changes in the regular movements.
He will continue to watch them and if there are any
changes he will advise me at once.
Instructed Waesche to have a cutter ready soshe
can go on 24 hours notice.

PK142

428

September 26, 1938

HM, Jr called Miss Le Hand at 4:30 and said,
"The President asked me what would he have to do if

he wanted to intern German and Italian boats. Please
tell him that a proclamation is ready and all he has
to do is sign it. It goes back to the Act of June 15,
1917, and he declares that our foreign relations are
threatened, etc."

429

TREASURY DEPARTMENT
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR

WASHINGTON

September 26, 1938
CONFIDENTIAL

MEMO. TO THE SECRETARY:

Re: Attorney General's Special Committee as to what
could or should be done to control prices under
absolute neutrality of our own country in event
of disturbance in Europe.
The above committee was called to meet in the Department of Justice at 2:30
P.M. this afternoon.

Present: Golden Bell

Justice

James W. Morris

Mr. Appleby

Commerce

C. J. Peoples

Procurement Division

Agriculture
"

Alexander Holtzhoff
Dr. Ezekiel

Mr. Meeken

It appears that a report submitted by Mr. Bell, Mr. Morris and Mr. Holtzhoff
to the Attorney General was submitted by the latter to the President who wished
the committee to continue, and to explore the problem in more specific detail.
It appears that the committee is in general of the same opinion as to the
advisability of indirect price control as well as direct price control when the
latter can be exercised under existing agencies.
After much discussion it was decided that Mr. Morris was to contact various
agencies as to the functions that each could contribute or exercise, and as to
any additional members.

Specifically it appears the President is not convinced that prices of some

commodities would not rise, and specifically desires a recommendation from the
Department of Justice as to:
1. What can the President do, without declaring an emergency, with

respect to the control of prices; and
2. What can the President do by declaring a National emergency.
The committee is to meet again next Monday at 3:00 P.M. at the Department of
Justice.

Attached is copy of memorandum from the Director of Procurement on this
question, submitted to the Department of Justice Committee.

Joseph
Director of Procurement

430
A. The Objective: The objective is the question of price control through
indirect methods or directed methods. Price control for peace time application
aimed to prevent the skyrocketing of prices.
The necessity for drafting such a plan immediately arises by reason of
the present critical European situation. Should war break out in Europe, European
belligerents would undoubtedly endeavor to obtain in lafge quantities a great
variety of products from this country. These products would comprise not only
items required directly and indirectly for war purposes, but also & great many that
they normally produce themselves but which they would cease to produce because of
the diversion of normal producing capacity to the manufacture of munitions indis-

pensable to their war efforts. Such a situation developed rapidly during the period,
1914 to 1916. The resulting expansion of our foreign market caused violent increases
in demand for our products, a skyrocketing of prices, and a disruption of not only
our price structure, but of our entire national economy. The international situation
now may prove to be identical to that of the summer of 1914.
The orders of European belligerents, as well as of those who normally are
supplied by those belligerents, may again flood this country to such an extent as to
exceed our present normal capacity to produce. In any such eventuality we must be
prepared to avert a disruption of our national price structure, with its inevitable
ill effects upon our whole national economy. The plan below is an attempt to suggest
a means to this end.

B. Postulates:
1. In the event of immediate war in Europe, this country will assume &
status of neutrality.
2. Any system of price control which may now be installed must be of such
& character to be sufficiently flexible for immediate and smooth conversion to
wartime application.
3. Any system of price control imposed must be such as to merit the wholehearted cooperation of industry, labor, and the public.

C. Principles:
1. When inventories and capacity to produce exceed demand, a system of

minimum price control is applicable, i.e., a figure below which the price of a
given commodity is not permitted to fall. The application of this principle is
suited to periods of depression. Outstanding examples of it are embodied in the
functioning of the N.R.A. and of the administration of the present agricultural
surpluses. This principle is not applicable to the present problem, as it pertains
to the control of skyrocketing of prices with its attendant disruption of the
national economy.

When demand exceeds inventories and capacity to produce, price control
of another nature is required. Under these conditions one of at least two means of be
2.

control are available. First, for a given commodity, a definite fixed price may
set, or second, a maximum price may be established above which the price of that

commodity would not be permitted to climb. This is the objective with which the
present problem is concerned.

(a) The second of the alternatives just cited, namely, the maximum
price beyond which the price of a given commodity would not be permitted to rise,

is to be preferred for the following reasons:

-2-

431

(1) A definite fixed price is in effect a minimum as well
a
price
and,us.
as shown above, the minimum price principle is not applicable as
tomaximum
the problem
before

(2) Fixation of definite fixed prices presumes a fineness or
perfection of administration not practically attainable.
(3) The establishment of workable fixed prices would require an
army of administrative accountants, which in turn would make the method too
unwieldy for prompt and effective administration.

