Full text of Diaries of Henry Morgenthau, Jr. : Volume 153 : Part 2

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221

2.

November 28, 1938

Secretary Morgenthau
Mr. White

subject: Agenda for Conference on the Sterling Situation,
November 29, 1938.

1. It was decided at the last conference on November 14,
1938, that a statement indienting our growing concern over
the decline of sterling should be presented to Mr. Bewley

for transmission to the British Treasury. (On that day
sterling was $4.74.) A draft of the proposed statement is

appended.

2. Several days before the British trade agreement was
signed, (it was signed on the 17th) the State Department
communicated to the British Government the concern of our
Government over the drop in sterling BR related to the proosed trade agreement. (The concern expressed by the State
Department did not, however, originate with that Department.)
On November 17, 1938 the British Government replied in a

note to the State Department. The note, which was given to
the Secretary, mode the following points:(a) The British Government had for many months made

strong effort to support exchange by the use of gold
reserves and that they had every intention of continuing
to do so.

(b) That weakness in sterling was due chiefly to the
"ithdrawal of sterling balances by non-British subjects.
(c) That were the British Government to attempt to peg
sterling its loss of gold might become too great in view
of the large foreign balances held in England.

(d) That the fall in sterling had been relatively alight

and was far less than would have been the case had they

not supported it lavishly.

(e) That they saw no reason why sterling should not im-

prove when there was A recovery of confidence.
(On November 17, 1938 sterling was $4.70.)

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Secretary Morgenthau - 2

3. on Tuesday, November 22, 1938, the Secretary presented
to Mr. Bewley a statement which included four paragraphs
selected from the proposed draft with some explanatory oral
comments. (A copy of the statement is appended.) The
Secretary requested an answer to his communication as soon

AR possible. (On November 21, sterling closed at $4.70.)
4. on November 28, 1938, Mr. Bewley orally conveyed the response of the British Treasury to the statement the Secretary
had given him on November 22. The gist of Mr. Bewley's oral
message wast

(a) The British Treasury WRE glad to furnish us with
information with regard to the gold and capital position.
The material would be available Thursday or Friday of
this week.

(b) The decline in sterling was due to basic economic
and political factors and (in Bewley's opinion) no technical devices could serve to check the decline.
The Secretary asked Mr. Bewley to convey to the British
Treasury the following observations:
(a) He was very concerned about the continued decline

of sterling and did not feel that either he or the American
public could watch sterling continue to decline without

doing something to attempt to check it.
(b) He wanted to know whether the British Treasury expected to let events take their course without attempting
to do more than they were doing to check the decline. He
asked whether the British Treasury had any suggestions
whatsoever as to what steps could be taken by them or by
the United States Treasury or jointly to help check the

decline.

5. The questions before us for consideration today are:
that more can the British do to prevent further
sterling declines in the near future?
Is there anything we can do in cooperation with
the British to strengthen sterling?
Should sterling continue to deeline, what independent action could we take to protect the dollar position?
Examination of the proposed draft of a letter to

the President commenting on a proposal to impose an
embargo on gold imports.

223
secretary Morgenthau - 3

(1) what more can the British do to prevent further sterling

declines in the near future?

(a) The only thing that England has done to date to

support sterling has been sales of moderate amounts

of gold.

We estimate that during the past three months the
gold reserves of the British Treasury and the Bank of
England have declined roughly about $200 million. During
that period sterling has dropped about twenty points or

an average drop of one point for every 10 million lost.
In this connection, it should be pointed out (a) that
England still has over 44 billion worth of gold, (b) she
securited half of this gold in the last few years through

inflows, (a) that the loss of gold in the past six

months has been primarily due to canital outflows (her
loss on current account 1s less than $25 million per month
and is now running no higher and probably less than it was
last year), and (d) from July 1935 to 1938, during which

time the British Treasury gained about $2 billion, the

average monthly sterling rate varied between 490 and 505.

It should also be noted that the British Treasury

has done nothing to counteract the innumerable press
statements claiming that sterling was overvalued, and
frequently expressing both the hope and expectation of

S lower sterling rate.
(b) To strengthen sterling the British Treasury (a) can
use more gold in defense of the rate: (b) can indicate
in an effective manner that, in its opinion, sterling is
no longer overvalued at current levels, and that the
British Treasury means to use s11 appropriate measures
to keep sterling up: and (o) can eak for cooperation from
the American Treasury.

(a) How can we cooperate with the British Treasury to
strengthen sterling?

1. If the British Treasury gives us adecuate assurance that it really means to do its utmost to
prevent further declines in sterling, we might consider the possibility of employing a portion of our
stabilization fund (possibly $200 million) to support sterling on the condition that (a) England will

expend a similar (or larger) amount in defence of
the rate, and (b) that any loss we would sustain
from the transaction be limited in amount by British
guarantee to supply gold to us at a pre-agreed upon
rate.

224
Secretary Morgenthau - 4

2. We might reexamine the "hot money" question

with a view to assisting countries losing funds
rather than safeguarding ourselves against continued
acquisitions.

3. We can consult with England with the specific
objective of securing an informal agreement to sta-

bilize the sterling dollar rate. Stabilization of

the dollar sterling rate by agreement does not, of
course, mean any formal arrangement of rigid adherence to the agreed upon rate. It means simply ar-

rangements similar to that which both England and
the United States have made in the past with France.
Possibly the move can be accompanied by a formal
revaluation of British gold. Possibly the agreement can be broadened to include measures to con-

trol unwanted capital flows or to provide for the
exchange of information which will facilitate such

control.

(2) If sterling continues to decline, what independent action

can we take to help check it?

(a) Inform the British Treasury that unless sterling
decline is checked you propose to publicly announce dissatisfaction with the course of sterling on the grounds
that either the British seem to be unable to hold the
rate within a reasonable limit or are seeking a competitive advantage contrary to the terms of the Tripartite

Accord.

(b) If that threat fails to induce the British Treasury
to hold sterling, the issue of a public statement by you
that the British Treasury has violated the Tripartite

Accord and that the United States considers itself free
to take whatever action is necessary to defend the dollar
position.

(e) Raise the price of gold by successive amounts neces-

sary to keep the dollar sterling rate within what we regard as a reasonable relationship. (The legal limit for
your operation is not, I believe, 50 percent of old per.)
(d) Publicly invoke the exchange clause in our commercial

treaty with Great Britain.
(e) Take measures to force the repatriation of portion
of the foreign short-term funds held here.

3.

225

We are concerned by the deeline in sterling.

1. This decline 1f it should continue is likely to raise

questions
in this Accord.
country concerning the meaning and usefulness
of
the Tripartite

2. Given a continuance of the present economic recovery
and the increase in American commodity purchases abroad likely
to accompany it, we do not at present find in the trade positions of the two countries any apparent fundamental reason for

the appreciation of the dollar with reference to sterling. Moreover, it appears to us that there are substantial reasons why a
decline of sterling may not be in the British interests.
3. We feel that a continued decline may seriously endanger
the world economic situation just at a time when American recovery is tending to check the general decline of trade now
affecting most countries.

4. In dealing with these questions, we find ourselves

somewhat handicapped by the lack of information concerning the

short-term capital and gold position of England corresponding
to the information which we collect and periodically publish
for the United States. and of information not published that
we
would be glad to exchange with the adherents of the Tripartite
Accord.

226
RE STERLING EXCHANGE RATE

Present:

Mr. Hanes

November 29, 1938.
3:00 p.m.

Mr. Taylor
Mr. Butterworth

Mr. White
Mr. Lochhead
Mr. Stewart
Mr. Warren

Mr. Williams

Mr. Goldenweiser

H.M.Jr:
Lochhead:

Got everything solved, Archie, for you?

No, I don't think the thing is solved. What they've

done is work out two things: One, that answer to that letter on the embargo; and secondly, going over
the various points raised in Harry White's memorandum.
+hey have arranged them in the order that we think
they are important.
H.M.Jr:

Got something written, Harry, or

White:

"hy, no. John Williams dictated what he thought was
the concensus of, or the opinion of many, which will
be ready in about ten minutes and which will serve
as a basis for discussion, because I don't think
everybody here either heard what he said or saw the
paper, so they may or may not agree with everything

he
stated, although it tended to carry out the general
idea.
Taylor:

The revised letter, I take it, will also be ready.
that's on its way in, or words to that effect.

H.M.Jr:

Can you remember what you dictated?

Williams:

We found ourselves this morning discussing a series

of points, measures that might or might not be taken.
We wound up with that at lunch-time, and sort of suggested we put them down. And I have done that and
indicated the ones that seemed to me just in the discussion we were most interested in.

And those are two. One is the consideration of
British gold policy, and that involves the question
of now much gold they have and how much they're

227
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willing to give up and whether it's better to
follow sterling down or pursue a more vigorous
policy and keep it firm or even put it up. And
the other measure we seemed to be principally
interested in was the idea of operating an
exchange fund for joint account. And I had included those two in the list of seven or eight
points we had as the two principal ones, and
said that if you were interested in those we'd

spell them out more at length - those two.
H.M.Jr:

One, exchange account?

Williams:

First was the gold policy, their policy: Are they
giving up enough gold, are they doing it in the
right way, how much are they prepared to give up,
and so on? And the other is the operation of a
joint exchange account.

H.M.Jr:

Well, as to one - I'm vitally interested as to
the first thing.

Williams:

I had these down. I can remember the other points
I had. I might mention them.

White:

This is the letter, which I take it you want to
take up secondly.

H.M.Jr:

Well, we could do the letter first if - we can do
the letter first, work with what we've got.
"One of the measures proposed to protect the

position of the dollar against further depreciation of the sterling currencies is to impose an
embargo on the imports of gold into the United
States. In my opinion, such a step would tend not
only to have the opposite effect of the one intended
but would also have consequences which would raise

serious problems for the United States.

"During the past year the demand for dollar exchange
has exceeded the supply of dollar exchange by almost
$110 million a month. About $1,400 million worth of
gold has been shipped to the United States so 'ar this

year in order to supply the additional dollars to the
foreign exchange market. If under such conditions an
embargo were imposed on the importation of gold, the

228
-3-

demand for dollars could not be met and the

dollars which are available in the foreign
exchange market would become more valuable.
In other words, other currencies, particularly
the sterling group, would depreciate still further vis-a-vis the dollar. Thus an embargo on
imports of gold would be a step in the direction
of aggravating the very condition we are. seeking
to alleviate.
"Furthermore, the declaration of an embargo on gold

imports would be a very disturbing factor in international economic relations, the full consequences
of which cannot be entirely foreseen. There would
be an attempt by foreigners to acquire dollars by
selling silver to the United States and we would be
confronted with the necessity of acquiring more
foreign silver or permit the price to fall sharply.
Instability in exchange rates would be greatly intensified, with wide repercussions on the economic system
of all countries. The Tripartite Agreement would, of
course, be automatically terminated."
Do you people feel that that is definitely so on
silver? Is that unanimous?
White:

I think it's put there a little more strongly than
it should be. I think they'd all agree that the

short time we had to revise this letter consisted
largely in pulling out sentences; so it would have

to be reworked over and made a little smoother.
That point might be open to some question - whether
too much emphasis isn't being given there. But there
certainly would be some of that.
H.M.Jr:

Well, it seems over-emphasized to me.

Stewart:

Well, I think if you were prepared to buy silver and
not prepared to buy gold, there would be a market for
silver which would buy up the world silver; as long

as they could create dollars by selling silver, I
think they would.

White:

They'd go out and buy silver instead of gold.

H.M.Jr:

I think that that part could be clearer, with something
like this: "The potential purchaser of dollars, not

being able to acquire them through gold, would be

229
-4-

Gold'r:

driven to do so through silver." I mean
That's right.

H.M.Jr:

I mean sort of a transitional sentence there -

Gold'r:
H.M.Jr:

Gold'r:
H.M.Jr:

Stewart - huh?

That's right. It would make your silver problem

much bigger than it's ever been.

I think if you could explain it that way - what?
That's right. It could be strengthened.
"If we do not accept gold, smaller countries may
likewise restrict the inflow of gold. Most important, however, would be the blow to the prestige
of gold as an international medium of exchange. We
have too much interest in the future of gold to
seriously endanger its use as a medium of exchange
among nations. We must not forget we have almost

half the world's monetary gold stock and are the
world's third largest gold producer.
"We would by curtailing the possibility of employing
gold in its role as a compensatory mechanism in the
settlement of international transactions be promoting

widespread reliance on exchange controls and clearing
agreements. The cushioning effect that gold movements
exert on exchange rates would be removed and other
countries would thus be induced to adopt exchange

controls for the purpose of introducing some tability
in exchange rates. New obstacles to international
trade would thus be created. Our action would violate
the spirit of our trade agreement program and run
counter to its objectives."
Well, I think there is a lot of meat there, but I it's got to be smoothed up.
White:

Very definitely needs to be reworked.

H.M.Jr:

It's not ready.
I take it they didn't think it was. It was merely
a question of doing something in a short time.

"hite:

230
-5H.M.dr:

I'd like to postpone discussing this.
Could I just raise a question while we wait? Do
the people who are doing the typing know that
we're waiting?

White:

H.M.Jr:
Lochhead:

Yes. Don't they?
Where is it being typed?

Mr. Taylor's secretary is typing it. I'll check,
see that it's coming in as soon as possible.

H.M.Jr:

I just got this week's
report on international capital transactions - the
week ending November - it's the most recent that's

While we're waiting
come to my desk.

White:

What's the date?

H.M.Jr:

November 21.

White:

There should be another one out today; 28th - there
should be another one out.

H.M.Jr:

(On phone) Ask Dr. White's office whether they have
a more recent report on international capital transactions; my latest is dated November 21. If they
have a more recent one, shoot it in here, please.
This thing here seems to be definitely - looks as
though at least for a week or two we were past the
peak. And I never - there was a net outflow of
capital for the week ending November 9 of 11 million
dollars.

White:

Two weeks running, I think, there was an outflow;
then there were inflows again, just judging from the
New York banks. The New York figures, I think,

are there on the later period.

H.M.Jr:
Lochhead:

I'm just raising that. Are we in a period that

there's going to be a net outflow again?
I think the figures are going to show it comes up
again, because I think the figures show Great
Britain shipping gold heavily to meet December

maturities. They'11 sell the gold and that will

231
-6-

show an increase here.
Taylor:

They went the other way the last week, last two weeks.

H.M.Jr:

October 1, 137, through to August, '38, capital net movement of capital was out of the country.

Gold'r:

Itothink
would
checkitthat
now.be very difficult, Mr. Secretary,

H.M.dr:

Well, I'm just raising it.
Yes. I think the chances are that capital is

Gold'r:

going to move into the country for the next few

months.
H.M.Jr:

Well, I just mean - I wondered whether this was a
trend or whether that's too early.

Gold'r:

Well, in my opinion it's too early.

H.M.Jr:

O.K.

Gold'r:

Wouldn't you think so, Butterworth?

B'worth:

Breathing space.

H.M.Jr:

Well now, gentlemen - trying and see what we could do

Gold'r:

while we're waiting.
May I make a suggestion? I think it would be a very
desirable thing if you could have a little statement
from Walter Stewart on the setting of this problem

as he sees it. He gave it to us more or less, and
I think it would be very a dvantageous if we could
hear it here.
H.M.Jr:

Just a minute. I'd love to hear it.
(On phone) Hello. - Thank you.
November 21 was the last.

White:

Should be ready today.

H.M.Jr:

At your service.

-7Stewart:

232

Well, I don't know just what Mr. Goldenweiser has
in mind. Really, what I have in mind saying would
probably have been much more appropriate after you
have this document of points before you.
The one observation that I'd like to make about the
rather recurrent visits that I have made down here

is not with reference to the particular points that

we have discussed, but rather a question of the
approach to make to a problem of this kind, where

you're dealing with the dollar-sterling rate.
Frequently our discussion takes the form of activity
in two centers, New York and London: What's the
British Treasury doing about it, what are we doing
about the dollar-sterling rate? That's such an

over-simplification of the problem when you realize
the extent to which all these problems come to focus
in London, the great variety of questions that are
raised by it, that even if we were to respond adequately to the particular points which you ask, which

we're not going to do today, I would still feel that
we hadn't adequately fulfilled our function as outsiders coming down; that you, in an executive position, have to deal with these problems as they come
to you, day by day as they come to you; that as
outsiders, not being confronted with that, the contribution we ought to make to you, it seems to me,

is the attempt to get a sufficiently broad basis of

approach so we understand the problem. And I am not
confident that the approach we're making in these
discussions is the most adequate approach for purposes of understanding.

We speak of the sterling bloc, talk about the policy
of the Bank of England, what are they doing in the
stabilization fund, what can we do, and so on; but
the general problem of the whole sterling area, its
balance of payments within itself, the relation of
that to our dollar area, the common problem that
we have It isn't that I don't believe there are
differences between ourselves and the British, points
of divergence; just what they are and what their
magnitudes are I don't know; but I also believe that
we have more in common with them, in the sense that
we also are concerned about the maintenance of a

sterling position, the sterling area, the sterling

233
-8-

currency.

And that's the long of what I had in mind; it was
some such observation that Dr. Goldenweiser was

referring to. I can illustrate it, perhaps, a little

H.M.Jr:

Stewart:

more concretely for you.
I wish you would.

Concretely, I am thinking back on our today's discussion. My g eneral approach to this, instead of
responding to the particular points that are raised
in this memorandum, would be to say, in what attitude am I going to greet this Britisher, say Mr.
Bewley, when he comes over here? What's the next
step in this program? Let's assume that on Thursday
or Friday ne comes in with the information which
they say they're going to furnish. My inclination
would be to say, "Well now, thanks for this information. We're sorry we haven't had it earlier. It
would have been helpful to us. We're quite likely
to want more information. We notice that within
these last few days you have taken action in two
or three different ways to affect the speculative
position in sterling. Glad you did that. Are we
right in assuming that you believe that was a
favorable opportunity - the events evidently have
shown that it was - in the sense that the rate goes
higher? You may be a better judge of that particular
rate than we are. It would have been our feeling
over quite a long period that you might have done
better to have used your gold more generously in

supporting the rate."
A series of additional pressures, without any
manifestation of an outward move on your part,
but rather a rather steady series of pressures
for more information more action on their part,
throwing the responsibility back there, for this
reason: that as I review these various things that
we consider doing, there aren't many things that

we can do independently.
H.M.Jr:

You're talking now for yourself.

Stewart:

Yes. As I view this situation

234
-9H.M.Jr:

This
think. isn't a rehearsal. That's what you really

Stewart:

Yes. There aren't many things, as I see it, on
the dollar - actions on the dollar-sterling rate
that we have in our hands to do. There are certain
extreme measures that one can take. Conceivably you
could change the price of gold or end the tripartite
agreement - such things as by their very nature are
extreme moves and seem to me entirely inappropriate
at this level to even be thinking of - that set of
moves. The other things are things we wish they'd
do, wish they'd volunteer; if they don't volunteer,
perhaps we can induce them to do them. There are
still a more limited list of things we would consider
possibly doing jointly.
So my inclination is to say that, partly in the
hope we may have passed the worst of this particular
exchange movement, a series of constant pressures

should be directed on them, very much in the
direction that the pressures have been exerted
since your recent meetings here. They now get
some information; you want some more, you're rather

sorry you haven't had it earlier. They've done

H.M.Jr:

something on short position; what next do they intend to do? A series of continuous or more or less
continuous contacts, with continuous pressure.
Well, you started off and I thought you were going

Stewart:

to give me a constructive criticism, and this is
what I hoped that you were going to say: that we
bring you down here and in a half a day or a day
1 expect you to advise the Treasury on this whole
very difficult problem of international exchange,
and "we can't advise you in one day"; and that I,
as Secretary, look at the thing too much from day
to day, hour to hour. And therefore I thought you
might end up by suggesting sort of a standing
advisory committee that would look at this thing.
-ou didn't think any such thing.

H.M.Jr:

Yes. And that "we don't only come down when you're

in hot water, but that we want a continuous study,

being thoroughly objective, so that when something

235
-10-

does break we're au courant of what's going on,
and that therefore we can really do a good job

for you." But that's what I thought you were
starting off to say.

I was going to say, "Well, I accept the criticism."
And I think it would be justifiable, because this
is one of very many very difficult problems that
we have, and the day isn't long enough to give it
the adequate study. And I thought that's what you
were leading up to.

Stewart:

If you put the matter in that way, Mr. Secretary,
I'd want to make another response. I'd say that

no one could advise you adequately on day-to-day
operations except those members of your staff that

are in touch with the day-to-day information. Anybody that you call from the outside who doesn't have
that day-to-day information is just as likely to
give you the wrong advice as the right advice.
There is one thing that your inside staff can't do,
because they too are executives, and that is to take
a much more distant, objective view of the situation.
Now, that can be done, a great deal of it, without
knowing your particular problems so far as the
British are concerned.

H.M.Jr:

Well, as to day-to-day advice, I think up to now the

record shows that I've been getting as good advice
as is available, because we have met with our share
of success in holding up our end. I mean we have

no particular - there's no particular criticism of

the Treasury as far as I know, as to its operation.
SO I mean as to that I feel that I'm getting as good
advice as I can get, and I'm not dissatisfied and
have no reason to be didssatisfied, and there are

no complaints before me, as to our day-to-day
operations.

But I personally am dissatisfied with what I personally am trying to do on the - not day-to-day, but
the trends of over a period of years, see? And that
kind of thinking neither my staff nor myself have time
to do, and that's the kind of advice that we need
very, very badly, and that's the kind of advice that

people who are not in the Treasury, but who are trained
the way you people are,, could give us; that's what
I

meant.

236
-11Stewart:

H.M.Jr:

At least, some of us are supposed, by either experience or function, to wish to do it, but it's a
far cry in this situation, with as many unknown
factors as there are, with as many bewildering ele-

ments of a political kind and economic kind - all
one can say is that one is interested in the problem,
prepared to study it; but the amount of that that
would be useful to you in the immediate situation
is to my mind very doubtful.
Well, no one can tell.
I mean, as I was saying today, October 1 was a his-

torical date in the world, but it didn't all happen
on October 1. I mean the fall of prestige of the
British Empire in the world - I date it from the

time that Mr. John Simon didn't back up Mr. Stimson
in Manchaukuo. I think that from that day on the
British Empire has been losing its influence in the
world. What was that, 133?
B'worth:
H.M.dr:

31.

131. And then when they repudiated their debts - I
mean it's been, in other words, an operation of
seven years; and then suddenly it all comes to a
head on October 1. Now, if I called you in on
October 1 and said, "How should I treat with the
British Empire as of this moment?" - well, there's
a background of seven years which led up to the
point that necessitated Mr. Chamberlain calling on
Mr. Hitler. I mean it just didn't happen overnight
or in a week, did it?
Now, the thing that I'm talking about here is that
in this question of world exchanges and the position
of the United States in world trade, the kind of
advice that we want and I want desperately is on the
trends. I mean: are we gradually slipping into a
position that we found ourselves in in 131 and '32?

If so, what can we do about it? I mean it isn't
necessarily visible today. But we have all the
funds necessary, for instance, to hire people outside,

to put them at your disposal. I mean we have unlimited money but we have very limited brains.
Stewart:

That's true the world over.

237
-12H.M.Jr:

What?

Stewart:

That's true the world over.

H.M.Jr:

Now, what I'm talking about - this help here is
tremendously valuable - I mean as of today - but
it's the long-time transactions I'm very
serious, never more serious, that I thought you
were leading up to giving me a friendly criticism.
Not a criticism, only a reservation about what we

Stewart:

can accomplish any day that we come down, and the

difference between the question that is presented,
what's one going to do about the immediate situation, compared with the problem of how does one

understand
the problem of this kind in the longer
view.
H.M.Jr:

Well, in this particular case I don't - I'll go

through the motions, putting increasing pressure
on the British. I may get some results; I may not.
I am very doubtful if I get any results. They
happen to have a short position; we get a rise
for a day of a couple cents, then it slips back;
it's one step forward and two steps backward. And
I think that the present day-to-day thing is relatively unimportant as to the position that the
United States and the dollar bloc are gradually
working themselves into. And that's something that
somebody has to sit back that doesn't have the telephone ringing every minute, that doesn't have to be
worrying about complaints, that doesn't have to be
worrying about a Senate and Congress, and that thing,
and this little thing, and political appointments
and what not, and the hurly-burly of the thing. You
just don't get time. Now, I - on a day like this
devote the day to it. I think I'm pretty good to
be able to devote a day to it. Wednesday, Thursday
and Friday I got my financing, and if Harry White
comes in and talks about the pound I'm going to be
very cross, because I've got to do my financing.
I think it might be said by way of explanation possibly it is not necessary - that the material
you see is only a small part of the material we
prepare and analyze. It simply isn't brought before
I

White:

you.

238
-13-

All this question of the balance of payments
between the British Empire and the United States
and the sterling countries - we have that and a
lot of other material. So it may be quite true
that you are not here long enough to see that.
There is no attempt to present that to you, because

of the lack of time. There is a great deal of that

going on.
H.M.Jr:

That's the 23th there, Mr. Secretary, if you
Well, I have a very definite reason for doing this,
and I just want to leave it with you people and let
the three of you - and there's Hansen and Viner, who
are up in Ottawa - I wish the five of you would think
about what I've been saying and what you've been saying
for the last ten or fifteen minutes. Because the difficulty that we find ourselves in, and I guess it's
you can't refer to any textbook, and when I ask the
various fellows where there is some fellow that I can
bring in here - where are they? - and the people that
know this stuff are the people that really have seen
the Treasury work from the inside. And outside of that
most of it is guess work.
But I wish some of you would think about what I have

been talking and the possibilities of forming a group
to take the long distance view on this thing and not
just come down when we're in trouble; because I don't
know what position the United States is slipping into,
and I can certainly say - in the world's market - and
as far as I know there's nobody in Washington that

knows.

Take Agriculture, for instance, with all their world

market and their technical business; they have nobody
over there who is an authority on what we're talking

about here today. Is that right, Harry?

