Full text of Diaries of Henry Morgenthau, Jr. : Volume 154 : Part 2

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179
December 3, 1938.
10:15 A.M.

Present:

Mr. Lochhead

Mr. Harris

Dr. Haas
Mr. Gaston

Mr. Bell

Mr. Seltzer
Mr. Hanes

Mr. Taylor

Haas:

We could get 23/28.

H.M.Jr:

Oh, yes. A little thin in case anything should
happen. Would make everything go into the two per cent
if you offered a 8 year.
Forget the 8. It's a 9 year.

Lochhead:

The fact we have advanced it makes it more vulnerable.

H.M.Jr:

You mean you would leave it at 60-65?

Lochhead:

I think 80. On the 24 I would be inclined to give
them something. It's a long bond and it's the portion

Lochhead:

of the market that we have not really taken care of.
Harris:

Do you have any objection to having Hadley listening

H.M.Jr:

I am too nervous to be bothered. Yes, I do. I will
just have to -- I can't. The answer is no.
Sterling has moved up a little to 4.68 France are

Lochhead:

H.M.Jr:
Gaston:

in?

holding steady.

Herbert, do you know the origin of that story, please?
Yes, Mike Flynn of the Wall Street Journal came in
and told me that at the Federal Reserve he was told

Eccles had submitted a memorandum to you on banking

legislation.

H.M.Jr:

He was told where?

Gaston:

At the Federal Reserve. I told him it was true.

-2H.M.Jr:

180

But he got the story from the Federal Reserve?

H.M.Jr:

Originally.
Dan, I'm just raising a point - whether possibly we

Bell:

What difference does it make in yield?

Harris:

Only about one point increase, I guess.

Gaston:

should extend the long bond out another year.

(At this point H.M.Jr. called Mr. Sproul. A copy of
the conversation at 10:19 a.m. 18 attached)

H.M.Jr:

What do you think, Larry?

Seltzer:

Well, that 18 not bad. What you do there, of course,
is take some chance on European developments. I think
that some of the optimism with respect to a long bond
in New York would be due to the fact that they expect
the short bond to be 80 popular. If, on the other
hand, the long bond went over, it might be a little
heavy. You might need a little more premium to carry

it. I, personally, lean against extending the maturity
of the long bond. I think it 18 safer to keep it
60-65.

H.M.Jr:

I am just raising the question. Talked to the President last night. He did a lot of kidding; had a lot
of people sitting around - Bullitt, Frank Walker, and
the rest. He thought that was a terribly sweet long
bond and he wanted me to subscribe $5,000 for the
church and $5,000 for himself. I told him we don't
take every $5,000.

Bell:

It's $1,000.

H.M.Jr:

I will have to write him a letter.

Gaston:

Each one of the elders 18 a vestryman and they could
each subscribe $1,000.

Bell:

Are you suggesting that the church do some padding!

H.M.Jr:

How do you feel, Archie?

Lochhead:

I feel the same as Larry. I think the market as it
stands now will support it but at the same time I
have the same feeling he had. If there is a heavy

subscription of the 21, I think it will be a little
safer.

181
December 3, 1938.
10:19 a.m.
HMJr:

Hello.

Operator:

Mr. Sproul. Go ahead.

HMJr:

Hello.

Allan
Sproul:

Good morning Mr. Secretary.

HMJr:

How are you?

S:

Fine thanks.

HMJr:
S:

I just - have you got any ideas this morning?
Well, I've thought about it over the night and talked

to the market a little this morning.

HMJr:
S:

Yes.

They think that
and rights yesterday and
after the close was based more largely on an expectation

of conversion into the longs than into the shorts.

HMJr:

I see.

S:

Therefore that raises some question in my mind as
between a nine and an eight and a half because I would
still be concerned about getting too large a supply of
the long bonds into the market.

HMJr:

Yes.

S:

Particularly in view of - in view of recent developments
abroad that factor is emphasized in my mind.

HMJr:
S:

HMJr:

S:

Yes.

So that I think the safest issue would combine an eight
and a half with the two and three quarters, but I
still think the nine would go and that the amount of
risk would be small, but I think there'd be some risk
there of too great a concentration in the long bond.
Well, I've got a suggestion, I mean I've pretty well
made up my mind that I want a nine, see?
I see.

182

-2HMJr:

What about extending the long bond by one year?

I think that's quite a possible alternative. It would

S:

HMJr:

damp that down just a little.
Uh-huh. Well supposing you do a little figuring on
that and I'11 call you back again about quarter of
eleven.

All right. Fine.

S:

HMJr:

See?

S:

Right.

HMJr:

Supposing - I mean - I'm pretty determined that I want
to do a nine year.

S:

I see.

HMJr:

See?

S:

Yes.

HMJr:

Now just think about the possibility of extending the

S:

Yes.

long bond one year.

HMJr:

See?

S:

All right.

HMJr:

Thank you.

183

-3H.M.Jr:

This morning I talked to Mr. Sproul. He weakened;
now he wants an8 year. I said how about extending
the long bond a year. He thought that would be all
right.

Haas:

The 81 is too sweet now.

H.M.Jr:

Is
that
now
on sweet
the 9? enough? What do you fellows figure

Seltzer:

It is rich.

Haas:

One and 5/32's.

H.M.Jr:

Is that bottom?

Bell:

Yes. Well, we figured that's about the probable.
Harris has it ranging from one to 1/18.

Harris:

No, that's the 8t.

Bell:

What have you on the 9?

Harris:

One and 5/32's. I can't see it selling much higher

H.M.Jr:

How about the 5 year?

Harris:

30/32's.

H.M.Jr:

Is anybody in the room here worried if we get one

Haas:

Seltzer:

than that.

billion dollars of the long ones out?
If you had a quiet market everything would go nicely.
If you had disturbing news from abroad you might have
some dumping; price might go down temporarily but

rapidly and unsettle the long end of your market
generally.

Bell:

What did the market do in long term issues the last

Harris:

They handled nicely.

Bell:

They stood up better than the medium?

Harris:

It was the middle of the market which was in a bad
situation.

disturbance?

184

-4-

Harris:

Have you got the eight and three-quarters?
Yes, one and12/32's.

Bell:

That would be September, 1947.

H.M.Jr:

(Mr. Taylor came in at this point.)
We are talking here of a possibility of either extending the long bond one year or making it eight and
three-quarters. They say the 9 year has one and 5/32's

H.M.Jr:

and the eight and three-quarters would have one and
12/32's.

Seltzer:

A month later than maturity. On eight and threequarters you would have a 41 callable in 1947 in
October.

Bell:

That's the one billion four 80 you would have two

Harris:

61-66 would give you about exactly the premium that
they now have on the rights. They have two one
hundred one 30/32's bid now.

Haas:

billion.

There 18 one other angle to this and that is we are
assuming largely that the subscriptions will come in

on purely a price basis; that it may be a bank will
say, "I want that 9 year and I can't get it later
and I am going to take it now at some disadvantage.
If it works out that way, that we don't know.

Lochhead:

George, anybody figuring on price would go for the
long bonds? Your subscriptions will come from people
who want the 9 year more than they want the extra
5/32's.

Bell:

It will come from banks who have already told us

H.M.Jr:

What I think -- I have seen this happen every time
see if you people agree or disagree that a bond,
intermediary bond of fixed maturity having a certain
premium is something you can't figure. The 9 year
is just something that these fellows like a little
more than it is worth on a mathematical basis.

they want an intermediary bond.

185

5-

Haas:

H.M.Jr:

Bell:
H.M.Jr:

Bell:
H.M.Jr:

We have taken that into account, that part of it,
in our price calculation, the best we can do because
we based prices on those that had fixed maturities
but there 18 the other point, about the same thing
you had, that this maturity just fits the requirements of certain banks and they are afraid by buying
the long first and afterwards going into the 9, that
they can't get it 80, therefore, they will subscribe
direct at a sacrifice of a little premium. If it
works out, it's swell.
If we leave it the way it was last night, subtract
what they will take into the notes -- and then some
fellow was here who -- I have changed. Leave it the
way it 18. I think it will go about fifty-fifty.
I have changed a little.
How about your insurance companies with fifty million?
They don't like it but they will take the 9 year.
That's what I mean. They've got to have rights in
order to get the 9 year.
So they will buy rights and take the 9 year. So after
thinking it over I think there are some chances of
even division on the 9 year and conversions. One
school of thought thinks it will jump them all into
the long.

Seltzer:
H.M.Jr:

Bell:

It seems to me that in trading a bank would take the
long without question.
I am eliminating the trading bank.

(At this point H.M.Jr. spoke to Mr. Sproul. A copy
of the conversation at 10:33 18 attached.)
Just to give you Childs for what it is worth, last
night they called me quite late and said that they
felt that it was rather impossible to figure the difference between an 8 and a 9 in this market. That
they had a feeling that a 9 year bond would sell almost down to 1.80 per cent basis and would give you
anywhere from 1 to 1 5/8 premium. That's larger
than any of the other. They feel that all this market that
is going up because of the feeling in the Street but
you are going to give them a two per cent bond,
their advice is a 9 year will go and go very well.

186
December 3, 1938.
10:33 a.m.

HMJr:

Hello.

Operator:

Mr. Sproul. Go ahead.

HMJr:

Hello.

Allan
Sproul:

Hello, Mr. Secretary.

HMJr:

Sproul, I'm throwing another one at you.

S:

Yes.

HMJ:

Leave another - leave the longs where they are,

S:

Yes.

HMJr:

And make an 8 and 3/4 bond which our boys think is

S:

They think what?

HMJr:

One and twelve thirty seconds premium.

S:

Yes. It's very hard to figure those premiums on that
fixed maturity bond without any cash offering. It

66-65.

one and how much?

might have a scarcity value which should move the
premium up so that -

HMJr:

Well I'm just, I'm not wavering an awful lot but I'm
sitting here and I'm thinking as hard as I can.

S:

Yes.

HMJr:

I'm just throwing this stuff at you.

S:

One other question on an eight and three-quarter.

HMJr:

There is a maturity in Sep - in October '47 I think.

Yes. True.

HMJr:

But that would put it together.
Yes. Well I'm just throwing it at you.

S:

Yes.

HMJr:

Mr. Ransom will be over here at eleven.

S:

S:

I see.

-2HMJr:

187

And I still like the thing the way it was last night.
Yes.

HMJr:

S:

And I still, I'm coming around more to the opinion that that conversion into the nine SQ that the sixty sixty
five will be about even. I think those people, I think
a lot of people want those nines.
Well I also was of that opinion until the market of
yesterday, of late yesterday, when they turned in the
rights and stated that they had some preference for
the longs as a speculative transaction. Wouldn't you
like to throw the conversions into the longs - higher
than we thought, and putting that together the exchanges
with the cash we'd have a pretty large issue of longs
out.

HMJr:

But Sproul isn't it also true that with a long, especially
the two and seven eighths going up yesterday, it looks
as though the people made up their mind they were going
to buy those and not wait to get the others?

S:

Well that's - that's a possibility too.

HMJr:

I mean the long ones went up as much as anything

yesterday.

S:

Yes, they did.

HMJr:

What?

S:

Yes they did.

HMJr:

S:

HMJr:
S:

HMJr:

So it looks as though the Yellow, at least I might put
this interpretation which might be entirely wrong, they
say, "Well we'll buy the long in the market now, not
wait, buy the rights and convert those into the nine."
Now is that a false interpretation?
I don't think they would - I don't think they would,
they were doing that, no.
You don't think so.
No, I think the activity of the rights was more on the
basis of long bonds and going into the shorts.
Well I'11 call you again sometime between now and
eleven.

188
-

S:

HMJr:

All right.
Thank you.

3

-6H.M.Jr:

189

Well, even before the market changed that's what
Devine
He said, "Don't think of anything but
a 9 yearsaid.
bond."

(At
this point Harris got the latest ticker report
on the bond market.)
Harris:
Bell:

Harris:

We have a rise here of 5/32's.
Getting better.
The two per cent 9 year with the bonds following where
the 9 year would come are up 4 to 5/32's. Therefore
the premium on the two per cent becomes greater.

Instead of 1.4, as estimated at the close last night,
it is possibly 1 and 5/32's now.

Taylor:

Typical of this thing that 16 going on, Spaulding
of the Northern Trust of Chicago -- he's an awfully
good bond man -- he said he wanted to buy that too
and sorer than hell because he didn't have rights
and they wouldn't be offered for cash. "I don't want
any long bonds; I have plenty of those. I am afraid
I am going to have to go in and buy them because I
have to have that bond."

H.M.Jr:

They tell me they haven't heard from the west coast
this time.

Bell:

They might take out some of the padding.

H.M.Jr:

How long since you (Lochhead) talked to the market?

Lochhead:

H.M.Jr:

Not since I came in here, but they sent the prices in.
Isn't 8t out of the question now?
It is sweet. Probably by close it is one and 22/32's.
Looks like I am awfully uncertain.

Harris:

My feeling is sit tight like you did last night.

H.M.Jr:

How much do I have in F.D.I.C.?

Harris:

One hundred five million.

H.M.Jr:

How much has Postal Savings?

H.M.Jr:

Harris:

190

-7Harris:

Fifty-two
- million and one hundred five million in
F.D.I.C.

H.M.Jr:

Government Life?

Harris:

Three million eight.

H.M.Jr:

Anybody else got any money to invest?

Harris:

No, sir.
From five to seven million. scattered around on March

Bell:

maturities which will be exchanged.

(At this point H.M.Jr. spoke to Walter Cummings. A
copy of the conversation at 10:50 a.m. is attached.)
H.M.Jr:
Gaston:

After listening to him I say 9 years.
I talked to my old pal Elliott about this story and I
told him what happened -- and Mike Flynn told me he
got it from the Federal Reserve.

"Well, he said, "I just don't see how that can be.
It's a mystery to me how these fellows get this stuff.
Certainly I wouldn't tell him anything of the kind.
I don't think the Board members even know about it.
So far as I know there are only two copies in existence; one that went to the President and the one
that went to Secretary Morgenthau." And I told him
you were somewhat embarrassed, that you had not read
the thing yet and would like to have his suggestions
what we should do about it.

"Well, Eccles is out of town," he said. He hadn't
much of anything to suggest. of course it wasn't a
plan at all. He wasn't suggesting anything; he was
just putting the problem and I told him well, I
thought it was a plan, a suggestion of a plan. I
thought it may have been suggested as tentative and
there are other things that could be done, but I
thought there was distinctly a plan there.
He said, "Well," he guessed that was right but it was
entirely tentative and the only thing he could suggest, if we were asked about it, we could say that
Mr. Ecclee would submit some thoughts on the subject
of whether there should be banking legislation; that
it was entirely tentative.

191
December 3, 1938.
10:50 a.m.
HMJr:

Hello

Operator: Mr. Walter Cummings. Go ahead.
HMJr:

Hello.

Walter

Cummings: Hello.
HMJr:

Walter?

C:

Yes, Henry.

HMJr:

How are you?

C:

Just fine, how have you been?

HMJr:

Oh, still got my head above water, that's about all.
How about you?

C:

Oh, I'm fine Henry. I'm fine.

HMJr:

How do you feel on the Government bond market?

C:

HMJr:
C:

Well I feel, I'm real optimistic on it? The story that
comes from your office 18 that you're going to be
pretty liberal this time.
Uh-huh. What do you think we're going to do?

Well, of course the report is out that you're going to
put in the short the short time, the five year, and
eight and half/nine year and then a long time bond.

HMJr:

Yes.

C:

Whether that's correct or not, I don't know.

HMJr:

C:

Well, we gave it out officially yesterday. We didn't
say whether it would be an eight and a half or nine,
and we didn't say it'd be Well of course that'11, of course you know Henry,

those will go fine.

HMJr:

Which?

C:

All of them, the whole three.

HMJr:

Will they?

192

-2C:

Oh, yes.

HMJr:

Which way will most of the fellows convert? The banks -

will
they convert into the - what will they convert
into?

What we're going to take, we're going to take your
long time stuff because we think that's where - we think
that's where we ought to land, where all of you people

C:

should land.

HMJr:

You going to take all long?

Yes. We'll take all that we can, yes. Of course the
others won't do that, New York won't do that, they '11
take the short time stuff. We're going to recharge get this interest recharged, we need it.

C:

HMJr:

How long will you keep the long ones Walter?

We're going to put them - we'll keep them all the
time. We don't dispose of them Henry.

HMJr:
C:

I see.

You see New
York takes them and then gradually let
"But

them go,/ we don't do that.

HMJr:

Uh-huh.

C:

We're holding them for investment.

HMJr:

C:

Well how about your friends around the Chicago district?
What do you think that they'11 convert into?
What - what we've talked to are people, all that are

here, is to go out and get this return.

HMJr:

Do what?

C:

To go and get the return, to take the two and three
quarters.

HMJr:

Uh-huh.

C:

We want them to have some earnings, see?

HMJr:

Uh-huh.

193

-3Now our Eastern friends won't agree with us in the
Middle West on that but you can be assured that this
whole thing will go over in good shape.

C:

HMJr:

Well I'm not worrying about it That.

C:

HMJr:

But -

In fact it's pretty rich this time Henry. It's all

C:

C:

possible for the banks to take it.
Well, which - if you were back in the Treasury, which
would you make it, eight and a half or nine?
Oh, that's immaterial.

HMJr:

Uh-huh.

HMJr:

It just depends on what day it'hits there.
in front of you and what - eight and a half or nine
it doesn't make any difference.

C:

HMJr:
C:

HMJr:
C:

HMJr:
C:

HMJr:

Doesn't make any difference.

Not a bit, no.
Uh-huh. But you think the boys are hungry this time?
Uh. They're hungry, oh yes, I should say.
What?

They're - they're hungry for these bonds.
They are.
going

C:

They are / over in good shape.

HMJr:

Uh-huh.

C:

And we're going to - Henry ''re going to do everything
out here in the Middle West to get the long ones, boost
the long ones.

HMJr:

Boost the long ones.

C:

Oh, yes.

194

-4HMJr:

Uh-huh.

We want to do that. I think it's better for the

C:

Treasury too.

HMJr:

Uh-huh.

HMJr:

Like to have as many of those taken as we possibly can.
Now what do you know that I ought to know?

C:

I think you've got all the news.

C:

HMJr:
C:

Well anything else around? Anything sour?
What is it?

HMJr:

Hear anything sour as far as the Treasury is concerned?

C:

No, I should say not. I think it goes along in very fine
shape, and I think you're smart in taking this money

now.
HMJr:

Uh-huh.

HMJr:

The best possible time you could get.
Fine. How - How's - how big a deposit you got now?

C:

A billion two.

HMJr:

How much?

C:

A billion two.

HMJr:

Oh, for heaven's sake.

C:

C:

So you see - say, Henry, when you do that, of course you're
not going to allot eight hundred thousand, are you?
Eight hundred million? In other words, you know you put
it up at - how much are you going to -

HMJr:

Seven.

C:

How much are you going to -

HMJr:

We'11 keep it down - we'll keep it down to ten or below.

C:

You won't give over ten per cent?

Over - we won't - we'll take -

195

-5HMJr:

No. A little more psychie this time, a little bit
less. Because last time the boys -

I wish you would because then we're - everybody's sure

C:

you know then.

HMJr:
C:

HMJr:

Well, we'll keep it below ten this time.
Yes. Well that's just fine.
Yes.

Well we're going to have a good year out here in
Chicago, we're going to make a lot of money in our

C:

bank.

HMJr:

Good for you.

So we're - we're feeling pretty happy about it.

C:

HMJr:
C:

Well, I'm glad to hear it Walter.
Things out here are in pretty fair shape.

HMJr:

They are.

C:

Yes. We're - I think we're about as good as any part of
the country.

HMJr:

I think you are too.
All right Henry.
Walter, just a minute. Do you know this young fellow

C:

No.

HMJr:

What?

C:

Yes, I know him, but I don't know him well.

HMJr:
C:

HMJr:

Campbell? The new District Attorney.

Do you know anything - do you know anything about his
reputation?

C:

He has - yes, he has a fine reputation.

HMJr:

He has.

196

-6Yes.
C:

HMJr:

Is he -

He's pretty young, but everybody that - people that
know
much better than I tell me that he's O.K.
him

C:

HMJr:
C:

HMJr:

Is he mixed up with any of the political factions?
No, no, that's one good thing.
He's clean.

He's absolutely clean.

C:

HMJr:

Well, that's good.
Of course there's - the last District Attorney was head

over heels in the political factions.

C:

C:

You're telling me.
It's a damned good thing they put him up in the judgeship.

HMJr:

Yes. Kind of touch on the bench, but it's all right.

HMJr:

C:

Well he can't do anything up there.

C:

All right.
But this fellow is all right.

HMJr:

Well now Walter, when you come to town let me see you.

HMJr:

C:

All right, I'll do that. I'll be down in a week or
80, Henry.

HMJr:
C:

HMJr:
C:

All right.
I'll drop in.
All right.
Goodbye.

197

-8- 11:00 A.M.
Mr. Ransom

Mr. Piser

Mr. Hadley
Ransom:

H.M.Jr:

Piser:
H.M.Jr:
Ransom:

Joined the group

Sorry, Mr. Eccles 18 still out of town.
I am too. We will do the best we can. Have you
people got the most recent figures this morning?
Based on last night's closing.
It's up considerably in the last half hour. How
does it look to you, Ronald?

I think it looks all right. I asked Mr. Piser to

canvass the available Board members and Mr. Harrison's

office. He 18 not available himself, and Mr. Sinclair

will make a report which will represent the consensus
of all these members.

Piser:

All of this is based on last night's closing. Nobody
had this morning's market. Mr. Sproul said that he

was acquiescing in Mr. Harrison's views. They thought
1 1/8 note, together with a 60-65 two and threequarters, and as far as the two per cent note was concerned, their feeling was that June, 1947 would be
safest and would insure the best conversions by commercial banks, but that they felt December, 1947 would
be satisfactory and possibly would not overburden the
long market too much. I talked with Mr. Sinclair. He
said he favored June, 1947. His views on the nature
of the long bond were the same. He also thought, however, that either issue would be satisfactory but had
a slight preference for the June, 1947 issue. He made
the further point that the two and three-quarters
45-47, maturing in September, 1947, and that's a large
issue - if it should be carrying over to maturity, that
plus the four and one quarter of October, 1947, might
make a substantial refunding problem at that time.

He thought it would be well to get this particular
issue out of the way before September, 1947.

H.M.Jr:

Piser:

Therefore, he wanted what?

Thought June, 1947 might be a little better. I talked
to Mr. Draper who felt it would be desirable to give

198

-9about the same premium on the two per cent. He

thought it would be desirable to give about the
same premium on the two per cent as on the long
bond and he had no opinion as to maturities. But
that was one point he wanted to make in order to
insure long conversions into the small one. And

Mr. Szymozak had the same opinion. Mr. Goldenweiser
had the same opinion.

H.M.Jr:

They all lean which way?

Piser:

Towards giving the same premium on the issues.
Those are the persons I canvassed.

H.M.Jr:

As between last night and today, how much sweeter is
the two per cent?

Harris:

Harris:

Possibly 4/32's.
So on the 8 it would be how much?
Around 22 or 23/32's

H.M.Jr:

Would you care to sum up, in view of what 18 happening?

H.M.Jr:

Ransom:

H.M.Jr:
Ransom:

I think, Mr. Secretary, that just about expresses the
views of our group 80 far as I have been able to pick
it up since I saw you last, yesterday.
Would you repeat? I am a little bit confused with 80
many opinions.

The preference seems to be for the June, 1947. As
between June and December, definite preference for

June. As to the note, 5 year 1 1/8 and a 8 year
two per cent.

H.M.Jr:

But do I gather that if I should make it full 9 years

Ransom:

No, that's my own opinion.

H.M.Jr:

Is that the opinion of those you talked to on the

Pieer:

I think that would be their opinion. There would be
a little more risk, but not great.

your people would not be disturbed?

phone this morning?

199

- 10 -

Ransom:

There is still a chance that might not exist in the
others. I don't remember the distinction there. It
seems to me if you want to make it full 9 years,
just about as good a chance as any of the others.

H.M.Jr:

When you talk about risk?

Ransom:

Perhaps there might be more of a tendency to go into
a long bond instead of a short.

H.M.Jr:
Ransom:

H.M.Jr:

But no risk, as far as success of the issue?
I see none, and nothing in the opinion of the men we
talked to this morning. You might get your banks
into more of a long term than they would take on the
other. Seems to be the only distinction.
If the Treasury should say 5 year 1 1/8 and a 9 year

Ransom:

two per cent 60-65?
I would not be concerned.

Piser:

Has there been any thought of making the long bond

H.M.Jr:

Yes, we talked about it and we simply felt -- I will
sum up for my own people -- that if we needed any
sweetness we needed it in that place there, irrespective of how many go in. I think that's the place
we need the extra margin of safety, because the way
I feel on it, I would hate to cut down, particularly
if we get a particularly heavy subscription in there,

61-66?

then we need all the additional margin above par.

Piser:

I was thinking, 1f we made it 61-66, possibly the

December issue would be a little more comparable in
price.

H.M.Jr:

I put that up at 10:30 to Sproul and told him to do
a little figuring and checking, and as soon as I am
through talking with you gentlemen I was going to call
him up and ask him. We put up aneight and threequarters 60-65 and a 9 year 61-66.

Ransom:

I would be interested in his reaction to that

H.M.Jr:

So we gave him both of these at half past ten.

suggestion.

200

- 11 -

Ransom:

Has there been any different development from the
point of view that you expressed yesterday as to

your staff thinking there would be heavier con-

version in one type than the other? I still don't
understand how we got 80 far apart.

I think the question of conversions from our calculations and calculations of dealers, I understand,
may be was that we were figuring it on purely paper
basis, but there is a question on this type of issue
like the proposed 9 year issue that the banks may
not account on a purely paper price basis; that they
may be willing to forego a difference of a few thirtyseconds and subscribe directly for the 9 year without
thought of later, because of the few thirty-seconds
advantage in the premium going back into the short.
They may calculate, unless they get the 9 year directly
in the subscription, they won't be able to get them
H.M.Jr:

Ransom:

H.M.Jr:

at all.
I changed a little in my opinion. I think -- this has

nothing to do with mathematics -- I think after you
deduct the amount that will go into the notes, I
think that the subscriptions in the twos, if it is a
9 year, will be about even. I mean, as to conversions between the twos and the longs. I think there
will be a big demand for the twos even with the 9 year.
I think that is the opinion of most of the people we
have talked to.

I may be wrong. We talked to Walter Cummings this
morning and as far as he's concerned, his friends
are all going into the longs. I said, "What do you
think about a 81"? "Don't make a damn bit of

difference." Both Mr. Ecker and Mr. Parkinson
very much prefer -- not very much, but they have a
preference for the 9 year. So if the insurance companies are going into the 9'8 -- Parkinson said he
will take some of the longs but he will take twice
as many of the 9's as he will the long. I think the
fellows who want the twos are buying up the rights.

We may be wrong.

(At this point H.M.Jr. spoke to Marriner Eccles.
Copy of conversation at 11:12 a.m. attached.)

201

- 12 -

H.M.Jr:
Ransom:

H.M.Jr:

I don't think he has been thinking about it.
And I don't think he has any fundamental views.
It seems to me he was getting it cold. I don't
think he thought it through. I don't think he has
been studying it.

H.M.Jr:

One year, it really means 80 little to the Government

Ransom:

That would help.

H.M.Jr:

I will tell you right now we are good for fifty million. Let's agree, if we can, it is going to be a

and it's an insurancy policy. We have quite a lot of
money we can invest in the long, if necessary. I'll
tell you now, we have fifty million.

9 year.
Ransom:

I see no objection.

H.M.Jr:

So we can get this thing out.

Haas:

Fine with me.

H.M.Jr:

Should we agree on the 9 year?

H.M.Jr:

(All present agreed.)
Suppose you pencil sharpeners all get together. Piser,
do you want to go with my gang? George, you go with
them and come back at twelve o'clock.

202
December 3, 1938.
11:12 a.m.

HMJr:

Hello.

Operator:

Chairman Eccles is calling to his office from New York.
Would you like to talk to him?

HMJr:

Yes.

0:

All right. Go ahead.

HMJr:

Hello.

Eccles:

Hello.

HMJr:

Eccles?

E:

Oh, yes, Henry.

HMJr:

I've got my whole group here. Would you mind if I put

you on the loud speaker?

E:

Go ahead.

HMJr:

Is that all right?

E:

That's fine.

HMJr:

All right. Now Ronald Ransom and Piser are here, and
the way the thing looks about now 18 five year one and
an eighth.

HMJr:

Five year one and an eighth.
A nine year two.

E:

Nine year two.

E:

HMJr:
E:

HMJr:
E:

And a sixty sixty-five two and three quarters.
Sixty-five?

Sixty sixty-five.
Sixty sixty-five.

HMJr:

Yes.

E:

Two and three quarters.

HMJr:

Yes.

203

-2Uh-huh.

E:

HMJr:

Now -

E:

You adopted a three-way program?

HMJr:

Yes, that was in yesterday morning paper.