(4) Lack of flexibility in price range below an upper limit
would favor the low-cost, large-scale producer, and would tend to prevent the full
cooperation of the small and marginal producers.
(5) Any tendency toward discouraging the smallevolume producer
would make the Government's position in peacetime extremely vulnerable to attack
by unsympathetic elements - which in turn would tend to impair the effectiveness

of the means of attaining the prescribed objective.

On the other hand, a system of maximum price control:

(1) allows the forces of supply and demand to function
elastically below upper limits.

(2) provides elastic means of control with upper limits
established through trial and error, bringing in all production considered desirable
and consistent with the prescribed objective, i.e., the prevention of skyrocketing

of prices.

(3) was tried and found effective during the World War.

D. Scope of application:
The volume of work necessary and the staff required to extend price
control to all materials and commodities make such a plan impracticable of application.

For this reason alone price control should be restricted as much as possible. It is
likely that control of the prices of basic materials and commodities at source of
production will suffice. In any case, unnecessary control must be avoided.

It is believed that peacetime price control, at least initially,
should be further restricted to items involved in foreign trade. If sufficient
Control can be exercised by our Government over the volume and distribution to
American producers of foreign orders, it may be practicable to permit an upward

price differential for foreign orders over and above that prescribed for domestic
consumption. with property vested authority, this may even comprise a strong weapon
for keeping prices in proper bounds. In any case, however, large volumes of foreign
orders would make mandatory the imposition of price control over the items they
involve. Large foreign demand for these items would create domestic scarcity, and

if uncontrolled, prices would rise rapidly.

It may be necessary soon to extend price control to items other
than those involved in foreign trade. The effect of large volume foreign business
would soon be reflected in increased public purchasing power, which of itself would
create additional demand and hence tend to raise the general level of prices.

-3-

432

Incidentally, it must be borne in mind that the existing neutrality
legislation limits the scope of products that may be exported to nations at war or
to nations declared by the President to be belligerents. A further limitedg factor
is the prohibition against credit or loans which may be granted domestically to
finance sales to nations now in debt to the United States.
The extent to which foreign orders should be encouraged by price differentials
or otherwise is debatable. Rapid productive expansion beyond domestic peacetime
needs would be desirable if we were drewn into the conflict; World War experience
has proved that it would have disastrous repercussions # we were not.
As has already been indicted, one of the sources of foreign orders may be
expected to be those for whom belligerents or potential belligerents have acted AS
suppliers, but whose productive capacity is now or may be preempted for war production.
Expansion of our own productive capacity over and above our normal peacetime

ability to consume should be gauged to a considerable degree by our probable ability
to hold a substantial amount of this newly acquired foreign trade with neutrals.
Some measure of aggressive action might even be desirable as a means of

utilizing present idle capacity and of furnishing useful work for the present

millions of our unemployed.

It. must be borne in mind, however, that the peacetime mission of price
control is the maintenance of stable domestic prices and that only in war time or

when war is imminent does the paramount consideration become one of bringing into

production the last indispensable unit required for the war effort and for essential
civilian consumption. Until it is evident that we will ourselves become a yelligerent,
and subject to the above reference to increased foreign trade possibilities,
production to meet maximum peacetime requirements hould be the happy medium for

which to strive in the system of price control adopted.
E. Type of Control:

Price control should be constructed primarily upon the principle of
volumtary cooperation of all concerned. Arbitrary measures of duresa normallyanse

distastefull to American standards. In view of the limited direct means of enforcement at present available, control of & volumtary cooperative nature is mandatory in
peacetime. In wartime, such cooperation is indispensable for the maintenance of public

support of the war effort, without which maximum prosecution thereof cannot be
attained.

F. Means of Control:
1. Agricultural Products: Governmental agencies now in being are, in

effect, at the present time controlling the prices of a number of agricultural
products. This control is of the minimum price type, since supply of these products
considerably exceeds the demand for them. War abroad undoubtedly would create a

market for the present surpluses; would likely eliminate these surpluses, and render

unnecessary the type of control now exercised. The Government thereupon would be

relieved of the necessity of acting in its present capacity as a corporation to buy
and sell these products, but might continue to utilize its existing machinery to
set upper limits of agricultural prices as the emphasis is shifted from minimum to
maximum price control.

Industrial Control Control of the prices of industrial output, the both
extractive 2. and manufacturing, is quite another matter. It is believed that

433
normal means of doing business should here also be adhered to as closely as possible.
The setting up of a governmental corporation to buy industrial products from the
producer and to sell them to a foreign belligerent, however, is not recommended.
Such a departure from the normal means of conducting international trade appears
entirely unnecessary and, in all likelihood, would entail most undesirable repercussions. It would set up an expensive temporary bureaucracy difficulty subsequently

to eliminate, and its administration might involve us politically from an inter-

national standpoint.

Here again it is believed desirable to utilize for price control purposes

the framework which is now actually in existence, augmented as may be found necessary such augmentations being made in a manner to fit into the projected vartime organization for the mobilisation of American Industry.