White:

I don't know what you mean by an authority.

H.M.Jr:

Well, who knows his stuff.

White:

It's a highly specialized field, and a man either
has to be with it all the time in his work or in his
academic work.

H.M.Jr:

Well, Williams and Warren and Stewart, will you think

239
-14-

over what we've just been saying the last ten or
fifteen minutes, huh?

Stewart:

That's agreed mutually, to think about it, because
your point is somewhat different from my point;
but I think both points are good.

H.M.Jr:

That doesn't mean I don't want you to come down when

I'm in hot water, but it does also mean that the
if they had a group who was willing - thinking and

United States Government would have a real a sset

meeting occasionally and discussing these things
when there was no pressure.

Stewart:

I agree with you that there is a possibility of giving

a group not in the Treasury, outside, a somewhat better
basis for a continuation of a consideration of the
problems in the broad way you're thinking about.
H.M.Jr:

It's just what I asked this morning. How many people
in the United States foresaw the position we slid into
in '31 and '32 and understood it? Huh? If there were
some, they were very rare birds. Maybe the people or maybe - I don't - as I say, maybe you people that
are in the room did foresee it and are on record and

all that, and most likely if there is anybody who
foresaw it, they are here in the room now. But I
wasn't here and I don't know.
Gold'r:

The f act is that at that time, Mr. Secretary, McMillen
was about to come down, and Mr. Keynes was in this
country, and they had just said that that problem
was now over and "we've got to prepare for the next."
The question of returning to the gold standard and
staying on it was no longer in the picture. So the
best British brains at that time missed their point

completely.
H.M.Jr:

White:

"ell, as I say, I wasn't in the Treasury, I wasn't
in this field in those days, so I don't know. But

I'd feel lots more comfortable and happy if I knew
that I had a group outside who were looking at it in
terms of years and not in terms of hours.
And if the results of their thought were collected,
synthesized, and put on paper.

240
-15H.M.Jr:

And as I say, there is money available to provide
you with a staff of people to do any work that you
want, and I think you all know by this time that
I'll listen and that my mind is open and that I want

to listen. Will you think about it? You're (Warren)
not going to be a professor after the first of

January.

All right.
White:

There was that November 28 statement, if it meant
anything.

- net inflow of

H.M.Jr:

Oh. Report of International
capital, 21 million.

Williams:

(Distributing copies of attached Memorandum to

Secretary Morgenthau) This is a very short statement

and pretty limited, but it pretty well indicates what
we talked about, and I think it indicates where we
came out.

(Group reads memorandum)
H.M.Jr:

who wants to talk to this memorandum?

Williams:

Well, I don't - in the first place, I'm not sure I wrote it up at the last minute - whether we all
agree that that is where we felt the main emphasis
to be. Some of these points we really didn't care
for very much. For example, 1 under Roman numeral
II, the loan of gold or dollars against gold, we all
felt would be inadvisable, temporizing with the
situation, and there is a rather bad history behind
all that sort of thing anyway. I think we all felt
that that wouldn't be advisable.
Then as to Roman numeral I, number 1, technical
measures to curb speculation, perhaps Archie would

know better than any of us whether it is possible to
go much further along that line. They have done certain things yesterday and it seems to have had a

salutary effect. But it's probably pretty limited,

isn't it, in its effect?
Lochhead:

Well, they haven't got the same legal powers, for
instance, as we would have to deal with that. They
probably could go further than they have now through
certain other steps; probably could get the banks to

241
-16-

cooperate. But after they get to a certain point,
they will meet opposition that will defeat its own
purpose.

Williams:

Then Roman numeral I, number 3, the suggestion of a

committee to supervise capital exports, it seems to

me is thoroughly in the tradition of the British.
They can do things informally. And perhaps the fact
that they are dealing with a smaller number of banks
would suggest this type of thing. But I think Mr.
Butterworth feels quite differently, that it wouldn't
work, owing to the fact that these funds are nonBritish funds and it would be pretty difficult for
the British to impose limitations on the outgo of
that kind of money; and that seemed to me to have a
good deal of force behind it. If we reached the point
where British capital was taking flight, that would be
another matter and I would think pretty favorably of
this kind of thing before going into the more drastic

and probably much more difficult controls of hot
money, such as tax measures and so on, on which we
have always had a lot of difficulty when we have
talked about it. Perhaps the British could accom-

plish a good deal in this informal way. I recall that

Fred Kent at one time was undertaking a somewhat

similar function here; probably work better in the
British market than in ours.
But the recommendation seems to me at any rate to
come down to two main points. One is the gold export

policy. Now, aren't we confronted by the fact that
the British have taken in far more gold in connection
with inflowing funds than they have yet been willing
to give out? I hear statements now to the effect that
the equalization fund's supply of gold is being exhausted, and you get the suggestion that the British
either aren't able to go very much further or they
don't feel that they should. It seems to me there is
a subject that might well be explored.
There is a lot of technical g round to be covered:
Just what is the best way to restrain the movement of

the exchanges? Is it better to follow it little by
little, or is it better to confront it boldly and

spend a lot in a short period of time and give the
impression of stability, or even put the exchange up

somewhat, so that the psychology will be on your side

rather than against you? It is, I think, a very fruitful

242
-17-

field for discussion; it could be entirely sympathetic

and
we might all learn something by it, we as well as
they.

And then the other main point, the main point under
cooperation, seems to me to be the use of a fund
for supporting the currency or even putting it up.
Now, of course, that would have to be, I suppose, on
the assumption that you were dealing with a very tem-

porary situation. It would also have to recognize the
possibilities of loss. There might be some political
repercussions. On the other hand, if you put sterling
up or interfered with its going lower, there might be

a very favorable reaction to that, that something had
been accomplished to overcome this fear that so many

people now feel as a result of declining sterling agricultural interests, for example, and so on. The
amount of the loss, I think, would not be very great
as measured against other sums that we have to spend
in one way or another. I think the risk is really
rather small and could be definitely limited.
But I think the chief feature of such a measure would
be that it would bring cooperation out into the open.
It implies a certain amount of obligation upon the
British. It must be based upon an assumption that
we both share that it is undesirable to see sterling
going down and that there is no economic justification
for it, and I think it would be very desirable to bring
that out.
So that those seem to me to be the two points, and I

think that's the right order for these two points,
the gold policy coming first and this after.
Now, if they feel that - if they have good reasons
for not letting gold go, if they think it would have
bad effects, then there is this other. But it seemed
to me that that gives you a definite program for discussion.

H.M.Jr:

Well, I can see, if they're still taking more gold
and they' 're losing it, their net position is still
gaining, it's a good point to argue with them, and

it might or might not have some effect. I mean say,
"Well, what are you worrying about? Your net position

is, you're still gaining."

243
-18-

When it comes to joining them in buying paper cur-

rency, I'd be very reluctant to do that. I mean I
thank heavens - I had the job of liquidating what
was left of the Farm Board; that left its mark on
me forever. And I see this administration doing it

-

Hanes:

now in so much E bigger way - I mean this loan - what
got loans against?
Ten million.

Taylor:

Ten, yes.

H.M.Jr:

Whatever it is, it's just a bottomless pit. And we
once owned five million dollars worth of sterling

we got, eight million bales of cotton now that we've

and, believe me, it's a hard piece of merchandise

to sell. It took us about a year to sell it. So

I'd go into that very, very reluctantly, because I
don't - well, it would be just putting a corn plaster
over the wound, and I think the wound wouldn't heal
or it wouldn't even help it heal.
Stewart:

May I say, Mr. Secretary, I'm in complete agreement

with you rather than with the advisers on that point;
I had an exception on this. I agree completely with
you. I wouldn't touch it. I wouldn't have any form
of joint account on this basis, because I think even
if you took the most favorable view, the magnitude
of money that one would be prepared to risk is too
small to have any effect; it therefore takes on the
character of a gesture, the failure of which is serious
to both parties.
H.M.Jr:

I'm not afraid to lose money if it's worthwhile; but
as I say, I saw what the Farm Board was, I've seen
what Agriculture is doing today with cotton, and I I was only Governor of the Farm Board five weeks, I
think, but that was enough. I mean my - everything all my instincts rebel against dealing in paper currency.

White:

H.M.Jr:

I

Let me just finish. Now, after all, we get back -

we believe that this money that's coming over here

is not British capital, it's flight capital. And as

1 say, I'm willing to do all of these things - I

244
-19-

mean as to talking to the British that they should
be more aggressive and all that. We're doing that.
I don't think over a long time it's going to do any
good. I think the trend is against us, against them,
against
I think. the pound. I may be wrong, but that's what
But when we get through, as I see the thing, it's
this flight of capital that's here, and I wonder if
we can't go back and reexamine everything that we
have studied in making it very unpleasant for that
kind of money to be here, and just begin to pile
.on one kind of - if you talk of an incentive tax,
if you can get the word for a penalizing tax, whatever - something to penalize these people that want
to put their money here, make it just as unpleasant
for them - just begin to pile onething after another
on these people that want to put their money here,
and let them know in no uncertain terms, "As far as
this refugee problem is concerned, you keep it at
home." And I'd like to raise the point of reexamining
that whole thing all over again to see what we can do
to make it unpleasant for these people to keep their
money here.

Now, that's the money that's bothering us; it's those
people that are selling sterling and buying dollars
and converting into gold and bringing it over here.
Lochhead:

H.M.Jr:

And selling the gold after it gets here.
and then selling the gold after they get it over
here. and one suggestion I'd like to make is that we
study that.

Gold'r:

well, I think, too, Mr. Secretary, that that's the

most fruitful field for the immediate program.
H.M.Jr:

Pardon?

Gold'r:

I think, too, that that's the most fruitful field -

thing that you can do. I agree entirely with Mr.
Stewart about the futility of a joint account, and

so does Butterworth.
H.M.Jr:

Well, may I just say one thing a minute. It immediately puts me in the most embarrassing position that

245
-20-

I'll do it for England but why won't I do it for

France?
White:

There is a very excellent reason. I think there is
something that should be presented on the other side,
after it is made clear that those who felt there may
be some advantage in considering that were divided

among themselves. I think John was of the opinion,

I know definitely I am of the opinion, that it should

be undertaken only if the maximum loss was known

ahead of time and determined ahead of time; and it
could be determined ahead of time in a very different

way than in any of the other enterprises that you

happen to mention, so you would know what you were

letting yourself in for at most to start with; and

that a further preliminary condition of any such
undertaking would be a complete satisfaction on
your part that the English were desirous of maintaining that rate and were competent of maintaining that
rate in the future during which this thing would last.
It couldn't be a positive thing, but you could fairly
well be certain. And the amount that you could set
up, if you adopted the principal of having sort of
stop-losses, if you like, could be very large and
could be very effective.
Wayne Taylor believes that you couldn't go in with
a stop-loss, have to put in as much as you decide

and have to use it.all without that stop-loss. I
think that's his position. But I think if there is

a preliminary understanding that (a) they want to
stop it - you have to be convinced of that - and (b)
that there was some reasonably good possibility that
they could; and (c) that there was a stop-loss arrangement, which can be quite simply a rranged, I think that

it has much to be said for it, if in addition to the

other measures you have already suggested.
H.M.Jr:

White:

H.M.Jr:

Well, Harry, I'd put it at the end of the road, because
in dealing with somebody - I mean every instinct I
have rebels against it.
I know it's a risk, it's an unpleasant alternative,
but the alternatives might be worse.
Well, if you don't mind - I mean we're all human, we
all have feelings, and what I say is take that thing
and all I say is put it over here at the end of the

246
-21-

desk and let's start with something else. I don't
say knock it off the desk; just put it at the last.
White:

Itomerely
it. want to present that there was another side

H.M.Jr:

I know you can wrap it up with pink ribbons - "We're
not buying their cotton, we're lending money against

it" - but don't let's waste more time. All I'm
saying - I'm not discarding it, but I would put it

at the end of the road and see if we can't think of
other things which would be more palatable to me.

White:

Well, I think the suggestions which are being made
are just exactly those which you are following and
which have been recommended. That is, you are
bringing mild pressure to bear and increasing its
strength. That's going forward. If that is successful, why, obviously nothing more is required.
"hen we get additional information, which you will
get Thursday and Friday, ES to the extent of their
gold losses and their capital position and gold

holdings, you'll be in a little better position to

be able to discuss with them whether they feel they
might lose more gold or whether you feel they have
been doing as much as they can. That will cover

that point. Then there is the third suggestion which

was made, for a reexamination of not money.

But that all leaves you with the position, supposing
none of these are successful and still sterling continues to decline; because these things are going to

take time. If it doesn't decline substantially, you
have no problem; that's fine. But if it does decline

sharply, then think you are confronted with another
problem, and that's the problem that the gentlemen
here wish definitely to avoid considering, which I
on the other hand feel would be well worth getting
their opinion on, always with the understanding that
it's an "if" you're confronted with that situation
and that you don't intend to apply any of those drastic measures unless the situation is such that you

feel it is called for.

But for them to go away - and that was the tenor of
this morning's discussion; they did not want to

consider any of these drastic measures on the ground

247
-22-

they were not in order at present. That's completely
granted, but I think you want to get ahead of it.
H.M.Jr:

Well, let me ask these gentlemen this question now.

We've taken a look at this thing as it is of today.
We've brought you up to date. I'm always very hesitant about asking them to come down too frequently
because I know they've got lots of other responsibilities. If over the next week or so this thing again
becomes very weak and we find ourselves not being
able to talk the English into doing anything more,

would you people be willing to come down again within
a week or so? Do you see? And in the meantime we
could dig out everything we've got on hot money and
repolish it and take a look at it, and have it ready
for you, do you see?
Williams:

Were any of those measures, Mr. Secretary, of the

H.M.Jr:

kind that could be put into effect fairly promptly?
I think so.

Williams:

I have

H.M.Jr:

I think so.

Williams:

I have long thought that that is the answer to the
international problem. We used to think of it in
trade terms, but it's become a short-term capital
movement problem primarily; I've felt that for a
long time, but I've never had any very clear idea
of what could be done, and it never got beyond the
stage of discussion before, as far as I know.

White:

We spent about six months

H.M.Jr:

Supposing we get it all out and repolish it and

Warren:

then if this thing gets steadily worse I get in
touch with you people and ask you if you'd come
down again, see. Be all right, Warren?
Yes, sir.

H.M.Jr:

Would it

Stewart:

(Noas yes)

248
-23H.M.Jr:

And we'll follow these suggestions. I'd like a
memorandum, Harry, that I could use the next time
I see Bewley, or we can wait until it comes in - if
we can show that their net gold position is still
increasing, be a talking point.

Taylor:

Williams:

Well, there's a misunderstanding about that.
No, we didn't mean that.

H.M.Jr:

What's that, Wayne?

Taylor:

Said that during about a three-year period, or whatever
it was, why, they gained a great deal of gold, and
until they lost what they gained during that period
Well, certainly another week will show whether these
two talks or three talks we've had are going to have
any effect. He's going to bring back another answer

H.M.Jr:

Thursday or Friday.

You have all the not money stuff, have you?
White:

I'll put it together, bring it up to date, and we'll

have something for 2 week or so which will be a summary
of what was gone over. And it must be remembered that

at that time there was no completely satisfactory
conclusion arrived at, but we did a great deal of
work on it.

Taylor:

and there was none that was even moderately satisfac-

H.M.Jr:

tory that did not require legislation.
Well, Congress isn't so far off and

Taylor:

Yes.

H.M.P.:

: and if by next Monday or Tuesday the pound is very
weakish, you might expect a telephone call and we'll

take another look at it.

Now, before we break up, let's go around. Wayne,
do you want to say something? Want to leave it the

way it is? What? Got anything?

Taylor:

(Nods nothing)

249
-24H.M.Jr:

Mr. Stewart?

Stewart:

Nothing to add.

H.M.Jr:

Goldenweiser?

Gold'r:

There is just one thing I'd like to say, and that
is - probably it is implied in some of the things
that have been said, but I think that an important
thing to find out definitely is where the British
want the pound. Where do they want it? I think
they ought to be able to give you a clearer indication of it than - maybe you have it, but I haven!t
got it from anything I have heard here. Are they
satisfied to have it go down lower, or are they just
as reluctant to have it decline as we are? I'm
inclined to think that they don't want it to fall,
but I think it would be a good thing to get as much
commitment on that as you can. We feel - I think
we all felt that for the short run the pound is
now low, that there isn't any - need be no expectation of it going down in the short run, and that
probably they don't want it to fall. But I would
be awfully glad if that attitude of theirs was
clarified further.

H.M.Jr:

Well - and would you also, your own staff who have

vold'r:

sat in on that not money thing, take a look at it?
Yes, sir, we'll do that.
Dig up the old hot money and take a look at it.
Yes, sir, we'll do that.

H.M.Jr:

Maybe you could get in touch with White and compare

Gold'r:
H.M.Jr:

notes.

Gold'r:
H.M.Jr:

Yes, sir, very glad to.
Would you do that? Because you people did a lot of

work on hot money.
Gold'r:
S.M.Jr:

Yes, we'll be very happy to do that.
I just would like to speak of one thing that I would

be very reluctant to do at this time - is to use that

250
-25-

hundred percent reserve against foreign capital,
because I think it would be a mistake at this time
from the standpoint of the Fed to bring up the
reserve question. I'm just throwing that - you
may disagree with me, but I'd hate to see the

reserve thing brought up at this time. Wouldn't

you?

Gold'r:

Well, if you mean at this time - you mean within

H.M.Jr:

Next month.

Gold'r:

Within the next month. Yes.

H.M.Jr:

I just - maybe I'm wrong, but I'm just - I mean that's
E device that I haven't got very much confidence in.

the next few days?

I mean it penalizes the banks and not the owners
of the hot money.
Gold'r:

It's not a very good device in the hot money scheme
anyway, because all they need to do to escape that is
to transfer their money to some other short-time

stuff.

H.M.Jr:

Well, transfer it to a private bank.

Gold'r:

From a hot money point of view, there isn't much in

H.M.Jr:

They could put it with J. P. Morgan.
They could buy Treasury currency and put it in the

Lochhead:

Gold'r:

it.

vaults.

Gold'r:

It isn't a good hot money device.
All right. Anything else, Dr. Goldenweiser?
No, sir.

H.M.Jr:

Butterworth?

B'worth:

No, sir.

H.M.Jr:

Williams: I have nothing at all.

251
-26White:

I just have a memorandum here that - it's the summary
of the London commercial a ttache's report on the

effects of sterling depreciation on American export

trade. They made a very lengthy study, and presumably very comprehensive.
H.M.Jr:

Have a copy made and send it to each one of these
gentlemen, will you?

White:

Yes. It merely indicates varying levels of what
they thought the loss in trade to American exports
would be, and according to their estimates it's very
substantial, if it should go down.

H.M.Jr:

Well, have copies made and mail them to each of

White:

I'll do that.

H.M.Jr:

Anything else?

these gentlemen.

Dr. Warren?
Warren:

Just one footnote to Mr. White's remark about the
unwillingness of the group to discuss these very

drastic proposals at this time. I think that was
because they were drastic and because everyone felt
that they would like to have a little more time to
think about them, that there was not an immediate
emergency and that I don't think very many of us

felt prepared to offer an opinion on a drastic proposal immediately.

H.M.Jr:

Warren:

You and I both. But I'm fearful that we're going that the thing is going to get worse. I'm very
discouraged, very discouraged. I mean I think
the whole trend is against us.
But it may not be as precipitous as it has been,
let's say, for the last two weeks, which means that

we do have perhaps a certain amount of time to think
them over.

H.M.Jr:
Warren:

I think that's right, but I - in these times
I hope it's right.

252
-27H.M.Jr:

I hope it's right too, but in these times - I mean

for sterling to jump up and down two and a half cents
a day is very unhealthy.
Anything else?
Warren:

No, sir.

H.M.J.:

Thank you.
Archie?

Lochhead:

I think we've gone as far as we can today.

H.M.Jr:

Johnny?

Hanes:

I have nothing.
Well, I'm very much obliged.

H.M.Jr:

253

Preliminary Draft of Proposed Letter to the President
One of the measures proposed to protect the position of
the dollar against further deprecia tion of the sterling ourrenoies 18 to impose an embargo on the imports of gold into
the United States. In my opinion, such a step would tend not
only to have the opposite effect of the one intended but would

also
have consecuences which would raise serious problems for
the United States.

During the past year the demand for dollar exchange has
exceeded the supply of doller exchange by almost $110 million . month. About $1,400 million worth of gold has been

shipped to the United States 60 far this year in order to
supply the additional dollars to the foreign exchange market.
If under such conditions an embargo were imposed on the
importation of gold, the demand for dollars could not be met
and the dollars which are available in the foreign exchange
market would become more valuable. In other words, other
currencies, particularly the eterling group, would depreeis te
still further vis-a-vis the dollar. Thus an embargo on
imports of gold would be a step in the direction of segravating the very condition we are seeking to alleviate.
Furthermore, the declaration of an embergo on gold imports
would be a very disturbing factor in international economic
relations, the full consequences of which cannot be entirely
foreseen. There would be an attempt by foreigners to sequire
dollars by selling silver to the United States and we would be
confronted with the necessity of acquiring more foreign silver

or permit the price to fall sharply. Instability in exchange

rates would be greatly intensified, with wide repercussions
on the economic system of all countries. The Tripartite Agreement
would, of course, be automatically terminated.
If TO do not accept gold, smaller countries any likewise
restrict the inflow of gold. Most important, however, would
be the blow to the prestige of gold as an international medium
of exchange. We have too much interest in the future of gold
to seriously endanger its use as A medium of exchange smong
nations. Te must not forget we have almost half the world's
monetary gold stock and are the world's third largest gold
producer.

To would by ourtailing the possibility of employing gold

in its role as a compensatory mechanism in the settlement of
international transactions be promoting widespread reliance
on exchange controls and clearing agreements. The cushioning

254

effect that gold movements exert on exchange rates would be
removed and other countries would thus be induced to adopt

exchange controls for the purpose of introducing some stability
in exchange retes. New obstacles to international trade would
thus be created. Our action would violate the spirit of our
trade agreement program and run counter to its objectives.

11/29/38

255

November 29, 1938.

MEMORANDUM

To:

Secretary Morgenthau

In dealing with the problem of sterling there are three possible
lines of action, independent British action, cooperation between the
British and ourselves, and independent American action. We all feel that
it would be premature to consider at this time any measures of independent

American action. Such action, we feel, is bound to be drastic and to
represent a virtual breakdown of attempts to deal with the problem in a
sympathetic and cooperative spirit. This memorandum, therefore, deals
only with monsures that might be taken by the British independently or
in cooperation with our Treasury.
The measures which are here suggested are based on the assumption

that there is no economic reason for a further decline of sterling, and
that with the continuance of our recovery, sterling should by next spring
find support through a more favorable British trade position.
The following measures are listed merely as a basis for discussion.
At a later point in the memorandum we will indicate those which impress us
most favorably.

I. Independent British Action.
1. Technical measures to curb speculation, of the same general
character as those taken November 28.

2. A more vigorous gold export policy by the British Equalization
Fund.

THe see no reason why this subject should not be discussed with

256
-2--

the British informally. It raises such questions as the
amount of gold available, the amount which the British are

willing to give up, whether it is better to follow sterling
down gradually, or to attempt to keep it steady or even to

raise it.
3. Informal supervision of short-term capital exports from
London by a British committee on exchange.

This would involve informal cooperation between such committee

and the English banks designed to favor trade transactions and

to restrain short-tern capital movements.
4. Other steps to control outgo of "hot" money.
II. Cooperation between the British and ourselves.

1. Loan of gold or dollars against gold.
2. Operation of exchange fund for joint account, without
conversion into gold.

3. Exploration of possible joint action on "hot" money.

Of these various measures, the ones which find most favor

among us are I - 2. The British gold export policy, and II-2. Exchange
operations for joint account. We feel that these two should be made
the subject of a more extensive memorandum.

257

November 29, 1988.

MEMORANDUM

To:

Secretary Morgenthan

In dealing with the problem of sterling there are three possible
lines of action, independent British action, cooperation between the
British and ourselves, and independent American action. We all feel that
it would be premature to consider at this time any measures of independent

American action. Sush action, we feel, is bound to be drastic and to
represent a virtual breakdom of attempts to deal with the problem in a
sympathetic and cooperative spirit. This memorandum, therefore, deals
only with measures that might be taken by the British independently or
in cooperation with our Treasury.
The measures which are here suggested are based on the assumption

that there is no economic reason for a further decline of sterling, and
that with the continuance of our recovery, sterling should by next spring
find support through a more favorable British trade position.
The following measures are listed morely as a basis for discussion.
At a later point in the memorandum we will indicate those which impress us
most favorably.

I. Independent British Action.
1. Technical measures to curb speculation, of the same general
character as those taken November 28.

2. A more vigerous gold export policy by the British Equiliantion
Fund.

30 see no reason why this subject should not be discussed with

258

...
the British informally. It raises such questions as the
amount of gold available, the amount which the British are

willing to give up, whether it is better to follow sterling
down gradually, or to attempt to keep it steady or even to

raise it.
S. Informal supervision of short-term capital experts from
London by a British committee on exchange.
This would involve informal cooperation between such committee

and the English banks designed to favor trade transactions and

to restrain short-term capital movements.
4. Other steps to control outgo of "hot" money.
II. Cooperation between the British and ourselves.

1. Loan of gold or dollars against gold.
2. Operation of exchange fund for joint account, without
conversion into gold.

3. Exploration of possible joint action on "hot" money.

of those various measures, the ones which find most favor

among us are I - 2. The British gold export policy, and IL-2. Exchange
operations for joint account. We feel that these two should be made
the subject of a more extensive

259

CA

Gray
PARIS

Dated November 29, 1938

REC d 7:17 p.m.

Secretary of State
Washington

2016, November 29, 7 p.m.
FOR THE TREASURY

Confidence that the Government will maintain the upper

hand in the general strike called for tomorrow was again
manifest today in the strength of the franc on the Exchange
market and in the good undertone of the security market.