Yes. Well I saw that, I was down to the Fed. yesterday
and talked the thing over with George - yesterday

E:

afternoon.

HMJr:

Yes.

And they had this information with the exception of the
maturities.

E:

HMJr:

Yes. Well this - we haven't fixed the maturity. We're
trying to do that now.

E:

Yes.

HMJr:

That's what -

E:

This is the option.

HMJr:

Well the only thing that we haven't really fixed is
whether this thing is going to be an eight and a half
or a nine year two. Everybody else is pretty much
in agreement.

E:

What - yes. Eight and a half or nine year, what's
the premium?

HMJr:

Well as of this
morning, just a minute, on the - on the nine year the

Two per cent. Oh, the premium?

premium is how much? It's about one point and nine
thirty-seconds.
E:

HMJr:

That's pretty good.
And on the eight and a half, one point twenty-two
thirty-seconds.

E:

One point and twenty-two thirty-seconds.

HMJr:

Yes.

E:

That - that ought to be sweet enough.

204

-3HMJr:

Well we think it too sweet.
Why
they
- that's why they want to cut down on the
eightdo
and
a half.

HMJr:

Yes, we think it's too sweet.

Yes. Well eight and a half, of course, it reduces the

E:

premium on that short bond.

HMJr:

No, increase it.

If you cut the - if you cut the - what do you want what
do they want to cut it to eight and a half years
for?

E:

HMJr:

Well -

HMJr:

And then I should say it would increase the premium.
Yes, increase the premium.

E:

And - and - you've got one and thirty-two hundreds,

E:

I mean one and nine thirty-two hundred premium now
on a nine year bond.

HMJr:
E:

HMJr:

E:

HMJr:
E:

That's right.
So why cut it to eight and a half.
Well the reason that your people are arguing 18 that
they're afraid that maybe you have too many subscriptions
to the long bond. That's what's bothering the Federal
Reserve people that I've talked to.
Well I know, but if you get a higher premium on the - on
the nine year bond by dropping it to eight and a half.
Yes.

You'd get more subscriptions than ever if you'd get it
higher. I see they want to get it closer. They want
to get the premium closer, don't they?

HMJr:

Now what they want is they - they don't want too many

E:

Yes, but I say, they want to get the premium closer

long bonds.

between the nine year bond and the long bond.

205

-4HMJr:

Well -

A little spread you see, nine thirty-seconds and
twenty-two thirty-seconds.

HMJr:

Yes.

Well, all right, it looks to me like that that - that
set up is all right and of course it takes care, it

E:

HMJr:

takes care of everyone by giving them the three way
opportunity.
That's what we thought.

E:

The -

HMJr:

We thought it was a nifty.

E:

For cash

HMJr:

Pardon me.

E:

What do you expect to do for cash?

HMJr:

Oh, on the cash?

E:

Yes.

HMJr:

Well, we're offering four hundred million of the longs,
and three hundred million of the notes.

E:

what do you expect to do.

The same - the same long one and of course the same

notes.
HMJr:

Yes.

E:

It looks all right to me.

HMJr:

You're not worrying about too many longs?

E:

Well, of course what I would have preferred is to not
have given the long bond in the option.

HMJr:

Yes.

E:

It was my first choice.

HMJr:

Yes.

206

-5And not give the three way.

E:

HMJr:

Yes.

Because the banks own eighty per cent of the notes.

E:

Let the banks take either the new notes or the nine
year bonds, and merely confine the long bond to the
cash.

HMJr:

Yes.

But I realize that Harrison and Sproul both felt that
the long bond ought to be - ought to be also offered
in the option.

E:

HMJf:

Yes.

E:

Because the insurance companies and investors had about

HMJr:

Yes.

twenty per cent of the notes.

And they felt that there would be discrimination unless that they should all be given the opportunity. Well
I don't entirely agree and it would be, and as I said,
the other day, my first choice was the option of the
five-year, neither a nine year, ten year, an intermediate
bond, for the option.

E:

HMJr:
E:

Yes.

Leaving merely the long bond for the cash subscription
and then there wouldn't be any trouble. Now this way,
of course a lot of banks and others with these notes
at this high premium are going to take the long bond
and then - and then we may have some difficulty on a
secondary market.

HMJr:

Yes. Are you worried about it?

E:

Not worried, no.

HMJr:

All right.

E:

I'm not worried. Well of course you've announced the
three way - you've announced that now.

HMJr:

Oh, that was all in the papers.

207

-6Yes, yesterday.

E:

HMJr:

Sure.

I saw that.

E:

HMJr:
E:

HMJr:
E:

Yes.

So that the whole question is, this morning, is a
matter of pricing.
That's all.
And it's just a question of - this high premium here,
of course makes that pretty sweet and - and why
should they take notes or even short bonds if they
can take long bonds at this premium and then sell
them.

HMJr:

Yes.

The question 1s, can - can you reduce - can you
increase the maturity to a point where you reduce that

E:

premium?
HMJr:

Yes. Well, I don't know.

E:

Well now, I mean, anything that you can do along that

HMJr:
E:

HMJr:

line I certainly wouldn't object to.

Well I mean you're satisfied with a nine year two?
What is it?
You'd be satisfied with a nine year two?

E:

Nine year two.

HMJr:

Yes.

E:

Well I would.

HMJr:

Yes. Well, I'm going to talk once more to Allan Sproul,
and then we'll make up our mind, we'll all hope for
the best.

E:

Yes. All right. Well thanks Henry for calling.

HMJr:

Thank you.

E:

Goodbye.

208
December 3, 1938.
11:20 a.m.
HMJr:

(aside: I'm going to ask him what he's going to do

with his eighty four million.)

HMJr:

Hello,

Operator:

Mr. Sproul. Go ahead.

HMJr:

Hello. Hello.

Allan
Sproul:
HMJr:

Yes, Mr. Secretary.

Now we've all been kind of talking it over. How does
it look to you now?

S:

Well the market is very strong.

HMJr:

Yes.

S:

The rights are now a hundred and one, twenty-two, twenty-

four.
HMJr:
S:

HMJr:
S:

Yes.

And I think that confirms the opinion which had them
yesterday afternoon's market that the market is in its
valuation of rights is now goingmore of the long bonds,
they've already discounted any trade in on the notes
or the short bonds.
Yes.

And therefore having concerned myself about getting
too many of the long bonds out.

HMJr:

Yes,

S:

And you have cash for four hundred of the long bonds.

HMAr

Yes.

S:

I think you'd get two hundred million conversion no
hundred million and since I'd rather have the two

matter what you've put out, that'd be at least six
issues somewhat evenly divided.

HMJr:

Yes.

S:

My first choice would be for an eight and a half year
two, plus the sixty sixty-five two and three quarter.

209

-2HMJr:

Yes. What's your second choice?
My second choice would be for the nine-year two plus

S:

HMJr:

the sixty one sixty five two and three quarter.
Sixty one sixty five, or sixty one sixty six? You said -

I think sixty one sixty five, I think you - I don't
think it makes much difference however way you put
that
date. I think the important thing there
is thematurity
call date.

S:

HMJr:

The call date?

S:

Yes.

HMJr:

Well now, the market's going up so fast, let's say
this, and just a moment, just, I mean I want to make

the thinking a little bit simpler. Will you -

S:

Yes.

HMJr:

Do you want me to call you back in minute, or will you
hold on?

S:

I'll hold on.

HMJr:

Just hold on.

S:

Yes.

HMJr:

Mr. Ransom is here and Mr. Piser.

S:

HMJr:

Hello.

I see.

My own people. I just talked to Eccles but I don't
think he's had a chance to study this thing.

S:

I see.

HMJr:

Now, in the room here, we've all agreed we want a nine.

S:

HMJr:

S:

I see.

Now, we've got the thing set, one and an eighth on a
five year.
Yes.

210

-3HMJr:

S:

Two per cent nine. Now let's talk a little bit about

the longs here. Do you want to refigure, or should
I call you back again?
Well, I figure that the twenty-three year would have a
premium of about one and twenty-two thirty seconds.

HMJr:

What?

S:

One and twenty-two thirty seconds.

HMJr:

On the what?

S:

On the twenty-three year, that's a sixty-one call day.

HMJr:

Sixty-one.

S:

Yes.

HMJr:

Yes.

S:

That's about five thirty-seconds down from a twenty-two

HMJr:

year sixty call date, and I think that a nine-year
two that it would be better in the present state of the
market to put out the sixty one call date long bond,
just to dampen that down a little.
Well now, that is too important, I want to do a little
walking, a little thinking, and I think with the market
jumping the way it is I'm going to wait until she
closes.

S:

HMJr:
S:

HMJr:

Before you decide?

Yes, this is too important.
Well I don't see any reason why you shouldn't, that's
only thirty-five minutes off.

Yes, I think I'll wait until it closes. And, I'll

call you back right after it closes, but the way it
stands now to clear your thinking.

S:

Yes.

HMJr:

We'll make it nine years.

S:

Yes.

211

-4-

a little
HMJr:

Then I'll have the boys get out and do/figuring with
their pencil on the - on whether we should do anything
of a change on the longs.

S:

Right.

HMJr:

How's that?

S:

Right.

HMJr:

O.K?

S:

Fine.

HMJr:

Thank you.

212

December 3, 1938

11:30 a. m.

By arrangement, Mr. Bewley brought Mr. Hall-

Patch, British Financial Attache to China, to call
upon Mr. Wayne Taylor. Mr. Butterworth was present.
Mr. Hall-Patch began by saying that the attitude and position of the Japanese in North China
differed from that in Southern and Central China.
In North China the Japanese definitely intended to
go through with their project of supplanting the existing Chinese currency by the issuance of the new
Reserve Bank notes. In North China the Japanese
militarists were in the saddle and all arguments of
moderation or recitation of the real difficulties
involved in such a drastic step carried little or no
weight. It was the firm intention of the powers
that be to impose the new Reserve Bank currency by
March 10, the anniversary of the establishment of
the Bank. To this end, exports were being held up
for the most part unless exporters were willing to

accept the new currency. Even Germany was receiving
different treatment in North China from Manchoukuo.
In Manchoukuo, under the German-Manchoukuo trade

agreement, Germany was being given preferential

treatment, but in North China the Japanese were, in
effect, aying to the Germans, "You are our friends;
therefore, why should you press us for foreign exchange? It is only these Democratic countries whom
we should have to be bothered with and by."
Although Hall-Patch did not underestimate the

very real difficulties involved in imposing such a

drastic measure in such a short time, he was impressed
by the determination of the Japanese authorities and

he felt that due to the sectional feeling which has
so long existed in North China, Japan had a fair chance
of getting away with it.
To undertake any such step as regards Central
and Southern China was an infinitely bigger problem
and Hall-Patch believed that the Japanese would not
now make this mistake.

213
-2-

Hall-Patch considered that the two persons
whose influence had, to date, been responsible for
a more moderate policy were Munakata and Kodama.
Kodama, in particular, had been a "hard nut" for

the militarists "to crack"; formerly head of the

Yokohama Specie Bank he had only come out of re-

tirement on the condition that he be given a free

hand and he was using that free hand with vigor and
courage. Munakata, formerly the Bank of Japan representative in London, had also played an important
and courageous part, but his teeth had now been
somewhat pulled by a maneuver of the militarists
in having him attached to them, thus curtailing his
direct channel of communication with Tokio.

In this general connection, Hall-Patch em-

phasized how disorganized Japanese efforts were in

Central China by reason of the lack of cooperation
between the military and civil groups: "Japan in
Central China speaks with a dozen different voices."
Illustrative of this was the fact that although the
militarists had not been able to have their way in
supplanting the Chinese currency in Central China,
they had nevertheless tumbled to the fact that if
exports were held up they would have a powerful
weapon and Hall-Patch considered that this was one

of the reasons appealing to the militarists to keep

the Yangtze closed. He also felt that the rapidity

with which the Japanese were taking over the customs
was cause for alarm and that the Chinese were making

a mistake in playing for friction between Japan and
the other foreign Powers, that should the customs be
destroyed it would be next to impossible to recreate

it.

On the other hand, he expressed astonishment

at the ease with which the Chinese currency had thus
far been held. The Hong Kong-Shanghai Banking Cor-

poration was operating in Shanghai on behalf of the
Chinese monetary authorities and Hall-Patch cited

the fact that in the last three months or so they

had only lost some 90,000 Pounds in holding the rate.
Immigration remittances, which played an important
For

part, are still coming in remarkably well.

the most part they came to the Hong Kong-Shanghai

Bank who, in turn, passed the credit to Chinese banks

214
-3-

in Hong Kong who, in turn, credited particular

amounts to up-country Chinese banks; despite the
war and ensuing disorganization, the system was

working effectively. However, Hall-Patch considered
that the spread between the official and market rates
was too great and if maintained indefinitely would
result in the immigration remittances being sent
through other channels. He had, therefore, urged
the Chinese authorities not to be too greedy and to
diminish the spread in order not to lose their source
of strength.
Incidentally Hall-Patch mentioned that since
K. P. Chen had been away the Foreign Trade Board had
somewhat changed its character and the brother of

T. V. Soong had obtained a virtual monopoly of the
trucking business; doubtless he and others were per-

sonally taking advantage of this situation.
Hall-Patch felt that the Japanese had been

short-sighted about the manner in which they were obtaining Chinese produce, seizing it on every occasion

and paying with Japanese Army bills. To date, the
Chinese for the most part still preferred their own
currency. In fact, Chinese resistance in general
had been remarkable and he emphasized that when he

was in China in 1928 he would never have believed such

an effort possible. He added that both the effective-

ness of the Chinese exchange control and resistance in
general to Japan were being maintained by reason of the

strength of the National feeling and also by the fear

engendered through chopping off the heads of those who

got out of line.

However, Hall-Patch did not underestimate the
advantages which Japan had obtained in controlling

almost all the natural entrances and exits to China

and thought with the passage of time the advantages
of their position would become more and more apparent.

Incidentally, with regard to the remaining

non-Japanese controlled entrances and exits, Hall-Patch
said that he had recently had a man go over the YunnanBurma Road who reported that it was not yet complete
and that when the rains came much of the completed work
would undoubtedly be washed away and another gang of a
couple hundred thousand Chinese coolies would be needed

to repair it. Communication between French Indo-China
and China was, however, open. The French had given
undertakings to the Japanese about restricting traffic,
particularly as regards instruments of war, and the
official and public French attitude was that these under-

.

215
-4-

takings were being honored, but in point of fact
they were not. Hall-Patch had talked with representatives of the foreign armanent manufacturers
who told him that even before the fall of Canton,
Chiang Kai-Shek in order to obtain an alternate
route had been forcing the armanent exporters to
send their shipments through French Indo-China
and the French were prepared to let them through
if too much fuss was not made about it.

Before leaving the Far East, Hall-Patch had
spent a month or more in Japan where he found it
was now fully realized that Chiang Kai-Shek is the
cement making for Chinese resistance and unity.

The Japanese, therefore, were taking the definite
line that Chiang Kai-Shek must go. Furthermore,
it seemed clear to Hall-Patch from both his conversations in Tokio and the action of the Japanese
themselves that since the fall of Hankow and Canton,
which encouraged them greatly, they are determined
to exploit China for Japan's benefit and that Western
interests will be allowed in China only on Japanese
terms and to suit Japanese interest. It was noteworthy that in Japan itself there was more cooperation
between the various civil and military groups and more
of an attempt was made to arrive at common attitudes
towards matters Chinese.

In Hall-Patch's opinion there is no reason to
believe that Japan will crack up in the short run
although there are signs of stress and strain which
may well become more apparent in ensuing months. He
felt that the foreign bankers, both in and out of
Japan, and wandering economists who came to Japan,
attach far too much significance to figures and not
enough to the difference between Japanese and Western
standards of living and to the capacity of the Japanese
people to endure hardship and poverty. Furthermore,
he was impressed by the improvement in the Japanese
exchange control system. It had been chaotic in its
early stages, but now delay had virtually been eliminated.
The Japanese importer knew within ten days whether or
not he would be allotted a given amount of foreign exchange for a given purpose and, therefore, could make

216
-5-

his plans accordingly. Allocations
of foreign
exIncidentally,
Hall-Patch

change were still uneven.
mentioned that he had come upon three officials of
the Reich Bank in Tokio and had ascertained that they
were there to help the Japanese to improve the exchange

control system. As illustrative of one type of stress

and strain which might have unfavorable repercussions

on Japan at any given time, Hall-Patch cited the fact
that Japanese authorities had forbid Japanese insurance
companies from re-insuring risks abroad. As a result,

foreign insurance companies were beginning to discriminate against Japanese insurance companies. Furthermore,

should a large fire or important domestic disaster occur,
without the risk being spread through foreign re-insurance,

the Japanese insurance companies might find themselves in

grave difficulty.

There was some discussion of Japanese gold exports,
about which Hall-Patch said that we knew more than he
did, because Americans were employed in the gold producing areas as technicians, but Hall-Patch was very

skeptical about the Japanese estimates, which he felt

were on the optimistic side, particularly as regards
Manchoukuo. Furthermore, he emphasized that Tokio
might well experience great difficulty in obtaining
Manchoukuo gold; that a spirit of "Manchoukuo for Manchoukuo" was growing up. This even applied to the
Japanese who as the Number 2 in all establishments
and
that
was
enterprises really ran the show. The reason

after the establishment of Manchoukuo as a Kingdom,
Tokio had paid off the numerous Japanese Civil servants

that it had sent there and they now had to look to their
new State for salaries and pensions. Consequently,
they were becoming more and more concerned about its
interests which did not always coincide with those of
Japan proper.

Hall-Patch expressed the opinion that united
action on the part of Great Britain and the United
States in, for example, denouncing commercial treaties

with Japan, was the only external development which

the Japanese really feared. In this connection, he

mentioned that the Japanese had put forward to him

217

-6-

and to other British officials a good many feelers
for loans with the implication that if forthcoming
then British interests in China would be respected
by Japan. He said that Ambassador Craigie and he
had both taken the line of referring to Craigie's
five-point note and saying that they would believe
that British rights and interests would be respected
should loans be given, provided Japan took steps to
implement its previous promises to Great Britain and
dealt without delay with the matters mentioned in
Craigie's note.

Hall-Patch talked about the whole position
with apparent frankness and his general estimate of
the Far Eastern position seemed to be that there
were no definite indications that events were moving
to force a change in the Japanese attitude; that the
Japanese were making considerable progress in con-

solidating their position and that they were determined to exploit China for their own benefit and
without undue regard for foreign rights and interests;
that by the sheer force of their effort and by reason
of their control of the main entrances and exits to
China they might well "pull it off".

218
December 3, 1938.
11:31 a.m.
HMJr:

Hello.

Allan
Sproul:

Hello Mr. Secretary, I want to correct one thing

HMJr:

Yes.

Ilong
said.
I said sixty-one sixty-five on that alternative
bond,
I should say sixty-one sixty-six working with the yield,

S:

probable yield figure and premium I was working.
HMJr:

Yes. Well now do you mind letting me switch you over
to George Haas, wherever he is and you can tell him,

because the boys all left the room to do a little
figuring.

S:

All right. Fine.

HMJr:

Just a second, please.

S:

Yes.

HMJr:

Just a moment, please.

Operator: Operator.
HMJr:
Would you see that Mr. Sproul is connected with
George Haas, I don't know, he may be over with
Lochhead,

O:

I'll find him.

HMJr:

But he's somewhere around, and let Mr. Sproul talk to

0:

All right.

HMJr:

Thank you.

him please.

219
December 3, 1938.
12:00 Noon.

RE FINANCING

Present:

Mr. Gaston

Mr. Harris
Mr. Hadley
Dr. Haas

Mr. Bell
Mr. Seltzer

Mr. Lochhead
Mr. Hanes
Mr. Ronald Ransom

Mr. Piser

H.M.Jr:
Haas:

George, how does it look to you now?

There 18 some range. A different yield basis they
used, but the difference between those two long
issues on the basis of the present market is about
5/32's.

Ransom:

That's on the 60-65?

Haas:

Yes, that's the one you had last night. 61-66, one

Ransom:

You figured the 5/32's?

Piser:

I think that's about right.

H.M.Jr:

You figured it Harris?
Yes, sir.
George, you had half an hour with the fellows. Which

Harris:
H.M.Jr:
Haas:

year longer, I have figured one hundred one 16/32's
which makes about 5/32's difference.

do you recommend, the 60-65?

I would stay with that, yes, because I think part of
this calculation is on the basis of the market which
is run up on expectation. I think they are expecting
a 60-65 and you can't figure this stuff that close.
It's only a question of 5/32's and I think the problem as between those two issues is too small. My
own personal opinion, I would stay with the 60-65.

220
-

Harris:

One
objection
that it might give you a premium
less than
your is
rights.

Seltzer:
Piser:

I definitely hold for 60-65.
I still vote for the 61-66.

Ransom:

Why?

Piser:

The reason 18 the premium 18 a little closer in line
with the two per cent bond and if you have too big a
spread I am afraid a too large proportion of the
conversion will be into the long bond and the 61-66
would make two issues of about equal price 80 that
I think you would not get as much pressure on the
longer bond if you have a longer maturity than if
you have the 60-65.

H.M.Jr:
Lochhead:

Archie?

I would stick to the 60-65. I don't like this jump-

up in the last day or two. It's frothy. I don't

like to question this 5/32's that has been added on
the last day. Incidentally, Mr. Taylor said that he
preferred the 60-65. If, however, you wanted to
stretch it a year, he would not make any serious
objection.

Bell:

I don't believe by shifting the short bond for a year
or the long bond a year that you are going to shift
these exchanges materially, and if there is a chance
now of exchanges going into longer bonds, I would
rather have a higher premium 80 as to keep the bond

on a better market condition later on.

H.M.Jr:

So you are in favor of

Bell:

60-65, even though it 18 sweet.

H.M.Jr:

Do you want to say anything, Hanes?

Hanes:

I am impressed by the 60-65. That's what I would
vote for.

Ransom:

I would like to get the premium closer together, but

I am impressed that in the last few days we have had
a run-up which might not indicate anything except
the market situation and perhaps there is not as

221

-3-

great a difference as we think. I would like it

based on such a plan as would keep banks out of the

long as much as we can, but I don't believe this
difference of 5/32's 18 going to make any great
difference and it may ease off when the final
announcement comes out.

H.M.Jr:

It could move off half a point.

Ransom:

So I don't think there is such an obvious edge over

Bell:

It seems to me it might have a little advantage from
the standpoint of the Federal's portfolio to keep

the 61-66.

the 60-65. You have a higher premium; stand up
longer.

H.M.Jr:

Now, before we call up, if this 18 a fair question,
what are you going to do with your 80-odd million?

Ransom:

That I can't answer because I have had no opportunity
to consult with the people who have to make that

H.M.Jr:

decision. I would be tremendously interested in
knowing the views of these people as to what we could
do to have the most stabilizing influence on the
market. That's the thing I am most interested in.
But you are not apt to go into long bonds.

Ransom:

I should not think 80, but I would like to get the
judgment

H.M.Jr:
Ransom:

You can tell me Monday.

of these people what would be the most

stabilizing procedure to follow.

H.M.Jr:

Still have them?

Ransom:

As far as I know we have them.

Piser:

83 millions.

Ransom:

If any of your boys have any definite opinion, I

H.M.Jr:

I think we had better leave that to you fellows.

Ransom:

All right.

would be glad to have them express it.

222

-4-

Haas:

I might add that at the close, the market was in-

clined to shade off from its high. Dealers felt

prices went up too high on the amount of business
done.

(At this point H.M.Jr. spoke on the 'phone to
Mr. Sproul as follows:)
H.M.Jr:

Hello.

Operator:

Sproul.

H.M.Jr:

Thank you.

Operator:

Go ahead.

H.M.Jr:
Allan
Sproul:

Hello.

H.M.Jr:

Well!

Sproul:

Yes.

H.M.Jr:

We're all sitting here waiting to hear from the oracle.

Sproul:

Well, you must have the wrong man.

H.M.Jr:

Yes.

Sproul:

I've thought it over and figured it over, combination
of a nine year two and a twenty-three twenty-eight
two and three quarter. Looks all right to me. I
think it would give a chance - the best chance of a
proper or an even distribution of the two bond issues

Hello.

in the market.

H.M.Jr:

Well, the reason that the Treasury is unanimous for

a sixty sixty-five

Sproul:

Who is?

H.M.Jr:

The Treasury.

Sproul:

Yes.

H.M.Jr:

Is that they feel that this run-up in the last two
days 18 sort of fast and kind of faulty?

223

-5Sproul:

I think that's right.

H.M.Jr:

And it might perfectly well settle down.

Sproul:

I think there has been some covering of short positions
among the dealers in the thin market for instance,
and
thatgo
when
is completed that the long bonds
might
off athat
little.

H.M.Jr:

Bell pointed out to Ronald Ransom that if 60-65 is a

little rich, why it is just that much more of a
cushion
port
it. before you fellows have to come in and supSproul:

Well, I think it is more a question of how many of
those long bonds get out than of the calculation of

what the premium might be which can be off on either

side of this point.

H.M.Jr:

If you'll just wait a minute we'll give you a decision.

Just wait a minute, will you?
Sproul:

Yes.

H.M.Jr:

(H.M.Jr: talks aside to group as follows:)
I would like to make it 60-65.

Ransom:

H.M.Jr:

I don't
about.

think there is enough difference to argue

I am going to be very frank. If we get a billion

dollars worth of bonds I am going to be rather proud
of it. We will be there. We will help 1f necessary.
I am not worried. Personally, I wouldn't mind getting
one billion dollars' worth of these bonds.
Ransom:

H.M.Jr:

There isn't anything about it that gives me concern.

I will be very much surprised if it does, but it
wouldn't bother me a bit. I would rather be bullish;
that the United States Government can borrow that

long -- give it that interpretation.
Ransom:

I have no argument.

H.M.Jr:

I want
to tell you how I feel. I don't think it
will
go there.

224

-6Ransom:

It sounds high to me.

H.M.Jr:

Well, all right. I don't think it will go there

because I think there is going to be a much better
demand for the 2' 8 than anybody thinks.

Ransom:

H.M.Jr:
Ransom:

H.M.Jr:

I am inclined to think you are right there. You
will get a surprising demand for that.
Ifor
still
think
the
2's.there will be a very healthy demand
I think 80.
But if I am wrong and they go into the longs, I, as
Secretary of the Treasury, would not be a bit concerned;
in fact, I would be rather proud. I want you to know

in time. I want to play as fair as I can. I don't
think it 18 going to happen, but if it does, it is
something to boast about.

Ransom:

It wouldn't be alarming to you?

H.M.Jr:

Not in the slightest, and just remember this, that if
anything happens, I don't have to do anything March
15th. We could sit tight and skip March.
I don't think you will have to.
But I am in that position. Check, Dan?

Bell:

Uh-huh.

H.M.Jr:

Certainly in six months you could absorb this thing.
I could do nothing, or I could borrow money from
Jesse on the three-year notes. We are in a very

H.M.Jr:

Ransom:

nice position. I don't think they will go to a
billion, but if they do, it won't bother me.

Bell:

O. K.

(At this point H.M.Jr: resumed his conversation with
Mr. Sproul as follows:)
H.M.Jr:

Hello.

Sproul:

Yes.

H.M.Jr:

We'll make it 60-65.

225

-7-

Sproul:

60-65?

H.M.Jr:

And a nine year.

Sproul:

And a nine year two?

H.M.Jr:
Sproul:

Yes, and a five year one and one-eighth.
And a five year one and one-eighth?

H.M.Jr:

Yes.

Sproul:

All right.

H.M.Jr:

And thanks for all the help, and I feel very confident

Sproul:

Well, I have no question about the whole thing going
over well.

H.M.Jr:

Just as long as something that I can't foresee happens
between now and Wednesday night, I think we are sitting
pretty.

Sproul:

H.M.Jr:
Sproul:

H.M.Jr:

on the whole picture.

I think that it will go very well, and the only ques-

tion I had all along has been the question of the
distribution as between the long and the short bond
and not wanting to get too many longs.out. I have no
serious concern about the issue at all.

I still think that something you can't figure out with

a slide rule is going to make people buy nine year two.

That's the point. You can't figure that the factor of
scarcity, the factor about the cash, the factor of
filling in a fixed maturity in a desirable area.
Right! Well, I'm ever 80 much obliged for all your
help. Just a minute, just a minute -- (pause)
Mr. Ransom says when he gets back to his office he

is going to call you as to what system will do.

Sproul:

Yes. All right, I'll expect a call from him then.

H.M.Jr:

Thank you very much.

Sproul:

Thank you.

H.M.Jr:

Good bye.

q-3-

226
December 3, 1938.
12:10 p.m.

Operator:

Operator.

HMJr:

Mr. Sproul please.

0:

Right.

HMJr:

Hello.

0:

Sproul.

HMJr:

Thank you.

0:

Go ahead.

HMJr:

Hello.

Allan
Sproul:

Hello.

HMJr:

Well!

S:

Yes.

HMJr:

We're all sitting here waiting to hear from the oracle.