Here also must be considered the fact that at present, compulsory means of
enforcement are now largely non-existent, and that voluntary cooperation of industry
must be relied upon.

The following means of price control in peacetime is therefore suggested:
(a) Direct Means:

(1) Trade Associations: We have at present trade associations for
nearly all industries. The potential value of these associations in policing the

members within their own organizations was demonstrated during the World War.

It was again demonstrated during the days of the NRA, which, incidentally, served
to revitalize and expand these associations as component parts of our industrial
str Picture. Their framework is now available for peacetime and wartime application
of price control.
(2) Commodity Committeen; Commodity Committees composed of

representatives of industry, of the Government, and of the public, could be set up

in each industry to parallel trade association alignments. These Commodity Committees
could be used to determine fair maximum prices for the voluntary application of the

trade associations. One policy forming Price Control Authority to coordinate the

work of the commodity committees could be established in Washington.

(3) Foreign Purchasing Agente: It is believed that the State
Department through diplomatic negotiations could induce each foreign belligerent
to establish within the United States a centralized purchasing agent. The J. P.
Morgan Company acted in this capacity before we entered the World War. The desire
of foreign belligerents to obtain and maintain the good-will of our National
Administration, and the fact that otherwise inevitable high prices and other 111
effects of unrestricted competition could thereby,Anvoided, should furnish the
incentive to accomplish this and. Our Government could appoint advisor-observers
to act as liaison agents among the foreign belligerent purchasing agents, our own
government, cammodity committees and trade associations, thus making available full
information to the policy forming committee in Washington and to the Administration

for the determination of price control policies. Any additional administrative or

legislative measures necessary to make price control measures more effective would

thereby be brought to light.

(4) Export Quotes: Export quotas could be used as a brake by the
Administration on excessive exports. The records of our various fact-finding

434

agencies, such as embodied in the Departments of Commerce, Labor and Interior,
could be used to determine when the brakes should be applied.

(b) Indirect Means:

(1) Financial It is a well recognised economic fact that the contraction and expansion of credit have a very definite indirect effect upon business
activity, and hence upon the national price structure. Such a means of control
is now exercised by such Government or Government controled agencies as the
Securities and Exchange Commission, the Reconstruction Finance Corporation, the
Federal Reserve System and even the Treasury Department itself. The Securities and
Exchange Commission, for example, controls the issuance of commercial securities;
the Federal Reserve System sets rediscount rates, prescribes reserve balance requirements of member banks, and enters into open market transactions to stabilize credit;

the structure of the Reconstruction Finance Corporation is available to make loans to
prevent undesirable business failures; and the Treasury Department regulates the
issuance of long and short term public securities. All of the functions of these
agencies can be coordinated indirectly to support the direct means of controlling
prices.

(2) Numerous other indirect but nevertheless powerful means of

enlisting the cooperation of industry in a price control program are available.
Wages of labor, for instance, constitute & great portion of the costs of production,
which, together with a reasonable profit, comprise the base upon which the price
structure must be constructed. The Government has assumed an important position in
the determination of labor wages. The determination of export quotas by the Government, previously mentioned, comprise another indirect method of enlisting the
cooperation of industry in price control matters. Excess profit taxes now imposed
and the threat of increasing them could also be employed for this purpose. The
power of the purse in public grants of money is still another potent weapon for
obtaining industrial cooperation. In fact, the Government now has so such of our
national economy under review and so many indirect means of compelling the coopera-

tion of industry with its policies that it can exercise powers tantamount to
coercive action in making price control measures effective.
G. Application of the Means of Control:

The fact that the Government has adequate direct and indirect means

of enlisting national compliance in a system of peacetime price control is of little
consequence if & proper organisation is not set up for the timely application of
control Only when such powers are at the disposal of one authority can control
become effective. It is for this reason that the above organization, with the
central Price Control Code Authority superipposed upon all of the organization's
component parts, is suggested.
prove

It can be safely forecasted that the proposed organization will
to be imperfect, and that mistakes will be made in constructing and in

administering it. This is the price one must pay for any new undertaking. should The

really important consideration, however, if disturbed conditions abroad
culminate in a European war, is to get this price control mechanism functioning,
and, through trial and error during the initial period of peacetime experimentation,
discover its weaknesses and take remedial action to correct them. The remedial

-6-

435

action required may prove to be either administrative or legislative in nature,
but if the organisation is non-existent when prices begin to skyrocket, the damage
to our national economy will be incurred before the mechanism to control it can be
made operative. To maintain the stability of our price structure, timely action by
a control agency is imperative. Almost anyone knows when prices get out of line.
The important factor is to have the organization to control them ready to function
before prices become exhorbitant.