Sterling opened on the unofficial market this morning at
178.58 and gradually receded to 178.54. It opened at this
rate on the official market and is now 178.48. The dollar is
at 38.35, after 38.48. The fund has been able to acquire
very substantial amounts of sterling. The forward rate for
one month sterling fell to 30 CENTIMES and to 1.75 CENTIMES
for three months.

On the security market all Government securities WERE
in demand and rentes gained from 30 to 60 CENTIMES. Other
French securities WERE firm.

The Parise Bourse and all banks will be open for business
tomorrow as usual.

The press today publishes a semi-official statement
denying

260

-2--2016 from Paris

CA

denying rumors that gold shipments WERE made on Saturday

last. It is stated that on the contrary Entries of gold
continued at a satisfactory rate.
END SECTION ONE

WILSON

EMB NPL

261

CA

Gray
PARIS

Dated November 29, 1938

Rec'd 7:32 p.m.

Secretary of State
Washington

2016, November 29, 7 p.m. (SECTION THO)

The impression SEEMS to prevail in many quarters here
that the Anglo-American commercial agreement contains a

secret clause providing for a lower rate for the pound and
that this accounts in large measure for the continuation of
pressure on sterling. Many financial writers contend that if
this impression was dissipated the rate would immediately
move upwards.

Financial quarters are closely following reports of steps
that might be taken at Washington to halt the flow of capital
from Europe and it is thought that new fiscal measures are
being considered in this connection or that the Government may
propose modification or cancEllation of the Johnson Act.
AGENCE ECONOMIQUE this morning carries a telegram from

its NEW York correspondent to the Effect that Secretary Morganthou refused to discuss rumors that the authorities at Washing-

ton WERE studying the possibility of a further devaluation of
the dollar. This paper also published a story quoted from the
International NEWS Service that the Washington Government is
actually

262

--2--2016 from Paris Section 2.

CA

actually considering a new devaluation of the dollar. The
statement appears that "In reliable quarters it is believed
that the Government has instructed its Experts to study

the possibility of an increase in the price of gold to
41.34 dollars per ounce."
Such rumors are being considered with caution and
reserve here. JOURNEE INDUSTRIELLE observes in this connect-

ion that Paris is becoming accustomed to devaluation reports
from the United States and suggests that they are now regarded

as "instruments of pressure, in one direction or another,
and very useful under certain circumstances."
(END SECTION TWO)

WILSON

HTM NPL

263

HRE

GRAY

PARIS

Dated November 29, 1938

Rec'd 7:06 p.m.

Secretary of State
Washington

2016, November 29, 7 p.m. (SECTION THREE)

The account of interviews given to the Editor of the
LONDON FINANCIAL TIMES by Paul Reynaud and Blum published

today is being given SOME notice. The Minister is quoted as

Expressing the belief that as far as his measures of
financial construction WERE concerned no other workable

alternative could be produced. Blum is quoted as having

insisted upon the necessity of Exchange control in France.

Statistics were published today regarding the project
of the 1939 budget. Appropriations of the ordinary budget
total about 66,317,000,000 francs and Estimated revenue
about 66,345,000,000. The special armament and public works

budget totals 28,400,000,000 francs of which 25,551,000,000

are Earmarked for armament. It will be recalled that
resources for this special budget are provided almost entirely
by loan issues. The memorandum of the Government which

accompanies the budgetary project is mainly a repetition of
the general report which was attached to the recent decree
laws. A comprehensive summary of this general report was
Embodied

264
HRE

2-#2016 From Paris Nov 29,7 p.m. (SEC 3)

Embodied in the Embassy's despatch 3272 of November
15, 1938.
(END MESSAGE)

WILSON
NPL:ROW

265

PARTIAL PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, London, England

DATE: November 29, 1938, 6 p.m.

NO.: 1370
FOR TREASURY.

One. In reply to a question in Parliament this afternoon Sir John Simon announced that the Government would

bring in legislation next year to provide for additional
borrowing for defense. He said that the problem was not
immediate because pounds 220,000,000 of the pounds 500,000,000

provided for in the Defense Loans Act would still be available
after the end of present fiscal year March 31st and that
he could not anticipate the budget or mention figures but
that he made this announcement to remove uncertainty as soon

as possible. Incidentally, there have been many suggestions
in the press from the TIMES to the HERALD and in the financial

dailies that the budget should be anticipated to the extent
of a general statement by the Government on the policy for
financing the armament program because uncertainties breed

hesitancy in home business and foreign mistrust of sterling.
The statement was received with cheers and some home indus-

trial securities gained in the street market as a result.
Two. The dollar opened at 4.65-1/4 bid and after going

quickly to 64-7/8 jumped to 66. It was later bid from
New York and the market detected sales of dollars by the

New York authorities at 65-1/8. It is the belief of one
exchange

266

-2exchange source that this morning dollars were bought by

the British fund at 4.66 to 4.66-1/4 in a roundabout way.
A number of other dealers believe this also, but it has
not been possible to trace or confirm this. The rate now
stands at about 65-1/2.

Three. 361 bars of gold were sold at the fixing at
149 shillings 3 pence giving a premium of one penny at
4.66; 65 bars were married the remainder being provided

by the British fund.
Four. The franc has been strong all day with the Bank
of France buying sterling heavily at 178.55 and later at
48 and the three months' forward rate was bid up to one
and three-quarters.
KENNEDY.

EA:LWW

267

Kunming, Yunnan,

29th November, 1938.
The Honorable

Secretary Henry Morgenthau, Jr.,
Treasury Department,
Washington, D.C.

Dear Mr. Secretary,

I enclose reports typed from notes just received from Dr. Buck.
Respectfully,

Third Saunders
Enid Saunders

Secretary to Dr. Buck

RECEIVED
DEC 28 1938
TREASURY DEPARTMENT Secretary

OVER

Office of the

Technical Assistant to us Secretar).

EXCRIAED ZECHEIVEX.2 V3 CONNECBONDENCE DIAISION

268

INDEX

Page

Russian Influence in Northwest China

1

Unofficial Interview with Commissioner Foreign Affairs 3
Interview with Chen Te-cheng, Commission of Reconstruction

5

The Kansu Mint

7

tool Warehouse

8

Wool Factory

Interview with Mr. Ku

9

10

Celebration of Sun Yat-sen's Birthday

12

Government Purchase of Grain

13

Silver and Gold

14

Kansu Revenues

15

Lanchow

16

Air Raid Alarm

17

269
1

Lanchow, November 12th, 1938
To Secretary Morgenthau
From J. Lossing Buck
RUSSIAN INFLUENCE IN NORTHWEST CHINA

It has been difficult to ascertain the character of the Sino-Russien
relationships in Northwest China because it is veiled everywhere with so much

secrecy. Until yesterday I failed, in spite of many attempts, to obtain the
number of Russians in Lanchow. Fortunately at a dinner in my honor by University
of Nanking alumni I met the Commissioner of Foreign Affairs, who offered to explain everything to me on the basis that so much secrecy has led both Chinese and

foreigners to exaggerate Russian help and influence; he stated that in reality
Russian help has not been very much.

I am also wiring you through Campbell the following statement, which is
general summary:

November 14th, 1938

Foreign and Chinese visitors to Northwestern provinces only allowed by
official permission as Russians desire secrecy and Chinese also intrested controlling extension Chinese Soviet influence. Chinese official attitude here welcome

Russian assistance but not their political faith and precautions taken by keeping
Russian aviation corps in supervised guest houses. Russian official attitude is
China not giving enough in return. Average number of Russians Lanchow one hundred

forty, size of guest houses gives credence to this number. Russians only permitted
by Chinese to trade with Chinese government, otherwise they curry favor by offering
favorable prices purchased products.

270
2

Kuomintang three months political schools Kansu have trained 2500

teachers students. Generalissimo's so-called Blue Shirts organization very

active here. Kansu is 8 battlefield of political faiths with Kuomintang
apparently well in the lead.

Commissioner Kansu foreign affairs states British former plottings
turned Governor of Sinkiang to favor Russians. Russian influence Sinkiang

apparently great. Governor of Sinkiang permits no foreign or Chinese visitors
with exception of Chen, the Kansu Commissioner Reconstruction Bureau, who visits
Sinkiang often and who negotiated Sino-Russian barter agreement. Chen urging
Chinese government build railroad Russia to Lanchow and possibly Szechuen and

Paochi terminus Lunghai railway. Distance Russia railroad to Peochi two thousand
seventy miles. Chen's suggestion China supply laber, Russia materials and United
States equipment as credit to Russia. Mine concessions possible. Commissioner
Foreign Affairs also desires American investment Northwest China to balance influence and states Russians are not in position to oppose.
I have been warmly welcomed and WAS only foreigner present and on

platform at ceremony Sun Yat Sen's birthday, November 12th. I am favorably

impressed with new Kansu officials, all from South.
Central Government control silver gold collection and prices evident
here.

J.L.B.

271
3

Lanchow, November 15th, 1938
To Secretary Morgenthau

From J. Lossing Buck

UNOFFICIAL INTERVIEW WITH COMMISSIONER FOREIGN AFFAIRS

In addition to the items contained in the above cable, some further

details of the interview will be of interest. The Chinese complain of the suspicious attitude of the Russians, but the Chinese are also suspicious. My
informant stated: "The Chinese Reds strongly demanded extension their territory

to Lanchow, but were met with flat refusal. At present they are trying to extend their influence westward into eastern Kansu, but the effectiveness of the
cooperation of the Farmers' Bank has won the farmers to the Kansu government
rather than to the Communists.

"The Chinese Reds are doing ell they can to strengthen themselves

and to extend their influence. They are not doing much fighting now. There
was an attempt on the part of the Russians to supply arms directly to the
Eighth Route Red Army, but this was prevented, and the Russians were told that

all arms must go to the Central Government for distribution.

"We are very vigilant in preventing sales of communistic literature,
and the New Life Book Company, which publishes such books, has stated that Kansu

is the most reactionary of all provinces.

272
4

"Six Germans have just come to Lanchow. We know the Russians don't like

it, but we feel that if we keep people out it will only create more suspicion of
the extent of Russian influence.

"There are several military and political training schools in Kansu,
under the Whampoa cadet influence - the C.C. corps - in other words, under the

Generalissimo. The so-called Blue Shirt organization, which in reality is not

Blue Shirt, as named by certain foreign writers, is strong here. It is true that
it is the Generalissimo's organization. It is not a fascist organization.
"The Russians here are permitted to go to the shops to make purchases.
They are especially fond of buying watches and leather goods, as their government

permits them, as volunteers, to bring them back into Russie. The shop keepers
have been informed that they are only to talk business with the Russians, and
since they are here to help China, not to ask 8 higher price because they are

foreigners." (During the seven days here I have seen about thirty Russians in

all on the streets, or in motor cars. J.L.B.)
"The Mohammedan generals are a problem. Their forces are not very
strong and even fear a Japanese attack via Ninghsis to Lanehow. However, the

relationship with the Mohammedans is improving. The 191st Division of Central
Government troops is being sent to Ninghsia, and as the General happens to be a
Mohammedan, the Mohammedans will accept him. The 87th Division of Central troops

is being sent to east Kansu. Some of the old Kansu generals in charge of divisions
are being promoted so as to give an opportunity for the Generalissimo's men to

train and control the divisions."

273
5

Lanchow, November 9th, 1938
To Secretary Morgenthau

From J. Lossing Buck

INTERVIEW WITH CHEN TE-CHENG, , COMMISSION OF RECONSTRUCTION

Mr. Chen was formerly in charge of the Division of Reads of the
National Economic Council. He received his training in America, and had
practical experience with the American Bridge Company. He did commendable
work in the road development of China.

The most important point is Chen's interest in building a railroad
connecting Lanchow with the Russian railroad, and his suggestion that the
equipment be from the United States on credit to Russia. Chen would like to
see such a railroad extended into Szechuen. American participation would help
to prevent exclusive Russian influence and would be welcomed by the Chinese.

It is a proposition worthy of consideration. Chen suggests mine concessions
in Sinkiang if necessary, and is interested in the development of such mines.
In Kansu he has macadamized the Lanchow-Sian road to Pingliang on

the Lanchow side - about one half the distance. He has also been in charge
of the new road west of Lanchow through Sinkiang. Not more than one-tenth

of this road is macadamized. It is entirely an earth road through Sinkiang.
He describes the road as "passable". This I judge is a good description, as
one-half the distance from Lanchow to Liangehow is still an old cart road,
and it takes two days to travel the distance of 160 miles. From Lanchow to

274
6

Sinsinghais is a distance of 711 miles. Sinsinghsia is a border town of Kansu
and Sinking, and is the place where the Russians take delivery of the Chinese

wool. It is apparently the border for Russian entry into China.
At Harmi over the border in Sinkiang is a big assembly aircraft plant
and also a training center for Chinese pilots.
Chen is building a new road along the Yellow River to Sinning, the
capital of Tsinghai, which will shorten the time by one day over the present
road. Another road is nearing completion to connect with the road from Sian to
Chengtu. This road is via Tienshui, and meets the Chengtu road near Paochi.
Chen is interested in 8 direct road to Chengtu from Lanchow, but it must pass
B difficult mountain.
Chen states only handicrafts and small scale industry can be developed

in K nsu under present conditions, and some effort is being made in that direction.

275
7

Lanchow, November 10th, 1938
To Secretary Morgenthau
From J. Lossing Buck
THE KANSU MINT

The Kansu Provincial Mint was closed by the order of the Central
Government when the managed currency system was adopted. It has now been

reopened for the minting of the national one cent copper coins. The mach-

inery is antiquated, but by ingenuity a coordinated plant is now in operation
with a production of 150,000 coins per day. I attended the inspection of

its first day of operation at the invitation of the Commissioner of Finance.
About fifty people were invited, and the Governor also attended. This is
another instance where the Chinese have done the best possible thing with
the means at hand. The crucibles are of American manufacture, and more are
needed.

276
8

Lanchow, November 10th, 1938
To Secretary Morgenthau

From J. Lossing Buck
WOOL WAREHOUSE

Today I visited the wool warehouses of the Foreign Trade Commission. New warehouses of economical but good construction have been

erected on the edge of the Yellow River, where much of the wool is delivered

in rafts of bullock skins with wool packed tightly inside. The wool is dried
I

in the sun on the bank of the river, and then carried to the wareHouse.
saw thirty men packing sacks of wool to be carried by camels. A bunch of

sacks was packed ready for shipment, and just before I left the camels came

up for loading. I also met there the Russian wool expert who inspects the
shipments. The sacks are made up at the warehouse from sacking imported from
Russia.

I was favorably impressed with the outfit. I expect to be able to
send photos later.

277
9

Lanchow, November 11th, 1938

To Secretary Morgenthau

From J. Lossing Buck
WOOL FACTORY

Today I visited a wool factory operated by the military for woollen
blankets for soldiers. The factory has been out of operation for ten years.
Most of the machinery is 62 years old, partly German. The output is eighty

blankets per day. The quality and colour are good. The significant thing is
that the factory has been put into operation under great difficulties, as some
of the machinery had been removed.

278
10

Lanchow, November 12th, 1938.
To Secretary Morgenthau
From J. Lossing Buck
INTERVIEW WITH MR. KU, PRESIDENT OF THE KANSU PROVINCIAL BANK AND OF THE
FARMERS' BANK, AND WITH SEVEN OTHERS IN CHARGE OF COOPERATIVE LOANS TO FARMERS

Mr. Swen, graduate of the two year agricultural course of the University of Nanking, did excellent work for the University in organizing 2,000
farmers into farmers' unions and in organizing cooperatives at Wukiang, 110
miles from Nanking. He uses his farmers' organization to obtain or preserve
the rights of farmers, and he had opposition from the Wukiang magistrate but

won out with the backing of the farmers in threatening the magistrate with a
lawsuit.

Mr. Swen has even Increased his energy in Kansu, and with Mr. Ku's
cooperation 5,600,000 yuan have been loaned to Kansu cooperatives during the

past year. He states loans are being returned on time, and both Swen and Ku

feel cooperative work is feasible and successful in Kansu. A good crop this
year facilitates such refunding. Farmers in Kansu hitherto have only known
officials who have "milked them dry" so they are surprised that any government
would help them. This cooperative work is checking the spread of Communism
in eastern Kansu, and Communists themselves state they have never heard of

Kuomintang people working so hard. Cooperative organizers walk instead of

riding horses, so that they can be one with the farmers. Communist organizers

ride horses. These cooperative loans appear to be a definite method of forestalling Kansu going Red.

279
11

The head office of the Farmers' Bank feel that Ku and Swen are

proceeding too rapidly, and fear the loans will not be repaid. Swen and
Ku out of experience have no fear in this respect, and are chafing because
of the checks from the head office. Swen is a remarkable man, and very
energetic.

280
12

Lanchow, November 12th, 1938
To Secretary Morgenthau

From J. Lossing Buck
CELEBRATION OF SUN YAT-SEN'S BIRTHDAY

I was invited by the Commissioner of Foreign Affairs to attend the
ceremony for Sun Yat-sen's birthday. The affair was held on a drill ground.
About 18,000 people, representing various groups, were present. These varied
from monks to sing-song girls who are receiving nurses' training, and were

present in this latter capacity. I was invited to the platform with the other
officials. I was the only foreigner there. No Russians were present, and the
official of the Central Bank who accompanied me remarked: "No Russiens would

be invited, they belong to another political faith than the Kuominteng." This
perhaps best expresses the attitude of many Chinese toward these Russians.

They are tolerated for the assistance they give, but their political faith is
not welcomed.

The invitation to me to attend this service is an evidence of the
cordiality of the Chinese towards Americans. This has also been evidenced by

the number of dinner invitations various officials have extended, including

the first invitation by the Governor himself. There is every evidence of a
friendly feeling.

281

13

Lanchow, November 14th, 1938
To Secretary Morgenthau
From J. Lossing Buck
GOVERNMENT PURCHASE OF GRAIN

The Central Government is purchasing 2,000,000 yuan of grain from

the farmers to prevent falling prices, to accumulate stocks for military purposes, and to absorb surplus resulting from abolition of opium growing.

282
14

Lanchow, November 14th, 1938
To Secretary Morgenthau
From J. Lossing Buck
SILVER AND GOLD

Mr. Ku of the Provincial Bank states that silver reserves are about

25 million yuan, but that it would be easy to collect six million yuan from
the people. He states that the Central Government price of gold is so much

lower then the market price that the price must be raised before it can be
collected.

Placer gold is found in most stream beds of west Kansu and Tsinghai.
Present methods, as the saying goes, "can keep gold sand washers from starving
There is some feeling that with encouragement the production of gold could be
greatly increased.

283
15

Lanchow, November 14th, 1938
To Secretary Morgenthau
From J. Lossing Buck
KANSU REVENUES

The Commissioner of Finance states that 70 per cent of Kansu's

revenues are from land taxes, and the chief other source is likin taxes which
have never been abolished in this province. Land revenues have decreased

because there is no good system of land registration here, and now there are

15 million mow of land less paying taxes than formerly. An attempt will be
made to remedy this, but registration of land in western Kansu, which is
controlled by General Ma, is not feasible, as Ma bleeds the farmers so that
they leave the land and seek new lands in Mongolia.

284
16

Lanchow, November 15th, 1938
To Secretary Morgenthau
From J. Lossing Buck
LANCHOW

Lanehow is a city of 90,000, at an elevation of some 5,000 feet,
and situated in a valley about two miles wide and ten miles long. Surrounding
it are barren loess mountains. This part of the province is a mass of loess

hills, absolutely barren this time of the year, but mostly cultivated. One
sees nothing but gray or yellowish earth everywhere. It is the spring wheat
area of China, and now that opium is suppressed, wool, a small quantity of
skins and fur, and some tobacco, are the chief exports.
The population of Lanchow has increased from 90 to 120 thousand

since the beginning of the war. Prices are high and houses difficult to rent.
This is the time of the year when the sun shines every day, so it is favorable
for aviation practice.

285
17

Lanchow, November 15th, 1938
To Secretary Morgenthau
From J. Lossing Buck
AIR RAID ALARM

This morning I arose at 4:30 AM to take the Eurasia plane to Chengtu.

After reaching the airport I was asked to wait. It was still twilight, but I
found a surprising amount of activity. After five minutes I was asked to hurry

into the bus to go to the plane on the field. The field is a military one. The
airport officials asked the driver to hurry, and then I saw the plane taking off.
The driver continued driving straight across the field, past training and military planes, and into a gulley between the loess hills. I asked what it was
all about, and the reply was, "an air alarm". Military trucks and airport
guards were going in the same direction. Guards dotted the hillsides. We
stopped by a dugout of the aviation company in the loess hills. The hills
were full of dugouts and guard stations were along the road. These loess hills

afford an excellent protection.
I had a good view of the planes going up, of their smoke screens
and their manoeuvres. The largest number of planes which could be seen at any

one time was twenty-four. The release alarm did not sound until about two

hours later. On my way back I saw thirty planes on the ground, mostly of the

training type, and if the edge of the field for its entire length were equally
populated with planes the number would run into the hundreds. I think, however,

that there is a concentration of planes at that end of the field. As we approached one big plane with a Russian and several Chinese pilots by its side,

286
18

one of the airport officials asked the chauffeur to drive faster so that the
Russian would not see the foreigner in the car. This is another of several
direct evidences I have had that Russians object to the presence of foreigners.

The explanation for the departure of my plane is the air alarm,
and the pilot would not even wait for the passengers to reach the plene.

I think there was some inefficiency in the office, as the airport officials
knew nothing of the raid until one of them was told by the pilot. Apparently
8 servant had been notified by phone, and when we arrived at the airport he
assumed that the airport officials who had come from the city in the same

bus also knew. At least I got an impression of the air activities, and new
hope there will be a plane tomorrow.

I

bill

10

OE ABEVENUA
OFFICE

287

November 29, 1938

My dear Mr. President:

At the request of Dr. Isaiah
Bowman, I am sending to you herewith
his memorandum, addressed to you, on

the subject of Costa Rica. The map,
referred to, is being mailed to you,
under separate cover.

Sincerely,

The President,
Warm Springs, Georgia.

288

November 29, 1938

My dear Mr. President:

At the request of Dr. Isaiah
Bowman, I am sending to you herewith
his memorandum, addressed to you, on

the subject of Costa Rica. The map,

referred to, is being mailed to you,
under separate cover.

Sincerely,

The President,
Warm Springs, Georgia.

289
THE JOHNS HOPKINS UNIVERSITY
BALTIMORE. MARYLAND

OFFICE OF THE PRESIDENT

November 25, 1938

My dear Mr. Secretary:

Here is a letter and a map for the President.
You
may
want to be informed of the one and make a copy
of the
other.
Dr. Pelzer has arrived and is hard at work.
Within ten days, we shall have a first statement on Africa.
Sincerely yours,

1mich

raming
1/ Map under separate cover

The Honorable Henry Morgenthau, Jr.

Secretary of the Treasury
Washington, D. C.

290
COPY

THE JOHNS HOPKINS UNIVERSITY
BALTIMORE, MARYLAND

Office of the President
November 25, 1938

My dear Mr. President:
I have pleasure in handing you herewith a map
consisting of two sheets of the Millionth Map of Hispanic
America pasted together to show the whole of Costa Rica
and parts of adjacent states. The map should be examined
in the light of McBride's telegram and my earlier comment
of which copies have been sent you.
The area between 3,000 and 5,000 feet above the

sea is marked off by heavy inked lines where the two sheets

join. If we include country above 1,500 feet this area
trebled. Settlement would have to be adjusted to all of
the elements of the environment and not to elevation only,
since some of the higher land on the eastern side of the
mountains is too wet and too heavily forested to permit
agriculture.
One may get a clear idea of possibilities by looking at the inset in the middle bottom of the map, called

would be doubled; and if above 1,000 feet it would be

the San Jose-Cartago region which is one of the most densely
populated areas in Latin America. One observes villages
crowded together all the way up to 3,000 feet and down to

400 feet and less. Given an adequate water supply the soil
of central and western Costa Rica is highly productive.

I have not spoken of the political difficulties

which a large foreign immigrant group would create if planted
in this small Latin American country, assuming that Costa
Rica is willing to receive them. The effect of such a group
upon the state, and the possibility that through the presence
of the group we might become seriously involved in European
quarrels, are matters upon which reflection is needed. My
own feeling is that we keep our position uncompromised in
the Western Hemisphere only so long as we do not interest
ourselves directly in the importation of European population
elements. The moment we do so we are likely to be charged
with the importat ion of an European quarrel into America.

291

President Roosevelt: 2

November 25, 1938

Even if we are right about such importation from the
humanitarian standpoint, we thereby give the other
fellow a chance to claim that we are wrong. Do we
want to run that risk? Do we wish to confuse our
position and dilute our argument respecting the Monroe
Doctrine?
Why not keep the European elements within the

framework of the Old World? Even if we do not favor

migration to Latin America, but allow it, difficulties
will arise. If we both favor it and allow it, we commit
ourselves to the consequences. These consequences will

surely involve us in the rightness or wrongness of acts
of the governments of the states of Central Europe.

All this is gratuitous advice. I am forwarding

my letter through Secretary Morgenthau, together with the
map in question, so that he may make his own independent
comment on the contents of this letter.

The African material is now in course of rapid
compilation and will be sent the moment it is ready. It
will be illustrated with clarifying maps.
Sincerely yours,
/s/ Isaiah Bowman

President Franklin D. Roosevelt

The White House

Washington, D. C.

292
JR

confidential
Tokyo

Dated November 29, 1938

Rec'd 7:10 a.m.

Secretary of State,
Washington.

755, November 29, 5 p.m.

OnE. The following statement was issued last night
by the Cabinet: "The Cabinet this afternoon decided
on its fundamental policy for regulating Sino-Japanese
relations in connection with the construction of C. new
order in East Asia which the FiVE Minister Conference has
been considering."