S:

Well, you must have the wrong man.

HMJr:

Yes.

S:

I've thought it over and figured it over, combination of

a nine year two and a twenty-three twenty-eight two
and three quarter . Looks all right to me. I think it
would give a chance - the best chance of a proper or an
even distribution of the two bond issues in the market.

HMJr:

Well, the reason that the Treasury is unanimous for

S:

Who is?

HMJr:

The Treasury.

S:

Yes.

HMJr:

S:

a sixty sixty-five -

Is that they feel that this run up in the last two
days 18 sort of fast and kind of faulty.
I think that's right.

227

-2HMJr:

And it might perfectly well settle down.
I think there has been some covering of short positions
among the dealers in the thin market for instance,
and that when that is completed that the long bonds

might go off a little.

HMJr:

S:

Bell pointed out to Ronald Ransom that if sixty sixtyfive is a little rich, why it 18 just that much more
of a cushion before you fellows have to come in and
support it.
Well, I think it is more a question of how many of those
long bonds get out than of the calculation of what the
premium might be which can be off on either side of this
point.

HMJr:

If you'll just wait a minute we'll give you a decision.
Just wait a minute, will you?
Yes.

S:

(HMJr. talks aside to group)
HMJr:

Hello.

S:

Yes.

HMJr:
S:

as follows

We'11 make it eixty sixty-five.
Sixty sixty-five?

HMJr:

And a nine year.

S:

And a nine year two?

S:

Yes, and a five year one and one-eighth.
And a five year one and one-eighth?

HMJr:

Yes.

HMJr:

S:

HMJr:

S:

HMJr:

Alright.
And thanks for all the help, and I feel very confident
on the whole picture.
Well, I have no question about the whole thing going
over well.

Just as long as something that I can't foresee happens
between now and Wednesday night, I think we are sitting
pretty.

228

-3I think that it will go very well, and the only question
I had all along has been the question of the distribution

S:

as between the long and the short bond and not wanting

to get too many longs out. I have no serious concern
about the issue at all.

HMJr:

S:

HMr:

I still think that something you can't figure out with

a slide rule is going to make people buy nine year two.

That's the point. You can't figure that the factor of
scarcity, the factor about the cash, the factor of
filling in a fixed maturity in a desirable area.
Right ! Well, I'm ever 80 much obliged for all your
help. Just a minute, just a minute -- (pause)
Mr. Ransom says when he gets back to his office he

is going to call you as to what system willdo.

S:

Yes. Alright, I'll expect a call from him then.

HMJr:

Thank you very much.

S:

Thank you.

HMJr:

Good bye.

229
December 3, 1938.
12:49 p.m.

Operator: Governor Ransom.
Ransom:

Yes.

HMJr:

Hello.

Ransom:

Turning this question of our own position over in my
mind since I saw you, and speaking for myself alone
because I won't have a chance to compare with the

rest of them intelligently until the first of the

HMJr:
Ransom:

week, it would be my thought - let's put our position
fifty-fifty between the short-time bond and the note.
I think we ought to stay out of the long-term bond.
That's alright.
Particularly in view of your thought that you are
going to get a billion in it, why we want to keep
as much reserve as we can on that one.

HMJr:
R:

HMJr:
R:

Well, I said that was an outside possibility.
Well, you might -- you might at that.
Yes, I really don't think it will go there.
Well, with the position you are in with the funds you
have, why - ah - and excess reserve position such 88
it 1s, I wouldn't anticipate any Secretary reaction,
but I think we had better stay out of it. You asked
me and I hadn't even crystalized my own thinking on

it, but --

HMJr:

Well -

R:

That would be my own feeling about it.

HMJr:

That's what I thought you would do and I believe its

R:

alright.
We'll get together the very first part of next week Monday or Tuesday at the latest.

HMJr:

Fine !

Ransom:

We'11 canvass that out and let you know.

HMJr:

Thank you.

R:

O.K.

-2HMJr:

230

Hello - Hello.
Yes?

R:

HMJr:

R:

HMJr:

R:

Ah - after you left the Wall Street Journal ticker
carried a little statement on what we were talking
about.
They did?

I don't know whether you have seen it. It came out
at 11:54. They just brought it in now. On that
thing about --

Yes. I'll try to check ours on it. I hadn't seen
it.

HMJr:

I think you will be interested in view of what you

R:

O.K. I'll get it right away.

HMJr:

Thank you.

and I were talking about on the Dow Jones.

231

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

TO

FROM

DEC 3 1938

Secretary Morgenthau

Mr. Oliphant

For your information:

We have sent to the Acting Comptroller General a letter,
(signed by Mr. McReynolds) about the WPA relief workers, asking them
to reconsider their decision of November 22 to the Chairman of the
United States Employees Compensation Commission. In its decision the
General Accounting Office held that:
(1) The Commission may not, under the provisions of
Sec. 601 of the Economy Act of June 30, 1932,

transfer to the United States Public Health Service
from special funds under its control such sums as
may be necessary for the continuation of medical
services to injured relief workers; and

(2) The appropriation made to the Employees Compensation Commission would not be available for payment

of compensation of employees of the Public Health
Service engaged in the work of furnishing medical
services to relief workers if such employees
actually continue to perform the same service under
the Public Health Service as heretofore.

do

232
December 3, 1938.

MEMORANDUM

Mr. Taylor invited me in to a meeting which took place this
morning when he received Mr. Bewley, Financial Counselor of the
British Embassy in Washington. Also present were Messrs Lochhead,
White and Butterworth. I understand Mr. Butterworth has prepared a
memorandum for the Treasury of this conversation. For my own infor-

mation I record the following.

Mr. Bewley explained that, in response to the request conveyed
through him by Secretary Morgenthau, he had received from the British
Treasury on the trip of the Queen Mary which arrived in New York
December 1 certain documentation. He said this was not as complete
as the Secretary requested, most importantly because such detailed
information as the Secretary desired was not available to the British

Treasury, due in part to the British regard for the professional
attitude of the banks toward the confidential character of their
clients' transactions with them.

Bewley did give specific figures in regard to gold holdings of

the exchange equalization account. At the end of March, 1938, the
account held 297 million pounds of gold. By September 30, the account
had lost 140 million pounds; by the end of November another 60 million
and 40 million pounds were required to cover future operations
pounds; maturing in December. This left in the fund, therefore, approximately the

60 million pounds or 300 million dollars. Bewley stated that

present plan was to increase toward the end of the year the fiduciary be about

issue of the Bank of England by 60 million pounds which would
110 million pounds at the current rate or 5 hundred million dollars, dollars thus
giving the account a balance of approximately 8 hundred million

for the first of the year.

Bewley stated that the hoarded gold on the British market was
estimated the last week in November at upwards of 200 million pounds.
He could give no figures in regard to foreign capital holdings, that

at short term, on the London market. He felt the
London recently had

particularly capital which had been leaving conclusively been that entirely the foreign.

He thought the figures above cited proved

British officials had been taking every appropriate and possible discussion measure

to stop the decline of sterling. There was considerable of
of the possible effect on American prices of the depreciation this
and it was agreed that any further talks on subject
be sterling, between Messrs.Bewley and White. Mr. Bewley remarked to Mr. Taylor

233

December 3, 1938.

-2-

that in the conversation which Bewley had had with Secretary Morgenthau
some days ago the latter had remarked that the French had not seen fit
to follow American advices. Bewley asked Taylor if he could give him

a little more light on the significance of this remark, particularly

since it was desirable under the tripartite arrangement that the three
parties there to be conversant with policies discussed between the
various members. Mr. Taylor thought it would be necessary for him to
speak further with Secretary Morgenthau before he could elaborate upon
this point with Mr. Bewley.

H.M.C.

234
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE: December 3, 1938, 1 p.m.

NO.: 2044
FOR THE TREASURY DEPARTMENT.

This morning trading between banks very quiet and
uneventful, and the tendency remained favorable to the

franc. Rate for sterling was about the same as at closing
last night. Pressure again experienced by the belga.
The market appears to be unmoved 80 far by the

Italian incident.
Today's financial press reports rumors that a monetary

union is envisaged by Berlin and Praha; it is the view of
financial writers, however, that it would be surprising
if Germany would be successful in persuading Czechoslovakia
to accept an arrangement which would be 80 detrimental

to its interests.
There are reports that on the tenth of December

conversations of an economic character will begin in Paris
between the French and German Governments on two points -

renewal of existing quota arrangements, and the situation
resulting from Germany taking over Czech territory. The

transfer of this territory brings up questions of customs,

tariffs, quotas and financial transfer. It may be that the e
will also be discussion of the participation of the Reich in
the service of Czech loans.
END MESSAGE.
WILSON.
E&;LWW

235
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Berlin, Germany

DATE: December 3, 1938, 1 p.m.
NO.:

684

No. 35 FOR TREASURY FROM HEATH.

The Financial Press (Government controlled) has

predicted that the great increases in currency circulation
and Reichsbank credits which took place in September would

be reduced rapidly and substantially; however, this predio-

tion has not been fulfilled as yet.
The Reichabank statement for November 30 shows a

total currency circulation of 9,844 million marks as
compared with 9,856 million marks on October 30,
10,154 million September 30, and 7,180 million on November 30,

1937. Reichsbank credits (mainly bills rediscounted)
totaled 8,407 million marks as compared 8,423 million

marks at the end of October, 9,071 million marks at the
end of September and 7,431 million marks on August 31.

The increase during the last week of the month in credits
was 923 million marks which offset the remarkable repayment of reichsmark credits during the first three weeks
of November reported in my No. 34 for November 30.

Coincidently with the increase of Reichsbank credits
occurred

236

ML -2- Berlin Dec.3,1938 9 a.m. #684

occurred an increase in Reichsbank deposits of 99 million
marks to a total of 1,141 million marks.
With the statement there are also published figures
of Reichsbank giro clearings which for November WERE 100

billion marks as compared with 104 billion in October,
103 billion in September and an average of 81 billion
marks for the preceding Eight months of 1938.
The money market which had as usual stiffened at the
month-end Eased soliewhat yesterday. Call money was quoted

to 3% as compared with 2 7/8 to 3 1/8
at from 2 3/4
at the November close.
GILBERT
DDM:MMC

237

CABLE
From: Bankers Trust Co. of N. Y.
London Office

Date: December 3. 1938
Saturday

ON NEWS STRAINED FRANCO ITALIAN POLITICAL SITUATION MARKET OPENED
OFFERED FOR FRANCS AND WANTED FOR DOLLARS BUT TENDENCY TURNED WHEN

FRENCH CONTROL ENTERED AS SELLER OF STERLING. BRITISH CONTROL STARTED

BUYING DOLLARS INDIRECTLY AT 4.68 AND OVER FORWARDS STEADY. DeCASTELLANE
REPORTS AGITATION BY LEFT REFERRED TO OUR 36902 MEETING SOME SUCCESS
SEVERAL UNPLEASANT INCIDENTS AND FURTHER STRIKES PROVINCES. BELIEVES

COMBINED FACTORS AGGRESSIVE LEFT ITALIAN INCIDENT AND RIBBENTROPS VISIT
TO PARIS MAY TURN CURRENT TREND FOR REPATRIATION FUNDS PARIS.

CONFIDENTIAL

238 stat

Dec. 3, 1938.

riginal of attached sent to the President (in Georgia)
by special messenger, train leaving at 6:45 p.m.

239
STRICTLY CONFIDENTIAL

December 3, 1938.
MEMORANDUM FOR THE PRESIDENT:

I understand that a proposal to impose an embargo on
gold imports has been suggested as being an effective

measure to protect the position of the dollar against
further depreciation of sterling currencies. Such a step,
in my opinion, would in the normal course of events have
an effect on the exchange rates exactly opposite to the

one desired, and in addition would have consequences which

would increase the economic instability throughout the

world.

An embargo on gold imports would increase the pressure

against foreign currencies. During the past eleven months
the demand for dollar exchange exceeded the supply arising

from all international transactions other than gold ship-

ments by almost $1,500 million. The means of supplying the
dollar exchange necessary to satisfy this excess demand

has been the importation of gold. (so far this year about
$1,500 million of gold has been imported.) If the demand
for dollar exchange continues to be in excess of the supply
and if, further, dollars could not be acquired by the sale
of gold to the United States, such dollars as are available
on the foreign exchange market would become more valuable.

In other words, numerous currencies would depreciate still

further vis-a-vis the dollar. Since there does not seem to
be any immediate prospect of a substantial shift in the
demand-supply relationship for dollars an embargo on the
imports of gold at this time would be a step in the direction
of aggravating the very condition the proposal seeks to
alleviate.

Furthermore, the declaration of an embargo on gold

imports would -- quite apart from its political repercussions
both domestic and foreign -- constitute a very disburbing
factor in international economic relations. The Tripartite
Accord might be terminated and the instability in exchange
rates would be much intensified. Grave uncertainties with
respect to international monetary and commercial matters
would be introduced, the full consequences of which cannot
be entirely foreseen.

FILE COPY

240

-2By ourtailing the possibility of employing gold as a

compensatory mechanism in the settlement of international
balances, we would be promoting greater reliance on substitute devices. The cushioning effect that gold movements
exert on exchange rates would be reduced and still more
countries would resort to clearing agreements and the more
undesirable forms of exchange control for the purpose of
narrowing the fluctuations in exchange rates.
Finally, an embargo on gold would deal a blow to the
prestige of gold which now rests almost wholly on its use
as an international medium of exchange. As a nation
possessing more than half the world's monetary gold stock,

and as the third largest gold producer, we have a vital

interest in the future of gold. In any case, any step

which would help to undermine confidence in gold and endanger
its use as an international medium of exchange should be

taken only with the greatest reluctance.

HDW:1s

12/3/38

FILE COPY

TREASURY DEPARTMENT

M

241

INTER OFFICE COMMUNICATION

DATE December 3, 1938

Secretary Morgenthau

TO

FROM

Herman Oliphant

For your information Nothing occurred at the Monopoly Hearing on Friday not amply
reported in the press.

Today, Leon Henderson held forth for two hours in what I con-

sider the best general presentation of our current problems that I have
ever heard or read. Since he was outlining the program of the Committee,
what he said was doubly important in making it clear that the purpose

of the Committee is not moral reform, but the making of those functional
changes necessary to restore our private competitive system to operation
at that increased and constantly accelerated rate necessary to absorb
the unemployed. His testimony will appear in printed form Monday.

HO

242

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
To

December 3, 1938

Secretary Morgenthan

FROM M. A. Harris
W. H. Hadley

Estimated

Indicated

Market Basis

Premium

2-3/4% Treas. bond 1960/65 (22-27 yrs.)
1961/68 (23-28 yrs.)
2-3/4%
1962/67 (24-29 yrs.)
2-3/46
1963/68 (25-30 yrs.)
2-3/48

2.63 - 2.65
2.64 - 2.66
2.65 - 2.67
2.66 - 2.68

2 pts. - 1 5/8 pts.
1 7/8 pts.- 1 1/2 pts.
1 3/4 pts.- 1 3/8 pts.
1 5/8 pts.- 1 1/4 pts.

2% Treasury bond 12/15/47 (9 years)

1.86 - 1.90
1.80 - 1.83

1 pt. 5/32 - 26/32nds

0.93 - 0.95

30/32nds - 27/32nds

.

.

.

2%

6/15/47 (8 1/2 yrs.)

1-1/8% Treasury note 12/15/43 (5 years)

1 pt. 18/32- 1 pt. 10/32

Note: The first premium is about the maximum that may be expected, while
the second we view as a conservative estimate and probably about
where the issues will open on the day of offering.

December 3, 1938

liy dear Mr. President:

I find that we no longer give allotments in full for Government subscriptions
up to $5,000.

It is now $1,000. There-

fore, I thought it would not be worth your
while to have me earry out your suggestion.
Yours sincerely,

The President,

Warm Springs, Georgia.

243

THE SECRETARY OF THE TREASURY
WASHINGTON

December 3, 1938

CONFIDENTIAL

Dear Mr. President:

In order to place the Treasury in funds to provide
for expenditures authorized by law, and to meet the March 15

turity of about $941,000,000 of Treasury notes, I propose,
subject to your approval, under authority of the Second Liberty
Bond Act, approved September 24, 1917, as amended, to offer for
subscription two series of Treasury bonds and one series of

Treasury notes, all to be dated December 15, 1938. The offering will consist of a 22-27 year 2-3/4 percent bond, a 9 year
2 percent bond and a 5 year 1-1/8 percent note.
The long-term bond and the note will be offered for
cash to the amount of $400,000,000, or thereabouts, and
$300,000,000, or thereabouts, respectively, and both issues
will also be open for the exchange of the March notes. The
short-term bond will be open for exchanges only.
The authorizing aot provides that bonds and notes may

be issued only with the approval of the President. Accordingly,
I trust that the proposed issues will meet with your approval.
It is my intention to make public announcement of the offering
on Monday, December 5.

Faithfully yours,

Secretary of the Treasury.
The President,
The White House.

APPROVED: form H.

D.. 4 1922

245

December 3, 1938

To:

The Secretary

From:

Miss Lonigan E.L.

The total number of WPA workers on
November 26, 1938 is 3,215,564
The decrease during the week from
November 19 to November 26 was 27,991

workers. This is a total decrease of
47,062 workers from November 5 to November 26.

The total increase from the low point of
October 2, 1937 to the high point of
November 5, 1938 was 1,814,215.

246

WORKS PROGRESS ADMINISTRATION
Number of Workers Employed
United States
Weekly V.P.A. Employment

Monthly V.P.A. Employment

1938
MAR.

JULY

MAY

MILLIONS IIIII UTTITTE

SEPT.

-

1939
MAY

JALY

SEPT.

NOV.

OF
BURKERS

WORKERS

BORKERS

3.5

3.5

3.4

3.4
3.2
3.3

3.3

3.2

3.2
2.8
3.1

3.1

3.0

3.0

2.9

2.4

2.9

2.8

2.8

2.7

2.0

2.7

2.6

2.6
2.5

2.5
1.6
2.4

2.4
2.3
2.3
1.2

2.2

2.2
2.1

2.1

2.0
.8

2.0

1.9

.4

1.8

1.7

0

1936

1937

1938

1939

1.6

-

1.8

1.7

1.6

unimium minimum WE u DYY: 11. NOV. whill JAN. 11111 MAR. BYY

SOURCE: WORKS PROGRESS ADMINISTRATION

Office of the Secretary of the Treasury
- Imments and Statistics

1.9

MAY

I 938

1939

247
WORKS PROGRESS ADMINISTRATION

Number of Workers Employed - Monthly
United States
Number of Workers

(In thousands)

1936

January

February
March

April
May

June

July
August
September

October
November
December
1937

January
February
March

2,926
3,036
2,872

2,570
2,340
2,256
2,249
2,376
2,482
2,581
2,482
2,192

2,138
2,146
2,115

June

2,070
1,999
1,821

July

1,569
1,480

April
May

August
September

October
November
December
1938

1,451

1,476
1,520
1,629

January
February

1,901
2,075
2,395

April

2,582
2,678
2,767

March

May

June

July
August
September

October
November

Source: Works Progress Administration

2,967
3,067
3,120
3,245

3,216 a

a/ Confidential
Monthly figures are weekly figures for the
latest week of the month.
They include certified and non-certified
workers.

WORKS PROGRESS ADMINISTRATION

248

Number of Workers Employed - Weekly
United States
Number of Workers
Week ending

(In thousands)

1938

March 5
March 12
March 19
March 26

2,167
2,244
2,357
2,395

April 2
April 9
April 16
April 23
April 30

2,445
2,504
2,532
2,545
2,582

May 7

2,608
2,626
2,652
2,678

May 14
May 21

May 28

June 4
June 11
June 18
June 25

2,695
2,711

2,736
2,767

July 2
July 9
July 16
July 23
July 30

2,807
2,853
2,899
2,938

August 6
August 13
August 20
August 27

2,996
3,017
3,039

September 3
September 10
September 17
September 24

3,086
3,102
3,114

October 1
October 8
October 15
October 22
October 29

3,129
3,136

November 5
November 12
November 19
November 26

3,263

Source: Works Progress Administration

a Confidential

2,967

3,067

3,120

3,167
3,201
3,245

3,257
3,244

3,216 a

12-3-38

Federal Surplus Commodities Corporation
Summary of Commodities Procured
Fiscal Year 1938 and Fiscal Year 1939 to date
(Figures in thousands)

Total

year

1,719

2,469

1,938

15,035

56

134

163

3,377

5,109

133

124

357

370

3,804

3,783

216

234

194

15

8

7

63

17

16

8

-

149

8

-

-

152

(11)

21

(12)

183

(13)
(15)

-

-

-

449

-

-

-

&

-

15

449

(17)

25

(18)
(19)

256

-

(20)

-

-

3

29

60

22

30

22

14

44

16

15

(16)

8

-

-

(21)

-

Cases
Pounds

-

Eggs (Shell)

(10)

(14)

-

1,133
9,780

243

-

Pounds

(8)
(9)

8

9

3,446

Bales
Yards

(7)

5

-

408

Barrels

Cottonseed 011

(6)

80

-

Cotton Fabric

328

-

Cotton

(5)

2,634

30

45

-

Corn Meal

100

(4)

38

28,283

1,773

-

Corn

Snoks

89

3,430

-

-

19

1,174

576

25

36

6

107

2,343

1

417

237

338

924

5

990

130

1

Sacks
Pounds

20

80

Bushels
Crates
Bunches

67

-

Gallons

46

2

Bucheln

11

65

39

1

Cheese

74

2

Cereal (Whole wheat)

11

2

Celery

Bushels

2

Senliflower

36

2

Carrots

33

1

Came Syrup

56,800
1

Cabbage

3,430

-

Butter

(2)
(3)

Bushels
Cases
Pounds

(1)
548

70

-

Blackberries (Canned)

1939

to date

-

Beets (Fresh)

166

198

-

Besms (Snap)

5,625
2,990

110

-

Beans (Dried)

Pounde
Pounds

14,557
3

Apricots (Dried)

Bushels

year

to

to

8/30/38 :9/29/38 10/5/1 0/19/38:10/26/38:11/2/38 :11/9/38:11/16/38 1/23/38 11/30/38

ended

Pounds

to

-

(Dried)
sooles (Fresh)

to

to

to

to

6/30/38*
Acoles

fiscal

9/1/38:9/8/38
19/15/38:9/22/38:9/30/38:10/6/38:10/13/38:10/20/38:10/27/38:11/3/36:11/10/38:11/17/38:11/24/38
to
to
to
to
to
to
to

-

Connodit

Unit

Total

Total
7/1/38

fiscal

-

(22)
-

-

-

214

84

--

464

132

95

-

-

2,300

-

4,791

1,873

913

6

5
-

-

-

204

-

8

3

2

19

45

(45)

11

-

-

-

-

-

-

3

-

-

-

-

-

-

-

-

-

-

-

1
4

16

20

Treasury Department, Division of Research and Statistics.
Justments.
Weekly figures reported by Federal Surplus Commodities Corporation are based on telegraphic reports
and are unrevised.
Fiscal year 1938 totals have been revised to include all contract cancellations and other ad

-

-

-

73

145

(48)

114

(49)

-

-

-

-

145

(46)
(47)

-

-

5

5

-

-

3,500
50

(44)

13

-

11

73,190
282

(41)

-

-

-

-

(49) Tomatoes (Fresh)

Bushels

2,367

(42)
(43)

-

Cares

(40)

-

12

108

1,907

232

42

378

8

36

-

(48) Tomatoes (Canned)

(38)
39)

-

-

122

-

(47) Tobacco

(36)
(37)

243

3

15

32)
(33)
(14)
(55)

12

440

55

(31)

831

3

862

6,000

4,315
2,562

979

-

11

17

73

96

31

29
30)

9,075
11,100

12

35

(28)

-

Pounds
Pounds

44

-

(46) Rice (Milled)

47
47

-

(45) Raising

1,223

54

-

318

Bushels
Tons

55

66

50

9,075

78

64

(27)

-

404

7

Tons

1,932

21,825
2,534

181

53

39

-

Pounds

394

74

4,823

-

Bushels

3,000

153

947

652

631

580

551

534

415

524

515

509

4,559

3,042

-

Potatoes (White)
Prunes (Fresh)

8

Bushels
Bushels

Potato Starch & Flour
Prunes (Dried)

-

Peac (Fresh
Potatoes (Sweet)

-

Peas (Dried)

-

Peas (Canned)

Boxes
Cases
Pounds

-

Pears (Fresh)

Pounds

-

Bushels

2,550
320

5,960

2,681
4,709

-

Peaches (Dried)
Peaches (Fresh)

-

Bage

-

Paper Bage

12,497

-

Oranges

Pounds
Boxes

21,520

Quarts

-

Onions

Pounds

-

Yards

15,560

(26)

-

Mattress Ticking
Milk (Dry skim)
Milk (Fluid)

(25)

15,560
2,550
8,961
24,991

-

Labels

Labels

1,225

7

-

Grapes

Tons

(23)

-

552

-

401

227

279

(24)
-

279

5

Boxes
Cases

-

Grapefruit

Grapefruit Juice

-

Barrels

-

Flour

3,677
2,699

-

Fish

270

December 3, 1938

250

DECEMBER 3, 1938

TELEGRAM

(VIA WHITE HOUSE WIRE)

REAR ADMIRAL ROSS T. MCINTIRE, U. S. N.
SURGEON GENERAL OF THE NAVY
WARN SPRINGS GEORGIA

WE WERE DELIGHTED TO LEARN OF YOUR APPOINTMENT AS
SURGEON GENERAL OF THE NAVY AND WE SEND YOU OUR
HEARTIEST CONGRATULATIONS ON YOUR PROMOTION BEST
WISHES FROM US BOTH
HENRY AND ELINOR MORGENTHAU

251

DECEMBER 3, 1938

TELEGRAM (VIA WHITE HOUSE WIRE)

REAR ADMIRAL ROSS T. MCINTIRE, U.S.N.
SURGEON GENERAL OF THE NAVY
WARM SPRINGS GEORGIA

WE WERE DELIGHTED TO LEARN OF YOUR APPOINTMENT AS
SURGEON GENERAL OF THE NAVY AND WE SEND YOU OUR
HEARTIEST CONGRATULATIONS ON YOUR PROMOTION BEST
WISHES FROM US BOTH
HENRY AND ELINOR MORGENTHAU

252

DECEMBER 3, 1938

TELEGRAM (VIA WHITE HOUSE WIRE)

REAR ADMIRAL ROSS T. MCINTIRE, U.S.N.
SURGEON GENERAL OF THE NAVY
WARM SPRINGS GEORGIA

WE WERE DELIGHTED TO LEARN OF YOUR APPOINTMENT AS
SURGEON GENERAL OF THE NAVY AND WE SEND YOU OUR
HEARTIEST CONGRATULATIONS ON YOUR PROMOTION BEST
WISHES FROM US BOTH
HENRY AND ELINOR MORGENTHAU

-

253

Delec (na WH-urie)
Rear Admiral Ross T. MoIntire, U. S. N.,

Surgeon General of the Navy
Warm Springs, Georgia

We were delighted to learn of your appointment as
Surgeon General of the Navy and we send you our heartiest

congratulations on your promotion Best wishes from us
both

Henry and Elinor Morgenthau

THE SECRETARY OF THE TREASURY
WASHINGTON

December 3, 1938

CONFIDENTIAL

Dear Mr. President:

In order to place the Treasury in funds to provide
for expenditures authorized by law, and to meet the March 15
maturity of about $941,000,000 of Treasury notes, I propose,
subject to your approval, under authority of the Second Liberty
Bond Act, approved September 24, 1917, as amended, to offer for
subscription two series of Treasury bonds and one series of
Treasury notes, all to be dated December 15, 1938. The offer-

ing will consist of a 22-27 year 2-3/4 percent bond, a 9 year

2 percent bond and a 5 year 1-1/8 percent note.

The long-term bond and the note will be offered for
cash to the amount of $400,000,000, or thereabouts, and
$300,000,000, or thereabouts, respectively, and both issues

will also be open for the exchange of the March notes. The
short-term bond will be open for exchanges only.
The authorizing act provides that bonds and notes may

be issued only with the approval of the President. Accordingly,
I trust that the proposed issues will meet with your approval.
It is my intention to make public announcement of the offering
on Monday, December 5.

Faithfully yours,

Secretary of the Treasury.
The President,
The White House.

APPROVED:

D. 4 1925

C

255

O

P

y

CABLE RECEIVED FROM CHUNGKING

Dated Chungking, Dec.4, 1938
Recd. Washn.D.C. Dec.4, 1938

FROM:
TO:

Dr. H.H.Kung
Mr. K.P.Chen

(Dec.3rd) Please inform Mr. Morgenthau Japanese trying extensively
to circulate Japanese military notes and counterfeit of Chinese bank
notes in occupied area in effort to provide themselves with funds and

to discredit lawful currency (stop) Have protested to British Ambassador
after learning that the British Authorities in Tientsin have passed motion
proposed to allow bogus government Federated Reserve Bank notes to be

accepted (stop) Sincerely hope American Government will take steps

to prevent their banks and firms in North China from following suit (stop)
We are doing everything practicable to oppose such measures which are
?)

contrary to foreign as well as Chinese interests because such (
are certain to involve exchange and trade control to the serious detriment

of other than Japanese interests (stop)
We would appreciate any steps American Government may be in position to
take to oppose such schemes.
H.H.KUNG

255 A
TREASURY DEPARTMENT

Washington
FOR RELEASE, MORNING NEWSPAPERS,

Monday, December 5, 1938.