In placing any price control mechanism in operation, we must not lose
sight of the force of public opinion. The temper of the people is in times of peace
different from the attitude of the public in times of war. In wartime emergency
measures are expected. In peacetime the people must be education to recognize the
necessity for such measures as price control. To this end appropriate publicity
must be used to explain the necessity for price control measures, and the people
must understand that price control, in the event of European war, is not only
necessary to maintain our own economic stability, but may even be a means, properly

controlled, for helping us to avoid being drawn into the conflict.

H. Transition from Peace to War: This organization suggested can be readily
adapted to wartime use. The Trade associations can be used as war service committees
now projected in the Industrial Mobilization Plan; the Commodity Committees can be
employed in identical capacities as a part of the projected War Resources Adminis-

tration; the Advisor-Observers to the foreign belligerent purchasing agents can
form the nuclean of the projected War Trade Board; export quotas can be supplemented
by export licenses, and the Federal Reserve System, the R.F.C. and the S.E.C. can
continue to perform in wartime the identical functions they perform in times of
peace.

Step has
Dear Gdminal

Director Precomment

9/19/38

KEY

Direct Control
Indirect Control

ORGANIZATION

Flow of Orders
Lisison

FUNCTIONAL CONTROL OF PRICES

THE PRESIDENT

Such Government

Such Government

Fact Finding
Agencies as the

Financial Agen-

Purchasing

Department of

Securities and

Agent

Agriculture

U. S. Tariff

Exchange Com-

Central

U. 8. Govern-

State Department

Price Control

ment Adminis-

tration Obeerver to Foreign

Code

Authority

Foreign

Commission

Governments

Federal Trade
Commission

Commodit ty
o

o

Department of

Commi ttees

Labor

Department of

Centralised Purchasing Agent in

Commerce.

o

mission

Reconstruction
Finance Corporation
Treasury Department

Federal Reserve
System.

o

U. 8.
*

cies as the

Trade
o

Associations
o

Member

Firms

o

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

437
CONFIDENTIAL

DATE September 26, 1938

TO

FROM

Secretary Morgenthau

Of

Mr. Haas

Subject: The Business Situation,

Week ending September 24, 1938.
Conclusions

(1) The renewed fear of a general European war has brought

an unpredictable factor into the foreground of the business picture, overshadowing all other influences. Until the outcome of
the present crisis is determined one way or the other, a discussion of the business outlook in this country can only be based
on hypothetical reasoning. Even assuming a peaceful solution
of the Czechoslovakian problem, however, the business prospect
would remain decidedly uncertain, owing to underlying weak

features in the current situation. In the event of 8 war outbreak, the initial depressing effect might later be offset by
increased business due to war orders and rising prices, unless
prevented by the strict application of neutrality legislation.

(2) The chief points of underlying weakness, which persist
despite surface indications of good business, are: (a) Deflationary pressure from abroad, only part of which is traceable
to the war crisis, which is tending to depress commodity prices,

and thereby to raise the possibility that inventory liquidation

may again become a factor in holding back production; (b) a
relatively unfavorable level of new orders, despite an upturn
this week; (c) the prospect of continued tension over the situation in East-central Europe, regardless of the immediate solution of the Czechoslovakian problem.

(3) Continuing its upward trend, business activity has

improved somewhat further during the past week, with greater

than seasonal gains in steel activity and power production.
An encouraging upturn in new orders is reported, particularly
from the U. S. Steel Corporation and from textile companies.
in
In the steel trade generally, however, orders during September
so far are reported as disappointing, and the fall upturn
automobile production is slow in getting under way. The
September index of industrial production is expected by the
Federal Reserve Board to be "above 90", as compared with the

August figure (revised) of 88.

438

Secretary Morgenthau - 2

Foreign influences continue depressing

Apart from the effect of war threats, which have tended
to support prices for a number of speculative commodities,
the influence of the weak foreign situation apparently continues to be an obstacle to recovery in this country through

its deflationary effect on prices. This influence, as re-

flected in the weakening of sterling exchange, (See Chart 1),
and other European currencies, seems to be attributable only

in part to the current war crisis. In part it reflects a

deterioration in business abroad and other factors. To the
extent that commodity prices abroad may be stimulated by war
demands, and to the extent that mobilization of industry abroad
for war purposes may reduce competition in our foreign trade,
weakness in foreign currencies would not have their normal

depressing effect on prices in this country.

Evidence of deterioration in the European business
situation appears in the weekly cabled reports to the New

York Cotton Exchange on the cotton textile situation. During
the week ended September 12, Great Britain cabled that yarn
and cloth business was continuing to decline, prices were very

unsatisfactory, and machinery activity in the mills was falling.
France continued to report stocks of goods at mills heavy,
sales light, and mill curtailment extensive. Switzerland
reported trade almost stagnant, and Belgium reported new business very small.
The failure of commodity prices to continue to improve

with the rising trend of business -- instead, the BLS all- -commodity index in August again turned downward to a new low
appears the most unfavorable feature of the present situation.
In this respect the situation does not conform to the trends
in other recent recovery periods, but resembles more nearly
the false upturns in the spring of 1931 and the fall of 1932.
Aside from the effect of weakness in commodity prices in

restraining new buying, the possibility arises that it may
again bring the inventory situation into prominence as a weak
feature of the business picture. While inventories, according

to our estimates, have been reduced to a point where they
should provide no material handicap to business recovery if
prices improved as business expanded, declining prices might Furtherresult in a renewed movement to liquidate inventories.

more, a tendency to build up inventories in anticipation of
improved demand has again become apparent, particularly in
the steel Industry. This has been due in part to the current

hand-to-mouth buying policy of steel consumers, which requires
the steel mills to have adequate stocks on hand to guarantee
prompt delivery.