Two. WE have been unable to obtain any authoritative

or otherwise reliable indication of the nature of this
"fundamental policy", and as WE understand that general

indications of the character of this policy are to be
given out in the next few days, WE believe that on
appreisal of verious conjectures now current would not

(repeat not) bE helpful to the Department. WE learn,

however, from a reliable source that the policy is to be
discussed in a conference to be held shortly in the
presence of the Emperor which if true is an indication
of the significance of the policy (SEE our 28, January 14,
5 p.m.).
Repeated to Shanghai for Chungking.
MWC:HPD

GREW

293
JR

Nanking via N. R.
Dated November 29, 1938

Rec'd 4:56 p.m.

Secretary of State,
Washington.

189, November 29, 3 p.m.
The opening CEPEMONIES of the "National PEOPLES Party

Congress" WERE held in Nanking yesterday, with 427

delegates present, chiefly from Kiangsu, Chekiang and
Anhwei; the purpose of the Congress was stated to be to
work for the establishment of a Central Governmement

for China. Japanese Special Service Section officials
WERE present, reportedly as "visitors",
Following the opening CEREMONIES Liang Hung Chih

delivered a speech; after the usual denunciation of
Chiang Kai ShEk and Communism he stated that China must

join hands with Japan so that PEACE might be established

in Eastern Asia, and that the Yellow Race must unite to

resist the aggression of the White Race. HE said that
there now Existed a Reformed Government here and a

Provisional Government in the north but that a Central
Government for China should be established; he added
that the Congress was meeting to Exchange views and study
the matter so that a Central Government might be

Established at an Early date.
The

294

-2- #189, November 29, 3 p.m., from Nanking via N. R.

The Congress is meeting again today and the final
session will be held tomorrow, when a manifesto and

circular telegrams will be issued.
SEnt to Shanghai and Peiping.
SMYTH

RR:DDM

295
REB

PLAIN

Chungking via N. R.
Dated November 23, 1938

Rec'd 7:49 p.m.

Secretary of State,
Washington.

570, November 29, 11 a. m.

Following is Embassy translation of a leaflet reliably
reported to have been dropped at Changio by Japanese planes

during air raic early November:
"Declaration of the Imperial Japanese Government.
The Imperial Army and Navy, manifesting His Imperial
Kejesty's aWE and dignity, have attacked and occupied
Kwangtung and the three Wuhan cities to the End that the

important sections of China might be pacified. The national
Government has fallen and become a local regime. If that
Government continues to persist in its anti-Japanese and
pro-Communist policy, then the Empire must punish it through

armed force, with a VIEW to its destruction. The Empire's
desire is to establish a new order with a view to the

definite preservation of the perpetual tranquility of East
Asia; this is also the final aim of the present Expedition.
The creation of the new order, by means of mutual
cooperation among Japan, Manchukuo and China, will be based
upon

296
REB

2-#570, From Chungking, Nov. 29, lla.m

upon the establishment of mutually helpful and interrelated relations along political, Economic and cultural

lines, with a view to stabilizing international justice
in East Asia and to attaining a joint defense against
Communism, the building up of a new civilization and the

matericlization of an integrated Economy This is really
an EXCELLENT policy for the stabilization of East Asia and
an admirable method for the advancement of the civilization
of the world.
The Empire Entertains the hope that China will also

share the work of establishing a new order in East Asia.
It is hoped that the Chinese people will realize the true
intentions of the Empire, which Especially hopes that they

will jointly participate in the Empire's Efforts. If the
National Government abandons its traditional policy, changes

its personnel, reforms its character and participates in
the establishment of a new order, the Imperial Government

will not dare to reject it.
The Empire is confident that various world powers

realize the true intentions of the Empire and that they
should put into effect the most suitable policy in regard
to the new conditions in East Asia. It is Especially
grateful

297
REB

3-#570, From Chungking, Nov. 29, lla.m.

grateful to the allied powers for their cooperative
assistance.

But the great work of establishing a new order in
East Asia originates in the spirit of the Empire's develop-

ment in the Far East. To accomplish this task is really
the most important and glorious duty of the present day
Japanese people. The Empire should decisively make

domestic Effort in order to improve its national
strength, OVERCOME all difficulties and make rapid
progress so that the task may be accomplished. This is

the Empire's immutable policy and firm decision. This
declaration is firmly made."
REDEATED to Shanghai, for Tokyo by mail
JOHNSON
NPL

298

GROUP MEETING

Present:

November 29, 1938.
9:35 A. M.

Mr. Oliphant
Mr. Gaston
Mr. Haas
Mr. Hanes

Mr. Taylor

Mr. Gibbons

Mr. Duffield
Mr. White

Mr. Lochhead

Mr. Bell

Mr. McReynolds

Mrs. Klotz

H.M.Jr:

(Nods to Mr. McReynolds.)

McReynolds:

I have nothing.

H.M.Jr:

How do you do, Mr. Bell.

Bell:

Good morning.

H.M.Jr:

How is everything with you?

Bell:

Rushing.

H.M.Jr:

Ah -

McReynolds:

Dan is still walking with a cane.

H.M.Jr:

Why?

Bell:

Oh, I sprained my back a little Saturday. It's

H.M.Jr:

Putting?

Bell:

I'm afraid not; if it were that I wouldn't care.

H.M.Jr:

When are you and I going to have a little talk

Bell:

Any time you say; this morning if you want to.

pretty good this morning.

before we see this group tomorrow?

289

-2H.M.Jr:

No thank you.

George, that's Seltzer - tell Seltzer he's been
sending me some good stuff - see?

H.M.Jr:

0. K. Do you want to see these daily things?
Supposing we call the experts at ten thirty
tomorrow. That - Mr. Bell, you are a bond expert;
you (Mr. Lochhead) Johnny, you want to sit in?

Hanes:

(Nods "Yes.")

H.M.Jr:

Taylor; George, you bring your boys in.

Haas:

If the group - you are all so secretive around

here - hasn't seen this memorandum of Harris' to
me yesterday, and Larry Seltzer's stuff, you ought

to circulate that stuff before tomorrow. I have

done my home work; I read them all this morning.
You be here?

Bell:

Yes sir.

H.M.Jr:

There are two good memoranda; one is from Larry

Seltzer and one from Harris. And - well that's

(Nods to Mr. Gibbons.)
Gibbons:

I have nothing.

Bell:

I'd like to talk to you sometime about this proposed

advertising scheme that someone sent in, and you
asked Mr. Taylor and Mr. Hanes to look it over.

H.M.Jr:

All right.

Bell:

We can do it this issue?

H.M.Jr:

No; they haven't made me a good offer yet,
either.

Bell:

The letter ought to be answered.

H.M.Jr:

All right; tell them, "Thank you."

Gaston:

Is that the Albert Frank-Gunther Law?

Bell:

Yes.

-3Gaston:

300

It isn't necessary to answer it; I talked to
Howard Allen about it when he was in.

H.M.Jr:

What else?

Bell:

That's all.

H.M.Jr:

You all right?

Gibbons:

(Nods "Yes.")

Lochhead:

Nothing to add to the early reports; sterling
touched a higher level - 4.66; it went down to
4.65; holding about that level. There seems to
be again a considerable amount of sterling in
the London market.

H.M.Jr:

All right.
You (Mr. White) won't be ready until ten fifteen?

White:

Approximately.

H.M.Jr:

All right.

White:

There is-the Trade Agreement Committee considered

the grant of two concessions, on tobacco and on
sugar, to Cuba, and the motion included the
statement that the negotiations with Cuba shall
be reopened with a view toward modifying the
trade agreement if Secretary Hull will agree on
these two concessions - sugar to Cuba. And our
representatives asked that it be amended. Secretary Hull and Secretary Morgenthau agree, touching particularly on sugar revenue, and that motion
passed. Now the question is up. It is as to
whether or not you would consider a reduction on
the duty of Cuban sugar. The quota is not going

to be increased, so that the economics to it is
rather simple; it is a reduction in revenue of
about six million dollars.

H.M.Jr:
White:

Fifteen per cent.
And it is an increase of receipts on Cuban sugar
in that amount. The only question might be raised
in addition to policy, and that's whether there

are any legal difficulties in the light of the

-4-

301

purposes of the Act. That is something that
Oliphant's shop might want to clear up.
H.M.Jr:

Did
it? he name any good sugar companies to look into

White:

American Sugar Company is the biggest, I think.

H.M.Jr:

London and New York Stock Exchange. (To Reporter:)

Put after this that I am joking, please. (Laughter)

White:
McReynolds:

We'll make -

It won't be necessary, before you give your

decision, for you to ask us all to sell the stocks

we have in sugar.
H.M.Jr:

I don't know whether the market could take it.
Listen, unless somebody objects, this is one of
the times I want to play ball with Sumner Welles,
see? And unless somebody's got some awfully good
reason, I want to let them know before noon today
the answer is "Yes," unless somebody wants to
argue about it now.

White:

If the legal Department wants to make an objec-

H.M.Jr:

tion

They've got till one minute of twelve. If you

don't hear from them before one minute of twelve
you call them and say, "Yes." We sit around and
say, "Let's do something for Central and South
America," and Welles says this is terrifically
important and he wants to do this. Unless somebody's got some awfully good reason, I want to

play ball with them. He says it's a straight
grant.

Oliphant:

To whom?

H.M.Jr:

Batista.

White:

Maybe.

H.M.Jr:

I am not - I am not looking behind the scenes;
Welles wants to do this, and he wants to do it
very, very badly, and he is charged with the

responsibility. Unless there is some reason -

-5-

302

this is his show, and this is what he wants.
Oliphant:
H.M.Jr:

Either do it, or fire Welles; that's the idea.
That's the idea. I don't see why we should fire

Welles. If you don't hear by one minute of
twelve, you call him up and say, "Yes." This
is his how, and you call him and do it. In
return for that he's approved the Chinese loan.
As Mr. Hanes puts it, he says Mr. Hull, when he
hears it, he will have several Peruvians
Klotz:

Several what?

H.M.Jr:

Peruvians. Incidentally, he's coming over at
three thirty tomorrow, so you Chinese babies put
down three thirty, will you? The President
cleared it yesterday.
And will you (Mrs. Klotz) find out whether Jesse
Jones is in town? I'd like him here.

Klotz:

Three thirty - Chinese.

H.M.Jr:

Call his office; get word to him. And tell Mr.
Welles' secretary that I am inviting Mr. Jesse
Jones to be here at three thirty. So I think
that that is -

Oliphant:

Well, I think we are taking this news so casually.
I'll tell you exactly what happened. Welles
called me up yesterday, and had three things he
wanted me to do for Cuba, and I think we'll be able
to do all three. When he got through I told him
the story about China; I told him about the

H.M.Jr:

President having given his word, and got a
satisfactory answer, and Mr. Hull objected, and
so forth, and so on. He said, what are we going
to do; the President passed his word. The Presi-

dent said if he got a satisfactory answer he'd act.
He said, "He got an answer; what are we going to

do about it?" He said, "I am going to talk to
the President within half an hour, and I'll ask
him." He called me back at six o'clock, and the
President said, "Go ahead."

He said, "There are a couple questions I'd like
to ask, and I'd like to come over and see you

Briss

-6-

303

so we fixed it up for tomorrow. But I don't
want to say anything about it until I get it.

I want something in writing from the President,
and I want something in writing from Mr. Welles,

but
they want to go to town on it. So that's
that.
Gibbons:

Will it be worthwhile? Will it help the Chinese

H.M.Jr:

Oh, it isn't the amount of money, Steve; it's
the fact that there is no country in the world
today, with the exception of Russia, that is
doing anything, and we all sit by here, and we
are just driving them in the hands of Russia.
We are just driving them in the hands of Russia.
There isn't another country that is just lifting
them up, and if they say they've got this
credit - it is a credit - then they go to England,
and the chances are two out of three they'11 get
something out of England. It will stiffen up the
French, and they will be encouraged. What we
are doing - what the world is doing, is driving

materially?

them in the hands of Russia. Everybody is
excited about communism; they all sit back and
won't help a country that is communistic. The
only people giving them any assistance is Russia,

and, in turn, they will get plenty. And here
we are, building battle ship after battle ship

that costs them a hundred eighty million dollars.

I told Welles yesterday somebody's got one chance

in ten of never getting paid back; I want you to
understand, it is one chance in ten. The situation
is, no country in the world is giving them any
help except Russia, and in return for that,
Russia is just sending their people in and taking
control of everything. Is it good business, or
anything?
Gibbons:

Oh certainly.

H.M.Jr:

I am doing it with my eyes open; I am doing it
directly. I think if we go ahead, fifty years
we be very happy. We have wasted

about a year; we have been talking this
butyear,
all of
this
from for just a now
may
and talking
that's Russia about going

in this country about communism
This on is a concrete example - most of them are fairy
tales.

304

-7Incidentally, I want you to send a letter to the
Secretary of War and the Secretary of the Navy,
including everything - for my signature - that we

sent to the President on China; and I want to
send one to Sumner Welles, and include everything
except their munition needs. You see?

Lochhead:

Send everything to Welles except that.

H.M.Jr:

Except that; but to the Secretary of War and the
Secretary of the Navy, a complete duplicate of
what we sent to the President. In the case of
the State Department, everything except their
munition needs.

(Mr. Taylor)

I spoke to Taylor; Welles said he/wants more

information on China, and, he said, from now on

we will get a daily report on what they have on
China; he said they have been negligent, and
have not sent us the stuff; from now on they'11
send us everything they have.

White:

There is a munitions control board meeting tomorrow.
They called me up about it and wanted me to
remind you that they want somebody there.

H.M.Jr:

Well, I'd like to know what's in that; I'd like

Oliphant:

Mr. Oliphant to go over it with a fine tooth
comb. I will not go to the meeting.
Taylor brought it to my attention yesterday, and
I am working on it.

H.M.Jr:

If it is all right

Taylor:

One is tin plate, and the other is helium for
Poland, for an experimental flight.
There is also a general report that will be brought
to your attention.
What is that? Isn't that tomorrow's meeting a
third item?

White:

Oliphant:
White:

No.

H.M.Jr:

I want Oliphant to go over it first, and then you

represent me.

305

-8Taylor:

I gave the stuff to him yesterday.

H.M.Jr:

Anything else, Harry?

White:

One other thing.

H.M.Jr:

Believe me, before we do anything on helium, for
Poland, let's see where we are on the last helium
deal.
I don't
else they can do the one
without
doingsee
thehow
other.

Taylor:

An individual, scientific flight, this is.

Oliphant:

You remember that Board - one of my boys raised

a meaty question yesterday that if I were consulted on it, I mean if I were advising you on
the legal side of your duties, as a member of
that Board, I would say that preshipments to
Germany are in violation of that law.

H.M.Jr:

Oliphant:
H.M.Jr:

Well, anyway

I assumed we didn't want to raise that question

until the boys could get it this time.
Well, I am not going to sign anything that is
illegal, with my eyes open.

Herman?

Oliphant:

I'll talk it over with White, and Taylor.

H.M.Jr:

I won't sign anything illegal, with my eyes open.
That report hasn't been prepared yet, but it
will be prepared and distributed, possibly, at
this meeting, so there will be time to go over
those details.

White:

H.M.Jr:

If you want to get something ready for that ten
thirty meeting, you may be excused. And tell
Mr. Kieley there is Goldenweiser, Walter Stewart,

and who else? and Warren - we'll be a few minutes

late. Ask them if they can wait in Mr. Hanes'
room, although they are all right outside; they

are all right outside.
Wayne?

-9-

306

Taylor:

We've got a problem in connection with the R. F. C.

H.M.Jr:

Central Republic Bank.
Is that an American bank?

Taylor:

Yes.

H.M.Jr:

Couldn't you clear it through the Banking Committee

that I wanted to - no immediate hurry about it.
It's placing around two million dollars in notes
that they want to sell to the Receiver for the

Taylor:

first?
I don't think it - I don't think it had anything

Bell:

It's financing.

Taylor:

Straight financing.

Bell:

It's part of the financing - straight issue you

H.M.Jr:

Could you take it up tomorrow? I mean, I am
crowded now. Can you take it up at ten thirty
tomorrow? We have thirty minutes. George is going

to do with the Banking Committee.

got out in November.

Taylor:

to give us a lecture. Huh?
That is 0. K.

H.M.Jr:

Will you do it then, Wayne?

Taylor:

(Nods "Yes.")

H.M.Jr:

Duffield:

(Nods to Mr. Duffield.)
I have nothing.

H.M.Jr:

Have you (Mr. Hanes) told Duffield about your

Hanes:

No. No.

H.M.Jr:

Will you?

Hanes:

I didn't have it until last night.

H.M.Jr:

Will you?

conversation with Douglas?

- 10 -

307

Hanes:

(Nods "Yes.")

Haas:

I have nothing this morning.

H.M.Jr:

You don't look very well, George, are you all right?

Haas:

H.M.Jr:

I've got kind of a half cold.
If you don't feel right, take care of it.

Haas:

Fine; I will.

H.M.Jr:

Why don't you go home today, and be here tomorrow?

Haas:

I'll see how I feel at noon.

H.M.Jr:

I know how you feel; you'd better go home today,

and be here tomorrow.

Haas:

All right.

H.M.Jr:

My mother used to say, "You look chesty."

Haas:

I feel worse than that.

H.M.Jr:

Herbert, somebody has been slipping back on us this story about Chinese going home, and all the

rest of it. I told them yesterday

Gaston:

Sandy Kline called me last night, and I warned

H.M.Jr:
Gaston:

Well, you want to wait?
Archie was trying to dig up some of the Chinese
today, and I thought perhaps we could stimulate
them to put out something.

H.M.Jr:

Will you do something about it, because that will
hurt them. You get hold of Chen, will you?

Gaston:

0. K. Yes.

H.M.Jr:

(Nods to Mr. Oliphant.)

Oliphant:

Nothing.

him he was likely to make a mistake. I told him
I thought this was all wrong.

308
RE DECEMBER 15 FINANCING

Present:

November 30, 1938.
10:30 A. M.

Mr. Bell
Mr. Harris
Mr. Hadley

Mr. Haas
Mr. Lochhead

Mr. Seltzer
Mr. Taylor
Mr. Hanes

H.M.Jr:

All
right, gentlemen. Mr. Bell, will you start
in?

Bell:

I think in this statement I have assumed the

least - the maximum financing in December is
possible, the minimum, March and June, and

that is eight hundred million dollars in

December, cash, and five hundred
H.M.Jr:

How much?

Bell:

Eight hundred million in cash. You add the
nine forty-two million dollars due in March; you
get a total financing of one billion seven; and
then five hundred million in each period of
March and June. That gives you a balance going
out of November with a billion seven eleven;
December, two billion four; January two billion
one; February a billion nine; March two billion

one eighty-eight; April one billion six eighty;
May one billion three ninety-seven; and June one
billion three ninety-six.

H.M.Jr:

Little heavy, Dan.

Bell:

I think so.
Little rich. I read a memorandum - Incidentally,

H.M.Jr:

I want to compliment you, Larry, on those couple

memoranda you sent through.

Seltzer:

Thank you.

309

-2H.M.Jr:

They were good, particularly the one in which
you pointed out - I don't know whether these other
gentlemen have seen it - the amount of Governments

in the open market has been coming - is less,

even though our debt is increasing, which I think
is very important. Thank you.

Then somebody wrote me a memo that we have still

-Government
year
and a half bonds are sold at least a year or

Bell:
H.M.Jr:

That's right.
... on the credit basis, which we haven't used

up. Who wrote that?

Bell:

That's Larry's memo.

H.M.Jr:

How far back does that go?
June - 138.

Seltzer:
H.M.Jr:

Seltzer:
Bell:

H.M.Jr:

June - 138. We've used it - we haven't sold the
money; is that right?
That is right. You still have eighty-one million
from December, 137.

You still have some Treasury bills you sold, but
I don't think that that is important, because what you've
done is used the cash in the subsequent issues
that have been paid in. Now, if you'd drawn
from the banks, that earlier issue, the subsequent
issues would have been paid for by credit. All

you are doing is substituting one credit for
another. I don't think that is important.
No, but I think, Dan, if we had an objective going
out on the first of July, next year, with a balance

of a billion, I think that is plenty.

Bell:

Well, that all depends on the program. If you
are going to run July and August with heavy

deficits, then a billion dollar balance will go
down pretty low by September 15.

H.M.Jr:

Well, yes, true, but you could

....

-3Bell:

310

If you have a two hundred fifty million dollar
deficit in each of the months of July and August,
then your balance drops to five hundred million.

That is all right, I think, as a matter of policy,
but we haven't been doing that.

H.M.Jr:

Bell:

How much are you figuring Hopkins is going to get
for the balance of this year - eight or nine hundred
million dollars more?
He probably ought to have around eight or nine
hundred million. He will probably spend seven,

H.M.Jr:

seven fifty of it.
Is that all included in that?

Bell:

Yes sir; we have kept the emergency expenditures

H.M.Jr:

Well, on the other hand, the market is as good

up pretty well.

now. Where is my chart on today's Governments?
Where is that one - the one you wanted today
for me?

Haas:

It should be in here.

Haas:

No, that is - that
Six thirty. (Over telephone:) Miss Lundy, there's

Bell:

in this morning? I see; all right.
I am in favor of the eight.

H.M.Jr:

Eight.

Bell:
Lochhead:

I'd be willing to come down to seven; I'm in
favor of the eight though.
Stick to the eight in the beginning, Dan, and

H.M.Jr:

How do you feel, Wayne?

Taylor:

I certainly am anticipating we may want to skip
a cash offering in March.

H.M.Jr:

two charts on the Government bond market to come

in to the Secretary every morning; did they come

he'll wear you down.

-4-

311

Bell:

There is a possibility of that.

Taylor:

That you pick up your Junes in March, and maybe

don't do any cash at that time. I don't say that
that will be the thing to do, but I think we

ought to always have that thing in mind, so that
when we talk about dividing it into three pieces
we may very well find we won't be able to do that.
That will give you a comparatively big issue in
June, which ought to be all right. You can

either step up your bills a little bit in March,
it, but I don't think we ought to count, let's
say, on half a million - half a billion new money

or sometime during that period, if you want to do

in March in the form of a public issue, which

would

H.M.Jr:

You don't think?

Taylor:

No.

H.M.Jr:

Name a figure.

Taylor:

Eight hundred.

H.M.Jr:

Of course. Am I right, boys, that since this
sterling thing has improved the last day or two,

which would lead me to think that you

ought to go a little high in cash now.

the bond market improved too?

Harris:

Yes.

Lochhead:

I think you will find a generally better tone
around; you can't transmit it to anything else
except better sterling, and it makes people feel
better. It is transmitted into the market.

H.M.Jr:

It made a difference; I mean, the weakness in

Lochhead:

The disturbing effect was that people don't know
what it means, and that makes it disturbing.

Bell:

We had a peak balance on September 21 - and, that

sterling had a very bad effect.

is, following the September financing. It shows
we had six hundred seventeen million, I think,

in the Federal Reserve Banks, and that has been

reduced to four hundred thirty-five, which is a
reduction of three hundred eighty-two million dollars.

-5-

312

We have used a hundred ninety-three million dollars in gold, and the Special Depositories have

paid in, in their discretion, fifty-five million

dollars. The balance has been reduced by six

hundred thirty. If you hadn't had your gold, if

you hadn't had your Federal Reserve balances,
made largely by reasons of your balances in
September, you would have used that Special
Depository money which was deposited there last

year. And you had a similar situation in June.
Of course, in the June financing, you had the
large. deposit of gold.

H.M.Jr:

Do you want to get in on this at this stage,

Hanes:

I'd rather listen; I am so ignorant about it.

H.M.Jr:

You'd like to go through one and just listen?

Hanes:

(Nods "Yes.")

H.M.Jr:

Any time you've got an idea, will you talk up?

Hanes:

Yes, I will.

H.M.Jr:

You will certainly have something to say -

John, or not?

something.

Larry, what figure would you think, to go after
this time?

Seltzer:

Five hundred. I think those balances Dan read

were too high.- those cash balances. I don't think
you need that much money. I'd like to see you use
some bills, after the turn of the year, to raise
a little money. I think the money market needs
some bills, and I don't like to pay two and three/
quarters interest for idle money that we are not
actually going to need. And I think that I can
go along with Wayne on skipping a cash financing
in March - raise money through bills before then,
and then get a lot of cash, say another six hundred
or so, in June. With your present big balance, I
think that would see you out very comfortably.

H.M.Jr:

Well, Larry, let me just tell you how I feel.

That doesn't say I won't change, but how I feel.

-6-

313

I don't want to increase our bills over a billion three, because I have always felt that that
is a reserve in time of danger. See? I mean,

something goes very sour, and, say sterling continued to drop for another Wednesday, we'd have

had plenty of trouble. In fact, that is one

reason I have been so fussy with sterling - I
wouldn't say this outside the Treasury - because
I wanted to get that straightened out before our
financing. We'd have been in a mess, and we'd

have had to skip it entirely if sterling continued
to drop all week. It's getting to be headline
news; everybody writing it up - didn't know a
damned thing about it, but making it quite a

thing. I don't think Taylor and I agree on that this, and somebody else - oh, yes, he (Mr. Bell);
he's the bill man - he's been taking you. I
don't say I won't change, but it's a comfortable
feeling to know I can go out any time and borrow
a hundred billion - a hundred billion dollars
worth of bills, and I hate to use that thing
up. He was the fellow that talked; Dan there is
the fellow that talked about it.

Taylor:

As you know, I am a bill man. That isn't why

I was making the comments that I was making at this
time.

H.M.Jr:

I just want to let the people that haven't been
with me before on this thing know how I feel about
bills. I mean, because

Seltzer:

The only difficulty with the situation is the
Fed itself needs about half your present bill
volume to move around.

H.M.Jr:

Please don't have me crying for the Feds, please.

Seltzer:

That means very little for the banks.

H.M.Jr:

I know. It's just too damn bad.