Press Service
No. 15-53

12/3/38

Secretary of the Treasury Morgenthau today announced the December 15 fi-

nancing, offering for cash subscription, through the Federal Reserve Banks, at
par and accrued interest, $100,000,000, or thereabouts, of 22-27 year 2-3/4 percent Treasury bonds of 1960-65, and $300,000,000, or thereabouts, of 5-year

1-1/8 percent Treasury notes of Series B-1943, and at the same time, offering the
holders of 1-1/2 percent Treasury notes of Series C-1939 maturing March 15, 1939,

the privilege of exchanging such maturing notes for additional amounts of either
the Treasury bonds or the Treasury notes offered for cash subscription, or for a
new series of 9-year 2 percent Treasury bonds of 1947, the exchange in any case

to be made par for par, with an adjustment of accrued interest as of December 15,
1938.

The 2-3/4 percent Treasury bonds of 1960-65, now offered for cash and in
exchange for Treasury notes maturing March 15, 1939, will be dated December 15,

1938, and will bear interest from that date at the rate of 2-3/4 percent per
annum payable semiannually. They will mature December 15, 1965, but they may be
redeemed at the option of the United States on and after December 15, 1960.

The 2 percent Treasury bonds of 1947, now offered only in exchange for
Treasury notes maturing March 15, 1939, will be dated December 15, 1938, and will

bear interest from that date at the rate of 2 percent per annum payable semiannually. They will mature December 15, 1947, and will not be subject to call for
redemption before maturity.

Both series of bonds will be issued in two forms: bearer bonds, with interest coupons attached, and bonds registered both as to principal and interest;

-both forms will be issued in denominations of $50, $100, $500, $1,000, $5,000,
$10,000 and $100,000.

The Treasury notes of Series B-1943 also offered for cash and in exchange
for Treasury notes maturing March 15, 1939, will be dated December 15, 1938, and

will bear interest from that date at the rate of 1-1/8 percent per annum, payable
semiannually. They will mature December 15, 1943, and will not be subject to

call for redemption before maturity. They will be issued in bearer form only with
interest coupons attached, in the denominations of $100, $500, $1,000, $5,000,
$10,000 and $100,000.

The Treasury bonds and the Treasury notes will be accorded the same exemp-

tions from taxation as are accorded other issues of Treasury bonds and Treasury

notes, respectively, now outstanding. These provisions are specifically set forth

in the official circulars issued today.
Subscriptions will be received at the Federal Reserve banks and branches,
and at the Treasury Department, Washington. Banking institutions generally may
submit subscriptions for account of customers, but only the Federal Reserve banks

and the Treasury Department are authorized to act as official agencies. Cash
subscriptions from banks and trust companies for their own account will be received

without deposit but will be restricted in each case and for each cash offering
to an amount not exceeding one-half of the combined capital and surplus of the sub-

scribing bank or trust company. Cash subscriptions from all others for either cash
offering must be accompanied by 10 percent of the amount of bonds or notes applied

for. Exchange subscriptions for either series of bonds or for the notes should be
accompanied by a like face amount of 1-1/2 percent Treasury notes of Series C-1939
tendered in payment, to which final coupon dated March 15, 1939 should be attached.

The right is reserved to close th books as to any or all subscriptions or
classes of subscriptions at any time without notice, for either series of the

-3Treasury bonds or for the Treasury notes and with respect to the cash offering or

with respect to the exchange offering thereof. Subject to the reservations set

forth in the official circulars, all cash subscriptions will be received subject
to allotment and exchange subscriptions will be allotted in full.
Payment for any bonds or notes allotted on cash subscriptions must be made

or completed on or before December 15, 1938, or on later allotment. Treasury
notes of Series C-1939, maturing March 15, 1939, with final coupon due March 15,

1939, attached, will be accepted at par in payment for any bonds or notes subscribed for and allotted, and accrued interest on the surrendered notes from
September 15 to December 15, 1938, (about $3.77 per $1,000) will be paid following
their acceptance.

Treasury notes of Series C-1939, maturing March 15, 1939, are now outstanding

in the amount of $941,613,750. The present offering will be the only opportunity
afforded the holders of these maturing notes to exchange them for other interestbearing obligations of the United States. Abcut $173,000,000 interest on the
public debt will be payable on December 15, 1938.

The texts of the three official circulars follow:

UNITED STATES OF AMERICA

2-3/4 PERCENT TREASURY BONDS OF 1960-65

Due December 15, 1965

Dated and bearing interest from December 15, 1938

REDEEMABLE AT THE OPTION OF THE UNITED STATES AT PAR AND ACCRUED INTEREST ON AND
AFTER DECEMBER 15, 1960

Interest payable June 15 and December 15

TREASURY DEPARTMENT,

1938

Office of the Secretary,

Department Circular No. 598

Washington, December 5, 1938.

Public Debt Service
I. OFFERING OF BONDS

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, approved September 24, 1917, as amended, invites subscriptions,

at par and accrued interest, from the people of the United States for 2-3/4 percent
bonds of the United States, designated Treasury Bonds of 1960-65. The amount of the

offering is $400,000,000, or thereabouts, with the right reserved to the Secretary
of the Treasury to increase the offering by an amount sufficient to accept all subscriptions for which Treasury Notes of Series C-1939, maturing March 15, 1939, are
tendered in payment and accepted.
II. DESCRIPTION OF BONDS

1. The bonds will be dated December 15, 1938, and will bear interest from that
date at the rate of 2-3/4 percent per annum, payable somiannually on June 15 and
December 15 in each year until the principal amount becomes payable. They will
mature December 15, 1965, but may be redeemed at the option of the United States on

and after December 15, 1960, in whole or in part, at par and accrued interest, on
any interest day or days, on 4 months' notice of redemption given in such manner as

the Secretary of the Treasury shall prescribe. In case of partial redemption the
bonds to be redeemed will be determined by such method as may be prescribed by the

-Secretary of the Treasury. From the date of redemption designated in any such

notice, interest on the bonds called for redemption shall cease.

2. The bonds shall be exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State. or any of the

possessions of the United States, 'or by any local taxing authority, except (a) estate or inheritance taxes, or gift taxes, and (b) graduated additional income taxes,
commonly known as surtaxes, and excess-profits and war-profits taxes, now or here-

after imposed by the United States, upon the income or prefits of individuals,
partnerships, associations, or corporations. The interest on an amount of bonds
authorized by the Second Liberty Bond Act, approved September 24, 1917, as amended,

the principal of which does not exceed in the aggregate $5,000, owned by any indi-

vidual, partnership, association, or corporation, shall be exempt from the taxes
provided for in clause (b) above.

3. The bonds will be acceptable to secure deposits of public moneys, but will

not bear the circulation privilege and will not be entitled to any privilege of
conversion.

4. Bearer bonds with interest coupons attached, and bonds registered as to
principal and interest, will be issued in denominations of $50, $100, $500, $1,000,
$5,000, $10,000 and $100,000. Provision will be made for the interchange of bonds
of different denominations and of coupon and registered bonds, and for the transfer

of registered bonds, under rules and regulations prescribed by the Secretary of the
Treasury.

5. The bends will be subject to the general regulations of the Treasury Department, now or hereafter prescribed, governing United States bonds.
III. SUBSCRIPTION AND ALLOTMENT

1. Subscriptions will be received at the Federal Reserve banks and branches
and at the Treasury Department, Washington. Banking institutions generally may subnit subscriptions for account of customers, but only the Federal Reserve banks and

-the Treasury Department are authorized to act as official agencies. Others than

banking institutions will not be permitted to enter subscriptions except for their
own account. Cash subscriptions from banks and trust companies for their own ac-

count will be received without deposit but will be restricted in each case to an
amount not exceeding one-half of the combined capital and surplus of the subscribe
ing bank or trust company. Cash subscriptions from all others must be accompanied
by payment of 10 percent of the amount of bonds applied for. The Secretary of the

Trensury reserves the right to close the books as to any or all subscriptions or
classes of subscriptions at any time without notice.

2. The Secretary of the Treasury reserves the right to reject any subscrip-

tion, in whele or in part, to allot less than the amount of bonds applied for, to
make allotments in full upon applications for smaller amounts and to make reduced

allotments upon, or to reject, applications for larger amounts, or to adopt any or
all of said methods or such other methods of allotment and classification of allotnents as shall be deemed by him to be in the public interest; and his action in any

or all of these respects shall be final. Subject to these reservations, subscriptions in payment of which Treasury Notes of Series C-1939 are tendered will

be allotted in full. Allotment notices will be sent cut promptly upon allotment,
and the basis of the allotment will be publicly announced.
IV. PAYMENT

1. Payment at par and accrued interest, if any, for bends allotted on cash
subscriptions must be made or completed on or before December 15, 1938, or on later

allotment. In every case where payment is not so completed, the payment with appli-

cation up to 10 percent of the amount of bonds applied for shall, upon declaration

made by the Secretary of the Treasury in his discretion, be forfeited to the United
States. Any qualified depositary will be permitted to make payment by credit for

bonds allotted to it for itself and its customers up to any amount for which it
shall be qualified in excess of existing deposits, when 80 notified by the Federal

-Reserve bank of its district. Treasury Notes of Series C-1939, naturing March 15,
1939, with coupon dated March 15, 1939, attached, will be accepted at par in paynent for any bonds subscribed for and allotted, and should accompany the subscrip
tion. Accrued interest from September 15, 1938, to December 15, 1938, on the
naturing nctos ($3.770718 per $1,000) will be paid following acceptance cf the
notes.

V. GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve banks are authorized and requested tc receive subscriptions, to make allotments on the basis and
up to the amounts indicated by the Secretary of the Treasury to the Federal Reserve

banks of the respective districts, to issue allotment notices, to receive payment

for bonds allotted, to make delivery of bends on full-paid subscriptions allotted,
and they nay issue interin receipts pending delivery cf the definitive bonds.

2. The Secretary of the Treasury may at any tine, or from time to time, prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve banks.
HENRY MORGENTHAU, JR.,

Secretary of the Treasury.

UNITED STATES OF AMERICA

1-1/8 PERCENT TREASURY NOTES OF SERIES B-1943

Due December 15, 1943

Dated and bearing interest from December 15, 1938

Interest payable June 15 and December 15

TREASURY DEPARTMENT,

1938

Office of the Secretary.

Department Circular No. 600

Washington, December 5, 1938.

Public Debt Service
I. OFFERING OF NOTES

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, approved September 24, 1917, as amended, invites subscriptions,

at par and accrued interest, from the people of the United States for 1-1/8 percent notes of the United States, designated Treasury Notes of Series B-1943. The

amount of the offering is $300,000,000, or thereabouts, with the right reserved to
the Secretary of the Treasury to increase the offering by an amount sufficient to
accept all subscriptions for which Treasury Notes of Series C-1939, maturing March
15, 1939, are tendered in payment and accepted.
II. DESCRIPTION OF NOTES

1. The notes will be dated December 15, 1938, and will bear interest from
that date at the rate of 1-1/8 percent per annum. payable semiannually on June 15
and December 15 in each year until the principal amount becomes payable. They will

nature December 15, 1943, and will not be subject to call for redemption prior to
maturity.

2. The notos shall be exempt, both as to principal and interest, from all
taxation (except ostate or inheritence taxes, or gift taxos) now or hereafter
imposed by the United States, any State, or any of the possessions of the United

States, or by any local taxing authority.
3. The notes will be accepted at par during such time and under such rules
and regulations as shall be prescribed or approved by the Secretary of the Treasury

-2in payment of income and profits taxes payable at the maturity of the notes.

4. The notes will be acceptable to secure deposits of public moneys, but

will not bear the circulation privilege.
5. Bearer notes with interest coupons attached will be issued in donominations of $100, $500, $1,000, $5,000. $10,000 and $100,000. The notes will not be
issued in registered form.
III. SUBSCRIPTION AND ALLOTMENT

1. Subscriptions will be received at the Federal Reserve banks and branches
and at the Treasury Department, Washington. Banking institutions generally may
submit subscriptions for account of customers, but only the Federal Reserve banks

and the Treasury Department are authorized to act as official agencies. Others

than banking institutions will not be permitted to enter subscriptions except for
their own account. Cash subscriptions from banks and trust companies for their

own account will be received without deposit but will be restricted in each case
to an amount not exceeding one-half of the combined capital and surplus of the
subscribing bank or trust company. Cash subscriptions from all others must be
accompanied by payment of 10 percent of the amount of notes applied for. The

Secretary of the Treasury reserves the right to close the books as to any or all
subscriptions or classes of subscriptions at any time without notice.

2. The Secretary of the Treasury reserves the right to reject any subscrip-

tion. in whole or in part, to allot less than the amount of notes applied for,
to make allotments in full upon applications for smaller amounts and to make re-

duced allotments upon, or to reject, applications for larger amounts, or to adopt
any or all of said methods or such other methods of allotment and classification

of allotments as shall be deemed by him to be in the public interest; and his

action in any or all of these respects shall be final. Subject to these reservations, subscriptions in payment of which Treasury Notes of Series C-1939 are

tendered will be allotted in full. Allotment notices will be sent out promptly

-3upon allotment, and the basis of the allotment will be publicly announced.
IV. PAYMENT

1. Payment at par and accrued interest, if any, for notes allotted on cash
subscriptions must be made or completed on or before December 15, 1938, or on later

allotment. In every case where payment is not so completed, the payment with appli-

cation up to 10 percent of the amount of notes applied for shall, upon declaration

cade by the Secretary of the Treasury in his discretion, be forfeited to the United
Statos. Any qualified depositary will be permitted to pako payment by credit for

notes allotted to it for itself and its customers up to any amount for which it
shall be qualified in excess of existing deposits, when so notified by the Federal
Reserve bank of its district. Trensury Notos of Series C-1939, naturing March 15,
1939, with coupon dated March 15, 1939, attached, will be accepted at par in payment for any notes subscribed for and allottod, and should accompany the subscription. Accrued interest from September 15, 1938, to December 15, 1938, on the naturing notes ($3. 770718 per $1,000) will be paid following acceptance of the notos.
V. GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve banks are authorized
and requested to receive subscriptions, to moke allotments on the basis and up to
the amounts indicated by the Secretary of the Treasury to the Federal Reserve banks

of the respective districts, to issue allotment noticos, to receive payment for
notes allotted, to nake dolivery of notes on full-paid subscriptions allottod, and
they may issue interin receipts pending delivery of the definitive notos.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe supplonental or anendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve banks.
HENRY MORGENTHAU, JR.,

Secretary of the Treasury.

UNITED STATES OF AMERICA
2 PERCENT TREASURY BONDS OF 1947

Due December 15, 1947

Dated and bearing interest from December 15, 1938

Interest payable June 15 and December 15

TREASURY DEPARTMENT,

1938

Office of the Secretary,

Department Circular No. 599

Washington, December 5, 1938.

Public Debt Service
I. OFFERING OF BONDS

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, approved September 24, 1917, as amonded, invitos subscriptions,

at par, from the people of the United States for 2 percent bonds of the Unitod
States, designated Treasury Bonds of 1947, in payment of which only Treasury Notes
of Series C-1939, maturing March 15, 1939, may be tendered. The amount of the

offering under this circular will be limited to the amount of Treasury Notes of
Series C-1939 tendered and accepted.
II. DESCRIPTION OF BONDS

1. The bonds will be dated December 15, 1938, and will bear interest from
that date at the rate of 2 percent por annum, payable semiannually on June 15 and
December 15 in each year until the principal amount becomes payable. They will

nature December 15, 1947, and will not be subject to call for redemption prior to
naturity.

2. The bonds shall be exempt, both as to principal and interest, from all
taxation now or horoafter imposed by the United States, any State, or any of the
possessions of the United States, or by any local taxing authority, except (a)

estate or inheritance taxes, or gift taxes, and (b) graduated additional income
taxes, commonly known as surtaxos, and excess-profits and war-profits taxes, now

or hereafter imposed by the United States, upon the income or profits of individuals

-2partnerships, associations, or corporations. The interest on an amount of bonds
authorized by the Second Liborty Bond Act, approved September 24, 1917, as amonded,

the principal of which does not excood in the aggregate $5,000, ownod by any in-

dividual, partnership, association, or corporation, shall be oxempt from the taxos
provided for in clouse (b) above.

3. The bonds will be acceptable to secure deposits of public moneys, but

will not bear the circulation privilege and will not be ontitled to any priviloge
of conversion.

4. Boaror bonds with interest coupons attached, and bonds registered as to

principal and interest, will be issued in denominations of $50, $100, $500, $1,000,
$5,000. $10,000 and $100,000. Provision will be pado for the interchengo of bonds
of different denominations end of coupon and registered bonds, and for the trans-

for of registered bonds, under rules and regulations prescribed by the Secretary
of the Treasury.

5. The bonds will bo subject tc the general regulations of the Treasury Dopartment, now or hereafter prescribed, governing United Statos bonds.
III. SUBSCRIPTION AND ALLOTMENT

1. Subscriptions will bc received at the Federal Reserve banks and branches
and at the Treasury Department, Washington. Banking institutions generally may
submit subscriptions for account of customers, but only the Federal Reserve banks
and the Treasury Department are authorized to net as official agencies. The

Secretary of the Treasury reserves the right to closo the books as to any or all
subscriptions or classes of subscriptions at any time without notico.

2. The Secretary of the Treasury reserves the right to reject any subscription, in whole or in part, to allot less than the amount of bonds applied for,
to make allotments in full upon applications for scaller amounts and to nako roduced allotments upon, or to reject, applications for larger amounts, or to adopt

-3any or all of said methods or such other methods of allotment and classification

of allotments as shall be deemed by him to be in the public interest; and his

action in any or all of these respects shall be final. Subject to these reserva-

tions, all subscriptions will be allotted in full. Allotment notices will be sent
out promptly upon allotment.
IV. PAYMENT

1. Payment at par for bonds allotted hereunder must be made or completed on
or before December 15, 1938, or on later allotment. and may be made only in Treasury

Notes of Series C-1939, maturing March 15, 1939, which will be accepted at par,
and should accompany the subscription. Coupons dated March 15, 1939, must be attached to the notos when surrendered, and accrued interest from September 15, 1938,
to December 15, 1938, ($3.770718 per $1,000), will be paid following acceptance of
the notes.
V. GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve banks are authorized and requested to receive subscriptions, to make allotments on the basis and
up to the amounts indicated by the Secretary of the Treasury to the Federal Reserve

banks of the respective dietricts, to issue allotment notices, to receive payment

for bonds allotted, to make delivery of bonds on full-paid subscriptions allotted,
and they may issue interim receipts pending delivery of the definitive bonds.
2. The Secretary of the Treasury may at any time, or from time to time,
prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve banks.

HENRY MORGENTHAU, JR.

Secretary of the Treasury.

256

Translation of a cablegram received from
Bureau of Highways, Ministry of Communications,
Chungking.

Dated, Chungking, Dec. 5, 1938.

Recd., Washington, D.C., Dec. .5,1938.

For Mr. T. K. Chao:
Your wire inquiring condition of Yunnan-Burma Road

received (Stop) Section between Paoshan and Lashio

already opened to traffic (Stop) Passage with some

difficulty (Stop) Strengthening of bridge over
Lu-Kiang for heavy loading will be completed in January
(Stop) Bridges and macadam surfacing in Lusi County
progressing slowly and Ministry issued strict orders to
complete the work before end of the year.

Remarks: Kunming Paoshan Section of the road is in good

condition, bus service being operated on the section
between Kunming and Siakwan. Lu-Kiang is the upper section

of Salwene River, the bridge is to be strengthened to
ten-ton loading.

257

36

ford Sjakwan

500

Wahyao 36xor Jam 27

12

45

.
110
66

38

Kunming

87

Paoshan

Tsuyung

34

75

Lungling
Bahmo

Lusi

88

Y

U

N

N

N

A

Wanting
6

BUR

Muse

M

A

Total Distance
Kuming Siakwan

Lashio

Siskwan -Paoshan
Paoshan - Wanting

SKETCH MAP OF YUNNAY-BURNA
ROAD
422KM

259"

294
975km.

Legend:
Yunnan-Burma Rd.
other Roads

Rivers
Big Bridges

258

December 5, 1938.

MEMORANDUM

TO: Secretary Morgenthau
FROM: Mr. Gaston

ms

SUBJECT: Eccles bank plan.

Alfred F. (Mike) Flynn dropped in to see me Friday afternoon
and told me that he had learned at the Federal Reserve Board that
Chairman Eccles had submitted a memorandum on the subject of bank-

ing legislation to you. After some fencing I admitted that you had

a memorandun on that general subject from Eccles, but I could not
tell him anything about the contents or whether it was a communication from Eccles or from the Board. He said that he knew as a
matter of fact that it was not from the Board; that there was some

difference of opinion on the part of the Board and that it represented only Eccles personal views. He wrote a story about it,

which appeared in the Wall Street Journal of Saturday morning and
subsequently there were brief summaries on the Dow Jones and the
U.P. tickers. You asked me about it during the morning and I reported in substance the above.

At your request I called up Elliot Thurston, told him what had

happened and asked for his suggestions as to how we should meet
further questions on the subject. He expressed amazement that the

story had gotten out, that he had not given it to Flynn, that he had

not seen him in several days and that he did not know of anyone
around the Board that knew about it besides Eccles and himself. He
added that his only contact with the Wall Street Journal within the
last few days had been with Barney Kilgore, head of the Wall Street
Journal Bureau here, who had wanted to talk to Eccles and on being
told that Eccles was in New York had said that he would call him up.
I asked Thurston if he thought Eccles might have told Kilgore in
their telephone conversation, but he said he thought that was unlikely. He expressed extreme concern about how that sort of leaks
occurred and said he would let me know if he learned anything further.
Later in the day there appeared on the Dow Jones ticker a
denial on behalf of Chairman Eccles that he had submitted any plan
of legislation to you. After this had appeared Mike Flynn called me
up and told me that Thurston had called up Kilgore to try to get him
to deny their story and asked me to support his recollection of what

had passed between us. I repeated the conversation as I recalled it,
substantially as above, and told him that of course I would not go
back on anything I had told him, at which he expressed great pleasure,

259

-2-

adding "It isn't the first time that that so and so over there
has tried to put me out on a limb." I also called up Kilgore and
repeated to him exactly what I had said to Flynn. Later in the
day Thurston called me up to tell me what he had done.

19

Today, Monday, the Dow Jones ticker carried a story reaffirming their assertion of Saturday that Ecoles had submitted

suggestions on the subject of banking legislation to you. Thurston
again called me up, after seeing that on the ticker, and I told him
that they had called me back and that I had confirmed what I had

previously told Flynn as I had reported it to him, Thurston.

He

suggested it was not worth bothering about any more and I agreed.
Your reply to Eric Friedheim's question at the press conference today
confirmed precisely so much of the Wall Street Journal story as I
had previously admitted was correct.

260

December 5, 1938.

MEMORANDUM

TO: Secretary Morgenthau
FROM: Mr. Gaston

SUBJECT: Eccles bank plan.

Alfred (Mike) Flynn dropped in to see me Friday afternoon

and told me that he had learned at the Federal Reserve Board that

Chairman Eccles had submitted a memorandum on the subject of bank-

ing legislation to you. After some fenoing I admitted that you had

a memorandum on that general subject from Booles, but I could not
tell him anything about the contents or whether it was a communication from Ecoles or from the Board. Be said that he know as a
matter of fact that it was not from the Board; that there was some

difference of opinion on the part of the Board and that it represented only Eocles' personal views. He wrote a story about it,

which appeared in the Wall Street Journal of Saturday morning and
subsequently there were brief summaries on the Dow Jones and the
U.P. tickers. You asked me about it during the morning and I reported in substance the above.

At your request I called up Elliot Thurston, told him what had
happened and asked for his suggestions as to how we should meet

further questions on the subject. He expressed amazement that the
story had gotten out, that he had not given it to Flynn, that he had
not seen him in several days and that he did not know of anyone
around the Board that know about it besides Eccles and himself. He
added that his only contact with the Wall Street Journal within the
last few days had been with Barney Kilgore, head of the Wall Street
Journal Bureau here, who had wanted to talk to Booles and on being

told that Eocles was in New York had said that he would call him up.
I asked Thurston if he thought Eocles might have told Kilgore in
their telephone conversation, but he said he thought that was unlikely. He expressed extreme concern about how that sort of leaks
occurred and said he would let me know if he learned anything further.
Later in the day there appeared on the Dow Jones ticker a
denial on behalf of Chairman Eocles that he had submitted any plan

of legislation to you. After this had appeared Mike Flynn called me
up and told me that Thurston had called up Kilgore to try to get him
to deny their story and asked me to support his recollection of what
had passed between us. I repeated the conversation as I recalled it,
substantially as above, and told him that of course I would not go
back on anything I had told him, at which he expressed great pleasure,

261

-2adding "It isn't the first time that that so and so over there
has tried to put me out on a limb." I also called up Kilgore and
repeated to him exactly what I had said to Flynn. Later in the
day Thurston called no up to tell me what he had done.

Today, Monday, the Dow Jones ticker carried a story reaffirming their assertion of Saturday that Eocles had submitted
suggestions on the subject of banking legislation to you. Thurston

again called me up, after seeing that on the ticker, and I told him
that they had called me back and that I had confirmed what I had

previously told Flynn as I had reported it to him Thurston. He

suggested it was not worth bothering about any more and I agreed.
Your reply to Eric Friedheim's question at the press conference today
confirmed precisely so much of the Wall Street Journal story as I
had previously admitted was correct.

--000--

262
Translation of Cablegram

Dated Chungking, Dec. 5, 1938
Recd. Washn.DC, Dec.5, 1938

FROM: Foreign Trade Commissi on
TO:

K.P. Chen

Shipment of woodoil from Chungking via Kunming to Haiphong and

Hongkong is cuite practicable. Experiemental shipments have been
made from Chungking. One shipment of 50 tons contained in Kerosene

tins was sent by junks to Suifu and then vie motor road to Kunmings thence
by rail to Heiphong. This shipment has already arrived Hong kong.
Another shipment of 50 tons was sent in iron drums via motor roads

to Kweiyang, then to Kunming, thence by rail to Haiphong. This
shipment has already reached Kunming. Four hundred motor trucks

are expected to be delivered within two months. With the additional
equipment and improved road conditions it is possible to increase the

freight carrying capacity to 60/100 tons per day.

263
WASHINGTON, D.C.

December 5, 1938

Memorandum on Truck Selections.

Acting upon our decision to purchase a fleet of 1000 trucks for use on
the Yunnan-Burma and other South-Western motor roads in China our engineers

held several consultations with Capt.Collins and Mr. Freeman. Specifications
for the required trucks were then drawn up and approved by Capt.Collins.
They were then sent out to all standard truck manufacturers on November 22nd

inviting them to send in bids with one week's time. Whereupon most of the
manufacturers submitted their bids within the specified time and two firms
asked for one day's extension which was granted. The eight bids are from

the following firms:The White Motor Company,

Mack-Internati onal Motor Truck Corporation
Chrysler Corporation
General Motor Overseas Operations
Diamond T. Motor Car Co.
International Harvester Company
The Studebaker Export Corporation
The Ford Company

Our engineers Messrs. T.K.Chao and T.G.Chang have studied over

these bids very carefully and prepared a detailed table of comparison

analysing all factors as stated in the various bids. It was discovered
that there are three classes of trucks offered: (1) Those that come fully
within our specifications; (2) Those that do not come within our specifications; and (3) Those by certain modifications and strengthening come near

to our specifications.
Of the (1) class there are: Mack, White, Dodge, (Model TH47)
Diamond T, and G.M.C.

Of the (2) class there is Ford.
Of the (3) class there are: International, Chevrolet, Studebaker
and Dodge (Model TF37).

--

264

In our general consideration of the various trucks offered it
wes agreed: that it is advisable to consider only regular standard makes

instead of those with modifications and strengthening to fit into our
specifications and (2) that heavy trucks are preferable than light trucks.
In accordance with the bove agreed principles a selection was
made and the following trucks are chosen:1. Mack

2. White
3. Dodge

4. Diamond T.
5. G.M.C.

And a table of comparison is then drawn up to show their relative merits
end price range. According to this table it was shown that Diamond T and
Dodge are the lowest priced, White and Mack are superior in construction
and G.M.C. is intermediary in both respects.
With the above materials and the various bids a consultation was

held again with Capt. Collins and Mr. Freeman. After thorough discussion
and careful analysis it was generally agreed that only the heavy type trucks
should receive consideration and of the five selected G.M.C. and White are
considered preferrable by Capt.Collins and on account of the p. ice difference

being considered out of proportion to difference in construction our engineers
suggested further negotiations should be conducted with all of them as to

price reduction and service to be furnished. It was finally agreed to
conduct such further negotiation and final decision to be made with
Capt.Collins within three days.