439

Secretary Morgenthau - 3

The steel situation

An upturn in orders of the U. S. Steel Corporation to
the ecuivalent of 48 per cent of capacity, 88 compared with
37 per cent last week, places them slightly above the previous

highs of the year. (See Chart 2.) If continued at that level,
they would apparently justify the current rate of activity in
the industry, which is estimated this week at 47.5 per cent
of capacity, representing a new high for the season.

Reports from the steel trade, however, make no mention
of any material improvement in orders recently, which suggests

that the increase in U. S. Steel orders this week may be due
to an isolated large order. The Iron Age says that "Disappointingly slow improvement in new business during September
tends to make the trade cautious in its expectations for the
near future.
Reports from Pittsburgh mention that orders during the
past week were a shade larger than a week ago, while for the

Chicago district, second in importance, it is stated that
"A lack of interest seemingly has developed for which there
is no apparent reason. Sales last week were from 15 to 20
per cent less to just slightly better than the previous week.
Orders are still confined to present needs."
A reduction in prices of rails and track materials this
week may stimulate some buying by the railroads. The reaffirming of steel prices on other products for fourth quarter
delivery was anticipated, and is not expected to affect
orders. Pig iron prices, on the other hand, have been
increased by $1 a ton, recovering part of the $4 cut made
last June.

Greatest hope for steel demand continues to center on
the automobile industry, from which some increase in orders
recently has been reported. Most companies, with the main
exception of Ford, are now producing 1939 models. The
progress on new models, however, has been disappointingly

slow, suggesting that the factories are proceeding cautiously
in their production plans. Labor troubles have also been a
factor. Whereas a short time ago it was believed that the
fall upturn would get under way two weeks earlier than last
year, it now appears that little or no advance over last year
will be made. (See Chart 3. )

440

Secretary Morgenthau - 4
New orders improve

An upturn in new orders during the third week of
September, partly seasonal in nature, has carried our weekly
total index back to the level of the last week in July. (See
Chart 4. ) The upturn in U. S. Steel orders previously mentioned was an important factor in the rise, but other orders
have also shown some improvement. This is particularly true

of orders for cotton textiles and building materials, which
normally improve during September.

The increase in orders so far is not sufficient, in our
opinion, to maintain business activity at present levels. It
might be possible, however, for the deficiency to be remedied

over the next month or two by a marked improvement in demand

for automobile steel, building materials and textile products.
Current business news

The New York Times weekly business index for the week
ended September 17 more than recovered its drop of the pre-

vious week, rising 1.4 points to a new high of 85.9. While
the adjusted indexes for automobile production, cotton mill
activity, and miscellaneous carloadings declined, these were
more than offset by increases in the indexes for steel, power,
and lumber production and "ell other" carloadings.
Barron's adjusted weekly index, on the other hand,
declined to 60.2 from 61.5 in the preceding week, after

levelling out for three weeks. This index differs from the

New York Times index in that weekly petroleum output and coal
production are added, while lumber production is excluded.
Department store sales during the week ended September

17, affected by unfavorable weather, were 12.5 per cent below
the comparable week last year. This compares with e decline
of only 2.7 per cent during the first week of September,
which was the most favorable comparison of any week in recent
months.

The construction industry continues to stand out as a
bright spot in the business picture. While the F. W. Dodge

data on residential awards for the first half of September
are not yet available, the Engineering News Record figures

for heavy construction awards for the week ended September 22
were the highest since the week of June 25, 1937, representing

an increase of 95 per cent above last year. Awards for public
construction were 177 per cent above last year, but those for
private construction were 35 per cent below. Mortgages selected
for appraisal by the FHA during the week ended September 17

were the highest for any single week under the program, with
60 per cent covering homes to be constructed.