Seltzer:

I am not weakening to the Fed, you know. I am

Taylor:

have been looking at the last six or more months.

indicating why I think your bill is too heavy.
That June maturity is the thing I think all of us

-7-

314

Bell:

The what, Wayne?

Taylor:

The June maturities, and if we can get that out
of the way in March then we can take quite a long

breath, but if we try to raise some cash also in
March, I'd be a little scared about it. You may
find that the market can do both, but I'd be a
little scared of Dan's bills in March.

H.M.Jr:

George?

Haas:

I would say that the main consideration - I am

inclined to think in terms of five hundred. At the
time the memorandum was written - it was Friday - and
the market, if anything is better than it was then.

The main consideration I had in mind at that time
was that if you might overload the market,

particularly on that end, and I'd say, if the market
would take it, I'd be inclined to take it with a
great degree of surety, I wouldn't mind going more
than five hundred.

H.M.Jr:

You would or wouldn't?

Haas:

Wouldn't; but I think it would be in terms of what

H.M.Jr:

The trouble with five hundred is, it's awfully
difficult to offer two different kinds of pieces

the market was.

of paper.

Bell:

Yeah.

Haas:

I think it mainly depends on developments in the
market. Of course, these other considerations
-

I agree with Larry about the bills. They - (pause)

H.M.Jr:

Go ahead, George.

Haas:

It is a compromise between your consideration and

H.M.Jr:

As to paying two and three/quarters for idle

Seltzer:

this other one.

money. The two-and-three/quarters money is the
money we are using; the other money is the decimal

two, thirty-seven (.237).
That's where you - a nice way to kid yourself.

-8- H.M.Jr:

315

The billion three we are borrowing, costs the

country
less than four hundred thousand a year,
is that right?

Seltzer:

Yeah.

H.M.Jr:

Less than four hundred thousand a year, and that
is the idle money; the two and three/quarters

is in our daily turnover. I am not kidding myself

much,

but (laughs). I've got an answer,

anyway.

Bell:
H.M.Jr:

Little - while you feel good.
That billion three doesn't cost us over four hundred
thousand dollars. I think that what we'll do is
this: unless somebody - I think - to go into the
meeting with the Fed at eleven, let's talk eight
hundred million and see what they do to us, huh?
What do you think, boys?

Lochhead:

I'd rather - I think we ought to take as much as

we can from the market. The maximum figure they
are talking is eight hundred; we'll agree to no
more than that.

Taylor:

They are talking eight hundred.

Bell:

Let's talk seven.

Lochhead:

You're going to have to compromise, somewhere

H.M.Jr:

between. If you start with eight hundred,
Let's talk eight hundred when we see them. It's

Seltzer:

You mean eight eighty when you say eight hundred.

Bell:

It might be nine.

H.M.Jr:

Dan always squeezes out the last drop.

Lochhead:

Some of us feel in that case it should be loaded

Harris:

really eight eighty.

more with notes than with long-term bonds.

I think a lot depends on how you borrow eight
hundred million.

- -9 H.M.Jr:

316

The trouble is this, Harris; if you make it five

hundred notes and at least one or two hundred con-

version, you get a seven hundred million dollar
note issue, see, which is too damned big. I mean,
I just - I hate these; I won't be here, but I hate
these things for the fellow that follows me, and
to give him a seven, eight hundred million dollar
note issue - that is what I'm going up against,
now, in March, on a fixed date.
Harris:

These recent note issues have been awfully small,

H.M.Jr:

What would you make it, five and three?

Harris:

and I know the market really needs it.

If you are going to borrow eight million, I'd prefer
to see that, because the turnover is going to be
on the bonds. You get too heavy a bond issue for
the market to absorb.

Bell:

Make it four and four.

H.M.Jr:

That is what I had in mind - four and four.

Taylor:

That's what I'd start talking.

Harris:

If you can assume four hundred million dollars

H.M.Jr:

will be turned in for the bond.
It looks like hell if the Secretary of the Treasury
said eight hundred million; five hundred notes,
three hundred bonds. It looks as though I didn't
have any confidence in the bond market. If I
make it even it's all right. "What's the matter?
Afraid he's not going to get a subscription to the
bonds? He's cutting down the bonds; wants more
notes."

Harris:

Well, you couldn't take just seven hundred
million dollars in a lot, so you could get eight
hundred million.

H.M.Jr:

I think we will talk to the crowd when they come

in, fifty-fifty; four hundred of each, huh? And
see what they do to it. They have had their
experts running all over the country. What do

you think, Wayne? Fifty-fifty?
Taylor:

Fifty-fifty, four hundred of each, and see what

they do to it.

- 10 H.M.Jr:

We'll see what happens.

Taylor:

You probably know they are going to talk

H.M.Jr:

317

I don't know what they are going to talk. Do

you?

Taylor:

I think so.

H.M.Jr:

What?

Taylor:

They are going to talk a three-way job.
(To messenger:) Another twelve chairs.

H.M.Jr:

Harris:
H.M.Jr:

They are going to say, exceeding an eight hundred

million won't be taken by the market.

Randolph Burgess has convinced me you can't have

three balls in the air at the same time, and I
think he's right.

(Open Market meeting immediately followed.)

318

OPEN MARKET MEETING

Present:

NOVEMBER 30, 1938.

11:00 A. M.

Mr. Taylor

Mr. Bell
Mr. Haas

Mr. Seltzer

Mr. Lochhead
Mr. Hanes

Mr. Harris

Mr. Hadley
Mr. Eccles

Mr. Harrison
Mr. Sproul

Mr. Sinclair

Mr. Goldenweiser

Mr. Williams
Mr. Piser

H.M.Jr:

Bell:

Shall we start in the usual way and, ah, and have
Bell tell us what's what? Go ahead, Dan.
These estimates of the capitalization of November 20
to June, are based on the asumption that we will
borrow eight hundred million dollars in cash in
December; five hundred million dollars in March,

and five hundred million in June. And in that
picture there is three hundred twenty-five million
dollars of maturities for Home Owners' Loan,
June 1, 1939. By that time that organization will
have built up about a hundred fifty million dollars
cash, which will be used to pay off the three hundred twenty-five, and I have assumed the balance will
be refunded and will not call upon the Treasury
for additional cash.
That gives us balances at the end of November of

a billion seven eleven; December, two billion four;
June, two billion zero ninety (2,090,000); February,

one billion nine fifteen; March, two billion one
eighty-eight; April, one billion six eighty-two;
May, one billion three ninety-seven; and June,
one billion three ninety-six.

-2-

319

If we exchange the nine hundred forty-two million
dollars, maturing in March, in connection with the

December financing, of course, that would make a

totalmillion.
financing of one billion seven hundred fortytwo

That completes it.
Eccles:

What does that - what does that estimate the net
expenditures would be in excess of receipts?

Bell:

Well, this follows very closely the Budget picture,
with an addition of about five hundred million
for Hopkins.

Eccles:

For the last five months?

Bell:

(Nods "Yes.")

Eccles:

Do you - do you - do you feel that - that is an
accurate - an accurate picture, or is it based on
estimates you think are excessive in relationship
to expenditures? For instance, R. F. C. and P. W. A.?
I shouldn't have said that; I should have said it's
seven fifty for Hopkins. It's two hundred fifty
million dollars, about, in addition to the five

Bell:

hundred million in the Budget's estimates.

Eccles:

This contemplates seven fifty for Hopkins

Williams:

Mr. Bell, does that include the Commodity Credit
and R. F. C., or are they excluded?

Bell:

It excludes those two organizations so far as they
have cash balances in the Treasury. Anything in
addition to that I am assuming they will finance
their own obligations.

Eccles:

Does this contemplate any reimbursement to the

Bell:

It does not, no.

Eccles:

There was the three hundred and - what was that?

Bell:

Three hundred million dollars.

Treasury from the R. F. C's. independent financing?

-3-

320

Eccles:

That they could put out any time between now and
then and reimburse the Treasury.

H.M.Jr:

Five?

Bell:

A little more than that.

H.M.Jr:

There is another five to go.

Eccles:

That includes the five fifty. You don't mean five
outside the five fifty? Five all together.
Sometime, I am under obligation to sell for Jones
another five hundred million of R. F. C. notes to

H.M.Jr:

the public.

Eccles:

But the maturities a while ago that was taken up

Taylor:

No.

Piser:

They refunded that? Oh yes, I remember now.

H.M.Jr:

If we got five hundred from the R. F. C. it would

by the Treasury.

mean we got five hundred million less from the
Treasury.

Eccles:

Or your balance is five hundred more.

H.M.Jr:

Greater. 0. K.
Or to the extent that these other estimates may
be excessive, of course, it would have that same
effect. The estimates, I assume, are liberal; I
mean, if anything, it would be a question of

Eccles:

whether that amount of money would go out.

Bell:

I think that is a fair statement. I think the

Eccles:

They have been in the past. You usually figure
they are going to spend more than they usually do.

Bell:

But we do finance on those estimates. We cut those
down materially.

Eccles:

Yes.

estimates are liberal, probably on both sides.

-4H.M.Jr:

Bell:
Eccles:

321

Well, if Bell's estimates are all, they are on the
liberal side, but not too much. Right, Dan?
Yes,
not too
much.
I don't
think the expenditure
estimates
are
far out
of line.
I don't understand where this Home Owner's Loan

fits in here. The Treasury, of course, won't won't advance them any money; they have this maturity
which they will be prepared to pay a hundred fifty
million, and the balance they would refund, which
is completely outside the Budget. It would only
be the question of the money market taking care
of the refunding of a hundred seventy-five million, but it would get over a hundred fifty million.
Bell:

That's right. The Home Owner's Loan has its cash
with the Treasury. It accumulates month by month
and we are using this cash.

Eccles:

But this cash will be drawn out?

Bell:

We'll pay a hundred fifty million in cash on
June 1 to retire those bonds.

H.M.Jr:

Anybody want to ask any more question of Bell?
You got the picture?

Well, then, the next thing will be to hear from

Mr. Sproul, to what he knows, or he's learned as
to what kind of merchandise the market would like
to have.

Sproul:

Well, we have made a canvass of the New York market

and insofar as it represents the markets for the
rest of the country, on the assumption of an ex-

change of the March notes, up to about eight hundred million of new money being acquired December

fifteenth.

H.M.Jr:

You have been talking eight hundred?

Sproul:

We have said anything up to eight hundred million.

And the market, I think, is prepared to receive
anything up to eight hundred million, and if it
were less than eight hundred million it would be,

perhaps, agreeably surprised. The various combinations which we discussed with the markets, to

-5-

322

do a financing job of about that magnitude,

have been a note and a long bond; a note and an
intermediate bond; a short and a long bond; a
note, a short bond, a long bond; a note, intermediate bond, and a long bond.

The general attitude of the market was, under
present conditions, that anyone of those combina-

tions could be sold and it was just a question

of how you wanted to meet the various investment
movements of the market; how well you wanted to
satisfy their demands as to how you would submit

your offerings. Gauging the market, it was estimated that the banks hold up to about eighty per
cent of the rights of the maturing issue and they
would have to be depended upon to do - in addition
to their own investments - to do a large underwriting job on an issue of that size, and that,
in the present state of world affairs, and in
prospect of continued deficit financing here for
some time, it would be desirable to meet market
requirements as nearly as might be possible.
A note and a long bond was not considered by

the markets to fit that picture adequately for
two principal and related reasons: One, that it
was considered that with a note and a long bond
you, perhaps, get out something like a billion of
long bonds and that would be more than the market
could comfortably carry as an investment market,

and as an underwriting market; and, second, that
the premium on the long bond would probably be

considerably fatter than the premium on the notes,

and you would have your exchanges into the long

bonds to take advantage of that situation, giving
you a secondary market with a lot of nervous
holders who, with any blow-up here or abroad any sudden blow-up here or abroad - would create
a problem which would be of particular concern
to us.

The note and the intermediate bond was considered

to be perhaps the safest thing that could be put
out, but as not being wholly satisfactory because
it doesn't tap that long term investment market
which actually exists at the present time, and

which is estimated to be any way from two hundred

million to four hundred million for immediate
investment.

-6-

323

A short and long bond also was considered safe,

and undoubtedly successful, but it cuts out the
possibility of reducing the average cost of the
borrowing with the note, and it's running counter
to what has been the practice of giving existing
note
holders an opportunity to exchange into a
new note.
So that the market, as we canvassed it, came down
to a comparable consideration of a three-way

offering, either of a note, a short bond, a

long bond, or a note, intermediate bond, and long
bond, and there, perhaps, was a note, short bond,
and long bond because they felt the two bond issues

should not be too competive, either in yield or
maturities; that the intermediate bonds and long
bonds would bump into one another, and there was
some insurance companies and some banks which

ordinarily would take the long - particularly

some insurance companies, which ordinarily would

take the long bonds, but which might be taken into
the intermediate bond market if you offered two
bonds too closely together. They thought the
note, short bond, and long bond would fit all
sections of the market. The short bond would be

particularly desirable from the standpoint of the
banks, which would get a maturity, a yield greater
than the notes which are now pretty slim. The
insurance companies and other long bond investors

would get a long bond offering out. Around sixtysixty-five they would like, and the notes which

would be something of a gesture under these
circumstances, would take care of a possible demand
for notes and give holders of maturing notes an

opportunity to exchange for notes, if they wished.
The market division of such an offering, as was
suggested, an offering of cash and equal - probably
equal amounts in the short and long bonds, and
exchange offering for all three, and they thought
that with such an offering you'd get out perhaps
seven hundred fifty million of the long bonds,
which is about all they thought the market could
comfortably carry. They'd get out, perhaps, seven
hundred fifty or eight hundred million of the
short bonds and fifty to a hundred million of the
notes, which in those circumstances, probably
would best be added to an existing issue rather
than a new note.

324

-7It could be added to the one and one/eighths
which are now selling at about a hundred, one/

sixteenth. If that sort of an offering were

considered not desirable or too cumbersome, and
a note and long bond were considered, then the
market's feeling was that the notes should be
sweetened up and made so that the exchange

would not go too heavily for the long bonds and
overload that section of the market.
If the note and an intermediate bond were offered,
that sweetening process wouldn't be necessary and

it would be a very safe offering, but it would be
satisfy either the banks or the long-term investors,
and would put another issue in the area of the

a compromise offering, which wouldn't entirely

H.M.Jr:

market which is now getting pretty crowded with
issues and where the pressure has been greatest,
perhaps, in recent months.
What is that?

Sproul:

In the 52-54 area.

Bell:

You mean you want to avoid that?

Sproul:

No, I don't think you need to avoid it; I think
it would be a safe one for you to offer, but it

adds a large bond which has a crowded area already.

Bell:

In discussing your three-way proposition, did

Sproul:

Which?

Harrison:

The December.

Bell:

The December bonds, intermediates - fifty---fifty-

Sproul:

Fifty---fifty-two? Yes, that is a possibility,

Bell:

They wanted an intermediate bond?

anybody suggest that you might have Septembers
reopened, and just for exchange only?

two.

but it doesn't meet the desire for a short maturity
on the part of the bank.

-8Sproul:

325

Something that gives them more yield than a note

but doesn't carry them out on that yield of

maturities. They are a little sick of note
yields, but they don't like to go out that far if
they can help it, to get the bonds.

H.M.Jr:

What
is this March issue? How much does the Fed
own?

Sproul:

Eighty-three million.

H.M.Jr:

Eighty-three million of the March?

Sproul:

Yes.

Piser:

Mr. Secretary, the Board has made a survey of the

ten districts outside of New York and Philadelphia
and I was wondering if you'd be interested in hear-

ing the results of that.

H.M.Jr:

Very much.

Piser:

What we discovered was that the majority of the

commercial banks seemed to prefer an option between

the note and the bond - a five-year note and a
bond. As far as the bond is concerned, the majority
of them would prefer a two and a half. And a
substantial minority of the banks, ah, would
prefer a shorter bond; and comparatively few of
them would be interested in a two and three
quarter permanent holding, although they would

subscribe and sell shortly afterward.

Among the savings banks and insurance companies too

the preference seemed to run to a two and a half.
But their second choice is a two and three quarter
bond, and a substantial minority of those institutuions seem to want the two and three quarter.
The ones that we surveyed seem generally to have

no interest in a short bond.

I think that is about a summary of the survey we

made of those ten districts.

Goldenweiser: An estimate of about thirty-nine banks.
H.M.Jr:

Haas and Seltzer made a very interesting study as

to which bonds sell off the least or the most.

9-

326

Give them a summary of that, George, and the

amount. You got it in your mind?

Haas:

Yes.

H.M.Jr:

I thought that was novel to me, because
Well, we made an analysis of the recent declines
in the bond market and found out there was the
section of the bond market that seemed to be the

Haas:

weakest was a medium-term bond market rather than

a longer term bond. And we've got the results
of it charted here somewhere. Isn't one of those
charts there that show that, Harry?
That was the main part, Mr. Secretary.

Eccles:

We had that here, that the intermediates had gone
off about twenty, twenty-two, and the longest
bonds had gone off from seventeen to twenty/thirtyseconds.

H.M.Jr:

But in a break, the long ones seem to hold up the

Eccles:

Well, they have - this has been a sorted - I wouldn't
call it a break - this slow decline - the long ones
have gone off just about the same as the inter-

better?

mediate ones, but you'd expect them to go off a

little more - but they haven't.

H.M.Jr:

Those figures are from the middle of October.
And the other thing, George, if you and Seltzer
would tell them the figures - amounts of Treasury
bonds in the hands of the public over the last
seven or eight months. That - you've got that?

Haas:

I'll see if I can recall the figures. Have you

Piser:

Seltzer:

(Seltzer) got the figures there?

Why, we took the total outstanding Treasury bonds
and subtracted the amounts held by trust funds,
and the United States Savings bonds, and found

that for the last two years there has been very
little increase in the amount of the public debt it
held in the market; that if you were to chart
find that it ran like that blank space line
you'd (indicating chart) underneath the lowest there.

- 10 -

327

That is virtually all. The increase in the debt
has been absorbed by trust funds and savings

bonds, and that fact probably explains - has
contributed to the underlying strength of the
market during the last two years.
Eccles:

You take into account, however, the big decline

in the bills that are outstanding, which were

held entirely by the banks, and the banks have
made up to a very large extent in the purchase of
notes and bonds, the amount of the decline in bills.
Seltzer:

Even there you don't get very satisfying figures.
June 30, for all banks the total increase in bond

For example, from the end of December '36 to

holdings was something like a hundred ninety-two

millions whereas they suffered declines in loans,
of better than a billion, and decrease in Govern-

ments better than a billion, so that - and this
net increase of a hundred ninety-two millions

included some seventy or eighty millions of savings

bonds.

H.M.Jr:

I suggest, George, you send that over to Chairman

Eccles - that study; I think it is very interesting.

Haas:

The bonds outstanding in the public?

H.M.Jr:

Yes. Also the one on fluctuations between the
different kinds of bonds and the recent breaks.

Sproul:

I don't think you can place entire reliance on
those fluctuations in that intermediate area

as an area with a lot of high premium bonds where

the holders, as far as the bank is concerned,

have considerable profits and when they come to

sell they are apt to take the profit out, but
it wouldn't carry along indefinitely as a market
factor.

H.M.Jr:

Well, I'll tell you what we intend to do first.
It will help clear me if each figure - if you will
each take a piece of paper and tell me how much

cash we should borrow.
Eccles:

The difficulty with me on that is, it would depend
on what the offering is.

- 11 Sproul:

328

It's the other way around; the offering would

depend on how much cash you're going to borrow.
H.M.Jr:

Well, take in the March

Eccles:

Take in the March?

H.M.Jr:

This is new money, plus calling the March in.

Eccles:

Yes, the total - I know.

H.M.Jr:

How much new cash?

Eccles:

Well, as I say, it would depend on what you are
going to offer, whether it's going to be two bonds
or a note and a bond.

H.M.Jr:

To help me, Marriner, I'd like to decide the cash

first. I mean that, we'll do it another way; if

you don't mind my going around and getting advice
this way; I mean, how much cash? Then, if we have

Eccles:

that, then I'd like to talk about what kind of
merchandise it will be, but I'd like to know how
much it is going to be. You don't mind my doing
it this way?
No, no. But it is difficult for me to say the

Sinclair:

This is not a secret ballot is it?

H.M.Jr:

Oh no.

amount.

(Ballots taken up and given to H.M.Jr.)
H.M.Jr:

What's this, two initials on one piece of paper.

Eccles:

Sign your name on this.

Taylor:

I was going to have to borrow his (Mr. Bell's)
pencil; I looked over his shoulder and saw what
he had written down, so thought I'd save a little

Is that the way we balance the budget?

time.

H.M.Jr:

Got everybody?

Hadley:

One more to come.

- 12 -

329

H.M.Jr:

Put me down for eight.

Sproul:

Are we to have tellers now?

H.M.Jr:

Yeah. Bell is the teller. We all need civil
service employees when it comes to tellers.

Did you get in that corner there?
Taylor:

There is a fellow who wouldn't sign his name.

Harrison:

He's a banker, I'll bet.

Seltzer:

Oh, that's mine.

H.M.Jr:

Come on, you banker. Did you get the wisecrack "He's a banker."

All right.

I see we've got one fellow that
works for Macy's - Harrison.

Bell:

Well, we have three for five hundred million cash;
we have one for five hundred fifty million cash;
we have two

H.M.Jr:

You have been associating with Ruml.

Bell:

We have two for six hundred million cash; we have
one, seven hundred fifty million cash; and we

have one, two, three, four, five, for eight hundred million cash.

Bell:

Wait a minute; you didn't count those.
Seven. There's three on one piece.

H.M.Jr:

Do it again, Dan.

Bell:

Seven, eight hundred million cash; one, seven
hundred fifty million cash; two, six hundred

Taylor:

million cash; one, five fifty; and three, five
hundred.

H.M.Jr:

Read off the name of everybody and it will make

Bell:

Haas, Bell Taylor, Secretary, J. P.
Who is that? That's mine.

Sinclair:

it a little bit different.

- 13 -

330

H.M.Jr:

Eight hundred.

Bell:

These are eight hundred. J. H. W. - Williams.
And
Lochhead,
eight hundred; Seltzer, five hundred;
Piser
is five hundred,

Goldenweiser: I think that is mine.
Bell:

Goldenweiser, five hundred; Eccles, five fifty;
and Harris and Harrison, six hundred; and Sproul
seven fifty.

H.M.Jr:

What did Hanes have? Didn't play?

Hanes:

I didn't put in one.

Bell:

He's observing.

H.M.Jr:

All right. Sproul, how much?
Seven fifty.

Bell:
Eccles:

Seven fifty.
I'll give you my my fifty and you can go out, and

H.M.Jr:

What did George have?

Harrison:

Six hundred, and that is the right figure.

Sproul:

I'll go back to five, Allan.

(Hearty laughter.)
H.M.Jr:

Did you level that down? Oh, George, that's

Harrison:

It is well under the maximum which the market

wonderful.

expects, which is good. It is about a third of

which you estimate your requirements to be, and
it is conservative because you don't know what is

ahead in world conditions, and in the interpretation of continued deficit financing. Five hundred,
I think, is not much better than six hundred, and
it is going below your average requirements.

H.M.Jr:

Harrison:

Well

I agree with the Chairman, by the way, the that

And the amount will depend a little bit on ticket

- 14 -

H.M.Jr:

331

you write, but assuming the ticket is right for
the figure, I think six hundred is better.
Well, at this end of the room, I think - I don't
think
we can figure the ticket until we have the
amount.

Harrison:

That
is right; you can fit your ticket to the
amount.

Eccles:

It
is like which is first, the hen or the egg,
here.

H.M.Jr:

We ought to be scientific now - find out what our
needs are and make the market come our way, like
we always do.

Eccles:

Are you fortunate in having room for flexibility?
It isn't a thing you've got to have, so you've got
some room.

H.M.Jr:

You could do without any.

Eccles:

That is right; I say you could have flexibility.

H.M.Jr:

Does anybody else feel as convinced as Mr. George
Harrison does?

Piser:

In defense of the five hundred, I'd like to say,
since the market has eased off half or three/
quarters, during the last month, I think it might
be desirable to cut it down to a minimum amount
and that was my reason for suggesting the five
hundred.

Sinclair:

I think, in defense of the eight hundred, I'd

take as much as you can get this time and keep in
mind next spring, not know what is going to happen.

I think the market, from the publicity that's been
going around in newspapers and journals, certainly
expects in the neighborhood of eight hundred,

and expects to take it. - the reason I'd be inclined
to take up to the maximum of eight hundred.

H.M.Jr:

Of course, you people know we are talking eight

Sinclair:

Well, a hundred million, one way or the other -

hundred; it really means eight eighty, so
I am not concerned much about it.

332

- 15 Harrison:
H.M.Jr:

As long as it doesn't mean nine twenty.
You can do that too.

Taylor:

Not again, that quickly.

H.M.Jr:

Anybody else want to - I wish somebody would tell
me what Congress is going to do.

Eccles:

You are going to discuss the type of issue.

H.M.Jr:

Well, I'd just kind of like to discuss this a

(Laughter.)

couple minutes more, Marriner. I'd like to do
this a couple minutes more.

Eccles:

The reason I say five fifty, I was thinking of a
billion and a half. I agree with Piser that there
is no point in pushing the market at this time, and I
don't agree with John Sinclair in that it is
necessary to try to get all you can get now because,
in the first place, you have a very, very small
amount of bills out; you've got that three or
four billion dollars in any amount, almost, you
want in that field, as emergency. You have also
got, if you do your March financing - at this time
you've got a spot there that you won't have any
refunding that you'd have to do. You have some
that you are - you've got some preparation there
for any emergency situation.
You also have, and would have, with five hundred

million, a large enough cash balance to carry us,
so you've got, it seems to me, plenty of ammunition with the short market, that is, the bill market,
unused with the excess reserve picture as it is.
With no maturities on March 15, and with a large
cash balance, and with a weak market today - not
weak, but at least a market that isn't too strong I see no occasion to in any way, take a chance or

to push it at all.