265

TRIPLICATE
No.131

STRICTLY CONFIDENTIAL

Rangoon, Burma, December 5, 1938.
STRICTLY CONFIDENTIAL
SUBJECT:

Burma Government states policy in regard

to transit shipments of war materials.

THE HONORABLE

THE SECRETARY OF STATE,
WASHINGTON, D.C.
SIR:

I have the honor to report that the Government of
Burma, on December 3d, issued a press communique de-

signed to make clear the policy that it is meant to pursue in connection with transit shipments through Burma

of war materials for China. The communique is that of
the Government, not of the British Governor, and it
amounts to a joint statement, based on agreement by the

Burmese Ministers with the policy of the British Executive. The statement stresses general-trade possibilities, pointing out that for many years there has been
an established trade route between Burma and China, and

that as a result of recent events in China trade conditions have changed and a trade revival has already

commenced; it says that, while reports of large supplies of munitions of war being already on their way

to the Chinese frontier are unfounded, "there is little
doubt that in present circumstances and as long as the
unfortunate hostilities continue between China and
Japan the transport of munitions through Burma may as-

same considerable proportions", and that "the Govern-

266
-2-

ment of Burma are not aware of any obligation on them

to interfere with this particular class of trade, and,
indeed, regard it as merely incidental". (Despatch
no. 82 of June 15, 1938).
A copy of the press communique, as published, is
being enclosed herewith.

Attitude of Ministers.
As reported to the Department (despatch no. 128

of November 29, 1938), a denial of responsibility on
the part of his Government for the shipment of war materials through Burma was published unofficially by Dr.
Ba Maw, Premier of Burma, following extensive publici-

ty in connection with the arrival at this port of the
S.S. STANHALL with the first cargo of supplies for China.

All of the Ministers indicated a desire to have nothing to do with the matter, primarily because of the
possibly unfavorable political reaction of the people
of Burma. However, it was made plain to them by the
Executive branch of the Government that it was held
that Burma's neutral position demanded that permission

be granted for transit shipments of war materials over
established trade routes, and that it would be unneutral to prohibit such shipments. An agreement for
the issue of the communique followed.

In connection with proposed transit shipments to

China it is pointed out that some of the lead produced
in the Northern Shan States, which are directly administered by the Governor, is exported to Japan, presumably for war purposes, and that it passes in transit through Burma proper on the way to its destination,
being

267

-3being shipped from Rangoon.

Danger of Influx of Chinese.
In the press communique the Government of Burma

makes reference to the necessity of safeguarding the
country from "the possible dangers which may follow in

the train of a great trade development, such as a large

influx of population from China". In its issue of November 28th the NEW LIGHT OF BURMA (largest Burmese daily)

printed an editorial protesting against the new motor
road in Yunnan and the proposed Yunnan-Buma railway on

the ground of fear that a great wave of Chinese immigra-

tion would result from improved transportation facilities, and that Burma would be crushed out of existence
between India and China. Similar expressions have appeared in other Burmese papers during the last few
months. The same newspaper, on December 1st, printed

a statement that greatly increased travel from China to
Burma had already commenced, but a possible explanation

of this may be found in reports that hundreds of Chinese
ooolies are being brought to Lashio to handle the war

supplies that will be taken off the railway there and
loaded into motor trucks. However, a British army officer who is familiar with the Burmo-Chinese frontier
country told me a few days ago that without a far greater force than that now available for such service it

would be practically impossible to patrol the entire
border, and that he considered it probable that large
numbers of Chinese refugees, deserters from the army
and from labor camps, and others would make their way

across the frontier into Burma.
In

288
-4-

British Paper Praises Stand.

In an editorial-page statement in its issue of today (December 5th) the RANGOON GAZETTE, leading British

daily, calls the Government communique a "timely state-

ment of policy" and declares it surprising "that anyone in possession of the facts could honestly support
the case for Japan in this war ****. The statement
follows:
"The Burna Government's communique on trans-

frontier trade with China is a timely statement
of policy. when the story of the current ChinoJapanese war comes to be written a small part
will be devoted to appreciation for those responsible for deciding that scarcely-veiled threats
and assiduous propaganda should not have been
made the occasion for another instance of the recession of moral principle in international dealing and another case of unhelpful treatment of
China by the Powers. The communique does not
take any such attitude, and puts the transit of
munitions in perspective in relation to general
trade, but it is nevertheless not without importance that threats or implied threats should have
been so answered. Aggression grows with success.
It would have been a shortsighted policy had attention been given to that section of public
opinion that opposes the transit of munitions, in
some cases, it is shrewdly believed, not altogether ingenuously. That anyone in possession
of the facts could honestly support the case for
Japan in this war and overlook such phases as the
fate of Nanking, and at present of Canton, is

sufficiently surprising. Added to this is the

failure of some to understand that some day China
must win, that China will increase in importance
as a power, and will regard trade with and via
Burma as a primary consideration. Western China
is due for development, and Burme can, to take
standpoint, do good business accord-

official opinion has not
but this communique commits
to the future of
Government the couraging, ingly. practical trans-border always of the been trade. the Burma enIt speaks of developments. The wishes

Chinese are well known. They wish transport rail- fa-

cilities to be pushed forward, including a
Lashio is not so far from the Chinese

way. frontier. At the same time the Burma Government

wisely committed to meeting public apprehen-

is sion regarding possible population movements on

the frontier.

Respectfully yours,
Austin C. Brady

American Consul

Enclosure

269

Enclosure:

Copy of article.

Distribution:
1. Original and four copies to Department.
2. Copy to American Embassy, London.

3. Copy to Consulate General, Calcutta.

800
ACB/CP

Dr.

270

(Published)

Enclosure to despatch no. 131, dated December 5, 1938,
from Austin C. Brady, American Consul at Rangoon, Burma.
Source: THE RANGOON TIMES, vol. LXXXVI, no. 285, Decem-

ber 4, 1938, page 8.

(Copy of article)
TRADE BETWEEN BURMA AND CHINA

OFFICIAL STATEMENT OF POLICY
"STANHALL'S" CARGO STILL IN RANGOON

A Press communique states:-

Frequent references recently in the Press, even
though they have been based on incorrect information

as to facts, indicate a lively interest in the sub-

jeet of Burma-China and particularly Burma-Yunnan
trade, and the Government of Burma think it opportune

to make an authoritative statement of the facts and of

their policy.

There has been for many years an established and
recognised trade route passing from Burma to Yunnan.
A convention with China concluded as far back as 1894

dealt with mutual interests and with the fostering of
trade relations between Burma and Yunnan.
The Tengyueh Route.

That trade, which followed mainly the Bhamo-Teng-

yueh trade route, flourished in spite of difficulties
of transport for many years and incidentally provided
Burma with a considerable part of raw silk for its silk
weaving industry. In later years conditions became
adverse and the trade languished; but as a result of

recent events in China, conditions have again changed
and the Government of Burma have decided that they
should take measures to encourage the Burma-Yunnan

trade in consideration of the great benefits which the
development of a flourishing trade must bring to the
people and revenues of Burma.

Revival Already started.
A revival of this trade has already commenced,

but the Government of Burma envisage more important
developments in future. While the reports that their large

supplies of munitions of war are already on way

to the Chinese frontier are unfounded, there is little the
doubt that in present aircunstances and as long as
unfortunate

271

unfortunate hostilities continue between China and
Japan the transport of munitions through Burma may
assume considerable proportions.

The Government of Burma are not aware of any ob-

ligation on them to interfere with this particular
class of trade, and, indeed, regard it as merely in-

cidental. Their interest lies not in this traffic

but in the development of general trade between Burma

and Yunnan including, in addition to the valuable

transit trade, a reciprocal trade in the products of

Burma and Yunnan to the maximum to which such trade

can be developed under conditions acceptable to Burma.
Trade Negotiations.

The Government of Burma anticipate that negoti-

ations for an arrangement regulating trade with the
Government of China will take place at an early opportunity as they have received through H1s Majesty's

Government assurances from the Chinese Government to

that effect.

Finally the Government of Burna wish to make it

clear that in considering all these questions and
measures their first and foremost consideration will
be their effect on the interests of Burma and the
people of Burma, and they are fully conscious that it
will be as necessary to safeguard the country from the
possible dangers which may follow in the train of a
great trade development, such as a large influx of
population from China, as to be vigilant in promoting
measures for the enhancement of the country's general
prosperity.
***

03V13032
A

MAL

--#-SOME

272
December 5, 1938.
8:58 a.m.
HMJr:

Hello.

Operator:

Mr. Sproul - go ahead.

HMJr:

Hello.

Sproul:

Hello, Mr. Secretary.

HMJr:

How does it look, Sproul?

S:

It looks alright. There was no bad news over the
weekend that would interfere with the financing.

HMJr:

Yes?

S:

The market opened up this morning a little off, but
it caught
last
week. itself and is now holding onto the gains of

HMr:

How do you think they received it?

S:

I think they received it quite well.

HMJr:

Good !

S:

I've heard no criticism of the terms of the offering.
I think the feeling is in the market that the longer
bonds will go better than the intermediates, but that's
not said in a cynical way.
It will do what?

HMJr:
S:

I say that the longer bonds will probably go out better
than the short bonde, but that that is not said in a
cynical way.

HMJr:

Alright, I'11 talk to you around noon.

S:

Alright, fine.

HMJr:

Good bye.

273
December 5, 1938.
9:30 a.m.
GROUP MEETING

Present:

Mr. Oliphant
Mr. Gaston

Mr. Hanes

Dr. White

Mr. Lochhead
Mr. Gibbons

Mr. Bell

Mr. McReynolds
Mr. Haas

Mr. Duffield
Mrs. Klotz

HMJr:

Herman?

Oliphant:

I have nothing.

HMJr:

Herbert?

Gaston:

I have this letter from Mr. Merz. (Secretary
read the following letter from Mr. Merz:
"Mr. Herbert Gaston,

Assistant to the Secretary,

December 2, 1938

Treasury Department,
Washington, D. C.

Dear Herbert:

Thank you for sending me the material on
employment about which we talked over the telephone.

You may be sure that we shall study it with inter-

est in this office.
I regret to report that I simply can not get

away from New York next week, even though it means

missing an opportunity of lunch with the Secretary.

Part of the difficulty is the fact that we are be-

ginning, the following week, publication of a
series of seven editorials on the whole question of
national defense, and I am deeply involved in this.
But the main difficulty is that only a few days

have passed since my appointment as Editor of The
Times and I am simply snowed under with details, both

inside and outside the office, in which that
appointment has involved me. All this I hope will
quiet down in a few days. Then I hope to get away

274

-2for a short rest, since I have been out of this
office only two weeks since 1936.

I hope you will take this letter to the

Secretary 80 that he may understand that it is
only these extraordinary circumstances (certain to
occur only once in a lifetime 80 far as I am concerned) that make it impossible for me at this
moment to accept an invitation which I recognize to
be an important one and for which I am deeply
grateful.
Sincerely yours,
(Signed) Charles Merz.
THE NEW YORK TIMES If
HMJr:

Gaston:

Let's wait until he asks for it.
(Showed him the attached letter from Mr. Schwarz

Assistant to the Publisher of Editor and then
quoted letter.)
December 1, 1938

The Honorable Henry Morgenthau,

Secretary of the Treasury,

Washington, D. C.

Dear Mr. Secretary:
Mr. Davenport has spoken to me about your re-

quest for tear sheets of the first Treasury article.

Unfortunately we have not been able to comply with

your request for 200 as these are not in existence

but I am having fifty sent to you direct from our
Jersey City printing plant.

These copies are what we call poor copies, and

I would therefore greatly appreciate it if you would

keep them within your own department. Though the
December issue is almost exhausted, I have discovered

that there are about twenty-five single copies left

(at $1.00 a copy) which we could let you have were
you interested.
John Davenport is still away on vacation and
has not spoken to me about the second Treasury story.

275

-3 If by some chance you would care to have fifty
similar tear sheets, would you be good enough to
let me know as then I can be certain of getting
them for you.

Sincerely yours,
(Signed) J. M. Schwarz.

Assistant to the Publisher.
FORTUNE. .

Gaston:

I don't know who ordered the tear sheets. I didn't,
but I would like to have 25 copies of Fortune.
I am ordering 12 for the Treasury.

HMJr:

If you will talk to Mrs. Klotz after this meeting

Gaston:

All right.

HMJr:

I would like 25 copies of the magazine for myself

HMJr:

and find out about the tear sheets too.

because I want to give some to Cochran and some

to Butterworth to take back to Europe. It is
amazing how few people read Fortune even those who
take it.

Oliphant:

I haven't anything else.
I might record that Duffield did a good job of
digesting the opinion on transferring the lawyers
from the Comptroller's office to General Counsel's
office.

HMJr:

It was favorable to the lawyers?

Oliphant:

Only one conclusion I see to that.
Herman, this is Monday morning. Inside the Treasury,
the sun 18 shining.
Pretty early!
I will say here Herman is a fast worker. Oh,
Herman! All right! What did you do, support the

Gaston:

HMJr:

Oliphant:
HMJr:

lawyers?

Duffield:

I just summarized the opinion.

276

-4HMJr:

Duffield:

I'm off you for life!
Preferred stock for the Anglo. All I have came
over from RFC late Saturday and these are the
conditions they attached to it, summarized. It
came over 80 late everybody had gone.

HMJr:

Those who are interested in the bank will stay

behind. I will read it after this meeting.
George?

Haas:
HMJr:

You might want this chart for the meeting at 10:15.

It's all right. Incidentally, Herbert, the memo

we dug up which George wrote two years ago about
Gaston:

national income at a certain point. Will you show
it to Alsop and Kintner.
I haven't shown it to them.

HMJr:

Well I would show it to them and make sure that they

Bell:

also get a chance to talk to Bell.
Yes. They have asked for a chance to talk to Dan.
I have a conference at twelve o'clock with Kintner.

HMJr:

Oh, you do! Good!

Haas:

That's all I have.

Hanes:

Giannini is going to testify today I understand

HMJr:

I think Gene ought to go up to be there.
We have had an observer during all the hearings,

Gaston:

Hanes:

instead of tomorrow. The taxation committee.

but this is a special case. I think you will want
to have somebody else.

HMJr:

Duffield:
Hanes:
HMJr:

I would like Gene to go especially.
What time is it?
They speak sometime during the afternoon, but
nobody knows the exact time.
Who is the secretary to the committee?

277

-5Duffield:

I will find out.

HMJr:

Mike Flynn will know.

Duffield:

Yes.

Hanes:

That's all.

HMJr:

Harry, if you would be outside at 10:15 and be
patient with me.

White:

Do you know if that message got off. You didn't
hear anything to the contrary?

HMJr:

Message?

White:

Saturday or Sunday.

Bell:

He had ten minutes to make his train.

Mrs. Klotz:

He's back.

White:

Then he made it and he had less than ten minutes
and it was raining cats and dogs and he couldn't

HMJr:

get a taxi.
That's all right. If the Coast Guard names an
aide for me he will make his train. He is a good
boy.

Bell:

He had a minute and a half at the station and when
he came back at Atlanta he had five minutes on the
other end.

HMJr:

McKay 18 a good boy. But he ran all the way?

White:

I saw him running going and coming.

HMJr:

Did you hold him up on the typing.

White:

He couldn't get a taxi and finally had to take his
own car.

He had no doubts. He said, "I'11 make it".
HMJr:

He's a good boy.

Mrs. Klotz:

He never said a word.

278

-6HMJr:

Mrs. Klotz:
Lochhead:

He was here this morning and never said a word;

just said everything went along beautifully.
He said, "I get service when I'm down there. I
get service.

Sterling is 4.691 and france are quite strong.
Quite a lot of gains to the French Fund this

morning despite newspaper stories.
HMJr:

Will you tell my friend to call up.
Why didn't they use a Coast Guard cutter with

all that fussing and everything for Cardinal

Mundelein?
Gibbons:

He was taken down on a Coast Guard cutter.

HMJr:

They went down on one of Moran's tugs.
They took him off and

Gibbons:
HMJr:

Gibbons:

It was one of Moran's tugs. All this fussing --

you might ask the Collector.
The Collector of Customs went down. It may have
been a ,tug was more suited for more people.

Gaston:

That's what Harry has done in other cases, have

Moran take care of it in the case of church
dignitaries.

HMJr:

Well, I would forget it.

Gibbons:

There was quite a crowd. He called me on Saturday.
The Bishop from out there was flying from Chicago
and everybody had to wait until he arrived and
fog was coming down and Harry was afraid that he

wouldn't get there after all the fuss.
HMJr:

What did he want you to do, dispel the fog?

Gibbons:

Just wanted you to know they were doing everything
they could.

See you later in the day with Mac.
HMJr:

Oh yes. Little dirty work. Customs.

-7Gibbons:

You saw this morning's Merry-Go-Round?

HMJr:

Yes. Yes.

Bell:

279

Shall I put in a subscription today for the new

long term bonds for FDIC Postal Savings and
Government life?

HMJr:

Oh, Government Life! I wish I had thought of it
before. We couldn't do it now, could we, put in

the actual amount we want and announce that? We

ought to give them one hundred per cent allotment.
I suppose that should have been in today's announcement. Has that ever been done?

Bell:

No.

HMJr:

Then I don't want to do it.

Bell:

Give everybody the same chance, Government trust

HMJr:

I would put Postal Savings in. Fifty millions.

Bell:

Government Life for four and a half millions.

funds as well as individuals

Won't get very much.

HMJr:

All right. All right. Nothing for FDIC.

Bell:

They have a 105 million, 2 per cent.

HMJr:

I know. I think I want to save that but I would
put Postal in for fifty millions. They have

fifty-five millions.

Bell:

Fifty-two.

HMJr:

Well, fifty millions. O.K.

HMJr:

Yes, and put in the Government life too.
Yes. Think about it another time that we announce
in advance, that we give Government Life - that
we will set aside Government Life funds for investment in the new issue.

Bell:

That can be found under the law. It just never

HMJr:

I won't do it now, but I would want it in the

Bell:

has been done.

announcement. Anything else?

280

-8Bell:

That's all.

McReynolds:

I understand that Bullitt 18 going to call you
about this fellow Robbins. That's Oliphant's
report (hands the Secretary Mr. Oliphant's
report). Said he had flunked out in law school;
not much of a lawyer.

Mrs. Klotz:

Is that the fellow Bullitt was interested in?

HMJr:

That other report for me, on how much less Taylor

McReynolds:
HMJr:

Oliphant promised to report on that this morning.
Yes, but I do business with you and I'm looking

McReynolds:

I'm still looking at him.

HMJr:

I asked you on Saturday should I speak to Herman
Oliphant and you said no.

Oliphant:

We will have it today.

HMJr:

When?

Oliphant:

Well, say three o'clock to Mac?

HMJr:

McReynolds:

All right, three o'clock to Mac and Mac to me.
Three o'clock to Mac. Two forty-five to Mac.
You can have it at two forty-six then.

HMJr:

All right.

McReynolds:

(Handed Mr. Morgenthau a memo from Mr. Oliphant.)

Oliphant:

can sign.

at you.

Public Health came to me two months ago with a

request for reallotment of Public Health funds to
carry on from regular Public Health appropriation,
the care of WPA patients going to Public Health
hospitals. We got four hundred thousand directly
alloted in the last relief appropriation bill to
pay the cost of handling those patients. We asked
for eight hundred millions, as a matter of fact,
but they out it down. They asked for well over a
million but I out it down to 800,000,000. Congress
cut it in half and gave them four hundred thousand
dollars. They came to me a couple of months ago

281

-9with a statement that that amount will have
disappeared by the first of January. They wanted
to reallot Public Health regular appropriations 80
as to carry them for the two months over that,
January and February, until WPA could get additional

funds to allot to us to make it up. What I said

to them was, "If we do that and Congress does not
authorize further money from WPA to pay for this

hospitalization, you'll be in a hole. You '11 have
to go back and ask for a deficiency appropriation
in violation of law. . On Friday or Saturday they
came in with a presentation of the case and I
signed another request reopening the thing at our
own instance and the Comptroller General's office,

after I went to them directly, have promised to
consider it and we may get it, but I thought I
would tell you. I have saved a spot with respect
to our own finances so that, if you decide, we can

take care of it if they finally turn this down.

But I thought we ought to do everything we can and

go to the last ditch with them to get them to
have it that way but that's the situation.

282
MEETING OF FISCAL AND MONETARY
ADVISORY BOARD

Present:

December 5, 1938.
10:30 a.m.

Mr. Eccles
Mr. Delano

Mr. Bell
Mr. Currie
Mr. Aull
Mr. Taylor

Mr. "hite
Mr. Haas

Mr. Sanford, FR Bank of NY (for part of meeting)
Mr. McReynolds

H.M.Jr:

All right, teacher.

Ruml:

I'm going to need some very large charts, and do you

H.M.Jr:

got the charts here. I just wondered where
- yes.
I think if you put them

Ruml:

At that end of the room?

H.M.Jr:

Yes.

Ruml:

Does that order of business suit you?

H.M.Jr:

All right with me, if it's all right with Mr. Delano.

think the best place is that end of the room? I've

(Hands agenda to Mr. Delano)

(Eccles and Currie come in)
Ruml:

Delano:

Ask Mr. Eccles if that's all right.
I've changed the order, because the first topic will
take quite a lot of time.
Mr. Ruml, I believe those charts are so big, I think
you'll have to bring those this side of the table.
(Messengers move charts into position)

283
-2Ruml:

Now, if I may, let me put before you these pictures
that you've already seen, simply for this reason:

that this gives a somewhat simple idea of where we're

going in the larger charts, and it's so simple here

that I think it will be helpful to do it this way.

(Refers to charts entitled "Income and Disbursements", in which numeric velocity indicators
are identified with classes of income and
of disbursements to indicate effect on
national income")

Now, you remember that when these were first presented, the general observationsmade on them were

these. This is a classification of income; this is
a classification of income; this is a classification
of income; this is a classification of disbursement;
this is a classification of disbursement. And our
problem is to determine what the effect on national
income is of the different classifications in the
budget.

The figures which we have used here were presented -

what we in the first meeting called velocity numbers,
which we now call multipliers, and which we would be

very glad to call nothing at all. There is a great
deal of difference of opinion as to the nature of
these numbers, not as to their magnitude so much,
but as to their character. And for that reason I
want to point out that the way these numbers are
arrived at is by considerations of the relative
amount that goes to consumption as compared to
investment as compared to savings. What we do know

is that there are differences, and we also know that

within the limits of reasonable probability these
things cannot give us any gross errors within terms
of the magnitude of the whole problem that we're
dealing with.

Now, the observations we made on these charts in

our first meeting were these. In the first place,
since our first meeting I have - it occurred to me
that it would be helpful to refer to this as the
visible budget, that is, the budget that we now know
about; we can talk about this as being the invisible
budget, the budget that relates itself to national

income and purchasing power. By using that terminology

284
-3-

we can have a way of talking about these things.
Now, the observation that we made the last time is

that, although the visible and the invisible budget
are related, there is not necessarily a one-to-one
relationship between them; that it is possible to
have a balanced visible budget with either a positive or a negative invisible budget. And by that
we simply meant that this balanced budget (indicating) adds to purchasing power, this balanced
budget detracts from it.
We observed that therefore there are two separate
problems in considering a budget, one a financial
problem, the other a production problem; that the

issues relating to the financial problem are questions of whether or not the budget can be financed,
the questions relating to the production problem are
whether production can give the goods and services
that the additional income will demand; that the
inflationary problem and deflationary problem hinges
around this particular budget, that the confidence
problem hinges around the visible budget. We saw,
in seeing that there are two problems there, that
it is possible to get a consistent approach to the
financial and production problem.

Now, we decided two meetings ago that the next step

was to move from this abstract arithmetical analysis
to a study of some concrete problems in terms of the

budget as it really is. And what we did was this:

we took the various budget items and asked the
Treasury, the Federal Reserve Board, and the Federal
Reserve Bank of New York independently to classify

these various items in five classes as to their relative effect on purchasing power. These classifications were made independently; they were then taken
together and any gross errors were eliminated. Mr.

Sanford, of the New York Bank, helped me on that; he
came to Washington, worked with one of Mr. Bell's
men on the accounting side to clear up any points
there.

Having done that, we then applied this analysis to
the 1937 and the 1938 budgets, because we had those
figures. Now if I get mixed up on detailed questions
there, Mr. Sanford kindly came down from New York and

285
-4-

Iquestions
can stepyou
outask
to the
me.other room and ask him any

I think at this point, Mr. Secretary, I should like
to show the 1937 budget, broken down in this form.

H.M.Jr:

Mr.
Bellin.said he thinks it's all right to bring
Sanford

Bell:

If you want to.

H.M.Jr:

Would it help you?

Ruml:

I'd feel a little better about it, because he

might
H.M.Jr:

(To Kieley) Ask Mr. Sanford to come in. He's outside.
Sanford - he's outside.
(Sanford comes in)

Ruml:

Mr. Sanford, do you know Secretary Morgenthau?

Sanford:

How do you do, Mr. Secretary.

(Sanford is introduced to other conferees)
H.M.Jr:

Go ahead, professor.

Ruml:

Well now, what you see before you, ladies and
gentlemen, is the 1937 budget. And whether these

items are in the order with which you are familiar,
I don't know, but this is the budget, excluding
debt retirement and excluding trust funds. Is that
correct, Mr. Sanford?

Sanford:
Ruml:

That's right.
I want to point out right now that this is made up
for you for purposes of illustration. Being limited
as it is to simply the - this budget - it does not
give a complete picture of the effect of Federal
operations. The trust funds ought to be taken into
account, obviously, if we were making an economic
analysis. But what I am trying to do now is to
simply show you how the application of the arith-

metic works when applied to a concrete problem of

286
-5-

the budget itself.
These, then, are the items in dollar amounts on the
receipt side, and this is on the expenditure side.
When you take considerations into account of the
effect of these various items on national income, we
secure these figures, indicating that while a reduction of some 13 billion was taking place as a result
of taxation, an addition of - oh, of 22 billion was
being made in expenditures in 1937; so that on the
visible balance we have a deficit of three billion 148,
and an invisible balance or an income effect of plus
nine billion 044.
Now then, it is possible to, then, see here the
figures that we took to get that result.
Now, it would be entirely possible, Mr. Currie tells
me, to approach this thing from the other point of
view, come to these multipliers, if you please, by
direct considerations of spending, investment, and
saving; that this particular terminology is oldfashioned and out of date. But nevertheless, I want
to present this for what it is and Mr. Currie will set
one up in the other form. But he assures me that the
logic and the whole picture is not substantially
different.
H.M.Jr:

Now, Ruml, how do you get your multipliers?

Ruml:

You get them this way, Mr. Secretary. You get them

by giving consideration to the question of, in any
particular classification of expenditure, what pro-

portional amount of the money spent - of money put
out by the Government is spent on consumption goods,
what proportional amount is invested, and what pro-

portion is saved. Now, by knowing that it is possible
to determine, or to approximate, how many times per
year or what the purchasing power effect of that

particular activity is.

Now, the thing that I want to point out over and
over again is that these figures here give an undue
impression of precision from the standpoint of any
knowledge we have about them; that our original classifications, Mr. Secretary, were made qualitatively;
in other words, these five classifications - we simply

287
-6-

talked about high, high middle, middle, low middle,
and so forth; that in these three independent classifications we made there were no substantial differ-

ences of opinion; and finally that all the issues
of policy with respect to budgetary policy both on
the income and expenditure side - all that we can
deal with today can be dealt with in qualitative
terms if we must; in other words, you might debate
on this point whether you wanted to use a multiplier
of one, one and a half, or two, but it would have no
practical effect, because anyone would agree that
it's not three or three and a half. The same with
anything on this side. Here's an item of one and a
half - interest on public debt. It might be two, it
might be one, but it certainly isn't three and a half

and it certainly isn't three.

And for that reason, you see, you can have confidence
in the analysis, provided you know always that the
arithmetical figure gives an impression of undue
accuracy. Now, you take a number, for example, such

as 3.4; it looks there as if you had a slide rule and
went out and measured the thing precisely. That isn't
what happened at all. It means that's a composition
of a number of different factors that have these
rough figures that we used; namely, we used three and

a half, three, two and a half, and one.

But the desirability of using the thing quantitatively
comes out in getting your aggregate effect, because
although this (invisible balance) might be a billion
dollars plus or minus, for practical purposes it
doesn't make any difference; the important thing
was that it was nine, that it was not four, as it
was in 1928. And the 1928 budget that I have here
is analyzed in the same way, shows the thing around

Ruml:

four billion instead of nine.
Four billion?
Four billion on the invisible balance.

H.M.Jr:

You mean minus?

Ruml:

Plus.

H.M.Jr:

You mean it produced four billion.

Ruml:

our billion in 1938.

H.M.Jr:

288
-7White:

He said '28 but he meant '38.