Chart 1
441

STERLING EXCHANGE AND PRICES OF COMMODITY FUTURES
JANUARY

FEBRUARY

DECEMBER

NOVEMBER

OCTOBER

SEPTEMBER

AUGUST
27

27

18 25

Ny

24

DOLLARS

NITTER

PER
GENT

PCR POUND
STERLING

56

5.06

55

5.04

54

W

5.02

53

5.00

has

4.98

52

Sterling Exchange
51

4.96

has

4.94

50

M
4.92

WM
4.90

47

n

4.68

46

4.86

Dow-Jones Futures
1924 25 - 100

45

4.04
44

4.82

W

4.80

43

42

4.78
41

27

3

20

10

17

13

MARCH

APRIL

24

22

29

19

12

26

10

MAY

17

JAY

a

6

,

Office of the Secretary of the Treasury

27

3

---

FEBRUARY

20

JUNE

1938

24

31

7

JANUARY

D
6

AUGUST

4

30

SEPTEMBER

25

2

23

13
16
0

16

11 18

OCTOBER

23

30

20

6

9

21 26

NOVEMBER

27

4

is

4.76

14

II

is

DECEMBER

25

TOTAL STEEL INGOT PRODUCTION AND U.S. STEEL CORPORATION ORDERS
Expressed in Percent of Capacity

1937
PER JAN
TTT

MAR

MAY

JULY

1938
SCPT

MAR.

MAY

JULY

SEPT

CENT

NOV

TTTE

PER

CENT

140

140

120

120

100

100

TOTAL STEEL OUTPUT

80

80

60

60

40

ORDERS, U.S. STEEL CORPORATION

40

IN TERMS OF U.S. STEEL CAPACITY

20

20

11111111

0

0

JAN.

MAR.

MAY

JULY

1937

SEPT.

NOV.

JAN.

MAR.

MAY

JULY

1938

SEPT.

NOV.

AUTOMOBILE PRODUCTION
U.S. and Canada

CARS

THOUSANDS

150
37

125

100
75

50

36-

38

25
Ward's Est.
0

JAN.

MAR.

MAY

JULY

SEPT.

NOV.

Chart 4

Confidential

444

INDICES OF NEW ORDERS
1936 = 100
I 938
0
A
J

N

D

S

A

J

M

F

PER

PER

CENT

CENT

110

110

100

100

90

90

TOTAL (COMBINED INDEX)
80
80

70

70

60

60

50

50

40

40

TOTAL EXCLUDING STEEL
30
30

20

20

STEEL ORDERS

10

10

0

D

N

0

S
A

0
J
J

M

A
M

F

J

(
Office of the Secretary of the Treasury
Division of Research and Statistics

1938

I 85

445

Paris, October 3, 1938.

Dear Mr. Secretary:

For your records, I have pleasure in transmitting
herewith three memoranda covering recent conversations.

Faithfully yours,

The Honorable Henry Morgenthau, Junior,

Secretary of the Treasury,
Washington, D. C.

Enclosures:

9/1

1. Memorandum dated August 30, 1938.
2. Memorandum dated September 8, 1938.
3. Memorandum dated September 26, 1938.

HMC/ams

9/1

446

Paris, August 30, 1938.

MEMORANDUM
Secretary Morgenthau called me at 4 p.m. today

from Washington. He instructed me to telephone my friends
in Central Banks in the Netherlands, Belgium, Switzerland
and Sweden. He wanted me discreetly to find out what

they thought of the general situation, of chances for
trouble in Czechoslovakia and also what they thought

of sterling breaking below 4.86. The Secretary said
it was then 10 o'clock with him and it was urgent that
my report be telephoned back within two hours, that is,
before 6 o'clock Paris time.

I put in calls for the various Central Banks and
succeeded in obtaining the information which was incorporated

in my 1371, dated 6 p.m. today. I had been able to telephone
the contents of this message to Secretary Morgenthau at
5.50 p.m. The cablegram covered practically everything
of value which I obtained from my friends, but the following
notes should be put down to complete the record.
Governor Janssen of the National Bank of Belgium
was interested to know whether there had actually been

any negotiations between the British and ourselves in

regard to altering the rates in one or both currencies.
I told him that Secretary Morgenthau had not even gone

to London on his recent European visit, lest such a visit
might be connected with the trade negotiations, and that
I

-2 -

447

I was aware he had carried on no negotiations while in

Europe in regard to the sterling-dollar rate.
When I talked with the Deputy Governor of the Bank
of Sweden, this gentleman seemed more nervous than any

of the other Central Bankers with whom I spoke. He also
was anxious to know whether the Americans had been

negotiating with the British in regard to changing
currency rates, and I replied to him as I had to Governor
Janssen. He told me that Governor Rooth was due back at
the Bank on Thursday, September 1.