That is the way I feel about it.
H.M.Jr:

Well, in order to make progress, supposing we say

this: Till we get our issue we say we will take

at least seven hundred and not more than eight
hundred. Does anybody argue very hard about that -

333

- 16 against
billing it, oh, say, between seven and
eight hundred.
Eccles:

That is, base your calculations on that?

H.M.Jr:

Yes, say take between seven and eight hundred.

I'd like to take at least seven, and I'd argue for
eight, but at least let's use that as an assumption.
And Chairman Eccles says it makes a difference to
him as to what kind, so we'll make a little progress,
but we can come back again. Let's say we'll have
something - take between seven and eight hundred
and see what we have. Would that be agreeable,
Marriner?

Eccles:

Yes, fine.

H.M.Jr:

Anybody disagree on that? Then let's say we are
talking in terms of between seven and eight hund-

Harrison:

red million dollars. Who - who's got - George,
you've got some very good ideas as to how you'd
do it if it were between seven and eight hundred.
I agree with Mr. Sproul that you can probably, at
the proper price, adopt any one of the various
combinations that have been discussed. I think
with conditions as they are, however, realizing

that the world is still in a turmoil, realizing
that you are still in the midst of deficit financing, and that you (words misunderstood) the

Congressional session. I think you've got to
try to do the best you can, as you have always
tried, to suit the market. I can best express
what I have in mind by trying to eliminate a
proposal that has been made. I think the worst

thing you can probably do in view of present
circumstances, is to offer a note and a long bond,
and by a long bond, I mean two and three/quarters,
for exchange.

Eccles:

You think that would be the worst?

Harrison:

I think that would be the worst for this reason.

Inasmuch as our estimates show banks own seventy

cent of the rights, and most banks do not

want per a long bond, you are forcing them to take
the long bond because of the premium you put on

it, unless you make the note so rich you'd probably

334

- 17 throw the whole note structure out of line. Now,
if that is true, and you force bonds to banks, to
take the better part of the exchange in the

long bond, you create for yourself a secondary
market which may be very good, in which event no
damage would be done; but it also may not be so
good, in which event damage would be done, and
you are taking an unnecessary risk.

Now, that being so, what - what - what should you

do on the exchange? To suit the better part of
the holders of the rights, I should think that a
short bond would best answer the purpose,

and by that I mean, say a two or at the most, a
two and a quarter per cent bond, at whatever

maturity it would be called for. And I don't think
the note issue makes an awfully much difference
because with the premium on the bond you'd get I think you'd have very few exchanges, to the
notes anyway.

There are some indications on the bonds you'd give

holders rights to subscribe to notes; I'd open up
the notes to satisfy that expectation there will

be some notes. Now I don't expect you'd get much
on the exchange.

Note holders would expect, and would take long

bonds. Insurance companies hold five, ten, fifteen
million dollars of the rights, and they may be
disappointed and a little sore, and you haven't

done anything to suit them. The difficulty, I
recognize, is that it makes it a little cumbersome,
and it might be a little confusing, but I don't
see why that should be a real deterrent. You
have done it once before, but it didn't work very
well, but circumstances then were very different in 1931 - when the three-way offering was all for
cash.

H.M.Jr:

What was that?

Eccles:

The Mellon issue - 131.

Harrison:

It did not work well, but conditions were very, very
different from what they are now. You didn't have
the excess reserves you've got now, buried in

pessimism and a declining market anyway. The

conditions changed between the date of the offering

and closing of the offering.

335

- 18 Piser:

May I interrupt at that point. I think one of
the difficulties of that particular offering

was the pricing difficulty because on the basis
of the current market at the time of the announcement, I think two of the issues could be figured
at a much higher premium than the third issue,
and
it was thisatthird
unsuccessful
that issue
time. which was realtively

Sproul:

I think that is right; they had to call up the

banks and ask them to go into the issue.

H.M.Jr:

What year was that?

Piser:

131.

H.M.Jr:

I just didn't want to make any mistake.

Williams;

Am I right; you said they wanted a five-year note

Piser:
Eccles:

Harrison:

and a long two and three/quarters?
Two and a half.

And that is all the districts?
If, for practical reasons, you don't want to do
the three-way offering on exchange, I think my
preference would be to make the notes - I don't

know how many would be taken - and a two and a

half per cent intermediate bond.

H.M.Jr:

Well, I can clear the atmosphere. Under the

tutelage of one Randolph Burgess, he convinced

me, for the last five years, I should never do a
three-way offering, and I don't want to seem as
though I am discourteous to Randolph.

Harrison:

H.M.Jr:

He's admitted already - whether he's changed his

status, I don't know - as a banker he looks on the
three-way offering with favor.
I don't want Randolph to think: "No sooner am I

out than he turns me down." Again, to make headway,

I don't want to do a three-way.

Harrison:

Well, I assumed you wouldn't. Then, if that is

true, in my judgment, rather than make it notes
and long bonds which, which has, I think, greater

risk in it, I would make it the note and intermediate bond.

336

- 19 H.M.Jr:
Eccles:

I definitely don't want to do three things. I

don't know how the Chairman feels on three.

Well, I - we discussed that this morning and I

raised that same point; it is confusing. It
might indicate weakness, and the suggestion I made,
if you were going to consider three at all, I
wouldn't do it in the way George suggests. I
would do it in this way: I wouldn't give the
real short bonds at all. Give a two and a half
bond and the note; give an option on them, for
the conversion, and then if you are going to
raise cash and you've got a minority - but a substantial part of the investment communities who
want the two and three/quarters, and they hold
very few of the notes - then you could give them this would be a three-way but it wouldn't be a
three-way all the way through. I mean, that is

if you were going to do that, I would prefer that
to George's method because the banks own most of
the notes; therefore, give them the shorter
bonds and the notes go to the market for cash.
Give the note and the long bond.

Now, I recognize, as you do, there is some dif-

ficulty to the three-way option. It may be
interpreted as weakness and it may be confusing,
and I would, therefore, prefer to, if you are going to get the seven hundred to the eight hundred
million, and I understand that is what we are
talking about, then a two and a half bond and a
note - five-year note - dividing, in the case of for the cash, you want to get - dividing it on
a

basis of possibly fifty-fifty. If you were

going to do the five hundred, if you want the
two and three/quarter bond, then I would cut to
five hundred million for new financing and make
the option two and three/quarters, because there
is a large minority who want the two and three/
quarter, and I would be afraid of a two and
three/quarter bond for seven or eight hundred
million when that is the only bond that is offered.
And I think you may take a chance on having a

difficulty in a secondary market.

Harrison:

I ask, Marriner, did you say in the exchange bond or
May there you would have a note and a short

a note and an intermediate bond?

337

- 20 Eccles:

Note and intermediate bond; and for cash, a
note and intermediate bond. You'd have the same,
that is, if you go between seven and eight hundred
million.

Harrison:

That is my second choice.

Eccles:

Now if you want the two and three/quarter bad
enough to drop down to five hundred million,

H.M.Jr:

then I think you could put it over.
Well, as to the kind of bond, I haven't looked
over it to decide. All I hoped to get was just
begin to get in touch with the market.

Harrison:

Mr. Secretary, you wouldn't consider, if you are
opposed, and I see a great deal of reason for
opposing the three-way thing - you wouldn't
consider making an exchange just a short while

and leave the note out of the thing entirely?

H.M.Jr:

When we come to what we are going to do, my mind

Harrison:

I'll sit down and trade with you.
You don't feel committed, necessarily, to offer

H.M.Jr:

is completely open, see? I mean, I'll- I'll a note.

I am not committed to anything; from our standpoint, we need so much money to get us by till
the first of July. What is a good amount, and
so forth and so on. Then when it comes down to

bond or note or bill or anything else, why, from
now until Saturday noon, my mind is completely

open; I've got no -- completely open, and I don't
expect to decide at this meeting today what - what
it will be. I do want to decide the amount of
money so we can let the Street know - give them
that much preparation for adjusting themselves

for the amount of cash. I would very much like
to decide that this morning, and I want to say
that, that here in the Treasury we feel much more
comfortable in the last two days with sterling at
4.67, and going up, rather than sterling at 4.63
with no bottom.

Lochhead: 4.67 3/4.

338

- 21 H.M.Jr:

Sproul:
H.M.Jr:

I think the market and newspapers are sterling
conscious - very sterling conscious.
They have been for a week or more.

It has been front page stuff a couple days.
Temporarily

Harrison:

Very. It improves your position.

H.M.Jr:

Very much. If the thing had gotten steadily
worse, I don't know what we'd done in the way of
financing, but with that up and with the
business indexes continuing to rise, and everything else, I think before the end of the week,

if the sterling thing continues, I think you
will find a much better tone in the market. It
is already there; it is up a point and a half;
stocks are up; today commodities are up, and
everything else. I mean, we didn't know. But

they were very conscious of that sterling, weren't
they?

Sproul:

Very.

H.M.Jr:

God knows, I was.

Harrison:

You had bad markets everywhere. You may find the

H.M.Jr:

As to the kind, but as to the amount of money,

Harrison:

situation more different by Saturday.

I'd - I'd like to get that out to the Street
right after this meeting, so they could prepare
this thing.
I don't think it's awfully important, really.

Going back to my six hundred, I said that because
I had the feeling that you were very apt to choose
in the exchange, a note and long bond, which I
think is so bad I'd rather have a smaller amount
for cash.

H.M.Jr:

You mean, if the medicine isn't going to taste
good, you'd rather have less of it.

Harrison:

Yes.

H.M.Jr:

If you don't take a full dose, George, it doesn't
work, you know.

339

- 22 Eccles:

I don't think you will have a problem of getting
seven hundred million or eight hundred - maybe
more; I don't think that is the problem. If the

offering fits the situation. That is the real
problem.

H.M.Jr:

That is the job of all of us.

Eccles:

You can get most any amount you want. After

all, there is the investment funds, excess reserves, in the banking systems. It is just a ques-

tion of fitting it to the market.

H.M.Jr:

Well, my thinking is clear, absolutely, as to the
money, and after talking, I think I'd say seven
hundred. That really means seven seventy.

Harrison:

No reason you shouldn't do that if you want to.

H.M.Jr:

Let's just go around.

Sinclair:

I think that's all right.

Seltzer:

Little high for me.

Goldenweiser:

I have no objection.

Piser:

Little high for me; I think the market might sell

Williams:

It's all right.

H.M.Jr:

You're an eight-hundred man, aren't you? You'll

Williams:

Yes. I don't know as there is any great
significance attaching to these differences.

off some.

take seven hundred?

My reason for choosing a larger figure was,

briefly, this: First, the reason given of

prudence of taking it when you can get it;
perhaps you could get it, however, at any time,
and I rather think you could, but it seems to
me, as recovery goes on, it must be said, the
tapering off, not
only of the budgetary deficit
(speaking very low) there is
but your
always the possibility you would be competing
with private capital markets and that gets take more

true as the recovery goes on. If you can

funds now, without taking money rates, without

340

- 23 -

affecting excess reserves in any material way,
(speaking
is
to do it.low) I say the balance of the advantage
H.M.Jr:

You know you are the first man that's mentioned
excess reserves today.

Harrison:

I mentioned it.

Eccles:

So did I, twice.
You just don't listen when Marriner says it.
Very good. Well, maybe he doesn't say it with

Taylor:
H.M.Jr:

as much conviction as he used to.

Eccles:

Well, the problem is still there - won't change
it any.

Williams:

It's all right.

Lochhead:

Seven hundred is agreeable.

Harrison:

I think I would prefer the six hundred, but
there's not much difference. You multiply your

estimate of what you're going to need, and when
you take three times seven seventy, it gets a
little high, and my inclination is, it doesn't
make an awful lot of difference to be too choosy
about the six hundred, but I agree, you can raise
seven hundred perfectly well, provided you suit

the ticket.

H.M.Jr:

You do?

Harrison:

Yes.

H.M.Jr:

Well, now, the market was sort of - what did they

Harrison:

They have been talking five to eight hundred
million - practically the same as we have here.
Those are the limits.

H.M.Jr:

Seven would be

Harrison:

Under what they expect.

think we were going to do?

?

- 24 -

341

H.M.Jr:

That's good.

Harrison:

And there would be an advantage in that over the
eight hundred, in my judgment.

Sproul:

I agree with that, that the seven hundred would
be under their anticipation, and would be good
from any standpoint. If it were mine, I'd use
seven hundred million with a note and intermediate bond, with a three-way offering. With a
note and bond, I'd go down to six hundred million, to make the burden on the market that much
less, and reduction that much greater.

H.M.Jr:

What did you say on your slip?

Sproul:

Seven fifty, and I had in mind the over-subscription.

H.M.Jr:

You really were in the seven hundred class.

Sproul:

That's right.
I take it this is what you want?
That's all right with me.
You've got from now until five minutes of twelve
to argue about that, on Saturday. My mind is
entirely open on that.

H.M.Jr:

Sproul:
H.M.Jr:

George?
Haas:

Seven hundred is satisfactory.

Eccles:

I don't think it makes any difference whether

it's five or seven or eight, if you fit the -

if you are going to put a note and a long bond
on, then no, I'd say five; if you are going to fit
the thing to the market, then seven or eight

doesn't make any difference.
H.M.Jr:

Harris?

Harris:

My concern isn't how much you borrow; it's how

borrow it. I recommended six hundred million

you because I recommended a program of a long bond and

a note.

- 25 H.M.Jr:

342

You (Mr. Hanes) want to be skipped?

Hanes:

Yes. I haven't anything to add.

H.M.Jr:

Wayne?

Taylor:

Seven is all right with me; if you want me to
average down for anybody, I'll say seven.

Bell:

Seven is all right with me.

H.M.Jr:

Sproul:

Let's make it seven. I think the sooner we tell
the Street, I think the better.
I think so.

H.M.Jr:

Now, I -

Harrison:

You are going to say, "Refunding the Marches?"

H.M.Jr:

Yes. Yes. And what I'll do - (To Mr. Kieley)

Mr. Gaston, please.

Then, we start in at nine fifteen tomorrow and
then, Marriner, maybe Friday, if you felt like it,
you might come over and we could talk some more.

Eccles:

Gosh, I can't be here Friday. I'll be in New
York; I'll be there until late Friday night, and

I'll be

H.M.Jr:

Will you be here Saturday?

Eccles:

I could. Or, could I talk to you by phone

Saturday?
H.M.Jr:

All right; 0. K.
Where are you going to be, Sproul?

Sproul:

I'll be there; I'll be there Friday and Saturday.

H.M.Jr:

Will Ronald be around?

Eccles:

Banking group Thursday
He'll be here.
night; that's the reason.

H.M.Jr:

Well, we'll do some more work; and thank you all
very much.

343
November 29, 1938,
11:52 a.m.
HMJr:

Hello.

Operator: Senator McAdoo. Go ahead.
Hello.
HMJr:
Senator
McAdoo;

Hello, Mr. Secretary.

HMJr:

How are you?

M:

Very good thanks.

HMJr:

Fine.

M:

HMJr:
M:

HMJr:
M:

I wanted to talk to you a moment about the shipments of
bullion which are being made from time to time from
some of these Asiatic ports.
Yes.

Now I took - I took the chairmanship of the Board of
this Dollar line, both because the President wanted me
to and the shipping board did.
Yes.

I wasn't looking for a job because I had hoped I'd get
back in law practice where I could make a living again.

HMJr:

Yes.

M:

Nevertheless having assumed this burden, and I tell you

it's some baby, it hasn't got any clothes on it at all.

HMJr:

HMJr:
M:

Yes.

We are trying our best now to do two things, first, to
get the Government agencies to specify wherever possible
that American bottom shall be used for making
shipments of imports to this country.
Well, where we control it we always do that.
Yes. Well that's good. Now -

HMJr:

Always.

M:

Yes, well that's fine. Now on the question of bullion

344

-2shipments I don't - well now, here's a pending

case.
Siam istogoing
from America
Siam. to ship some gold bullion I think

HMJr:
M:

Yes.

I'm not told this, I don't know whether it's correct
or not, but if it is I wondered if you wouldn't do what
you can to influence its shipment in American bottome
and especially if you can in the bottome of the
American President's line, that's the name of the

Dollar Company now.
HMJr:
M:

HMJr:

Well of course They're running now, we've resumedthe world - around world

Well I'll look into it Senator. I don't know if there's
anything I can do or not. It belongs to them until we
pay it, pay them for it -

M:

Yes.

HMJr:

At San Francisco.

M:

Yes.

HMJr:

But I'll look into it and if there 16 anything that we
can do we'll try to get it under American flag ships,
that's about as far as we can go.

M:

Yes, I know that. Well I'll be very much obliged if
you'll do that. Now we're - of course we're subsidizing
this line you know and we've got to get our people,
our big shippers and all, and I made considerable
progress in that direction on some of our biggest
shipments to specify American flag ships in - wherever
they can control the shipments.

HMJr:
M:

Yes.

Now, I imagine that if the Treasury would be willing
to suggest to Siam if you let them have this bullion
that you'd like to have it shipped in American bottoms
well they've no shipping - I mean they've no shipping I mean they have no maritime ships of their own,
commercial ships.

HMJr:

Well -

345

-3-

HMJr:

Any other kind. I imagine they'd be perfectly willing
to favor us if - I mean favor our ships if you should
suggest that you'd be glad to have that done if possible.
Well, I'11 certainly make the effort.

M:

All right, fine.

HMJr:

Thank you.

M:

Goodbye.

M:

346

November 29, 1938.
12:03 p.m.
HMJr:

Hello.

Operator:

Sumner Welles.

HMJr:
Sumner

Hello.

Welles:

Hello, Goodmorning.

HMJr:

How are you?

W:

HMJr:

I hope your A. D. economists didn't keep you up too long.
Well they gave me something to think about, and I had
another group of economists in here for two hours. They

just left.

W:

I called to find out if you could give me that favorable

reply which I hope for, in regard to the Cuban trade

agreement.
HMJr:

W:

Well I told them that i if no one said no by one minute of
twelve the answer was yes. I haven't heard anything,
80 I'd say yes.
Thank you very much. It's now one minute past twelve.

That's very helpful indeed. I'11 tell them then to go

ahead.
HMJr:

Yes, you tell them to go ahead.

W:

Very much obliged to you.

HMJr:

Now Summer would it be agreeable to you if we could have
Jesse Jones here tomorrow at three-thirty?

W:

Absolutely.

HMJr:

Because I'd like to carry/along on this at the same time.

W:

Very much 80.

HMJr:
W:

him

Fine. Then I think I'll have him here.
All right.

HMJr:

What else do you know?

W:

Nothing this morning.

HMJr:

Fair enough. I'll see you tomorrow.

W:

All right. Thanks. Goodbye.

347
November 29, 1938.
2:19 p.m.
HMJr:

Alan

Hello.

Sproul:

Hello Mr. Secretary.

HMJr:

How are you?

S:

I've been lining up these people for Thursday.

HMJr:

For Thursday.

S:

Yes.

HMJr:

Well, let's see what you've got.

S:

What's that?

HMJr:

What have you got?

S:

The tentative out - schedule I have is nine-fifteen

Mr. Levy of Solomons HMJr:
S:

HMJr:

Just a minute - Levy.
Ten o'clock with Mr. Aldridge.
Ten o'clock - Aldridge.

S:

Eleven o'clock, Mr. Garner, Guaranty.

HMJr:

Yes.

S:

One o'clock Mr. Burgess, if you won't care to have him
for lunch.

S:

Yes, that'11 be fine.
Mr. Rentschler has been 111 and 18 still laid up 80 he

HMJr:

That's all right.

S:

But Burgess at one for lunch.

HMJr:

Burgess and yourself.

S:

Yes.

HMJr:

Right.

HMJr:

won't be able to come down.

348

-2S:

At two o'clock Devine.

HMJr:

Yes.

S:

And three o'clock Mills and
Corporation.

HMJr:
S:

from the Discount

Well now, let's just change that a little bit see?

All right.

HMJr:

Let's make it three o'clock Devine.

S:

Yes.

S:

And four o'clock, what's the other fellows names?
Mills and

HMJr:

Yes, Mills.

S:

Yes.

HMJr:

HMJr:

That gives me Levy at nine-fifteen, Aldridge at ten,

Garner at eleven, Burgess and yourself at one, Devine

at three and Mills at four.

S:

Right.

HMJr:

How's that?

S:

That's fine.

HMJr:
S:

Yes, let's do it that way.
All right, I'll confirm all those appointments then with
these people and be sure that they're there.

HMJr:

That's fine.

S:

All right.

HMJr:

Thank you very much.

S:

Thank you.

349

being L Sam Domingo

nursuck

m identifier

350
New York, November 30, 1938

Memorandum of Activities of Refugee
Economic Corporation in Costa Rica.
The Refugee Economic Corporation is a Delaware

corporation with headquarters at 570 Lexington Avenue,
New York City, and has as its primary object the economic

reconstruction and settlement of refugees, mostly of the
Jewish faith, from Germany and other countries wherever

it may be possible to settle them.
In the year 1938 the attention of the Refugee
Economic Corporation (hereinafter referred to as the Corpo-

ration) was invited to the possibility of settling in the
Republic of Costa Rica about 400 families of refugees
through the purchase of a farm of about 50,000 acres of land,
called "Tenorio", located in the Province of Guanacaste and
owned at that time by the Banco de Costa Rica, of San Jose.

Before giving the acquisition of this farm serious
consideration, the Corporation approached the Government of

Costa Rica, and after unfolding its entire plan requested it
to state whether it had any objection to the carrying out of
said plan. The Government replied through a letter from the
President that there was no objection and that the Corporation

could safely proceed with its plan.
The Corporation then had the Tenorio farm examined,

and after brief negotiations with the Banco de Costa Rica

-2-

351

it agreed to purchase it at a price of $55,000. Power of attorney
was sent by the Corporation to Don Luis Castro Urena, a prominent

Costa Rican attorney of San Jose, to take title to the farm in
the name of the Corporation. The transfer deed was signed on
August 3, 1937, and the total purchase price paid on the same date.
The Corporation considered itself the owner of the

farm, took possession of it, and started developing it so as to
make it available for the settlement of refugees. At the same
time, the Corporation presented the deed of transfer to the
Registrar of Real Property for recording. In order to effect
this recording, it is necessary according to the laws of Costa
Rica to offer for recording not only the power of attorney of the
person who signed the deed on behalf of the Corporation, but also

a certified copy of the Certificate of Incorporation of the
Corporation, and a Certificate of the Costa Rican Consul in New

York that the Corporation is duly constituted according to the
laws of the State of Delaware and is actually doing business.
All these documents, properly authenticated, were furnished.
However, the Registrar of Real Property objected to them and

refused to record the deed of transfer of the Tenorio farm, not
for any reason against the form or authenticity of the documents,
but on the grounds that the purposes of the Corporation were
undesirable under the laws, or incompatible with the sovereignty
of the Republic of Costa Rica.
The Corporation believes the objections to the recording
were the result of a press campaign organized and fostered by German

-3-

352

and Nazi sympathizers against the settlement in Costa Rica of
German refugees, especially of the Jewish faith.
As the Registrar remained obdurate, notwithstanding
all the arguments and reasons advanced by the attorney for the

Corporation, Don Luis Castro Urena, in an effort to overcome his
objections, the matter had to be taken to the courts.
In October, 1937, the matter was decided by the Court

of Appeals and, by a vote of 2 against 1, the Registrar was
ordered to accept the documents presented by the Corporation

and to record its deed to the Tenorio farm.
The Registrar appealed to the Supreme Court (Corte de

Casacion) which is the highest court in Costa Rica. In December,
1937, said court rendered a unanimous decision reversing the
Court of Appeals and supporting the refusal of the Registrar to
accept and record the documents offered by the Corporation, but

on grounds different from those urged by the Registrar. While
the opinion of the court is supported by some legal reasoning,

a reading of it creates the impression that the decision was
reached first and then legal grounds were found to support it.
In the meantime, the Corporation remained in undisturbed

possession of the Tenorio farm, but under an unrecorded title.
In June 1938, and when the press campaign mentioned

above had subsided, the Corporation sent its representative to
Costa Rica to see how the problem of its title to the Tenorio

farm could be satisfactorily solved. This representative had an
interview with the President of Costa Rica in which it was agreed
that the Government would present no objection to the recording

-4-

353

of the title to the Tenorio farm provided same was vested in a
Costarican corporation especially organized for that purpose,
and with a Board of Directors composed almost entirely of Costa

Ricans. As regards the settlement of refugees on the farm, that
question was left in abeyance for discussion after the question
of the title to the farm has been settled.
In pursuance of the foregoing agreement, a Costa Rican
farming corporation was organized in October 1938 under the name
of "COMPANIA AGRICOLA COSTARRICENSE" with a capital of 500.000

Colones (about $90,000.-) and a Board of Directors of seven

prominent, influential and highly respected Costa Ricans. The
Tenorio farm was transferred to this Costa Rican corporation, and
the transfer recorded so that title now vests in said corporation,
which is, of course, fully owned and controlled by Refugee Economic
Corporation.

A few days after the news about the organization of the
Costa Rican corporation became public through the filing in the

public register of all the incorporation and transfer papers, the
newspapers of San Jose started another campaign against the

settlement of Jewish refugees in Costa Rica. Numerous newspaper

clippings just received, some of them dated as late as November

13, 1938, show that while this campaign is not particularly violent,
yet, it is far from friendly, and shows that any attempt actually
to settle a substantial number of Jewish refugees on the Tenorio
farm would only tend to increase the intensity of said campaign.