Ruml:

I think you - here's the 1938 on a comparable basis
(showing
smallform.
hand chart). There are only two
copies
in that

Just to show you how important it is to take the
trust accounts into effect, we have an analysis here
of the trust accounts which shows that in 1938,
although you had a visible - I mean an invisible

balance in income effect - it's four billion six,
isn't it, Mr. Secretary, there over '38? -

H.M.Jr:
4uml:

Yes.

when you take the trust accounts into account,

it's dropped to three billion seven.

Eccles:

When you say trust a ccounts, you mean the Social
Security.

Ruml:

Yes.

H.M.Jr:

I don't know what he means.

Bell:

You've got those trust accounts in there. You're

Ruml:

What do I mean, Mr. Sanford?

Sanford:

That's right, unemployment trust fund, and the falling
off in the payments to soldiers, cash bonus, between
the '37 and the '38.

Ruml:

Well, the point is very important, because it shows

talking about unemployment trust accounts.

that in terms of realistic pictures you have to take
both into account and not merely this. But this is
simply drawn up to g ive an indication as to how you
would proceed under this type of analysis to, if you

please, draw a program, because what you would do
would be to make some estimates with respect to what

you want here (invisible balance); that is, what
invisible balance do you want? You'd determine that

by making some examination as to what is physically
possible, and you would then determine what you have
to do as a going concern here. You would then
determine on what tentative tax policy you wanted

289
-8-

to adopt. You would then find out how far you are

from that, and then you would make gross changes as
you needed them. And you wouldn't expect it to come

out within a billion or two dollars, and you wouldn't
care very much; the errors we've been dealing with
are errors of five, six, and eight billion rather
than errors of one and two billion.

White:

Mr. Ruml, that invisible balance - that's the
additions to national income over a 12-month
period?

Ruml:

Over a 12-month period, of

"hite:

Out of this particular expenditure. And therefore,
when you say you'd first find out how much you'd like
to increase it by, you merely say it's a very distant
goal to shoot at, that there is no possibility of
getting that amount within your budget - no political
possibility.
well, obviously not; and there is no physical possibility in one year of getting there, because you have
bottlenecks of one form or another; you'd disrupt your
whole economic organization. But you can make a
determination as to what is practical this year in

Ruml:

view of what we know about items outside the budget,
what we know about the securities market and the

disposition of private business, what we know as to
various capital shortages that might be taken up.

And then you can determine what is conservative with

Currie:

Ruml:

respect to the budget itself.
Moreover, Mr. Ruml, you'd say that's not - the
aggregate quantity - that that's so significant as
the change from the preceding year, whether it's
nine billion
I would today say that, Lauch, but I think as we
learn more about these things what we're going to
find out some day isisthat
as all
an by
estimate of what
doing
other
words, if you
take
- Do figure you
private see?
In enterprise
itself.
if that
were as good as it ought to be, and if our figures

national income were as good as they ought to be, of
we'd on say that in 1938 nine out - in 1937 nine out

our 70 was produced; therefore, private enterprise

290
-9-

was doing 61. It could do 90; you've got a 30
margin.

White:

Mr. Ruml, it would be very interesting if that were
accompanied, not now but later, by an analysis of the
budget for 1928, in which it would very clearly indi-

cate the varying relationships between expenditures
and national income. And you might come out, for
example, with a minus addition, a net reduction on the

Haas:

white:
Ruml:

national income, due to fiscal activities in 1928.
Or you'd run into different multipliers.
AS a consequence of your different multipliers.
Well, Harry White, I think you might be surprised;
as long as you have an income tax structure that's
on a graduated basis, you're going to get low multipliers on this side (receipts) and you might find
that even in 1928 the operation of the Federal
Government was adding something.

White:
Haas:

White:

I think you're right. But there was a large debt

reduction.

But it was reinvested immediately, practically.
There is an element in that multiplier which isn't
taken into consideration. The actual expenditure,
actual increase on national income on the way up,

that is, has in itself a generative capacity on
multiplier figure.
And for that reason, if your total potential there
is, let's say, 20, you wouldn't expect your budget
to take care of up to more than 8 to 10 of it, be-

business conditions that's not included in that
Runl:

cause you would expect that sort of thing to

happen.
White:

That's right. That's why you can make a very large
allowance at once for the generative effect, providing it's large enough.

Ruml:

Exactly. Furthermore, since you can't predict it in
advance, it becomes very important indeed to have

291
-10-

flexibility with respect to your high velocity
income and high velocity expenditure.

H.M.Jr:

Well, Ruml, is this deduction right? This is one
thing that's very interesting out of this thing.
Taking '38 and the criticism of the fiscal policy we almost had a visible balance, we missed it by
a billion three; and the criticism so many people
made is that we shut off spending. Well, according
to this, our expenditures, roughly multiplied by two
and a half, gave us - added to our national income by
19 billion. According to this, it wasn't on the
expenditure side at all - I mean following the
theory of so many people, that this recent depression
came because we stopped spending - but the trouble
was on the revenue side.

Ruml:

H.M.Jr:

Ruml:

Particularly in the trust funds.
Well, that's never been pointed out. The thing they
keep saying all the time - people talk about it and
write about it - is that the trouble in '37 was we
tried to shut off expenditures too fast. Well, that
doesn't show up in this thing at all.
That's right. Doesn't show up. You see, this ends,

H.M.Jr:

however, in July '37; now, I don't know
But this doesn't show it.

Ruml:

Up to July 137 there is no evidence.

H.M.Jr:

But if this theory is right, the deflationary e effect

Ruml:

That's right. Up to that time

H.M.Jr:
Ruml:

Well, that's never been pointed out, has it?
Not clearly enough. It needs to be pointed out.

H.M.Jr:

Has it ever been pointed out?

Eccles:

was in the kind of money that we collected.

I've pointed it out several times. In that speech

I made up in New Jersey, I r eferred to it and said
that the difference between the Government's contribution to community spending between the calendar

292
-11-

years '36 and 137 was three billion 200 million.

And I explained it in this way: that in '36 the

bonus was paid, in '37 there was no bonus paid,
therefore the spending was less by the bonus

entering the picture. But in '37 we collected

a substantial amount of taxes on old-age pensions

and unemployment insurance, which wasn't disbursed.

Ruml:

High velocity.

Eccles:

High velocity. The Government's spending in '37
didn't diminish as against '36 except in the case of
the bonus.

Ruml:

I think this is true, Mr. Secretary: all the dis-

cussion of the fiscal policy as a spending policy
or not-spending policy is entirely beside the point.

You have to take the aggregate budget into account.
H.M.Jr:

That is, as I say, what this - that's the interpretation that I give this, that if you take - well, we
spent seven billion six in '38 and in that year we
spent eight billion four, which is eight hundred
million dollars more; but the difference is as
between nine billion and four billion six. Is that
right?

Ruml:

Yes. And if you take the other thing into account,

H.M.Jr:

Well, of course, the next thing that I'm asking - I'm
getting this all cold; you fellows have had a dress
rehearsal. I ask you the very obvious question - I
mean on the receipt side again - I mean I'm not
arguing about the theory for today, although I want
you to know that I'm going to test it very hard is it a fair question - I want to be fair -: can we

three billion seven.

do much about the receipt side?

Ruml:

Well, I don't know. This - if I were - if I were

king, I would look at these things first to see what
can be done, this sort of thing, estate and gift
taxes, where you get visible budget with no invisible
budget to speak of. I would be awfully chary about
this kind of thing (tax on employees - multiplier 3
where you have a very high multiplier. I would have
a darn good social purpose in mind if I began to do
anything about this sort of thing (excise and
miscellaneous taxes - multiplier 32) I wouldn't do

293
-12-

it for revenue purposes, because for every dollar
you take in on this kind of thing you have to spend
a dollar over here on this kind of a thing (AAA
program). In other words, all you do is get into a
circle of building up higher and higher expenditures, because you're getting into higher expenditures

on the high velocity classifications.

White:

You would increase the taxes where they are lower
than the average multiplier. Where you have the
zeros and the ones in the first column is where you
would, if it were politically possible, increase;
and reduce the high ones.

Ruml:

I would reduce them if I felt the fiscal thing
would stand it. You've got a double point, a pro-

duction problem and a fiscal problem.
White:

But you'd replace, if you could,

Ruml:

If I could make a switch out of this into this - I'm

not even looking at the names here - that's a question
again of prudential consideration; I don't know what
you can do.

(Taylor comes in)
H.M.Jr:

Excuse me a minute; I think, Wayne, it would be

helpful to you if you let Harry talk to you for five
minutes and bring you up to date, because I lay great
stress on this. I'm having all I can do to absorb it.
I think if you take five minutes, it would help you
like hell.
(Taylor and White go out)

Ruml:

Now, the other thing, of course, that can be done
about it is to see what is possible in terms of getting
some flexibility in the high velocity taxes, because
obviously 18 months ahead there are a lot of things
that can happen. Now, the place that you can really
affect your invisible balance is through manipulation
of high velocity taxes and high velocity expenditures.
So that flexibility should be sought there and there
and there (alcohol taxes, excise taxes, and tax on
employees). Politically and every other way, you
can't have inequality of treatment under the income

294
-13-

tax law, so that that's out of the picture. If

youget flexibility on the income tax, you have to
take it down the whole row, and for the sake of

getting flexibility for 700 million, you lose it
in this bunch. So for the first time in this thing,
I've seen clearly what some of my friends have told
me: that there is no use talking about flexibility
in income tax rates.

H.M.Jr:

May I again interrupt you? This one thing there,
taking your income over $150,000 - that's quite contrary to what people keep telling us, and people who
have a gross tax, who live in New York State, of 79
percent; that is, if we'd only reduce that, it would
be very helpful, so forth and so on. On that chart
you'd increase it from 79 percent, or at least you
wouldn't reduce it.

Ruml:

I wouldn't reduce it, and my only reason for not
increasing it is because I'm not sure the revenue

consequences would be important enough for the grief
you'd have to have.
Eccles:

That's right.

Ruml:

AS a matter of fact, if you wanted to make a gesture
on some reduction, I don't think it's important enough
to the whole picture to make any difference there. In
other words, you come to this paradoxical situation,
Mr. Secretary: that at a time when you need to have
a large invisible balance, that's the time to do what
tax reform you need to do, because that's the time you
can risk not getting the revenue. Now that's a very
curious generalization, but nevertheless it's correct,
I'm sure.

H.M.Jr:

Well, again questioning you, taking off a billion
dollars of expenditures on that side,
Yes, sir.
... on the visible, wouldn't it be very important
if you made an adjustment over on the left (receipts).
I mean if, for instance, Bell and the President and
myself could find a way of cutting a billion off, if
this adjustment could be made so that we would show,
say, an increase of three billion in the invisible.

Ruml:

H.M.Jr:

(Taylor and White return)

295
-14-

Ruml:

In other words, what I get out of this thing is
that - I mean that the place to concentrate is
on the collection side - I mean, that is, more
than the other. Right?
No, I don't think that's - I think that might lead

you astray, because there are so many other problems.
For example, Mr. Secretary, you've got much more

flexibility on the expenditure side than you've got
on the income side; therefore, in that respect you
have to pay attention to the expenditure side and
this other thing is terribly important. What we
want to do is to arrive at a balanced budget at
some higher income. Now then, if you begin to
get an aggregate that's too low here, you won't have
the tax structure that will produce that balance
short of a much higher national income than seems
probable in the near future. And so you have to
take that consideration into account as well. In
other words, the lower this figure (total receipts)
the less influence your operations will have on the
national income, and therefore the more dependent
you are on forces that you can't have anything to
do with. Is that right, Harry? Would you agree
to that?

White:

quite right. You could take a simple case, any
one item there, and illustrate how you could by,
let's say, substituting this tax here - for example,
this number two tax for this number three and a

half, let's say, even of 200 million dollars; as a

consequence of that you would earn - by that very
act alone you would increase national income, without
another step you would increase national income by
several hundred million dollars.

Ruml:

white:
H.M.Jr:

That's right.
Just that.
well, I think the suggestion that Harry made was very
important: that if we could take the budget - would it
be 128, the peak year?

White:

The peak year when we were on the upswing.

H.M.Jr:

And make an analysis of that.

296
-15White:

It would demonstrate the varying relationships, which
it is important to always keep in mind in this, because

it indicates that you'd have to constantly watch this
and constantly revamp it in the light of whether you're
Auml:

going up or down. The importance of each item increases
or decreases as you're going up or down.
Well, you don't mean from month to month. From

"hite:

From phase to phase.

H.M.Jr:

Something you want to ask, Eccles?

becles:

I'm particularly interested in the accuracy of those
multipliers. We could get very far afield if we
might miss them half a point here. I understand
the general principle; but now, for instance, we take
this question over here of net income between five
thousand and twenty-five, and between twenty-five and
fifty. It would appear that it wouldn't be advisable
to increase the taxes in that range of, we'd say, from
five to fifty because it's a pretty good multiplier

phase to phase.

in here.

Ruml:

Eccles:

Well, that's on the average. I mean you've got an
average in there of nearly three times, and three and

a half is the highest multiplier you've got.
So if you should increase taxes in that range, then
you would - you're taxing income which has an effect
of a turnover of three times; and if you're pulling it
out in taxes, then you've got to put back in expenditures the same type of income to take its place. For
instance, if you increase taxes on the income of from
five to twenty-five and you spend a like amount over
here on public works, you actually lose a half, you
are actually pulling out more money in taxes than a
like amount spent over here on public works.

Ruml:

I don't know, I just doubt that. I just don't
No, I think you're cutting the thing too thin there.
I should say you don't know about that; but what you
do know is that you can't finance the public works
program with a sales tax.

297
-16Eccles:

oh yes.

Ruml:

But that's just because there it's broad enough so
you can talk policy without getting too fine.

Haas:

There's nothing new in that - I mean, you see, on
that statement there's nothing new.
There's nothing new in any one of these. It's
merely an effective way

White:

Eccles:

Just a question of how accurate we can get. If there's
a half of a point - in other words, if that five to
twenty-five should really be two and a half and public
buildings and highways over here three, it would make
a difference.

Ruml:

Marriner, I wouldn't make a decision of policy on a
discrimination of half a point. I think the big
thing that we can do is to make discriminations as
between zero and two and a half and so forth and so
on.

And another thing: I would never make a decision of
policy on this alone, because there are many other
things that have to be taken into account.
Eccles:

Ruml:

Eccles:

Well, you take over here this point that you make 150 thousand and over, where the multiplier is one you see the amount involved is small; that's the thing
you've got to take into account. It's small compared
with - that's 337, whereas the one item of 25 to 50
is 687 million, twice as great, you see.
You want this as low as possible and this as high as

possible. This is high and this is low. This is low
and this is high. So that's a very good situation.

The point I see in an adjustment here would be, of
course, this tax on employees certainly shouldn't
be increased any, and if possible reduced. That
shouldn't be increased. The other item, that

manufacturers' tax - that accounts for a very large
multiplier: three and a half times.

Ruml:

Excises.

Eccles:

There is a place to - certainly you know those taxes

298
-17-

shouldn't be increased; if anything, in that range
other
- in these other fields where the multiplier
is smaller.

you should reduce them, increasing them in these

And we also learn, it seems to me, that on this side
(expenditures), if we want to get quick results, why,
we want to spend the money where you get three to
three and a half times.
Ruml:

H.M.Jr:

Well, let me make another - give you another example.

Just a minute. I want to see how my market's going.

Excuse me a minute. Go ahead and talk.
(H.M.Jr goes out)

Ruml:

White:

There's another point, Marriner, that I want to bring
up about this situation up here. You might want to do
that anyway, and for this reason: you might want to
create a tax structure with flexible expenditures on
that side that would give you a balance of your budget,
let's say, around 80 billion instead of around 85
billion. Do you see? I raise that to show that
there are other considerations of policy that lie
outside this and can't be answered from this. It is

only that this is helpful insofar as it goes and
provided you don't try to cut it too thin.
Mr. Eccles, I think there is something that must be
pointed out here; that possibly we should avoid

attempting to place too much importance on the magni-

tude. Or let me put it this way, rather: that the
political flexibility are not very great; that if
you establish a tax structure one year and you are
on the upswing, you can't alter it easily the next
magnitudes we are dealing with within the range of

year, and you can't alter a great many of these
taxes very much in any case, because of historical
reasons and because of political reasons, and so on.
So that where this sort of thing, it appears to me,

is subject to the severest criticism is that it

might give the impression that you're capable of
creating variations in magnitude in excess of what

is actually possible. That's one point.
The second is that I think it would be a little more
impressive if these figures were rounded off by a

299
-18-

great deal more than they are, much more approximated than they are, which would avoid the appearance of accuracy which they don't possess.
Eccles:

But now we've got a practical problem, looking ahead

for the balance of this fiscal year and the following
fiscal year. And it seems to me that the query is:
in the balance of the fiscal year, if we expect to
maintain the present rate of recovery - it seems to
me we must try to do that until such time as we get

a national income up very much closer to our capacity
of employment and production - then we are confronted
with a very practical problem of asking Congress to

make available certain funds for relief, for instance.
You've got that; that's the one part of the budget that
isn't taken care of. The balance is already fixed,
but you've got the one item, the adjustable item of
relief for the last five months. The question is,
what is actually likely to be needed in the picture:
500, 750 or a billion? Just what is likely to be
needed? Now, we know what the multiplier - we know
the effect of that, and that's the one flexible item
you've got.

Now, looking at the future, the following year, from
July until the following July, we know that there are
certain definite expenditures that are unavoidable:
interest, Veterans, and all the regular fixed expenditures. And then you have other items of expenditure
such as the increased expenditure for military purposes, what you're going to use for roads, what
you're going to use for C.C.C. camps, and all those
various items where there is flexibility. And it
seems to me if we're to advise on this question, then
we've got to consider the types of expenditure that
should be made, within the political range of possibility, of course. I recognize that we've got
certain factors that you can't control. You might
advise very S trongly against public works, any
further appropriation for public works, at this
time and more on W.P.A., or vice versa. Or, you've
got the Army and Navy expenditures coming in, and

you know that it isn't - it isn't a question of

saying, "Well, we're going to spend a lot or we're
going to be spent for other purposes, and it's
something that can't be varied.

not because of the need for employment." That's

300
-19-

But we've got to take, it seems to me, those factors into consideration in the preparation of the
budget, and there is only a very small degree of

flexibility.

Now, you get over on the tax side and the question

is - after you fix up the expenditure side, leaving
those items where there is flexibility to be determined, then you get over on the tax side and you
determine on that side where the flexibility comes
and whether or not you should propose a change in
the tax structure: for instance, the Social Security
tax and the income tax; and if so, in what range in

the income tax area? Or in the consumption taxes such
as your miscellaneous, alcohol, manufacturing, and
excise taxes.

Now that seems to me to be just exactly what our
practical problem is if we're going to be of any
assistance in the preparation of the budget with
the idea of tending to keep a balance in the
economy - I mean keep a degree of stability in the
economy and at the same time continue the process

of increasing the national income. Otherwise, I
can see now we may get a tax structure - I mean may
get an expenditure structure in this picture where

the national income may set out on a plateau and
maybe turn over or we may get a very - where the thing

takes a shot up too rapidly for a short period of time
and then down. Our job is to take into account just

all these factors and try to project into the future
in such a manner as to assure 8 continuance of a
rise in the national income and at the same time

not get too much of a rise in prices. Of course,
that's

Ruml:

Marriner, look; see what it does to have - if you get
868 on the negative side here, with no addition
whatever (pointing to "Transfers.totrust accounts,
etc.")

(H.M.Jr returns)
White:

There's another interesting observation in connection
with this. When one considers the amount of study
and the amount of fighting which is done over an

expenditure of - more or less of half a billion
dollars, you see, then one realizes that the amount
of study and work that would be justified in getting

301
-20-

Ruml:

the best kind of a relationship in this is
considerable, when you're dealing with at least
a billion or two or three. So even if you're
not dealing with magnitudes of five or ten
billion, even if it's only two billion, even a
billion, it's worth every possible study from
that point of view.
Oh yes, I'm sure that's true.
Well, I think the thing that shows, Marriner, is
this - excuse me - there is this observation that
occurred to me the other day: the question isn't
whether you've got a compensatory budget or not;
the question is whether you know it or not.

White:
Ruml:

That's right.
That really is true. I was just saying, Mr. Secretary,
the question isn't whether you've got a compensatory
budget or not; the question is whether you know it or

not.
Eccles:
Ruml:

H.M.Jr:

It's important to know it.
Well, that's what I mean. I mean this thing doesn't
change the reality any. It simply states it.
Now, what I'd like to do - I don't know how the
rest - when they're ready to move, what I'm going to
do is to invite a group of economists whom you know,
if they can come down here Friday and Saturday, and
I want them and you (Rum1) to get into a room and

see if you can sell this to them fresh, you see people you know - because this is too important.
And if you'd be willing to do that when they come
down

Ruml:

Can't do it this week.
Can't do it this week?
But there's a lot of fellows here who can.

White:

If he can't, we can present his point of view, pro-

Ruml:

H.M.Jr:

viding we have your permission to modify this

302
-21somewhat.
Ruml:

Oh sure. It's not my point of view. Harry can doCan

it perfectly. Lauch can do it. I mean it

you (Sanford) come down Friday?
Sanford:

Yes.

H.M.Jr:

I don't know whether I can get them together, but
I'd like to get an outside viewpoint.
I think there would be no difficulty in presenting
this position to whatever group you have. There are
enough here who are quite familiar with it, though

White:

they might not be in agreement.

H.M.Jr:

See, I'd like to have plenty of time to go back in back of these multipliers and everything.

Huml:

Why don't you do this, Mr. Secretary? Let them come

down, work on this stuff beforehand, raise all sorts
of questions and dig into it, then have a meeting and
state any points on which there is disagreement, find
out what the logic of the difference is; because, I
mean, they could spend a couple days on this, I'm
sure.

H.M.Jr:

If they'd be willing to.

Eccles:

would they come down and get into it before presenting

Ruml:

It should be presented to them, but I don't think

White:

This week is a bad week. One couldn't come down

this?

it would need to be presented by me.

whom you'd like to have see it - he said so - unless

you absolutely
H.M.Jr:

I'd like them - as I say, some people that have not

been working with the National Resources Board, from

the outside, who are not in this school of thought, to
take a look at- as
thiswell
thing,
are intellectually
asbut
thewho
National
Resources

- just not a group -

Board. honest I mean I people mean the National of not the

group of people who are working with

Resources; because this is too important, at least
from my standpoint.

303
-22-

Ruml:

Obviously, if there is any difference in logic

H.M.Jr:

Well, White and Currie are available, and they
could present this.

Eccles:

Sure, they could do it. They could take all day
there and give these people as much - if they come
down - I don't think it's necessary for Beardsley to
come down if he's tied up there.
Well, as far as I'm concerned, I'm ready to go on
to the next thing.

H.M.Jr:

Bell:

May I ask one question, Mr. Secretary?

H.M.Jr:

I'm sorry that Hanes isn't here, because he's got

White:

If you like, I'll give him

Ruml:

Shall I just leave this stuff with you, Harry? Then

the tax program.

you can

H.M.Jr:

Yes. We haven't got an awful lot of time on this,

Bell:

No; I personally think it's out of the question for the

White:

Well, it would be a little too bad, if you were convinced of the soundness of the underlying principle.
And it doesn't mean it has to be presented in this
way. There are other ways of presenting it. If you
were convinced of the underlying principle, it would

have we?

1940 budget.

be too bad if there weren't any time, because what

they're - we're saying, in other words, is that it's
too late to increase the national income by several
hundred million dollars. I mean if we put it in those
terms, the thing is important enough so if there is
time we could

Bell:

The time isn't available. I'm getting right in a

White:

I say if it were possible to make time, the thing

Bell:

bottleneck every day.
is important enough.

If you could get it ready by tonight

.....

304
-23-

Eccles:

Isn't there time to do this? After all, there are

certain flexible items in your budget, the question
particularly - for instance, in your 1940 budget
you've got the question of what expenditures are
going to be made outside of the definite expenditures that can't be varied. Your roads, C.C.C., your

P.W.A. - now, isn't that - can't that be flexible in
the budget?

Bell:

Well, I think your 1940 picture won't change mater-

ially from what you've got there. You certainly will

have a W.P.A. program.
Eccles:

But how much?

Bell:

Have a sizable amount.

Eccles:

How much?

Bell:

And you'll have a substantial increase in your national

defense, which after all has a high velocity - 2.8
they 've got there, which isn't a lot different from
the 3.5.

Eccles:

That's right.

Bell:

And your public works might come down a little,
although the cash outgo will probably be as large

in 1940 as it is in 1939. Now, on the other side,

you've got to determine what you're going to do

there anyhow after Congress meets and you have an

opportunity of studying that. The budget will go
up as a deficit, and how much you reduce that
deficit by additional taxation has got to come as
a subsequent study any how.

White:

There would be opportunities for that before it was

Taylor:

There are plenty of them.

Ruml:

Well, Mr. Bell, I would not be so ambitious as to

passed by Congress.

expect that this budget could be drawn up on this
set of principles. I think we'd be awfully lucky
to have them applied to the budget a year from now.
Awfully lucky. What I do think, however, as Harry

305
-24-

points out, is that it may be possible to take
certain hedges in case there are things you want
to do now in terms of this type of analysis. For
example, if it could be written into the law that
the President in January, 1940, might have some

discretion with respect to the tax on employees,
that would be a good thing to do. Now, there may
be a number of other good things to do that don't
require complete acceptance or application of this

H.M.Jr:

type of thing. I think it's too much to ask. We
started this whole business, really getting into it,
in the middle of October. This thing is of the most
immense importance as far as the whole national welfare is concerned. You can't go too fast.
Well, what I'd like to do, if the President will do
it and we're ready, would be to ask him for an
afternoon either Monday or Tuesday, Mr. Delano, to
snow him this, you see, so that he could have this
in his mind when he sits down and writes his budget
message. And I think that this is important enough

that he should give us an afternoon Monday or Tuesday

White:

and I'm going to ask him for it.
I think this ought to be modified somewhat, but
we'll have time to do it. There are some points
want to remove all possible major points of disagreement.

H.M.Jr:

But I think this is too important; certainly as
Secretary of the Treasury 1 will do everything I
can to get him to give us a couple hours so he can
take a look at this.

Ruml:

For me Tuesday would be much better than Monday,

H.M.Jr:

Listen, young fellow, take it when the President

Rual:

H.M.Jr:

Ruml:

because that Fortune dinner is Monday night.

gives it to us.
I know, but I'm just giving
I'll do it, but I'm going to ask him for the first
afternoon that's available next week and I'll take
the first afternoon cheerfully. I mean
I know.

306
-25H.M.Jr:
Ruml:

H.M.Jr:

I mean I'll put it that way.
I appreciate it.
Because you can't get many afternoons. We'll ask
him for two hours. See what I mean? I mean I'm

going to ask him to give us the first two-hour

period that he can. I'm going to tell him it takes
two hours.

Bell:

Mr. Ruml, let me ask you a question on the chart,
on the revenue side. Of course, there is a missing
link, which is the deficit and which means receipts
to the Treasury in the form of borrowed money. On

that side, in each case, 137 and '38, it's just
about - the addition to national income is just
about three times your deficit. Now, the conclusion that one might draw from that is that, adding
each side and getting an a verage and multiplying
the deficit gives you your addition to national
income, and therefore what would be the situation
if you had an absolutely balanced budget? - might
it not come out even?

H.M.Jr:

With no addition to national income.

Bell:

Yes. I'm wondering if people, just looking at this
thing, won't think of it as a mathematical thing:

Ruml:

addition to one side, getting your averages, and
multiplying.
That would be terrible, because really the hopeful

thing in this whole thing, Mr. Bell, is that it is

possible after we get a balanced budget to still go
on adding to national income. In other words, we
can have a balanced budget and not freeze the
economy by the proper arrangement of receipts and
expenditures.

H.M.Jr:

Well, if you couldn't do that, I wouldn't be

White:

There wouldn't be anything to the whole thing unless
that were possible.

Eccles:

The budget is just as important after it's balanced
as before it's balanced.

interested.

307
-26Ruml:

Eccles:

Haas:

That's right.
Because you may have a balanced budget temporarily

and then lose the darn thing by an improper type of
tax or expenditure based upon a given situation.
Then you also, Mr. Ruml, on your deficit - some
kind of a multiplier or something should be attached
to that, because it depends on where you borrow that
money from.

White:

Very
important thing whether it's bills, notes or
bonds.

Eccles:

It's important whether the banks buy it or whether
it's bought by investment trusts or investors. If
it's bought by the banks, you create new money; if

Bell:

it's bought by investors, all you do is take idle
money and put it into circulation. That's awfully
important on the question of the inflationary or
deflationary side of the picture.
"nich that doesn't bring up.

H.M.Jr:

You want to bring up something else?

Bell:

No, that's all.

H.M.Jr:

Now, couldn't we just go on to the next thing,

because I've got as much as I can absorb on this,

"uml.
Ruml:

May I then go on to the last one?