President Bachmann of the Swiss National Bank referred

to Secretary Morgenthau's visit to Switzerland and stated
that he would have liked to have called very mu ch on

the Secretary but had hesitated to do this lest it
might embarrassthe latter. I explained very frankly
to Bachmann that Secretary Morgenthau had traveled in

Switzerland only as a tourist; had made no calls on
either Swiss or American officials lest rumors might

arise; and had not even visited the B.I.S. in Basel.
President Bachmann asked if it would be possible for me

to visit him in Zurich before the October meeting of
the B.I.S.
When I told Secretary Morgenthau that the Swedish
Central Bank Deputy Governor seemed particularly concerned

over the situation and that his Bank was selling sterling
against dollars, the Secretary let me know that the
Swedish Central Bank had asked him yesterday1 to
sell
million

448

1 million pounds sterling at the best rate the New York
market would pay, and that the American Stabilization
Fund had itself taken this amount.
The Secretary asked what the French press reaction

had been to his statement in New York. I told him
that the Agence Economique in particular had carried

this in detail and that other papers had given it
favorable attention. I also referred to his farewell
remarks upon improved conditions in the French provinces
made as he was sailing from Havre and told him that

one paper had written quite a story on this interview.
The Secretary let me understand that he had a purpose

in mind in picturing the French situation encouragingly.
He asked me to send him all clippings. I told the
Secretary that after Rueff had returned from London he

had told me last Friday that he had found the British

Treasury people interested in fitting in with the
American plan if, after study and consultation by and
between the Banks of England and of France, this plan

was found to offer some real assistance to France.

I reported that Rueff had not yet let me know the results
of such consultations. The Secretary understood that
there was plenty of other problems to think about today.
The Secretary was most appreciative of the promptness

with which the opinions of the several Central Bank
Governors had been obtained and communicated to him.

HMC/ams

Paris, September 8, 1938.

449

MEMORANDUM
At 4.30 p.m. on September 6, Secretary Morgenthau

telephonedme at the Embassy. He asked that I do a

little telephoning to my friends and ascertain their
opinion as to trouble possibly breaking out in Europe
during the remainder of this week. He asked that I
call him back, Washington time, at 11 a.m., Wednesday

September 7. He told me that he had to make a decision
in regard to his September financing and wanted the
best available opinion as to what the chances were of

real trouble breaking out in Europe within the present
week.

I gave the Secretary a full account of the interview which I had just had at the Ministry of Finance
with Rueff. When the Secretary asked if I was going
to cable this I told him that the matter had not
entered any record of the Embassy and that it might

be preferable not to make the final chapter official.
It was agreed, therefore, that I should prepare a
letter yet that evening for mailing on the Normandie
the following morning. This was done in my personal
letter to the Secretary dated September 6.
On September 7, I telephoned or saw a number of

my central and private banking contacts. At 4.30
p.m. I put in a call for Secretary Morgenthau for
5 o'clock, which was accepted at that hour. When I
got

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450

got on the line three different times I was told by
the American central that the Secretary wished to
speak with the Ambassador and not to me. When I insisted

that I was putting in the call for the Secretary under
instructions from him, I was finally informed at 6 p.m.
that the Secretary was no longer available but would call
me back at my apartment at 7.30 p.m.
when the Secretary got connection with me at my

home at 7.30 p.m. I explained my efforts to reach him

earlier in the evening. He said he had put in a call
for the Ambassador but had been informed that the
Ambassador was at the races and had been asked whether

he desired to speak with the Ambassador's secretary.

He had replied that he did not want to speak with the
Ambassador's secretary and had cancelled the call. I
remarked that the central had evidently cancelled my
call as well as his which was, of course, a misunderstanding. I hoped I was not too late with my information.
He said that such was not the case and asked me to give

him a full report. I gave him a detailed statement as
incorporated in my cablegram 1405, dated September 7,

1938, 6 p.m., which I had already prepared but did not

file until after the Secretary requested it in our
conversation by telephone. After I had quoted my
various friends, the Secretary asked me what my own

opinion was. I told him that I was convinced there
would be no serious trouble the remainder of this week
on

451

-3on this side and that he could safely go ahead with his
loan in so far as Europe was concerned.

HMC/ams

Paris, September 26, 1938.

452

MEMORANDUM

Rueff telephoned me yesterday, Sunday, evening

between 5 and 6 o'clock. he told me that he expected
to see Minister of Finance Marchandeau after the latter
came out of the Cabinet meeting which was then in session,

and asked that I come over to the Ministry at 7.15 p.m.
When Rueff received me at 7.20 p.m. he told me that

in the present situation it was necessary for France
to preserve her gold stocks for military reasons. He
handed me the attached memorandum dated September 25.

He said that no decision had yet been taken to carry
out the measure suggested in the memorandum, that is,

that of having the Stabilization Fund restrict its giving
of foreign exchange to those parties who could justify their
requests on commercial or tourist grounds. He recalled that
such a measure had been used at certain times in the

past without great efficacy. He said that he just wanted
to inform us, through courtesy under the Tripartite,
that such a step was under consideration. He agreed that

I should transmit the text of the memorandum in strict
confidence to Secretary Morgenthau, and said that he
would let me know promptly if and when France definitely

decided to institute the plan under consideration. In
the meantime he wanted us to know the plan and give

consideration to cooperating with the French Ministry
of Finance on our own American market.
When

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453

When I asked Rueff if the rate of 179 francs to
the pound would be maintained if the abovementioned

procedure should be resorted to, he said that such
foreign exchange as the Bank of France gave for the