Whether the attitude of the press faithfully reflects

-5-

354

popular sentiment, it is difficult to determine. According
to the best information available, it appears that although
those opposed to the settlement of Jewish refugees in Costa

Rica do not constitute a majority of the people, they form,
at least, a percentage sufficiently large to cause the
Government to give their views careful consideration. The
Government and the higher type of Costa Ricans are in favor of

selected Jewish immigration for agriculture, but commerce is
generally opposed to it for fear the refugees may in a compar-

atively short time drift from the farms into the cities in
order to engage in trade. This fear is based on the unfair
competition they are experiencing from a large number of Polish
Jews of the peddler type who entered Costa Rica during the last
few years, and most of whom are now established in various small,
but ever growing businesses. The people at large who, on
account of their meagre education, are unable to form an indepen-

dent opinion, are largely influenced by the newspapers.

It is hoped that ultimately it will be possible to
carry out the plan of settling refugees on the Tenorio farm;
meanwhile the farm is being operated by working such lands as

are apt for cultivation, and preparing others for future cultivation, and by doing other work that tends to prepare the farm
for the settlement of refugees.

355
November 30, 1938

To:

The Secretary

From:

Mr. Hanes

On November 29th, 5:00 P.M., I spent an hour with Senator Harrison

in his office in the Senate Office Building. The Senator discussed at

great length the oncoming tax legislation and expressed the hope, which
he said represented the majority of opinion of his committee, that there
would be no increase in the general taxes at this time. He was hopeful
that they could get by with an extension of the excise taxes and a renewal of certain other corporation taxes. He is anxious and willing to
put through any administrative changes which we might suggest. He is
also anxious wherever possible to ease the burden placed upon taxpayers

in the mechanical work of supplying data to the Bureau of Internal
Revenue. He was very positive in his statement to the effect that he
sincerely hoped the Administration would not bring to the Congress any
suggestion for change either in the capital gains tax or in the undistributed profits tax. He expressed himself as being opposed to the
highest surtax rates now existing in the 1938 law and said positively
that he would favor a reduction of the high income surtax rate to the
maximum of 40 percent.

He discussed at length his hope for peace in the Democratic Party
and said that he would go to any length to bring about harmonious re-

lations between his faction and the Administration. His last words on
this subject were to this effect - "You and Henry are the only two men
in the New Deal who can bring this about."

356

JR

confidential
Tokyo

Dated November 30, 1938

Rec'd 7:08 a.m.

Secretary of State,
Washington.

756, November 30, noon.
Our 755, November 29, 5 p.m., last SENTENCE.

Statements of new Japanese policy.

The "reliable source" mentioned informed us

today that it has been decided that conference before

the Emperor is not (repeat not) to take place.
Repeated to Shanghai for Chungking.
GREY

DDM

357

material referred to is fled President
11/22/38, date at was sent to
November 30, 1938

My dear Mr. Secretary:

I am sending you herewith, for your confidential information, copies of various memoranda
and maps which have been furnished me by Mr. K. P.

Chen, of the Chinese Financial Mission now in
Washington:
1. Memorandum on Yunnan-Berma Road

2. Memorandum on North-western
Highway

3. Memorandum on South-western
Transportation Routes

4. Map of North-western and Southwestern Trunk Roads

5. Memorandum on Highway Adminis-

tration in Unina

Sincerely,

The Honorable

The Secretary of State.

358

November 30, 1938

My dear Mr. Secretary:

I am sending you herewith, for your oonfidential information, copies of various memoranda
and maps which have been furnished me by Mr. K.P.

Chen, of the Chinese Financial Mission now in
Washington
1. Memorandus on Yunnan-Berma Road

2. Memorandum on North-western
Highway

3. Memorandum on South-western
Transportation Houtes

4. Map of North-western and Southwestern Trunk Roads

5. Memorandum on Highway Adminis-

tration in China

6. Memorandum on Purchases of Equipment and Supplies.

Sincerely,

The Honorable

The Secretary of War.

359

November 30, 1938

My dear Mr. Secretary:

I am sending you herewith, for your oonfidential information, copies of various memoranda
and maps which have been furnished me by Mr. K. P.

Chen, of the Chinese Financial Mission now in
Washington:
1. Memorandum on Yunnan-Berma Road
2.

Memorandum on North-western
Highway

3. Memorandum on South-western
Transportation Routes

4. Map of North-western and Southwestern Trunk Roads

5. Memorandum on Highway Adminis-

tration in China

6. Memorandum on Purchases of Equiment and Supplies.
Sincerely,

The Honorable

The Secretary of the Navy.

360

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

M

DATE November 30, 1938.

Secretary Morgenthau

TO

FROM

Mr. Taylor

Arakawa and Uka called this afternoon at four o'clook. Arakawa
said that he was making one of his periodic visits to this country and
he had expected to come here last summer but that the European crisis had

caused him to remain in London. First, he said he wished to thank us and
the Federal Reserve Bank of New York for our many courtesies in connection
with the gold shipments which his government had made during the past year.

He then went on to say that he had found that a great deal of misunderstanding existed in London as well as in New York of the financial position
of the Japanese Government. Therefore he wished to mention several points

which he thought might be of interest.

1937

First he stated that the actual cost of the war from July up to
the present time amounted to approximately $1 billion, that this expense
had been met by borrowing, of which over eighty per cent had been placed

in private hands. He then mentioned that he understood that the fortnight

of crisis in London had cost the British treasury $250,000. I gathered
that he was using this figure to show that the Japs could prepare and fight
much more cheaply than the British. In explanation of the low cost of the
war, he said that the soldiers receive very low wages and that the cost of
feeding them was extremely small as they lived mostly on rice. Next he

stated that as far as food supplies went that Japan was entirely self-

sufficient - in fact there was a surplus of both rice and fish at the
present time. He included in all his calculations Korea and Formosa and

--

361

stated that Korea and Formosa alone could produce sufficient rice to

feed the entire population of Japan itself as well as being able to
take care of the army in the field and their own needs.
He then mentioned the very low requirements of their foreign
debt service and stated that the annual charges amounted to approximately

$30 million; that this included both the government and private indebtedness. He added that at least 50 per cent of the external indebtedness
WES held by Japanese subjects and that therefore you could consider that

the actual debt service was half of the $30 million which he indicated.
He next turned to Japanese gold production, which he said was

increasing and could be increased still further. For the calendar year
1938 the new production of Japan, Korea and Formosa would be approximately

$70 million, which represented an increase of approximately 12 million

during the past year. He said that in addition they could call on the
gold production of Manchukuo, which for the present calendar year amounted

to approximately $10 million, but which in turn could be materially
increased.

At the end of our conversation he asked me what the reaction of

the investment market would be towards the Far East after hostilities
had ceased. He said that he was curious as he had not been able to get

a very definite impression in either London or New York. I took this
latter opportunity to give him both barrels on the attitude of the
American public towards the situation in the Far East and said that
whereas no one could answer his question at this time, that it was my
impression that the natural hesitation which would attend investment

in any country after a war would be materially increased in this case;

-3-

362

that until the attitude of his government was clarified and understood
by the American people that investment capital would be extremely

reluctant to flow towards the Far East and even if the situation were
completely understood there would be far more hesitation than existed

after similar disasters.
He wanted very much to see you tomorrow and I explained to him

how busy you were and that I would pass on to you full details of his
conversation but that I was not very hopeful about your being able to
find time to see him as a result of the completely scheduled day.

-

wer.

363

Confidential

PARAPHRASE
A strictly confidential telegram (No. 757) of
November 30, 1938, from the American Ambassador at Tokyo

reads substantially as follows:
A telephone message has just been received from the

Director of the American Bureau of the Foreign Office
(Yoshizawa) to the effect that the conference on the new
Japanese policy which was to be held on November 30 by

five Cabinet Ministers and officers of the Imperial Headquarters in the presence of the Emperor took place, and
that within a short time a public announcement would be

made in regard to the new policy. The secrecy with which
the plan to hold the conference was carried out is shown

by the fact that a high official of the Foreign Office
had no direct previous knowledge of this important happening.

793.94/14433.

364
November 30, 1938

The President called HM,Jr from Warm Springs

today, at 12:30 p. m. The following is Mr. Morgenthau's part of the conversation:
HM,Jr: Good morning.

Well, the main thing is that the French are
having most of their main troubles at the port of
Marseilles, where they usually do, but the whole
thing to me seems 80 difficult to explain because
the French Treasury is gaining large sums of money
these last two days. In other words, this 18 what
the French people seem to like and the franc has
been stronger and the Pound is up to 4.67-7/88.

We have had another meeting with Bewley and

I have sent several messages back and I have been

putting pressure on the British to do something and
they have. Commodities are better. The whole
market has taken a better turn since Sterling has
straightened out. Everybody was really worried
about it.
The French are fighting Labor with bayonets.

That is what I think they are doing. Personally,
I don't like it, but the money people seem to like
it. I have not seen anything on the ticker other
than the trouble at Marseilles. If anything happens I will put it on your telegraph wire.
How are you feeling? Is there anything that
I can do?

We have practically decided on our financing.
We had a meeting with the Federal Reserve. We will
borrow $700,000,000 cash and we will take up the

March notes which are maturing now and give the

holders the opportunity to convert.
I have not followed the French thing very
closely because, frankly, I am as disgusted with
them as you are.

I felt that we might do that sometime when
Congress is on and we can still sell another

365
-2-

$500,000,000 of his.
time.

I

was waiting for an opportune

(Explanation: The President told Jesse Jones

that he thought we ought to borrow some money in
Jesse
Jones'
80 that we would not increase our
total debt
tooname
much.)
Welles is coming here with Hornbeck and he

said he talked to you. He was wrong -- it was
$20,000,000.
I am in writing on that. I have
recommended it. Welles told me that you told him
to go ahead with it. I also told Jesse Jones to
be here at 3:30 too. You are satisfied to go
ahead with it. Of course, I am tickled to death.

I got a very nice wrinkle. Of course it is

not too sincere. All these people who are worrying

about Communism -- we are driving China right into
the arms of Russia because they are the only people

who are helping them. If we give them a loan, they
have two friends instead of one. It 18 an argument
which can be used with one's tongue in the cheek.

(HM,Jr's comment to HSK: The main thing the
President wanted to know was how the French strike
was going.)

366

November 30, 1938
3:30 pm

Welles came in with Hamilton and Hornbeck

and asked the Secretary if they could see him alone

because there with
were ahim.
few matters
of he
Mr.
and Mr. Taylor were in
Mr. and wanted Hanes they to discuss already However, policy the Jones, that room

remained, and the Secretary asked Mr. 011-

phant, Mr. Lochhead and Mr. Foley to wait a few
minutes
in his outside office and would call them
in
a few minutes.

Mr. Welles asked that no stenographic notes

be made of his remarks. The following is in substance what he told the Secretary, but is not a
verbatim report.

1. Public opinion in this country is not
yet ripe for any evidence of policy on the part of
the United States which might result in the need for
any forceful action on our part.
2. Under present conditions in Europe, neither
Great Britain nor France are free to take any parallel
action. The position of the United States 18 weaker
than it might be at other times. Any open assistance on the part of the United States to the Chinese
Government may give rise to protest on the part of
the Japaneee Government and would bring us face to
face with those eventualities. We have received
a

communication that the Japanese Government is now

going to determine what other nations will be per-

mitted to trade in China. In order to answer that
communication the United States could, of course,
make its position very clear. We do not agree, but
will insist on our rights in China. The United
States will announce certain steps of economic kind
which would deprive advantages which Japan now en-

joys. I want to ask that any active step be post-

poned until after the President returns.

HM,Jr: I am embarrassed in this way: when

I

talked to you the other day, I got the distinct

impression that the President said to go ahead with

it.

367

-2-

Mr. Welles:
The President did say to go
ahead with
it.
HM,Jr: The President called me today to
ask me about the French situation and in talking
to him I told him that I understood that he had
talked to you about the Chinese loan and the Presi-

dent said that he had and that it is all right to
go ahead on the tung oil. He also said that it
was a matter of $5,000,000 and I said, "No, Mr.
President, it 18 a matter of $20,000,000, and he
said, Well, I don't think that makes any difference.
Frankly, on this letter which I have written
recommending it, in view of Mr. Hull's opposing it,
I think the President ought to countersign it.
mean, this whole thing has been hanging fire so long -if you really mean next week, I am perfectly willing
I

to wait.

Mr. Welles: The President will be back on

I think that since this step 18 of such
importance, if the President wants to accept the
second alternative, which I have just outlined, I
think your plan ought to be a part of it.
HM,Jr: I would hate to see this made part
of an aggressive policy.
the 6th.

Mr. Welles: It means assistance to the Chinese

Government.

HM,Jr: As I told you, I don't think there is
one chance in ten that we will ever get paid back.
As I told the President today, all these people that
are worried about Communism -- we are driving China

right into the arms of Russia because they are the
only people who are helping China. If we give them
a loan, they have two friends instead of one.
If on this Japanese thing, if you are going
into that, I would like to have our Customs people

prepare a memorandum on the discrimination against
our goods.

Mr. Welles: It would be extremely helpful
to have that.

368
-3-

HM,Jr:
We have
can wait
until next
week.waited 80 long I think we
of

Mr. Jones: Of course, I d1 sagree with both

you. If I felt as you do, Henry, I would not
make the loan. I personally think it is a good
loan.

HM,Jr: Perhaps, Jesse, I am just a little
bit franker than you. I really think we are approaching
from different angles, but will arrive
at the same itconclusion.
Mr. Welles: The President ought to consider
the two major alternatives that I pointed out to you.
HM,Jr: The President told me that if he could
get a satisfactory statement from General Chiang KaiShek, he would make this loan. He did receive such
a statement and the President felt it was a satisfactory one.

(At this point, Mr. Welles said he would like
to know a little bit more about the deal that we are

proposing to make with China on tung oil and Mr. 011phant, Mr. Foley and Mr. Lochhead were called in from
the Secretary's reception room where they had been
waiting.-)

Mr. Foley gave Mr. Welles a brief outline of
the plan to purchase tung oil fromChina.
HM,Jr: Since Canton has fallen, they have

been working very hard on their other routes. The

Highway Commissioner of China 18 here and, for the

first time, we have accurate information showing
various routes about which we never knew before.

They have $2,000,000 cash here which has been

earmarked and they are in the process of buying 1,000

trucks and those will be sent to Rangoon. They have

in mind that this transportation system will take,
for instance, gasoline and will bring back tung oil.

(Mr. Hamilton, of the State Department, spoke
about a cable which was then being paraphrased and
which stated that an American engineer had been studying the Chinese roads and reported that transportation

369

-4-

on these roads was impractical. A copy of

the

cable is attached herewith.) see hages 117, 118+119

HM,Jr: Well, in view of this cable, you

people certainly ought to see this Chinese Highway
Commissioner who is here and who is in charge of

these roads. They will not use tank trucks.
(At this point, the Secretary asked Mr. Hanes
to tell the State Department representatives about
his contacts with the manufacturers, which he did.)
Mr. Welles: That gives me the education that
I needed.

HM,Jr: There is a shipment of tung oil on

the water now.

Mr. Lochhead: There are two shipments on the
water, but they are coming out of Burma.

HM,Jr: (To Mr. Oliphant) I wish that you would

have Customs get everything together that we have on

Japan in regard to customs losses and I want to get it
into Sumner Welles' hands by Monday.

TREASURY DEPARTMENT

370

OFFICE OF THE SECRETARY

WASHINGTON
COMMISSIONER OF
ACCOUNTS AND DEPOSITS

November 30, 1938.
TO THE SECRETARY:

The Daily Treasury Statement as of November 30, 1938, shows the fol-

lowing receipts and expenditures in millions of dollars:
This fiscal
year to
Nov. 30

Corresponding

period last
year

Receipts
Expenditures

2,223
3,659

2,311
3,049

Gross deficit
Deduct public debt retirements

1,436

738

16

36

Net deficit
Net deficit last week

1,420
1,306

703

114

23

Increase during week

679

A summary of recovery and relief expenditures during the fiscal year
is indicated below:
Total to

Agricultural Aid:

Nov. 22,

Nov. 30,

1938

1938

Federal land banks

$21,826,572.29

Other

-

Relief
Public Works:
.

Works Progress Admn.
Other

Aid to Home Owners:

Farm Security Admn. ..
Other

Miscellaneous

Week ending

$45,977.33

Total to
Nov. 30,
1938

$21,872,549.62

- 386,215.48

- 2,843,846.26

1,332,589.24

34,075.57

1,366,664.81

905,456,943.44
196,547,158.38

55,606,781.85
13,974,273.52

961,063,725.29
210,521,431.90

47,200,001.03

2,478,124.72
1,192,193.06
2,000,000.00

49,678,125.75
6,709,874.16
1,999,910,19

$73,945,210.57

$1,250,368,435.46

2,457,630.78

6,517,681.10
- 89.81
$1,176,423,224.89

371

-2
DIVISION OF DISBURSEMENT

Since the last report, the following transactions have taken place:
During the month of October arrangements were made to make disbursements for the Federal Surplus Commodities Corporation on account of the

Northeast Timber Salvage Administration which will secure a loan of
$10,000,000 from the Reconstruction Finance Corporation for the purpose of
purchasing timber which was blown down by the hurricane and would, if left
on the ground, become worthless within a short time. This loan is to be

repaid as the timber is salvaged and sold, but it may be a five or ten year

program of disposing of the timber. Symbol numbers have been assigned for
doing this work and it is expected that the Federal Surplus Commodities
Corporation will reimburse the Division of Disbursement for whatever

additional work is involved.

The volume of work for the first four months of the fiscal year in
central and regional offices has increased by 40% over the first four months
of the previous fiscal year, which taxed the capacity of the various subdivisions to the limit. In the central office in Washington the typed checks
and cash payments for the period July 1 through November, 1938, has increased
by 61.4% over the volume of work for the corresponding period in 1937. Except

for the addition of a few typists for a short period, the number of employees

has not been increased.

In the Treasury-State Disbursing Offices the volume of work for
October, 1938, was 65.5% larger than the volume of work in February, 1938,
but the work is being done with an increase of only 4.02% in personnel.
This is possible by close supervision of the methods used. The result is
accomplished by frequent inspections by the staff of field investigators
and the constant study, in the central office, of improved methods.
INDUSTRIAL LOANS

The status of payments to Federal Reserve banks on account of
industrial loans has remained unchanged since October 14, 1937, making

the total loans to date $27,546,310.97.
BALANCES IN DEPOSITARIES

The amount of balances in special depositaries on November 30,
1938, was $735,802,000.

unt

Confidential

strictly 372
confidential
PARAPHRASE

A telegram (No. 758) of November 30, 1938, from
the American Ambassador at Tokyo reads substantially

as follows:
Information has been received from the Consulate

General at Seoul stating that the Russian Consulate

there is under closer surveillance and that information
colored with authenticity has come to the Consulate General to the effect that Changkufeng has been occupied
again by Russians and that Japanese soldiers are moving

in that direction.
A Japanese newspaper recently carried an article

under a Seoul dateline to the effect that a Japanese
officer who returned on October 28 from a reconnaissance of the Changkufeng region reported that the Soviets

were engaged in military construction in Manchurian ter-

ritory and that the Soviet flag was flying on the hill.
The Japanese Foreign Office states that it has

received no information with regard to the report from
the Consulate General at Seoul and the Embassy finds it

impossible at the present time to obtain from other
sources in Tokyo confirmation of the report. There is

02V13033

no way, of course, in which the Ambassy can confirm the

report that Japanese soldiers are moving in the direction of/Changkufeng the area. This rumor apparently has not

reached Tokyo as yet.

761.93 Manchuria/234

373
Recommendation

In our recent memorandum we suggested a 1-1/4% 5-year Treasury

note and a 2-3/4% 25-30 year Treasury bond but since that time long
term bonds have shaded slightly and it now appears the suggested bond

would not provide ample premium. Therefore, we suggest that the issue
be shortened 2 or 3 years. On the other hand, Treasury notes have
improved but our preference is still a 1-1/4% coupon over a 1-1/8%
coupon.

TREASURY DEPARTMENT

374

INTER OFFICE COMMUNICATION

To

FROM

DATE November 30, 1938

Secretary Morgenthau

M. A. Harris
W. H. Hadley

Estimates based on closing bid prices November 29, 1938.
Estimated
Market Bases

Possibilities

Indicated
Premium

NOTES
1-1/8% 12/15/43 (5 yrs.)

0.94 - 0.97

29/32nds - 3/4 pt.

1-1/4% 12/15/43 (5 yrs.)

0.94 - 0.97

1 pt. 18/32 - 1 pt. 13/32nds

BONDS
2-1/26 1950/53 (12-15 yrs.)

2.37 - 2.39

1 3/8 pts. - 1 pt. 5/32nds

2-5/8% 1952/57 (14-19 yrs.)
2-5/8% 1953/57 (15-19 yrs.)

2.49 - 2.51
2.52 - 2.54

1 pt. 19/32nds - 1 3/8 pts.

2-3/4% 1960/65 (22-27 yrs.)
2-3/4% 1961/66 (23-28 yrs.)
2-3/4% 1962/67 (24-29 yrs.)
2-3/49 1963/68 (25-30 yrs.)

2.63 - 2.65
2.64 - 2.66
2.65 - 2.67
2.66 - 2.68

2 pts. - 1 5/8 pts.

1 pt. 10/32 - 1 pt. 2/32nd

1 7/8 pts. -11/2 pts.

1 3/4 pts.-1 3/8 pts.
1 5/8 pts.- 1 1/4 pts.

* The first basis given is in line with the current market. The second
is a conservative estimate and the one on which the issue will probably

sell when first quoted.
Note: The 1-1/28 due 3/15/39 are quoted 101.18 bid, which is a price
about 1 1/2 points above a "no yield" basis.

375

November 30, 1938,
12:45 p.m.
Wayne C.

Taylor:

particular confidential. message is extremely technical and extremely

HMJr:

Yes.

T:

And he would feel a little better about it if the circle

HMJr:

and observers and 80 on wasn't too big.
Well, we can have you and Archie.

T:

Yes.

HMJr:

How's that?

T:

I think probably that's the way he'd like to do it.

HMJr:

All right.

T:

Right.

HMJr:

O.K.

T:

Yes.

HMJr:

All right. Fine.

You and Archie.

376
November 30, 1938.
4:33 p.m.
W.O.

Douglas:

Hello.

HMJr:

Hello Bill.

D:

Yes.

HMJr:

Henry Morgenthau.

D:

Yes.

HMJr:

Bob Allen of Pearson and Allen just left me.

D:

Yes.

HMJr:

And he said he had a letter from out West, that he knew
a lot about this Gianini stuff and all the rest of it,
what was there to it, see?

D:

Yes.

HMJr:

Sp I said, "Well after all this is SEC"and if there is

a story and 80 forth and 80 on, and he knew about
McAdoo being over there, but I said, "Why don't you go
over and see Douglas, it's his story, it's his
organization. #
D:

Yes.

HMJr:

D:

So I hope you don't mind, but I did tell them to come
and see you, and I told them nothing.
Yes. O.K.

HMJr:

I - I told them nothing, all I said was that I was in

this with you and we were shoulder to shoulder.

D:

Yes.

HMJr:

I did tell them that.

D:

Yes.

HMJr:

Outside of that I told them nothing.

D:

O.K. Thank you very much.

HMJr:

You're welcome.

D:

Goodbye.

377
November 30, 1938.
4:35 p.m.
HMJr:

Hello.

Operator:

Secretary Wallace. Go ahead.

HMJr:
Secy.

Hello. Hello.

Wallace:

Hello, Henry.

HMJr:

How are you?

W:

Oh, just fine. Henry, we're selling some wheat to

England where's there's a problem of some sterling.

HMJr:

Yes.

W:

Involved, some sterling exchange.

HMJr:

Yes.

W:

And before we moved on that front I wondered if we
could have Jesse Tapp talk with some of your people

HMJr:

about it.
Yes. Let him talk to Archie Lochhead.

W:

To Lochhead.

HMJr:

Who's in charge of our Stabilization Fund.

W:

All right, sir.

HMJr:

will you?

W:

Yes, I just - we want to handle it 80 we weren't taking
a risk.

HMJr:

W:

HMJr:

Sure, but - and incidentally we've been working like Hell
on sterling the last week and we got some results.

Oh, that's fine. Fine.
It's - it's much better, it went - you know it went

down to low 4.62, it's up to above 4.68 today.

W:

Yes.

HMJr:

And we're getting some cooperation from the British
Treasury.

378

-2W:

HMJr:

W:

HMJr:

W:

HMJr:

Good.

And I hope it'11 last a few days longer because the
commodity index has responded nicely and I'm doing
all
I can and we're getting better cooperation from
them than we ever had before.
Fine.

But if he'll - if he'll contact Archie Lochhead he'll

give them what - he'11 give them anything he's got.
Fine.
Zeke was telling me you're having some very fine
conferences.
Well -

W:

On the long range aspects of certain of our problems.

HMJr:

I'm doing the best I can and as I tell these boys if
they've got anything I'd like to have it and if they
think we 're on the wrong foot I'd like to have that too.

W:

We're - we've had one conference with Wayne Taylor on

this other matter on the - some of the long range
aspects of wheat and cotton and I think we'll have some thing for you.

HMJr:

Maybe some day the President -

W:

Week or so.

HMJr:

Will ask a half a dozen of us to get together and sit

W:

HMJr:
W:

down with him.

By the way I'm going to send a book over to you that's
to come out from - written by some young Harvard
Professor on -

Oh I've heard about that. I'd love to see it.
I'll send - ah - ah - I've ordered several copies, it
impressed me so much, I'll send one over to you.

HMJr:

W:

Oh, I'd appreciate it very much. I heard about it, but
I haven't seen it.

Yes. All right.

379

-3 HMJr:
W:

Well - Thank you.
Fine.

380
November 30, 1938.

4:38 p.m.

HMJr:

Hello.

Operator:
Mr. Gibbons. Go ahead.
Stephen
Gibbons:

Hello.

HMJr:

Hello Steve.

G:

Remember the Secretary of State calling you about ten
days ago on the Tay Bank narcotic case.

HMJr:

Yes.

G:

British Ambassador.

HMJr:

Yes.

G:

HMJr:
G:

HMJr:
G:

He's in to see me. Well, it's a case where they
exercised no care at all.
Yes.