H.M.Jr:

What I'll do - I'll try to get a clearance - I don't

Eccles:

know how much more time Mr. Eccles wants to spend

on this, but if I'm successful in getting these
people down I'll ask Mr. Delano and Mr. Eccles, if
they're here, if they'd like to sit with me when I
hear from the other people. I mean if they're here.
Well, I'd like to spend some time, whether it's then
or in between - but I'd like to - before the question
of a White House conference, I'd like to spend some
time; I've got a few doubts about a few things and
I'd like to go into it a little more thoroughly with
Currie or White here and myself.

308
-27Sanford:

I'd be glad to give you what I have here.

H.M.Jr:

I think inasmuch as that's that - I think we'll
excuse you (Sanford). You might wait, because

Sanford:
Ruml:

maybe somebody would like to see you afterwards.
All right.
(Sanford leaves)

My position on the conference is that I don't think

we should go any farther than we all agree we've had
enough progress.

The reason, Mr. Secretary, I asked to go to the last
point is that you mentioned the White House conference and you said at the last meeting it was desirable to have some sort of a memorandum to put before
the President if such a conference were had. I
haven't tried to draw such a memorandum, but if the
group would take fifteen minutes to consider some

questions that I have written down to put into the
memorandum, it might be helpful; because I don't think
that that thing standing alone is the basis for a
fiscal policy; there are some other things.
These are the questions: How much national income
per year can we produce with reasonably full

employment? How much national income must we have

to create a demand for substantial private invest-

ment? will the present revenue system produce enough
income to the Federal Government to take care of the
expenditures to which we are committed for normal
times? What national income is necessary to produce
this result? How can Federal fiscal and monetary

policies contribute to fuller employment and larger
production? How does the budget affect national

income? Now, it's just that one subject we're
discussing. How do fiscal operations outside the

budget affect national income? What should be the
immediate objectives of fiscal and monetary policy?
What action needs to be taken?

H.M.Jr:

Now, I've just jotted these things down. Is that
the scope of the type of paper you want? Is it
complete? Is it too much?
I think it's too much.

Ruml:

Too much. This more or less maps the whole problem.

309
-28-

White:

That is the whole problem.

Ruml:

Huh?

White:

That is the whole problem.

Ruml:

As I see it, that's the whole problem.
I say no g roup of men could take this in by just
having it read to them. They'd have to have it

Delano:

before them.

H.M.Jr:

You mean that memorandum, or

Delano:

I mean those questions. They're too searching.
Mr. Delano, I had in mind that - are these the
questions, or others, which should be answered in

Runl:

a memorandum? Thai's all.

Delano:

I think they should be posed anyway.

H.M.Jr:

Well, they can be. You can answer them.

White:

I think a report should be prepared attempting to
answer them. what portion of that you wish to use
for the President, say, is another matter.
But here's the thing. You've got one thing where
we're looking ahead five or ten years as to what
this committee - which is what this committee should
be doing. Then, on the other hand, two members of
this committee, Mr. Bell and myself, have got a

H.M.Jr:

thing which is on an hourly basis. And, talking for
myself, I'd like to - after I've digested this thing,
to get as much of this, if we decide that this is all
right and will stand up, into the President's message
some indication, you see, that he is thinking in
terms of national income; and that's the important
thing - and then get as much of that in the mes-

sage On the revenue side, I doubt if he'll

recommend any definite new forms of taxes, because
he never has, has he?
Bell:

No.

H.M.Jr:

What?

-

310
-29-

Bell:
Eccles:

Taylor:
Eccles:
H.M.Jr:

No, he has not. He's given suggestions.
But he could say that taxes should be considered

in the light of their influence on the economy.
That's exactly it.

Point that out, leave it up to Congress.
That's all right, Marriner, I agree with you there.
And then if he's going to - and then in terms of what
he does on the expenditure side, he could bring that
philosophy in.

Eccles:
H.M.Jr:

That's right, he could leave that somewhat open and

point out this, couldn't he?
Now, if you and I and the rest of us can digest
this thing, be thoroughly sold on it, go to the
President with a recommendation as to the philosophy,
I think we're really making some progress.

Eccles:

Put something in his message along that line.

H.M.Jr:

Yes. But I don't - to answer Ruml, I think that

anything anybody can do to study how we can increase
the national income should be done; but as to how

much we canget the President to say in a week, I
don't think we can get much more than what's before
us.

Ruml:

Well, the thing I'm wondering, Mr. Secretary, is

whether this - yes, I think that's all right. I'm
rather inclined - it would be just as well if I did
not go to the White House with you.

H.M.Jr:
Ruml:

Well, we can think about that.
The thing I'm thinking about is this: that when you
and Mr. Eccles and Mr. Delano and Mr. Bell come to

the point that's as far as you think you can go in
view of your own convictions, that probably is as
far as the President ought to go, and he probably
ought not to be over-persuaded by any language that
I would use or might use in that connection. But
let's think about that.

H.M.Jr:

Yes, that's something to come.

311
-30Eccles:

The important thing, as I see it, at this time is

Haas:

consider expenditures in the light of their influence
on national income; so that when you get up there in
connection with hearings on expenditures and on
taxes, you then have the opportunity to consider
them in the light of their effect on national income,
which is entirely a new approach, isn't it?
No, I think the President has expressed this under-

if we can get the President in his message to raise
the question and get Congress to consider taxes and

lying philosophy time and time again.

Taylor:
Haas:

He hasn't said it in quite the right way, George.
Well, he just said in his speeches - the Pittsburgh
speech - "We unbalanced the Federal budget to balance
your national budget," which is the underlying
philosophy, and so on.

Eccles:

What I'm speaking of is in his message to Congress,

H.M.Jr:

Go ahead, Wayne, please.

Taylor:

It seems to me the best we're going to get out of
this at this stage is possibly two paragraphs for
inclusion in the President's budget message, and I

the budget message; that's the place to put it.

think we're all pretty clear in our mind that two
such paragraphs, regardless of how far they go in
expressing these thoughts, will have to be written.
I would really suggest that we direct ourselves to
trying to write two paragraphs. All this other
stuff can go along on the side.

Eccles:

You mean the small part of the message; but two

paragraphs - they might - may be big ones or little

ones; may take a page or two.
Taylor:

Ruml:

What you're hoping is that there will be a mention

of this theory, if you want to call it that, in the
message, at least calling the attention of Congress
to this thing. That's as far as you're going to be

able to go at this time.
Well, I would like some time in the course of the
next six months to get this across to the public
mind: that the crucial issue is not a spending-lending

312

-31-

program, that it isn't a deficit program; that the

crucial issue is the compensatory program about
which we can do something. Now, there's my two
paragraphs.

Taylor:
H.M.Jr:

That's right.
Well now, is it agreeable to you we go ahead,

Marriner?

Eccles:

Yes.

H.M.Jr:

Mr. Delano, agreeable?

Delano'

Yes.

H.M.Jr:

Now, what's the next thing?

Let me ask something which isn't on there. I'd like
to ask Mr. Eccles whether he wants to report on this
question of railway equipment.

Eccles:

We have one.

Ruml:

That's in the operations outside the budget.

seeles:

That's one of them. And we've got a lot of stuff
here. I don't know just how extensively you want
to go into it. Currie, can you - you don't want
to take too much time, I guess - can you give
the high spots?

Currie:

I can state what I have on this overlapping problem -

budget bottlenecks and the agencies outside the
budget.

Eccles:

We've got a rather complete report there - the ques-

Eccles:

tion of type of legislation and the whole thing. You
don't want to go into that
Just the high spots.
... but we've got the whole thing.

Currie:

I have a statement of the proposal, the arguments for

H.M.Jr:

313
-32-

Taylor:

it, the objections that can be raised against it,
and the alternatives. I have also the proposal in draft of it in bill form, which I sent to Mr. Taylor,
in order to take up the points you (Taylor) mentioned as to some of the legal points.
I think it's unimportant, but we don't quite agree
in the approach there. In other words, you took one
form, we would have chosen another.

Currie:

Well, I'm perfectly willing to change it. I just
wanted to get your guidance on that problem. And
then I have a technical memorandum, which I will

not read, on the potential inadequacy of freight

cars. We have done very much more intensive work

on that of a statistical nature - by the experts.

Then, fourth, a note on that question you asked me
about the railroads' and automobiles' demand for steel.
Now, the memorandum on the - would you care, Mr.

H.M.Jr:

Currie:

Secretary, for me to run over the arguments for the
proposal and the objections to it?
Yes, I would, please.
"Proposal: to establish a railroad equipment authority,
with capital stock owned by the Treasury, empowered to
issue guaranteed debentures for the purpose of con-

tracting for the purchase of new railroad rolling
stock to be rented or leased to railroads."

The arguments for the proposal are as follows:

"1. The stimulation of recovery. Expenditures of some

$500 million on railroad equipment could be assured

in the first year of operation. Apart from the stimu-

lation this would afford the economy in general, it
would provide work for the railroads' own car shops
and increased traffic for the roads themselves.
"2. The removal of future bottlenecks. Preliminary
estimates indicate that in order to handle the volume
of traffic consequent upon the continuance of recovery
at a desirable rate, yearly expenditures on rolling
stock of about $800 million at present prices would
have to be incurred in the period 1939-41. From the
standpoint of the national economy it would obviously

314
-33-

be to our interest to utilize idle plant and labor
in the immediate future in order to relieve the
shortages, stoppages, and bottlenecks that will
arise in freight traffic, the railroad equipment
industry and in the steel industry with the continuance of recovery.

"3. A contribution to future stability. The

railroad equipment field has traditionally a feast
and famine character and is consequently an important
source of economic instability. A federal authority,
not pressed by financial considerations or immediate
profit considerations, could level off the peaks and
valleys of railroad equipment buying.
"In addition, variation in rental rates for equipment
would offer a highly desirable alternative to variations in freight rates as a means of bringing about
greater stability in railroad net earnings.
"4. National defense. A modernized supply of rolling
stock adequate to handle the volume of traffic incident upon war appears to be an indispensable element
in any comprehensive program of national defense.

Moreover, experience in the handling of a national
car pool will be invaluable in the event of war.

"5. Betterment of the financial structure of rail-

roads. The gradual substitution of rented and leased
rolling stock for owned equipment would permit a
reduction in the debt of railroads and a substitution
of variable for fixed charges. Moreover, the proposal
offers a means whereby the Government could stimulate

private expenditures without getting deeper involved

in the complicated financial structure of the rail-

roads.

"6. Improved efficiency. The proposal, through
making possible continuous buying, greater standardization, and more liberal provisions for research,
should permit very substantial reductions in costs
to be achieved. It should also permit more efficient

utilization of rolling stock in the handling of

empties, etc.

"7. Relation to the 'Railroad Problem'. The

proposal could be adopted independently and without
prejudice to any comprehensive program of reorganiza-

tion and consolidation of the railroads, which may

315
-34-

take a long time to accomplish."

Now we list the objections to the proposal.
"1. Government ownership. The proposal does, of
course, involve a degree of Government ownership,
so far as rolling stock is concerned. It may be
pointed out here, however, that

(a) it is only a degree removed from the
present practice of making loans to
financially shaky roads,

(b) it is far removed from the actual
Government operation of railroads as is
practiced in certain other democratic
countries such as Canada and Sweden,

(c) it is proposed that the Government

operations be confined to research and

ordering, renting or leasing equipment
and that no construction or repair be
undertaken in Government shops.

"2. Loss to the government. It may be objected
that the Authority's equipment will be used only

during peak periods and years of exceptionally

high traffic volume and that for the rest the
Government will be left holding the bag.' This
objection can easily be disposed of by pointing
out that this all depends on the terms of leasing
or daily rentals. If they are set sufficiently
low, it will pay the railroads to use the
Authority's equipment, and rely on old high-repaircost equipment for peak requirements. Low rental
rates will also constitute an inducement to retire
old equipment.

"This way out, however, raises another objection.

If rentals are set too low, the revenues of the
Authority will be inadequate to service its obligations and keep its equipment in good repair. It
should, however, for the following reasons, prove
possible for the authority to set sufficiently low
rentals to induce the railroads to use its equipment
and yet not suffer a loss:

316
-35-

(a) it will have the advantage of borrowing at
lower interest rates than the railroads can

secure;

(b) being a very large and continuous buyer of
standardized equipment it should be able to
secure greater price concessions than any

individual road could obtain;

(c) there should be economies consequent upon

the growth of a national car pool;

(d) it will be in a position to charge higher

rentals in good years to recoup any losses sustained in bad years.

"Finally, it must be kept in mind that even though
the Authority should actually show a loss, this
would not be incompatible with a large net national
gain in more stable and higher national income, production and employment.

"3. Technical difficulties. The proposal has been

examined by a number of operating railroad men and
although problems have been pointed out in connection

with repairs, zoning, storage, etc., it appeared to

be the general consensus that the problems would be
similar to those now encountered in connection with

'foreign' cars" - cars of other roads - "and the
private leasing companies, such as Pacific Fruit

Express, and various ways of meeting these problems
were at hand.

"In connection with the determination of the volume
of new equipment of various types, it would appear

feasible to make far better national estimates of
the number of different types of freight cars and
locomotives that a certain volume of traffic will
require than could possibly be arrived at as the sum

of individual estimates made independently by the
various roads.

"4. Inequities as between roads. Some companies
have normally an excess of cars and others a deficiency. Some companies, therefore, would be in a
better position to take advantage of low rentals on
new equipment while others might suffer a loss of
revenue now derived from the use of their cars by

other lines.

317
-36-

"Again, many roads now build a substantial amount
of equipment in their own shops and individual
hardships might result from the inevitable changes
in the location of work consequent upon national

bidding for a single buyer. These changes might
be tempered by policies of the Authority in distri-

buting new equipment, repair and reconditioning work."
That's the advantages and the objections as I have
been able to uncover them so far. Now, the thing I

run into immediately is the alternative which is
always proposed.

"The alternatives appear to be either to do nothing
or to stimulate railroad equipment purchasesthrough
loans to railroads from the R.F.C., on favorable

terms. It is said that if the R.F.C. should announce
that it was prepared to purchase equipment trust certificates (a) up to 100 percent of the cost of new
equipment, (b) at a 2 percent rate, (c) for comparatively long maturities, (d) the offer to be available
for a limited period only, a very large amount of
anticipatory railroad equipment buying would be
induced.

"While this alternative is far better than doing
nothing at all, it appears inferior on various counts
to the proposal under discussion.

"1. It lacks flexibility. The cnief objection, from
the compensatory fiscal policy viewpoint, is that an

emergency loan operation does not provide a mechanism
through which the Government could operate continuously,

and outside the budget, to smooth out fluctuations in
expenditures in an important field.
"With reference to the immediate situation, it is
almost impossible to forecast the extent to which a
favorable loan offer would be taken up. Once announced, it would be difficult to change the terms.
If a big rush of orders ensued, deliveries would have
to be spread over a future period, or else a temporary
bottleneck would occur. If few orders came in, the
terms could not be lowered further or the offer extended without arousing a sense of grievance on the
part of those who had already a vailed themselves of

the offer.

318
-37-

"2. There are definite obstacles in the way of
offering terms that will really be effective.
"The R.F.C. must consider the soundness of each

individual loan and cannot explicitly rely upon
averaging and upon higher interest returns in good
years offsetting low returns in bad, as could the
proposed Authority. The most favorable terms offered
to date by the R.F.C. were in connection with the
purchase of equipment trust certificates of the
Southern Railroad for 100 percent of the cost of

freight cars, at 4 per cent, and for fifteen years.

"In bad years, when on national economic grounds
expenditures on railroad equipment are most desir-

able, the credit of the railroads is weakest and,
confronted with surplus equipment on the one hand
and financial difficulties on the other, they would

be most reluctant to borrow and purchase new equipment even on the most favorable terms.

"3. A loan operation does not offer a good possibility for securing cost reductions and efficiencies.
"Each loan being an individual loan, there does not
exist the same opportunity to derive the economies
arising from large, continuous orders of standardized
equipment, or from research, or from car pooling.

"4. Other implications. Further large loans to the

railroads would involve the Government still more in
the complex financial structure of railroads, and
would result in a further increase in railroad debt
and fixed charges. Moreover, it would be difficult
to refuse to other borrowers the particularly favorable
terms that would have to be offered to the railroads."
H.M.Jr:

Well, what I'd like to do is this. Do you have a

Currie:

Yes.

H.M.Jr:

Of course you have one for Mr. Eccles.

copy for Mr. Delano?

And it's a question of time and if you're available
Wednesday night, Currie, I'd like you to come to the
house at 3:30; I'd like to sit down and go over that

319
-38-

stuff with you. I take it that the other people if they want you, they can send for you. Is that

all right with you, Mr. Delano?
Delano*

H.M."r:

Yes. I'm very much interested in it.
I think it's interesting. But I'd like to spend an
evening just on this, like to go to school on this.

In this little time I can't absorb it.

Eccles:

I realize this - it's like everything else; you've
got to sort of live with it. We spent a lot of time
last year on it.

H.M.Jr:

I'd like to spend Wednesday evening with Currie,
if he can come at 8:30.

Eccles:

In the meantime you can take that memorandum that

he just read - if he'd leave you a copy of that, then
I think you might have some questions.

H.M.Jr:

Now, do you (Delano) have a copy?

Eccles:

AS I say, possibly you'd find it very helpful because
that covers, as I see it, pretty generally the problem.
Are there other things you'd like me to do that even-

Currie:
H.M.Jr:

Currie:
H.M.Jr:

Currie:

ing, which you have there now?

I think not.
Just this.
This is the only one.
I have two or three other things to report on. You
may not be - I think you need not be bothered with

the actual bill, which I'll take up with Mr. Taylor.

Eccles:

H.M.Jr:

Don't you think, Currie, if you get time on Wednesday
night it might be advisable to be prepared to present
to the Secretary some of the other items that might
be handled outside the budget? That's part of this

whole picture. If you've got time
I'll give the evening to Currie - shoot anything he
wants at me.

320

-39Eccles:

H.M.Jr:

Currie:

It occurs to me he should be ready, and if you have
the time that would be a good field for discussion.

I just can't take it in this - on this short notice,

but I do want to get it. Go ahead, Currie.

Then there is that further question you asked me
about the railroads' and automobiles demand for
steel. A memorandum has been prepared on that.

Two conclusions appear. Just taking them very

briefly, they are:

"1. The demands of railroads and automobiles for
finished steel products are largely non-competitive.
The railroads require mainly plates, shapes, rails
and track accessories. The automobile industry's
demand is mainly for bars, sheets and strip. The
demands are, of course, competitive so far as steel
ingots, from which finished products are made, are
concerned.

"2. Railroad demands for steel at the 1922-26

average rate, would absorb 16 percent of present

ingot capacity. To meet the railroad steel require-

ments necessary to avoid bottlenecks should full
recovery be attained in three years, would absorb
considerably more of present ingot capacity."

I haven't been able to convert all these things
back yet, but it would be over 20 percent steel
capacity.

H.M.Jr:

Currie:

Have you got a copy for Mr. Bell too? And can
you give me a copy of this, because this would

go with the railroad thing, wouldn't it?
Yes. I would like to do a little bit of work on
this, Mr. Secretary.

H.M.Jr:

"hy not bring it in Wednesday night?

Currie:

I much prefer that.

Eccles:

You don't mean on the copy of the one you gave to
the Secretary.

MCR:

He's talking about the one he just read.

Eccles:

Just got one for Mr. Bell, the same one you gave to
the Secretary.

321
-40H.M.Jr:

That's what I meant.

Bell:

Thanks.

H.M.Jr:

What else?

Currie:

I thought on the technical memorandum I'd turn that
over to Mr. Haas and he could work with his people.

H.M.Jr:

Fine.

Currie:

That covers the bottlenecks of the agencies outside

H.M.Jr:

I'm sorry to push, but I

Ruml:

There is nothing more.

Currie:
Ruml:

Yes, there is one other, the timing.
Oh, the timing.

Currie:

You asked Mr. Eccles two weeks ago if he would have

H.M.Jr:

Yes.

Currie:

So the Division has been working on that. We can
tell you now what the national income will be in
1939. (Laughs)

H.M.Jr:

Wonderful. Are you in agreement?

Currie:

Yes.

Bell:

Underwrite it?

Ruml:

Calendar year.

Currie:

It's a guess, but it seemed to be about the best

of the Government.

prepared an estimate of the national income in 1939.

guess.

H.M.Jr:

Calendar year?

Currie:

Calendar year.

H.M.Jr:

All right.

322
-41-

Currie:

"It is estimated that the national income produced will
be approximately $68 billion in 1939."

H.M.Jr:

How much?

Currie:

68.

H.M.Jr:

Not enough.

Eccles:

No, it isn't, but

White:

Can't you boys go back-and make a better guess?

Ruml:

It's very important to know what is the rate in
January. The rate will be over 70, you see.

December going to be as comparedto the rate in
H.M.Jr:

What rate?

Ruml:

You see, this is the average for the year, so at
the end of the year it'11 be running at a much
higher average than 68.

Currie:

"This compares with an indicated $62 billion in 1938
(on the basis of data available for ten months only)
and $70 billion in 1937. On this basis approximately
three-fourths of the loss from 1937 to 1938 should be
recovered in 1939."

This was based generally on index averages - Federal
Reserve Board index of 106 for next year.
H.M.Jr:

That's off. Just put it in your envelope, will you?
Put it in your vest pocket: I say you're low. What?

Eccles:

I hope so. That's going to depend a good deal, though,

Ruml:

Eccles:

H.M.Jr:

on this picture right here.
That's just what - was going to say. It's on the

assumption we can't do anything about it.
Remember this, Mr. Secretary, that that may be low
or it may be high, all depending upon

Well, I'll bet anybody a dime that you're five percent
off. Ran out of nickels the other day. You said
106 for the year; you're five percent low at least.

All right.

323
-42-

Currie:

It doesn't
look so good for the next three months,
Mr.
Secretary.

H.M.Jr:

All right.

Currie:

You have to average it, you know.

H.M.Jr:

You're at 100 now.

Currie:

But you may not go up from here on. May go back in

H.M.Jr:

on yes.

Currie:

There is always a little bit of confusion when you

our tracks a bit; that's a possibility.

talk of national income, b e cause we use two different
senses. When we talk about national income, we mean
value of goods and services produced; that's what we
call national income produced. The monthly service

we get from Commerce deals with monthly payments,

which may not coincide with income produced. This
year we expect that income payments will be two
billion higher than income produced, because there
are two billion losses that have to be deducted
from that.

Eccles:

Make that clear, though: business losses after dividends are paid and depreciation and everything taken
off.

Currie:

That's right.

Eccles:

In other words, there is more money paid out in
dividends and depreciation and so forth, by about

two billion dollars - that's by individual businesses,

farmers and everybody - than is actually taken in and
earned. So you pay out two billion more than you take

in because you've been in a deflationary period. I

think that's correct.

Currie:

"The estimated rise in national income produced from

$62 billion to $68 billion is approximately ten percent, which reflects in part the improved position
with r eference to business savings. This item, after

payments of dividends and withdrawals by entrepreneurs,

is expected to show only a small net loss in 1939, as
compared with an estimated net loss of more than $2
billion in 1938. National income paid out is expected
to rise approximately six percent from $64 billion in

324
-43-

1938 to $68 billion in 1939. Since income payments

are running at about an annual rate of $66 billion
at the present time, it will be necessary for them
to increase to an estimated rate of approximately
$71 billion at the end of 1939 in order that the
estimated average for the year can be attained."
Now Mr. Secretary, we have also attempted, in the
case of the income paid out, to break that down

according to compensation of employees and various

fields such as dividends and interest, with the
idea that it might possibly be helpful in your
budget estimates, because you'd like to have them
set up in that way.
H.M.Jr:

Have you seen this, George?

Haas:

Currie:

No. We've made an estimate too, but I'll give it to
you as soon as we get through with it.
I'm finished now.

H.M.Jr:

You going to give us each a copy of that?

Haas:

I'd like to have those.

Eccles:
Haas:

Bell:
H.M.Jr:

Think that's very conservative?
I'm afraid to give mine now.
You're above that, aren't you?
I think Currie and Haas should exchange notes. I
mean not here - do it

Haas:

DO you want to hear mine?

H.M.Jr:

How long will it take you, George?

Haas:

It's quite at variance with his.
Where is it? I mean will it take long?
No. It's just a couple figures. But I think the
important difference that I've got here is that you can tell easier by looking at the chart.
wonder if I could hold this

H.M.dr:
Haas:

I

325
-44white:

Can I hold it for you, George?

Haas:

Iline
think
I'd national
better hold it, it's so small. This black
is the

H.M.Jr:

Detter stand back so we can all see it.

Haas:

This black line is national income for 1929 right
on through to date, and this finer line is the
Federal Reserve Board index of industrial production; and this dotted line is an estimated basis
which we put on here to show how it operated or how
well it worked during this period. Now this FRB
industrial production, you will note here, goes up precedes the upward movement of national income pay-

ments. These are national income payments. And

up here we projected it up into 1939, with this
sharp rise of the FRB; I took 104, I thought, so

we'd be on the same basis; Mr. Eccles said 104 the
other day when he was over here.
H.M.Jr:
Hass:

Well, you're only one percent off.
All right. end that was the average of a group
that we had down here talking about it; so for

convenience 1 took that. And then this estimated

formula was based upon the relationship between

the Federal Reserve Board index of industrial
production, the Bureau of Labor Statistics index
of wholesale prices - and then we took a third

factor, which is the ratio of durable goods to

other goods in the FRB index, because their index
many times runs up sharply due to the increased
proportion of durable goods, and in those instances
it runs above the general level of production, which

is so great - it has a higher correlation with
national income. The point is that down here we -

then we lagged those three factors six months with
national income, and we got this type of estimates,
which ran very close.

Now, it shows for 1939 that the estimate will be
about as it is this year, because the outstanding
factor is that the average price situation has
just about compensated for the increase in the
Federal Reserve index.

H.M.Jr:

SO you arrive at what?

326
-45Haas:

I arrive at - if the Department of Commerce is
estimating 64 or 65, I'd say the - this study
shows that the national income for 1939 will be

about that figure. There is only one out in it;
that is that labor policies might have changed
this lag. But if you're figuring on something
higher than that, it seems to me that it's on that
situation that you're basing your forecast: that
the usual lag will not take place for next year.
Currie:

About what figure, Mr. Haas, for 1939?

Haas:

About the same figure as this year.
This year they estimated 62 billion.

Currie:
Haas:

Income payments out this year, somewhere between
64 and 65.

H.M.Jr:

No increase?

Haas:

Practically none. I'd say a billion and a half,
two billion, on either side is the error.

Eccles:

Income receipts will be the same as income payments

Haas:

this coming year. That's what you're estimating.
Income receipts and payments will about balance out,
whereas last year there was the two billion dollar
difference.
I made mine on the basis of income payments, that's

right. One thing we have to realize is that the
price level is still going down. It's down to about
76; was about 88 - the high in '37, you'll notice on
this curve here; and we assumed a gradual increase
which we may not get. It hasn't turned yet, you see,
so

Currie:

Mr. Haas, you're assuming that with the index of
production of this year averaging 86, next year 104,
no change in income.

Haas:

H.M.Jr:

Well, the

Listen, won't you boys get together? You fellows

get together with those two memoranda, then come and

see us, because this is important - the two organiza-

tions, if that's agreeable to you, Eccles. Is it?

327
-46Eccles:

Oh sure.

H.M.Jr:

What?

Eccles:

Sure.

Haas:

I did this Saturday. I thought maybe you wanted
independent estimates.

328

Agenda
Problem4 Effect of
bredget items on

nation al income

Problem Federal fiscal

operations outride the

F budget
Problem d +2 Pountrate

national income and
probable federal revenue

problem 6 : fliability
Questions for a memorandum

329

the 3. GOVERNMENT RECEIPTS AND (GENERAL AND SPECIAL ACCOUNTS ONLY)

(Fince) Year Ended June 30. 1937-Dollar Amounts in Williams
RECEIPTS

Estimated Direct
visible bakes
(Dollar Amounts)

Hithdrawal from

Expenditure trees
Personiece Amount

L INTERNAL REVENUE

Individual Increa Tax

Net income under 1,000
Net income of 85,000 and under $25,000
Net income of 525,000 and under $50,000

54

229

90

48

80

183

172

75

129

Net income of 650,000 and under $150,000

299

70

210

Net income of $150,000 and over

337

40

135

1,220

50

306

25

77

1,124

95

1,066

552

95

524

95

92

Corporation Income and Capital Stock Taxes
Estate and 01/1 Texas

Alcoholic, Infre., Excise and Misc. Taxes
Tobacco Texas

61

Employment Tax (Title VIII-Old Area)
as on employees
Tax on employers

97

97

as

92

50

75

43

Tax on Employers of 8 or More (Title IXUnemployment

IL CUSTOM

486

90

438

III. ALL OTHER RECEIPTS (incl. ed 1.)

263

75

197

Total Receipts

3,295

5.294

EXPENDITURES

Estimated Direct
Visible Budget

(Dollar montal

additional

from

Expenditure Street
Percenters Amount

L GENERAL
560

90

514

264

85

224

167

100

167

National Defense

857

85

727

Veterans Administration

580

90

522

Agricultural Adjustment Program

527

85

us

Civilian Conservation Carps

386

95

366

all

25

217

355

as

300

1,0%

95

1,800

3°4

95

365

200

95

283

221

90

200

Departmental

Public bldge, highways river and barbor
work, and flood control

Social Security Act (grants to states for
needy persons, etc.)