Stabilization Fund's account would be within the 179

limit, but that if the demand for such exchange greatly
exceeded the amount which the Fund would be ready to
give, there would presumably develop a black market and

a second rate, Rueff said that no decision would be taken
until the market had been observed after its opening
on Monday morning. He said that the Fund had been

under considerable pressure last week, but still had an
important amount of gold, and that the franc had held
up well in London and New York on Saturday.
Rueff had not yet seen the communiqué which had

been issued following the Cabinet meeting but he was not

hopeless in regard to the international political situation.
He received Rowe Dutton, Finance Counselor of the British
Embassy, to give him the same information which he
gave me. I shook hands with Rowe Dutton in the waiting
room but had no further conversation with him.
While I was waiting to see Rueff I exchanged a

few remarks with his assistant, Couve de Murville, The
latter was convinced that there was nothing to do but
impose exchange control if war should break out.

After leaving the Ministry of Finance I came to
the Embassy, but was informed by the door man that

there

-3-

454

there was no code clerk on duty. I then proceeded to
my home and at 8 o'clock put in a long distance call
for Secretary Morgenthau at Washington.

At 8.45 I got communication with Secretary
Morgenthau at his farm, Beacon 211. I told him of my
meeting with Rueff and read him an English translation
of the note which I had made and which the Secretary

took down verbatim. It was agreed that I should cable
this message at once to Washington, to which city the
Secretary was returning by airplane within and hour and
a half, and that I should also tell the Ambassador and
Butterworth of my conversation. The Secretary asked
what was new, and particularly whether anyone had the
text of the German demands on Czechoslovakia. I gave

him what news I had, and told him that I understood the
text of the ultimatum had been cabled by our Embassy in

London. He said that he would see all the Paris messages

when he arrived in Washington. I let him know that the

British had been given a notice similar to ours.
After talking with the Secretary I telephoned Mr.
Murray, and met him in the Embassy Code Room around

9 'clock and prepared my cablegram No. 1582, of that

hour, incorporating therein the translation of Rueff's
note. While in the Code Room I telephoned to Counselor
Wilson and summarized my message, since I learned from

Mr. Murray that the Ambassador was at Chantilly. Mr.
Wilson said that he was preparing a cablegram on the
cabinet meeting and would tell the Ambassador aboutmessage
my

-4-

455

message when he telephoned to him to get his approval

for his cablegram under preparation. Mr. Wilson did
not think it necessary or advisable for me to telephone
the Ambassador and give too much of the details of the
note over the telephone.

At 10.30 I put in a telephone call for Mr. Butterworth at his home, Langham 2257, London. At 10.45 I

was told that no one answered at that number so I

cancelled the call. Shortly after my arrival at my
home, Mr. Butterworth got me by telephone. He was
still at the Chancery and there had been no one to
answer the phone at his home. Secretary Morgenthau

had, however, been in conversation with him and
mentioned my message. I read Butterworth the English

text of the note. He said the French and British
officials were still in session at 11 o'clock when
he talked with me. It was understood that I should
telephone Butterworth if and when the French Ministry
of Finance informed me that it would put into effect

the procedure discussed in the note. At 2.30 a.m. this
morning, Secretary Morgenthau telephoned me at my home.

He stated that he had returned to Washington and had
discussed my message with everyone including the President.

Feis and Moffat had shown him all of the State Department
messages on the European situation. He asked me to

telephone Rueff at once and let him know that the
Secretary of the Treasury was entirely willing and

glad to cooperate fully along the lines suggested.
If

-5456

If the French decided to go ahead with their plan,
the Secretary asked that we be informed as early

as possible. He insisted that I telephone Rueff yet
during the night thinking that this assurance might
make the latter happier. The Secretary told me to
call him whenever I received the French notice even
though it might be during the night hours at Washington,
since American cooperative steps could only be taken
through direct instruction from the Secretary himself.

In answer to the Secretary's inquiry, I told him that
I had nothing further than he did on the situation,
except that Butterworth had told me that the British
and French officials were still in conference at a
little after 11 p.m.
At 2.40 I telephoned Rueff's home, Littré 26-01,
but obtained no response. At 2.45 I telephoned the
Ministry of Finance, but could get no answer. Consequently,

I did not call again until 9 o'clock this morning when
Rueff's home told me that he had already left for the
Ministry of Finance. I reached him there at 9.30 after

failing to find him on a call at 9.15. I told him that
I had communicated his note by telephone to Secretary

Morgenthau early in the evening and that the latter
had proceded by airplane from his farm in New York
where I first talked with him to Washington where he

discussed the matter and called me back late in the

night. I told Rueff that the Secretary of the Treasury
said that he would be willing to cooperate fully in
the

457

-6the sense desired and only requested that the French

give us as early notice as possible if and when they
decide to put their plan into operation. Rueff thanked
me warmly. He said that there was nothing new this
morning and again assured me that he would promply

give me any news on the situation as soon as available.
H.M.C.

HMC/ams