And the British Ambassador is bringing pressure to bear
on Bryan McMann and Bryan McMann came over here. I had
a conference with Oliphant's assistant, Kearns and
Johnston and 80 on, and they've offered twenty five
thousand dollars.
Yes.

And Bryan - the law says that the Court can decide
whether the highest degree of efficiency has been main-

tained on these ships to stop the stuff from being
taken aboard.

HMJr:

Yes.

G:

And Bryan 18 afraid that if we go into Court on one of
these cases we may lose.

HMJr:

Yes.

G:

And there'd be no serious objection. I talked the

thing over with Kearns and Johnston and twenty-five

thousand dollars is a pretty good smack on the first the original fine at twenty-five dollars an ounce 18

ninety thousand.
HMJr:

Wasn't there something about them , we took their
check or something too quickly?

-2G:

Yes.
Yes. Well
that has no bearing on the final
settlement,
-

HMJr:

How much was the check?

G:

Twenty-five thousand dollars.

HMJr:

Uh-huh.

G:

381

Now I told Bryan if we could get them, you see the

Canadian Pacific Steamship Lines have set up a system
that they had three men aboard each ship -

HMJr:

I know about it.

G:

And they've never had a violation since. Of course,

that isn't foolproof.

HMJr:
G:

HMJr:

G:

What steamship company is this?

This is a foreign British steamship company.
Well look, if you fellows are all unanimous and will say

80 in a letter to me I'll go along with you.
Well, that's - we didn't want to put anything - he
hasn't for it in writing but we wouldn't - would we
seriously object if he - if he accepted the twentyfive thousand. He doesn't want to do anything that and he thinks it ought to be accepted, or twenty-six
thousand or thirty thousand, he's going to ask them
for say thirty-five thousand, and -

HMJr:

Who?

G:

Bryan McMann.

HMJr:
G:

HMJr:
G:

Yes. Well And he's perfectly sincere in his I'll leave it to you Steve and the rest of the boys.

Well, I just want to - I think that -

HMJr:

You get together, you - anything that's reasonable,

G:

O.K.

I'll take it.

382

-3HMJr:

How's that?

G:

That's
right,
thenfor
if we
get them to put up
a
system,
of and
course,
thecan
future.

HMJr:

Yes.

G:

That they're doing our work, see?

HMJr:

Then the next time if they fine us, then There will be nothing doing.

G:

HMJr:

Right.

G:

Yes.

HMJr:

O.K. Steve.

G:

O.K.

383

CABLE

From: Bankers Trust Company of N.Y.
London Office

Date: November 30, 1938
Wednesday

#323. LIQUIDATION BULL POSITIONS DOLLARS CONTINUES BUT TURNOVER
SMALLER THAN YESTERDAY. FORWARDS STEADY. STRONG DEMAND FOR SPOT
PARIS. FORWARDS WANTED. DeCASTELLANE REPORTS POSITION PARIS NORMAL
RAILROADS, BUSSES, METRO ALL RUNNING BANKS OPENED NO EVIDENCES STRIKE

GOING ON. REPORTS FROM PROVINCES INDICATE SAME STATE AFFAIRS. CERTAIN
PART STRIKES FACTORIES BUT GENERAL STRIKE COMPLETE FAILURE FOR
EXTREMISTS AND LABOR UNIONS. DALADIER SCORED GREAT SUCCESS. CONTROL
ACQUIRED BETWEEN POUNDS 4 - 5 MILLION MOVEMENT STILL CONTINUING PARTLY
DUE FEAR DOLLAR,

CONFIDENTIAL

384
Treasury Department

Division of Monetary Research
Date

1938

To:

3/28/39

Ask Miss Chauncey if she has copy

of this.

MR. WHITE

Branch 2058 - Room 200

385
November 30, 1938

Mr. Bewley, British Financial Attache, called
to see the Secretary of the Treasury at 3 p.m., and

Messrs. Lochhead, Taylor and Butterworth were present.
Mr. Bewley began by saying that he had received
a reply from London (see memorandum of meeting in Secretary's office on November 22nd) which was partly

technical and partly general, and he requested that
the technical part be kept with absolute secrecy and
he asked that no verbatim record be made of his remarks.

Mr. Bewley read what was obviously a telegram

he had received from the British Treasury, which outlined in general terms the technical steps which
Bolton had informed Knoke yesterday that the British
monetary authorities were taking, namely, that the
British clearing banks had been requested to refrain
from facilitating speculative transactions both against
gold and dollars with the intention of promoting a

squeeze. Mr. Bewley emphasized that this was not a
panacea, but a palliative, a temporary remedy to remove
some of the speculative pressure, but, nevertheless,

it was hoped that it would be effective.

In this connection, he asked that the American

Treasury, should the need arise, facilitate this ac-

tion as regards any American banks operating in London.
The Secretary readily offered to do anything that was
necessary to insure that the American banks would fall

into line and he specifically asked Mr. Bewley to let

him know if any of the American banks in London were
operating in a way which ran counter to the desired
aims.

Mr. Bewley took occasion to point out, on be-

half of the British monetary authorities, that if the
international political situation had not arisen, the
fundamental economic trend in recent months would,
nevertheless, have made impossible the maintenance

of a $5 pound and, in this connection, he emphasized

particularly the falling-off of American purchases

abroad by, roughly, $1,000,000,000. At the same time
he expressed the hope that the technical measures undertaken would gradually operate to strengthen the pound,

386
-

but that that, in turn, presented a problem of policy

as to the degree to which the pound would be permitted

to rise in relation to the amount of resources to be
recouped. To this the Secretary replied by saying
that, at first blush, he hoped that in their desire
to replenish the Fund that the British authorities
would
rise. not weigh too heavily against letting the pound

Mr. Bewley brought up the question of the use
of the devaluation powers by saying that the Secretary
had made some reference to this in their previous con-

versation and that it was a matter which his Treasury,
from time to time, pressed him about. He wished to
know whether their use was being considered. The
Secretary replied, "What I have said repeatedly, when

this is brought up, is this: the question of further

devaluation I consider a device only to use in a great
emergency, and at this time I don't envisage any such
emergency."

Mr. Bewley expressed entire satisfaction with

this answer.

It should be added that Mr. Bewley stressed at
several points in the conversation the importance of
maintaining secrecy about the measures the British
authorities were taking to restrict exchange operations;
that it was essential that the market should be kept
in the dark, and uncertain, even though it would eventually
realize that action had been taken. The Secretary
assured him that no publicity would arise from it.

MISC. 3.1 60M-6-38

FEDERAL RESERVE BANK
OF NEW YORK

(

OFFICE CORRESPONDENCE
TO

FROM

CONFIDENTIAL FILES

L. W. Knoke

M

387

DATE November 20, 1988.

SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF FRANCE.

I called Cariguel at 10:25 s.m. Things were very good
with them, he said. The strike had been a failure. He had taken
in about £5,000,000 today and was quite happy. The money market

already was in very such better shape as a result of the improve
ment.

LWK:KW

2(f)

388 11(e)

1.2 60M-6-38

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
TO

CONFIDENTIAL FILES

FROM

L. W. Knoke

DATE November 20, 1938.
SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

Mr. Bolton called me at 11 o'clock. They were having a

big day over there due in part, of course, to the fact that the
general strike in Paris, generally speeking, had been a "tremendous

failure and that only in isolated parts of the country had there
been any evidences of limited success. He expected that the French
were having a very big return of capital today, probably in the
neighborhood of £5,000,000 and that as things were looking now this

situation might continue.

As regards sterling #our little squeeze has begun"; in
connection with the improvement of the situation in Paris it had
brought out a large amount of dollars; he had bought about $15,000,000

et rates from 4.66 1/2 to 4.67 8/8. They were out of the market

now trying to see 11 the rate would improve further. Should it fall
back they had plenty of dollars to sell in support. The market as a
whole was just beginning to be aware that there was some squeeze

going on. This situation might cause some difficulties with the
American banks there and he wanted to warn me of that. Most of the

sterling funds which these banks had were simply the result of
hedges (they had furnished spot dollars to the London market against

forward dollars on a swap basis); if they couldn't renew these hedges

they might face difficulties. If that situation should develop they
at the bank would probably handle them, however, 1f the situation
should become at all serious he would let no know. Meanwhile, he

MISC 3.2 60M-6-38

389
FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
TO

FROM

DATE November 30, 1988.

CONFIDENTIAL FILES

SUBJECT:

L. W. Knoke

TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

2

did not think there was any necessity for us to warn any of them. He
simply wanted to put the idea into our minds not because he expected

trouble but just to be prepared if anything should happen. If the
covering movement continued for awhile, that is after the bulk of
the short positions were covered, it would probably be easier for:
the others - at a price, that is at a widened premium for forward
dollars - to maintain their hedges.

LMK:KW

390

JR

A portion of this tele-

gram must be closely
paraphrased before being

communicated to anyone.
(c)

Berlin
Dated November 30, 1938

Rec'd 1:10 p.m.

Secretary of State,
Washington.

673, November 30, 4 p.m.
(GRAY) No. 34, FOR TREASURY FROM HEATH.

It is understood that the American newspaper
correspondents have cabled the main sections of Schacht's

speech on "financial miracle" last night. Schacht
repeated his familiar praise and justification of
National Socialist internal financial rEconstruction
measures and his usual arguments that the bilateral
foreign commercial policy and Exchange measures were

unavoidably forced on Germany. HE described the various

financial rEconstruction measures but in an aside not

quoted in the official version of his speech said that
the rearmament and the automobile road construction programs

WERE practically sufficient in thems Elves to bring about

full Economic activity in Germany. HE referred to the
cessation of Central Bank credit creation on April 1 and
the new policy of meeting all Government Expenditures from
loans

391

-2-

loans and taxes. After the speech Schacht informed as
that he had battled for a year before he succeeded in

ending the issue of inflationary "special bills* and had
refused to accept a four-year prolongation of his term
as President of the Reichebank, limiting his acceptance
to one year instead, which indicated that be had feared

he would be unsuccessful in abolishing "special bills*
and desired to be free to resign in 0800 he were not
successful.

He asserted that foreign estimates of Germany's
total indebtadness were exocesive and that when it would

be possible -- which he hoped would be soon -- to disclose the entire debt "the world would be astonished that
so much work--creation and armstem had been accomplished

with relatively little recourse to credit." He declared
that Germany was not"autarchic" and will never be

autarchic "in all fields" of production. He admitted that
the quantity of manufactured goods imported had decreased
by 63% between 1934 and 1937 but pointed to the increased

importe of foodstuffe and raw materials. He described
Germany's bilateral trade system as "a natural and necessary

result of the war indomnities" and of the clearing systems
"imposed" on Germany and stated that as soon as our

creditors are ready jointly with us to do away with the

results

392

-3- #673, November 30, 4 p.m., from Berlin.

results of the war indemnities then a gate will be
opened through which WE can COME to multilateral trade

and to free international payments transactions".

Replying to assertions that monetary inflation
had occurred he stated "in 1929 the total German
monstary circulation amounted to around 5,980,000,000

marks. In the interim the population of the Reich has
increased by 14.900 through EXCESS of births and through

the acquisition of the Saar district, Austria and Sudetenland.
Therefore, figuring on the same per capita money

circulation a figure of 7,370,000,000 marks is reached.
Compared with this figure the average monetary circulation
for the first ten months of the current year was around
7,930,000,000 marks. It is therefore only 560,000,000
higher in comparison with the year 1929." HE admitted

in EVERY particular that "naturally the monetary
circulation in the critical month of September this year
had undergone a substantial increase" but added that this

was still less than the increase of circulation in other
countries.

It is true as Schacht states that the average
circulation for the first ten months was only about
8,000,000 marks but he did not mention that the circulation
stendily increased up to September. There was a decrease
in

393

-4- #673, November 30, 4 p.m., from Berlin.

in October but this has not continued so far in
November. The total circulation on November 23 stood
at 9,007,000,000 marks as compared with 9,069,000,000
marks on October 23 and 8,786,000,000 on September 23.

The remarkable ratio of repayment of fresh
Reichsbank credits continued through the third WEEK of
November at the End of which 114.8% of the October credits

increase had been repaid. Total Reichsbank credits
fell 165,000,000 marks to C. total of 7,484,000,000 marks.
The Reichsbank holdings of commercial bills stood at
6,611,000,000 marks as compared with 6,737,000,000 marks

on October 22. This reduction of credits was accompanied

by an increase of liabilities. Demand deposits increased
94,000,000 to 104.2 million and time deposits 8,000,000 to

a total of 417,000,000 marks. The disclosed gold and
foreign Exchange holdings of the Reichsbank continued

practically without change at 70.7 million marks and
6.2 million marks respectively.
The money market has stiffened recently presumably

largely due to final payments to be made on the October

loan. (Payments on the one point five billion marks
loan announced November 19 will not begin until

January 17) call money was quoted at 2-7/8 to 1-1/8
which is about three-quarters of one per cent higher than
the

394

-5- #673, November 30, 4 p.m., from Berlin.
the first WEEK in November.

Published indices show continuing slight increases
in Economic activity. The Employment index for October
was 118.2 (1936 Equal 100) as compared with 117.8 in
September. The index for hours of work performed was
122.8 in October as compared with 122.1 in September.

The index for retail trade turn OVER in September last was
12 per cent higher than in September 1937. There was a
net increase of 242,000,000 marks in deposits of German
savings banks during October.
GILBERT
HPD

395

JR

GRAY

London

Dated November 30, 1938

Rec'd 2:15 p.m.

Secretary of State,
Washington.

1375, November 30, 6 p.m.
FOR TREASURY. Only 106 bars, 78 of which WERE

married were sold at today's fixing at 149 shillings
1 pence which gave one-half PENCE premium at 4.66-3/8.

Opening at 4.66 the rate has moved to 4.68-1/8

with the British fund buying considerable amounts of
dollars.
An Exchange market source Estimates that the Bank

of France has bought something like pounds 10,000,000

of sterling today starting at 178.36 and moving .to 32.
The three months forward discount was quoted 1 to 1-1.
KENNEDY

DDM:HTM

396

November 30, 1938
11:30 am

Present:
Mr. Bewley

Mr. Butterworth

Mr. Lochhead

Mr. Taylor

HM,Jr: Before you start, would you like to
know the spot news? Tell him.
Mr. Lochhead: Sterling last night closed at
4.65-7/88. Of course it had gone down to 4.65-3/88,
then gone up again. Then the market, you remember
it was 4.66 in the morning, strong. Then it went
down to 4.65-3/8s and closed at 4.65-7/8s. This

morning opened over there 4.66-1/4 and strong all
The Bank of England reports that there was substantial
covering in their market, that may have reduced their
short position by $30,000,000 today, which shows there
is active covering caused, one, by technical methods
and, second, by the general improved tone of the market through the improvement in the French situation.
Mr. Bewley: The French situation is regarded

during the day. At the present time it is 4.68-1/2.

as improved?

Mr. Lochhead: Regarded as improved in financial

circles.
Mr. Bewley: I have a reply, part of which is

technical, part of which is general. I would like to
kept with ansolute secrety; that it is more secret
than the other part. I object to having it down in

begin by saying that the technical part they would like
writing. It seems to me my words are not of great value.
HM,Jr: Don't take it, Miss Chauncey.
(Note: Mr. Butterworth dictated a memorandum

on Mr. Bewley's off-the-record statement.)

397

-2-

HM,Jr: I can say unhesitatingly that if these
American banks -- to use the American vernacular,
"squawk"
will be that?
delighted to spank them
for
havingabout
doneit,it.I How's
Mr. Bewley: That's perfect.

HM,Jr: I will give the British Treasury full

support
banks

and if they will care to name the particular

Mr. Bewley: I don't know that it has happened.

HM,Jr: If they will name the banks, I will get

in touch with the heads of the American banks here, if
they wish me to, and tell them that this is something
that to
is ourselves.
both very displeasing to the British Treasury
and
Mr. Bewley: I am sure they would feel very
grateful.
HM,Jr: This 18 something that it 18 almost impossible for us to follow here.
Mr. Lochhead: If there are American ban's, it
would all be done on the other side.
HM,Jr: But if you will say this is the Guaranty,
or the Bank of Manhattan or Chase, these are the bad
banks

Mr. Bewley: If there are any.

HM,Jr: If there are any, I will back your
Treasury up 100%.

Mr. Bewley: Thank you very much.

HM,Jr: Cheerfully!
Mr. Bewley: I am sure my Government will be

gratified.
HM,Jr: I will call up the President of the Bank
or have our Fiscal Agent do that and say this is very
displeasing to us, unhesitatingly!

398
-3-

it.

Mr. Bewley: That, really, is all there 18 to

Of course, nothing has happened yet.

HM,Jr: Unhesitatingly I will support your
people along these lines if they will tell me which
of the American banks it is and it does not make any
difference
is a private
bank we will be very
glad
to get ifinittouch
with them.

Mr. Bewley: I will be very glad to tell my

Government that and they will be very grateful to you.

HM,Jr: I will do it cheerfully, enthusiastically
and forcefully. I can assure you there will be no in-

timation come out of this Treasury or the Federal Reserve

Bank of New York.

Mr. Bewley: I don't doubt it at all.
(At this point there was more off-the-record

remarks by Mr. Bewley.)

HM,Jr: The only thing, and this 18 at first
blush, I hope that in their desire to replenish the
Fund that they won't weigh too heavily against letting
the Pound rise. That's my first reaction. See? Now
I have not had time to talk about it with my associates.
I don't know how they feel, but in their desire to replenish their Fund I hope that they won't be too strict
about letting the Pound go back.

Mr. Bewley: We can't tell now the thing is going

to work; depends upon now much comes back, obviously.

HM,Jr: Today is a typical day. The Pound is

up 2-1/2 points and they nave gotten back $30,000,000.

At that rate they would not need many days like that
and, incidentally, the French did very well today too.

Mr. Taylor: I think the market itself will give

the answer to that on each day as to what it is going
to be possible to do.
HM,Jr: But today we could have put the lid on

where?

Mr. Lochhead: Around 4.6%

399

-4-

HM,Jr: And I told Archie to let it go up, and

we did about$50, 000,000. That', 8 the way I felt.
We have all this gold and we could say, Here's
chance. Now I am quickly going to sell a lot of a

gold,' but I said no, it's more important to see
the
rise.my
That's
the way I react. As I say,
I amPound
giving you
first blush.
You left me with the impression, the other
day,
as
what was
your own opinion, that there was
not any to
technical
action.

Mr. Bewley: I did not want to go as far as
that. I merely meant that tecnnical action is not
a panacea. It can only be a pallative.
HM,Jr: I do feel that there are certain tech-

nical steps which can be taken, particularly when the
situation is right, which it seems to be now, where
there 18 a big snortage.
Mr. Bewley: Yep.

HM,Jr: And I am very pleased to see that the

British Treasury has taken the steps it has the last
few days, but 1 also realize that it is only part of
the picture.
Mr. Bewley: I think we see fully eye to eye
on that.

HM,Jr: I want to thank Sir Jonn Simon for

this message. I can assure you it will be kept as
part of our Stabilization Fund information and that
if he finds that some of the American banks over
there are not playing ball, if he will advise me at
once I can assure nim ne will get full cooperation
at this end. Now, all I can hope for is wnat's happened in the last few days will continue at least a
few days more.

Mr. Bewley: Yes.

There was really only one other thing wnich
18 in relation to something you said the other day.
You said you would have to take some further action.
I wondered whether you were referring to furtner de-

400
-5-

valuation. 1 want to say that if the economic situation is such as to make for a weaker relation between Sterling and the Dollar, it does not to
me viewpoint and in this representing Treasury seem
-- that any deliberate alteration of any

-- I know I am

currency 18 any solution or the problem.

HM,Jr: Is this something you want to know or
your Government.
Mr. Bewley: It's just something my Government

is putting to me repeatedly.

HM,Jr: Do you want an answer?

Mr. Bewley: If you feel inclined. You don't

nave to give me an answer.

HM,Jr: What I have said repeatedly when this

is brought up is this: the question of further devaluation I consider a device only to use in a great

emergency, and at this time I don't envisage any such
emergency. Does that answer you?

Mr. BewleY; Yes; perfectly.
HM,Jr: I don't at this time envisage any such

emergency.

Mr. Bewley: That is certainly a complete answer.

I did not really suspect it for a moment, but as there
are all these rumors going out I thought it wise to

clear it up.

HM,Jr: At my press conference Monday they asked

me about it and I said this was not the season for gold
devaluation rumors. It was usually an not August day
when they had no stories to write and I refused, at
this time, to eitner confirm or deny because the story
was. not worth it and they did not write anything and I
just wasn't going to get into a series of denying twice

a week, because the more you deny the more you get

people to write it, but I can't add anything to what
I answer you.

Mr. Bewley: I don't want any further answer.
HM,Jr: Things have to get a great deal worse

401
-6-

for us to use it at this time, but it's there.
Mr. Bewley: The position as far as we are
concerned
is we are
doing
keep up Sterling.
We
snall continue
to do
theour
bestbest
we to
can.

HM,Jr: Ag I said, I hope the last few days
will continue for at least a few days more and 1f I
have something, if anything develops, I will ask you
to come down and 11 you have anything I would like
you to come and tell me about it.
Just before you go, Wayne, you want to add

anything

Mr. Taylor: You do expect in the pouch some

of the figures about the other thing
Mr. Bewley: I do. The Queen Mary is delayed.
1 will bring it down Friday or possibly Saturday, because the Queen Mary 18 delayed.

HM,Jr: (To Mr. Taylor) I mean as to Adminis-

tration attitude.
Mr. Taylor: I could not improve a word of it.
HM,Jr: Aronie?

Mr. Lochhead: There is just one thing. You
speak about these regulations. From what I gather
they are all pointed towards exchange position. When
you speak of that you take exchange positions between
Sterling and Dollar or also between Sterling and gold?
Mr. Bewley: I think botn.

Mr. Loonhead: Two tecnnical things. First,

that they were asking the London banks not to permit
exchange transactions and, secondly, not to continue

to finance transactions in Sterling against gold.
Mr. Bewley: That's certainly the way I feel.

Mr. Taylor: It covers the whole field.
Mr. Lochhead: Of course, there is just as much

402

-7-

speculation with gold as against the dollar.
Mr. Butterworth: I have nothing.
000-000

403

November 30, 1938

Mr. Bewley, British Financial Attache, called
to see the Secretary of the Treasury at 3 p. m., and

Messrs. Lochhead, Taylor and Butterworth were present.
Mr. Bewley began by saying that he had recei ved
a reply from London (see memorandum of meeting in Secretary's office on November 22nd) which was partly

technical and partly general, and he requested that
the technical part be kept with absolute secrecy and
he
asked that no verbatim record be made of his remarks.

Mr. Bewley read what was obviously a telegram

he had received from the British Treasury, which outlined in general terms the technical steps which
Bolton had informed Knoke yesterday that the British
monetary authorities were taking, namely, that the
British clearing banks had been requested to refrain

from facilitating speculative transactions both against
gold and dollars with the intention of promoting a

squeeze. Mr. Bewley emphasized that this was not a
panacea, but a pallative, a temporary remedy to remove
some of the speculative pressure, but, nevertheless,

it was hoped that it would be effective.

In this connection, he asked that the American

Treasury, should the need arise, facilitate this ac-

tion as regards any American banks operating in London.

The Secretary readily offered to do anything that was
necessary to insure that the American banks would fall

into line and he specifically asked Mr. Bewley to let

him know if any of the American banks in London were

operating in a way which ran counter to the desired

aims.

Mr. Bewley took occasion to point out, on be-

half of the British monetary authorities, that if the
international political situation had not arisen, the
fundamental economic trend in recent months would,
nevertheless, have made impossible the maintenance
of a $5 pound and, in this connection, he emphasized

particularly the falling-off of American purchases

abroad by, roughly, $1,000,000,000. At the same time
he expressed the hope that the tecnical measures undertaken would gradually operate to strengthen the pound,

404

-2-

but that that, in turn, presented a problem of policy
as to the degree to which the pound would be permitted
to rise in relation to the amount of resources to be
recouped. To this the Secretary replied by saying
that, at first blush, he hoped that in their desire
to replenish the Fund that the British authorities
would
rise. not weigh too heavily against letting the pound

Mr. Bewley brought up the question of the use
of the devaluation powers by saying that the Secretary
had made some reference to this in their previous con-

versation and that it was a matter which his Treasury,
from time to time, pressed him about. He wished to
know whether their use was being considered. The
Secretary replied, "What I have said repeatedly, when
this is brought up, is this: the question of further
devaluation I consider a device only to use in a great
emergency, and at this time I don't envisage any such
emergency.

Mr. Bewley expressed entire satisfaction with

this answer.

It should be added that Mr. Bewley stressed at
several points in the conversation the importance of
maintaining secrecy about the measures the British
authorities were taking to restrict exchange operations;
that it was essential that the market should be kept
in the dark, and uncertain, even though it would eventually realize that action had been taken. The Secretary
assured him that no publicity would arise from it.

405
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE: November 30, 1938, 5 p.m.

NO.: 2022
FOR THE TREASURY.

The general strike was more of a failure than had
been anticipated. Today the exchange and security markets

naturally reflected extreme buoyancy and strength as a

result of the success of the Government. During the official
market the rate for sterling was brought down from 178.47
to 178.32 because of the demand for francs. An excellent
day was experienced by the fund, and our market contact
informs us that about 8 million pounds was acquired by the

fund. Dollar rate is now 38.17 where formerly it was
38.34, and there were rather free offerings of the dollar.
20 centimes is the forward rate for one month sterling,
and 1 franc 12 centimes for three months sterling.
Firm and active security market here; gain of about

one franc in rentes. This afternoon Bourse news is that
defeat was admitted by the general Confederation of Labor
and that the Syndicates were given freedom to go back to

work again. It is understood from the same source that
the country was calm and no trouble of any importance has
been reported.
END MESSAGE.
WILSON.

EA:LWW