Interest on Public Debt
IL RECOVERY AND NELSER

Public highways, river and harbor work, and
Flood control

T.P.A.
Other

Aid to home orders (inc. Farm Security Idm.)
III. REVOLVIN FUNDS (NET)

Public Works, loans and grants to states, etc.

Total expenditures (excl. debt
retirement)

0

Y ALL OTHER EXPENDITURES

868

0

IV. TRANSFERS TO TRUST ACCOUNTS. ETO.

23

8,442

Visible Balance (Deficit)

75

160

6.293

- 3,148

Invisible - (Income effect) +9,044
Typed by Ire
12/8/38

330

U.S. GOVERNMENT RECEIPTS AND EXPENDITURES CONTRAL AND SPECIAL ACCOUNTS ONLY)

(Fiscal Year Paid June 30. 193 aller is Million

REGRIPTS

Visible Budget Invisible Dudget

Invisible Padget

(Dollar Amounts)

(Dollar insured)

.

Visible Budget

*

Multiplier (Dollar insured
L INTERNAL REVENUE

Multiplier)

Multiplier (Dollar

Multiplier)
L

3

3

1

2

2
1

1 1/2

Driats and sift Taxes

Tax on employee

681
430

299

598

337

337

1,220

3,050

1,124

3,934

1/2

552

1,360

Public bldds. highways; river and harber
work, and fleed central

3 1/1

?I

"

1/2

264

660

3 1/2

167

585

2.8

85T

2,356

580

1,983

3 1/2

527

1,845

3.2

306

1,833

866

1,299

Social Security Ast (grants to states for
National Defense

ever.
3.4

ever.

Agricultural Adjustment Program
civilian Desservation Corps

340

Interest on Public Debt

1 1/1

242

2

IL RECOVERY AND RELINE
3

C

58

5

486

W

Public highways, river and harber work, and
need central

263

1/2

1,458
263

other

3
1

ever.

Aid to home owners (inc. Farm Security MM.)

N

355

869

1,896

6,606

aver.
2.6
aver.

384

1,007

3.1

298

932

223

553

3.5

V.P.A.

III ALL OTHER RECEIPTS (incl. all.)

2 2/2

ever.

Tax as Employers of 8 or More (Title IX-II. CUSTOMS

1,680

Veterans Administration

3 1/2
2

Tax on employees

229

172

306

0

Alechelie, Matre., Excise and Miss. Taxes

Painment Tax (Title VIII--Old Age)

189

needy persons, etc.)

Corporation Income and Capital Stock Taxes

Tobacco Taxes

54

0

Net income of is 000 and under 825,000

Net income of 625,000 and under $50,000
Net income of 150,000 and under $150,000
Net income of $150,000 and over

1/2

3

IN income wither 15,000

560

Departmental

Individual Income Tax

aver.

III. REVOLVING FUNDS (NET)

Total receipts

5,894

13,082

Visible Balance (Deficit)

Total expenditures (esel. debt retirement)

- 3,148

Invisible Balance (Income effect) +9,044

868
0

L ALL OTHER EXPENDITURES

1/2

0

IV. TRANSFERS TO TRUST ACCOUNTS. ETC.

2

Public Works, leans and grants to states, etc.

2.3

213

498

ever.

8,442

22,126

331

December 5, 1938.

RAILROAD AND AUTOMOBILE DEMANDS FOR STEEL

1. The demands of railroads and automobiles for finished steel

products are largely non-competitive. The railroads require mainly
plates, shapes, rails and track accessories. The automobile industry's
demand is mainly for bars, sheets and strip. The demands are, of
course, competitive so far as steel ingots, from which finished products
are made, are concerned.

2. Railroad demands for steel at the 1922-26 average rate, would
absorb 16 percent of present ingot capacity. To meet the railroad
steel requirements necessary to avoid bottlenecks should full recovery
be attained in three years, would absorb considerably more of present
ingot capacity.

It appears from the following table that the steel mill products
used by railroads and the automobile industry differ considerably and
consequently that mills equipped to product finished products for one
industry would not be greatly influenced by demand or lack of demand
from the other.

332
-laTable I
PRINCIPAL STEEL MILL PRODUCTS TAKEN BY THE RAILROAD
AND AUTOMOBILE INDUSTRIES - 1937

Percent of

total takings
Product

By

By

railroad
industry

Plates

19

industry
1

..

11

Shapes
Bars

automobile

8

22
41

Sheets

6

Strip

2

30

..

Rails

31

Track accessories

14

"

91

94

Other

6

9

Total

100

100

Note: The percentages shown are based on ton-

nage figures, as estimated by THE IRON AGE

Two supplementary tables are attached. One shows that

the steel mill products used by the railroads vary widely
depending on whether they are for cars and locomotives,

buildings, or track. The other shows the percentage of

total output of principal products that were shipped to
the railroad industry and to the automobile industry in
1937.

333
2-

TABLE II
DISTRIBUTION OF CERTAIN STEEL MILL PRODUCTS
1937

Percent of total
taken

Product

By

By

railroad

automobile

industry

industry

Plates

24

Shapes
Bars

16

3

1

24

6

Sheets

32

3

Strip

57

2

Rails
Track accessories

87

Other

25

13

12

17

0

89

Total

0

Note:--The percentages shown are based on tonnage
figures, as estimated by THE IRON AGE.

TABLE III
PRINCIPAL STEEL MILL PRODUCTS TAKEN BY THE RAILROADS
1937

Percent of total takings for
Product

Cars and

locomotives

Rails and

accessories

Buildings

and bridges

19

18
1

36

Plates

11

56

..

17

Shapes
Bars

Total

12

8

1

14

6

3

12

Sheets

2

1

..

Strip

31

3

Rails

Track accessories

4

67

..

14

29

1

91

1

83

98

95

9

5

17

Other

Total

100

2

100

100

100

Note:--The percentages shown are based on tonnage figures, as estimated by THE IRON AGE.

334

-8-

Shipments of steel mill products to the railroads in 1937 were
about half the peak level of the early 1920's, while shipments to the
automobile industry were nearly 60 percent greater than at that time.

Data for selected years are shown in the following table. These figures represent shipments from steel mills, not consumption of steel

for which data are not available. In the past three years actual consumption of steel probably differed considerably from shipments, owing

to the accumulation of stocks in late 1936 and the first three quarters
of 1937 and the reduction of stocks subsequently.
TABLE IV
SHIPMENTS OF STEEL MILL PRODUCTS

(In thousands of gross tons)
To

Total

To

railroads

Automobile

industry

1922-1926 (average)

30,530

7,680

3,600

1929

40,600

6,900

7,300

1932

10,300

1,250

1,750

1936

32,000

3,300

6,500

1937

32,500

3,890

5,650

Source:-THE IRON AGE

In terms of present ingot capacity shipments to the railroads
at the 1922-1926 average rate would require about 16 percent of ingot
capacity; the requirement was about 24 percent of the capacity at that

time. In 1937 shipments to the railroad industry required about 8 percent of current ingot capacity. The automobile industry required 11
percent of ingot capacity in 1937, as compared with 10 percent in the
early 19205.

335
Confidential
December 2, 1938,

UNITED STATES RAILROAD EQUIPMENT AUTHORITY

Proposal Establish a railroad equipment authority, with
capital stock owned by the Treasury, empowered to issue guaran-

teed debentures for the purpose of contracting for the purchase

of new reilroad rolling stock to be rented or leased to railroads.
1. The Stimulation of Recovery
Expenditures of some $500 million on railroad equipment could

be assured in the first year of operation. Apart from the stimulation this would afford the economy in general, it would provide

work for the reilroads' own car shops and increased traffic for
the roads themselves.

2. The Removal of Future Bottlenecks

Preliminary estimates indicate that in order to handle the
volume of traffic consequent upon the continuance of recovery at

a desirable rate, yearly expenditures on rolling stock of about
$800 million at present prices would have to be incurred in the
period 1939-41. From the standpoint of the national economy it

would obviously be to our interest to utilize idle plant and labor
in the immediate future in order to relieve the shortages, stoppages,

and bottlenecks that will arise in freight traffic, the railroad
equipment industry and in the steel industry with the continuance
of recovery.

S. A Contribution to Future Stability
The reilroad equipment field has traditionally a feast and
famine character and is consequently an important source of economic

336
-2.

instability. A federal authority, not pressed by financial consider
ations or immediate profit considerations, could level off the peaks
and valleys of railroad equipment buying.

In addition, variation in rental rates for equipment would

offer a highly desirable alternative to variations in freight rates
as a means of bringing about greater stability in railrond net earnings.
4. National Defense
A modernized supply of rolling stock adequate to hendle the
volume of traffic incident upon war appears to be an indisponsable
element in any comprehensive program of national defense. Moreover,

experience in the handling of a national car pool will be invaluable
in the event of war.

5. Betterment of the Financial Structure of Railroads
The gradual substitution of rented and leased rolling stock
for owned equipment would permit a reduction in the debt of railroads

and a substitution of variable for fixed charges. Moreover, the proposal offers a means whereby the Government could stimulate private

expenditures without getting deeper involved in the complicated finan-

cial structure of the reilroads.
6. Improved Efficiency
The proposal, through making possible continuous buying, greater

standardization, and more liberal provisions for research, should per-

mit very substantial reductions in costs to be achieved. It should

also permit more efficient utilization of rolling stock in the handling of empties, etc.

,

7. Relation to the Mailroad Problem
The proposal could be adopted independently and without
prejudice to any comprehensive program of reorganization and

consolidation of the railroads, which may take a long time to
accomplish.

337

338

Objections to the Proposals
1. Government Ownership,

The proposal does, of course, involve a degree of Government

ownership, so far as rolling stock is concerned. It may be
pointed out here, however that
(a) it is only a degree removed from the present prec-

tice of making loans to financially shaky roads,
(b) it is far removed from the actual Government opera-

tion of railroads as is practiced in certain other democratic
countries such as Canada and Sweden,

(c) it is proposed that the Government operations be
confined to research and ordering, renting or leasing equipment and that no construction or repair be undertaken in
Government shops.

2. Loss to the Government

It may be objected that the Authority's equipment will be
used only during peak periods and years of exceptionally high

traffic volume and that for the rest "the Government will be left
holding the bag."
This objection can easily be disposed of by pointing out

that this all depends on the terms of leasing or daily rentale.

If they are set sufficiently low, it will pay the railroads to
use the Authorityfa equipment, and rely on old high - repair- cost
equipment for peak requirements. Low rental rates will also

339

constitute an inducement to retire old equipment.

This way out, however, raises another objection. If rentals
are set too low, the revenues of the Authority will be inadequate
to service its obligations and keep its equipment in good repair.
It should, however, for the following reasons, prove possible for

the authority to set sufficiently low rentals to induce the railroads to use its equipment and yet not suffer a loss:

(a) It will have the advantage of borrowing at lower
interest rates than the railroads can secure
(b) being a very large and continuous buyer of standard
ized equipment it should be able to secure greater price concessione than any individual road could obtains
(o) there should be economies consequent upon the growth

of a national car pool;

(d) it will be in a position to charge higher rentals
in good years to recoup any losses sustained in bad years.

Finally, it must be kept is mind that even though the Authority
should actually show a less, this would not be incompatible with
a large not national gain is more stable and higher national income,
production and employment.

s. Technical Difficulties
The preposal has been examined by a of operating rail=
read mon and although problems have been pointed out is connection

with repairs, soming, storage, etc., 18 appeared to be the general

340

-6
consensus that the problems would be similar to those now ancount-

ered in connection with "foreign" care and the private leasing
companies, such as Pacific Fruit Express, and various ways of
meeting these problems were at hand.

In connection with the determination of the volume of new
equipment of various types, it would appear feasible to make far

better national estimates of the number of different types of

freight care and locomotives that e certain volume of traffic will
require than could possibly be arrived at as the sur of individual
estimates made independently by the various roads.

4. Inequities ns Between Roads
Some companies have normally an excess of care and others

a deficiency. Some companies, therefore, would be in a better
position to take adventage of low rentals on new equipment while

others might suffer a loss of revenue now derived from the use

of their cars by other lines.
Again, many roads now build n substantial amount of equip-

ment in their own shops and individual hardships might result
from the inevitable changes in the location of work consequent
upon national bidding for a single buyer. Those changes might

be tempered by policies of the Authority in distributing new
equipment, repair and reconditioning work.

-70

341

Alternativent
The alternatives appear to be either to do nothing or to
stimulate reilroad equipment purchases through loans to railroads
from the R1 F. C., on favorable terms.

It is said that if the R. F. C. should announce that it was
prepared to purchase equipment trust certificates
(a) up to 100 percent of the cost of new equipment,

(b) at a a) percent rate,
(o) for comparatively long maturities,

(d) the offer to be available for a limited period only,
a very large amount of anticipatory railroad equipment buying would
be induced.

While this alternative is far better than doing nothing at all,
it appears inferior on various counts to the proposal under discussion.

1. It Lacks Flexibility
The ohiof objection, from the compensatory fiscal policy view
point, is that an emergency loan operation does not provide a mechanis through which the Government could operate continuously, and

outside the budget, to mooth out fluotuations in expenditures in an
important field.
With reference to the immediate situation, it is almost impossible
to forecast the extent to which a favorable loan offer would be taken
up. Once announced, it would be difficult to change the terms. If
a

big rush of orders ensued, deliveries would have to be spread over

a future period, or also a temporary bottleneck would occur. If few

342

orders Game in, the terms could not be lowered further or the offer
extended without arousing a sense of grievance on the part of those
who had already availed themselves of the offer.

2. There are definite obstacles in the way of offering forms

that will really be effective,
The R. F. C. must consider the soundness of each individual loan
and cannot explicitly rely upon averaging and upon higher interest

returns in good years offsetting low returns in bad, as could the
proposed Authority. The most favorable terms offered to date by
the R. F. C. were in connection with the purchase of equipment trust

certificates of the Southorn Railroad for 100 percent of the cost of

freight cars, at 4 per cent, and for fifteen years.
In bad years, when on national economic grounds, expenditures

on reilroad equipment are most desirable, the credit or the railroads
is weakest and, confronted with surplus equipment on the one hand

and financial difficulties on the other, they would be most reluctant
to borrow and purchase new equipment even on the most favorable terms.

3. E loan operation does not offer 6 good possibility for
securing cost reductions and efficiencies.
Each loan being an individual loan, there does not exist the
same opportunity to derive the economies arising from large, continuous orders of standardised equipment, or from research, or from oar
pooling.

4. Other implications
Further large loans to the railroads would involve the Government

still more in the complex financial structure of railroads, and would

343

result in a further increase in Failroad debt and fixed charges,
Moreover, it would be difficult to refuse to other borrowers the
particularly favorable terms that would have to be offered to
the railroads,

344

ESTIMATE OF NATIONAL INCOME IN 1939

It is estimated that national income produced will be approximately

$68 billion in 1939. This compares with an indicated $62 billion in 1958
(on the basis of data available for ten months only) and $70 billion in
1937. On this basis approximately three-fourthe of the loss from 1937 to 1938
should be recovered in 1939.

The above estimate is based upon analysis of underlying conditions and

current trends. This analysis indicated a probable average of 106 for the
Federal Reserve Index of Production in 1939. In December of 1938, the

indez is expected to be in the neighborhood of 100 and after a levelling
out, or perhaps even a small decline, in the early part of 1939, to increase

rapidly in the later part of the year.
The estimated rise in national income produced from $62 billion to $68

billion is approximately ten percent, which reflects in part the improved
position with reference to business savings. This item, after payments of
dividends and withdrewals by entrepreneurs, is expected to show only a
small net loss in 1939, as compared with an estimated net loss of more than

$2 billion in 1938. National income paid out is expected to rise approxisately six percent from 864 billion in 1938 to $60 billion in 1939. Since
income payments are running at about an annual rate of 086 billion at the
present time, $3 will be necessary for them to increase to an estimated

rate of approximately 871 billion at the end of 1939 in order that the estimated average for the year can be attained.

345
Estimates of National Income is 1989

a.

The accompanying table summarizes the above estimates and gives the

comparable figures for 1937 and 1988, the latter being partly estimated
also.
1937

1938

1989

National Income Produced
Business Savings

69.8
+0.5

68.0

68.0

-2.3

-0.3

National Income Paid Out

69.5

64.8

68.3

45.4

42.1

44.6

15.9
4.8

16.1
4.6

15.0
1.8

12.9
4.4
7.6
14.9
2.2

9.5

8.2

9.0

10.4

9.8

10.3

Net Rents and Royalties

2.6

2.6

2.6

Social Security Contributions, etc.

1.4

1.6

1.8

Compensation of Employees

Manufacturing, mining, construction

Transportation and utilities

Trade and Finance
Government, Service, Other
Work Relief

Dividends and Interest
Intrepreneurial Withdrewals

*Partly estimated
B- Estimated

7.9

7.9

15.1
1.9

346

DEC

5

-

Secretary Morgenthan
Herman Oliphant

For your information

Hamilton, Chief of the Far Eastern Division of the State Department, had raised the question whether the proposed arrangement with

reference to tung oil, etc. would violate our Treaty with China of 1884
and the International Treaty concerning China of 1922. I understand that
Mr. Welles told Hamilton to take the matter up with the Treasury and see

what we said since he wanted to take it up with the President on Wednesday.
We have looked into the questions which Mr. Hamilton raised and

have concluded that there is nothing to his objections. I got in touch
with Hamilton at once, so advised him, and suggested that we would be

glad to discuss the question with any of the lawyers in the State Department be may designate. He is sending someone over at 10 a.m. tomorrow.

(initialed) H 0

00 to Lochhead
White

Taylor
Hanes

HO18 Typed 12/5/38

347

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE DEC 5. 1938

TO

FROM

Secretary Morgenthau
Herman Oliphant

For your information

Hamilton, Chief of the Far Eastern Division of the State Department, had raised the question whether the proposed arrangement with

reference to tung oil, etc. would violate our Treaty with China of 1844
and the International Treaty concerning China of 1922. I understand that
Mr. Welles told Hamilton to take the matter up with the Treasury and see
what we said since he wanted to take it up with the President on Wednesday.
We have looked into the questions which Mr. Hamilton raised and

have concluded that there is nothing to his objections. I got in touch

with Hamilton at once, so advised him, and suggested that we would be

glad to discuss the question with any of the lawyers in the State Depart-

ment he may designate. He is sending someone over at 10 a.m. tomorrow.

Al

348

5 December, 1938

From:

To :

Miss Jacobson.

Mr. Nicholson.

Closing exchange rates today sell U. S. dollar at sixteen
one sixteenth and buy at sixteen three sixteenths.
Silver sale proceeds held by Federal Reserve Bank close of
business December 3, $6,852,781.33. Change during week, debit,
$5,000,000 withdrawn.

349

December 5, 1938

After reading the attached article by

Alsop and Kintner, the Secretary decided not
to say
to Hanes until he approached
him
onanything
it.
Hanes came in on Saturday morning and

made some reference to the article, whereupon
Mr. Morgenthau took the opportunity of cautioning Mr. Hanes. He said, I want you to know
that Arthur Krock hates the President and he and

his group will do everything they possibly can
to build you up in order to show that you are
the man who has the businessman's point of view,
and they will reach the point where they will
have you on one side and the President on the
other -- you, saying 'this is what business
wants; this is what the country wants, and
Hanes is the fellow to put it through, but with
the President on the other side directly opposHe said, John, you can't find youring you.

self in that position. They will use every con-

ceivable method to bring this about and you have

got to watch your step. When the President's
machine goes to work on a fellow, God help him!
They are going to use Oliphant; they will use
me; they will use anybody. Now, that's too
unimportant. I don't care what they say about
Oliphant or what they say about me, but their
whole idea 18 to prove that you are going to
use you as a symbol which the President is
opposing.

Homewhere in his tobacco-dealing ancestry. there Mr.
have been a revivalist strain Ha is positively evangelical on
the relationship between his two cherished projects-budge
balancing and the restoration of confidence At the same time,

WASHINGTON STAR - November 30, 1938.

he does not depart from the New Deal line so widely as Morgen.

thau did last autumn, when he wanted to balance the budget
by severe economy. Hane's theory is that with an improvement
of business. brought about by the restoration of confidence the
national income will rise to a point where the budget can balance

itself.

Since the reversion to spending last spring. Morgenthau has come

around to the Hanes view. Their joint prayer now is that the na

tional income will reach $80,000,000,000 by 1940, in which case the
budget can be balanced on the basis of present taxes. And they
have real hope that their prayer will be answered

The Capital Parade 1L20

Concerning the immediate future, several interesting inference
can be drawn from Hanes' new
power taxes. In the first place
unless the President himself
THERAY

Treasury Seen Adopting Business Point of View
On Taxes Under Hones Influence

very unlikely that financing national defense will be made an
excuse for revitalising the under610 000

#50.000
INCOMES

taxes on business will be avoided

There may be no call for new

taxes of any sert. for Morgen
thau and Hanes are not yet convinced that the next fiscal year
armament and relief expenditures will be big enough to necessitate
more revenue.

If new taxes are called for, they will probably take the form

of

increased surtaxes on incomes between $10,000 and $50,000 A

year. As one Treasury expert rather grimly put it. "that's where
the fat is." At present, total income taxes in the $10,000 to $50.000

Instead the study's guiding mind has been that of Undersecretary
John W. Hanes. a considerable businessman himself. and the leading
exponent of conciliation between business and the New Deal Since

class range only from u to 31 per cent. The ability to pay is
there, and about $4,000,000,000 of taxable income is also there.

Hane's transfer to the Treasury he and Oliphant have struck up a
warm friendship. There is no question of rivalry between them. But
as Secretary of the Treasury Henry Morgenthau, jr. has virtually
given Hanes carte blanche, the

Whatever the final recommendations they will be based on care.
ful. realistic examination of the entire tax structure. Some ma be
disappointed that budget-balancing has been deferred again. But
they should recognise that, in the last election. even the Republicans
hesitated to raise the cry of economy. And they should remember
that, unless the national income rises or the Government spending
apparatus is dismantled. the budget cannot be balanced without a
50 per cent increase in taxation

TOYOU

opinions rather than Oilphant's.

The difference between Hanes'

and Oliphant's opinions is considerable Oliphant. a practicing
economist. envisions taxation as
an instrument of economic change

tributed profits levy. Generally
speaking punitive or disturbin:

MUR

pleting.

Treasury's approach to tax problems is bound to reflect Hanes'

countermands Hanes' plans. it s

19,

By JOSEPH ALSOP and ROBERT KINTNER
There has been a highly significant change in the Treasury's
approach to tax and budget problems. After these last years It may
sound improbable, but the fact cannot be gotten around- there is a
new inclination to consider taxes from the businessman's point of view.
The change is pretty well symbolized by the withdrawal
from the tax field of Treasury General Counsel Herman OHphant. Oliphant is an able and far-sighted man, whose radical
tendencies have been ridiculously exaggerated but he cannot be
called business-minded. In the period of the undistributed profits tax his influence undoubtedly predominated in the Treasury's
tax programs. Yet be has had no sort of hand in the elaborate
study of the tax structure which Treasury experts are now com-

Me

as well as a method of raising
revenue. And he is not a budget-balancer. Hanes, on the other

hand, regards taxes solely as a way of getting money for the Government. and believes they should be planned. not to reform the working
of the economic system. but to interfere with it as little as possible.
Hanes like Secretary Morgenthau very emphatically is a budget-balancer. He is also a believer in the importance of business confidence.

350

December s. 1980.

Dear M. Spreads

a behalf of the Secretary I - w
knowledging your letter of December Sed,
commenting upon the security issues

offered during the past work.

The information contained is your

letter will be brought to Mr.
innodiate attention.

Sincerely yours,

E.

S. note,

Private Secretary.

Mr. Allen Spreal,
First Vise President,
Federal Reserve Bank of New Thank
New York, New York.

Noted
A. Lochhead

351

December s. 1980.

Dear Mr. Sprouls

On behalf of the Secretary I am asknowledging your letter of December 3rd,
commenting upon the security issues

offered during the past week.

The information contained is your
letter will be brought to Mr. Morgentham's
immediate attention.

Sincerely yours,

H. S. Note,
Private Secretary.

Mr. Allen Spreal,
First Vice President,

Federal Reserve Bank of New York,
New York, New York.

GEF/Abs

December 4 seen.

Dear w. spreads

as bubalf of the Secretary I as asmovielging your Letter of December Srd.
commenting upon the country issues
offered during the past week.
The information contained in your
letter will be bought to Mr. Margontham's
innodiate attention.
Sincerely yours,

W. S. nots,
Private Secretary.

Mr. Allen Spreal,
First Vies President,
Federal Reserve Bank of New York,
New York, New York.

our/due

352

December s, seen.

Dear w. Spreads

as behalf of the Secretary I - w
knowledging your Letter of December
commenting upon the country issues

offered during the past week.

The information contained is your
letter will be brought to Mr. Margantham's
Innoélate attention.
Sincerely yours,

N. S. note,
Private Secretary.

Mr. Allen Spread,

First Vice President,
Federal Reserve Seek of New York,
New York, New York.

our/abo

353

FEDERAL RESERVE BANK
OF NEW YORK

December 3, 1938.

Dear Mr. Secretary:

For the first time since October some corporate security
issues were offered in the open market this week. Three utility company
issues, of which two were bonds and one a preferred stock, were promptly

bid up to high premiums, ranging from 2 to 5 1/2 points. A fourth issue,

an industrial convertible preferred stock, is still being quoted at the
syndicate offering price. The four publicly-marketed issues were:
$13,780,000

Union Electric Company of Missouri

$5 preferred stock at 106, for refunding;

4,000,000 Blackstone Valley Gas and Electric
Company mortgage and collateral trust

3 1/2s of 1968 at 104 3/4, for refunding;

2,800,000 Michigan Associated Telephone Company

first mortgage 4s, of 1968 at 102, all
but $200,000 for refunding, and

6,000,000 National Gypsum Company $4.50 con-

vertible preferred stock at par, about
three-quarters for refunding.

$26,580,000 Total
There were also two small offerings of speculative common

stocks and the private placement of a $1,000,000 utility bond issue.
The largest flotation during the week was the award and success-

ful resale of $40,000,000 of bonds of the City of New York. A Chase National
Bank syndicate won the award at an interest cost to the City of 2.883 per
cent. The issue was divided into $25,000,000 3s maturing 1939-73 and $15,000,000

2 1/48 maturing 1940-44. They were reoffered to yield 0.50 to 3.15 per cent;

2.
FEDERAL RESERVE BANK OF NEW YORK

Secretary Morgenthau,

35

12/3/38

354
80 per cent were sold the first day and the balance on the day following. This is
the quickest distribution of a large New York City issue in some time, and was carried out despite the prospect of the exchange of up to $315,000,000 City bonds for

subway unification in the fairly near future. The City also placed $21,000,000 of
revenue bills bearing 0.50 to 0.75 per cent interest due in 3 to 12 months.
In contrast to the sale of the New York issue, the $25,000,000 State of
Connecticut issue reported last week is still unsold to the extent of about $13,000,000.
The yields at which the Connecticut issue was offered were about half those on the
corresponding maturities of the New York bonds.

To the list of forthcoming issues reported last week should be added
$55,000,000 of Public Service Company of Colorado bonds, debentures, and preferred

stock. They were registered last Friday and are eligible to emerge from registration
December 15, which would put them in the market as the new Treasury securities are

going into distribution. No serious conflict of interest is indicated, however, the
situation being comparable to that of September 15th, when a $25,000,000 issue of
Atlantic Refining Company debenture 38 of 1953 was offered at 99 and was readily sold

despite the market's preoccupation with Treasury financing.
Corporate issues during November amounted to about $175,000,000, only

half of the high total in October. Eighty-five per cent of the November flotations
were by private sale. Some $75,000,000 was for new capital. The December total
gives promise of being & little higher than $175,000,000, with about the same amount

for new capital as in November. child
The public market for corporate issues was not really tested last month,
because so much of the financing was placed privately, but,despite a period of some
decline in bond prices, both the taxable market and the tax-exempt market seemed

more than willing to absorb all offerings on which the yield was fairly attractive.
That issues were not greater is due tc lack of offerings rather than lack of demand.

355
3.

Secretary Morgenthau,

FEDERAL RESERVE BANK OF NEW YORK

12/3/38

The rates for the different maturities of municipal bond issues emphasised the

familiar point that, under present conditions, the long-term interest rate is
predominantly a charge for the lenders assuming the risk of fluctuations in

short-term interest rates. When the borrower is willing to assume that risk,
the current interest cost is much lower.
Yours faithfully,

AlZan Sproul,

First Vice President.

Hon. Henry Morgenthau, Jr.,

Secretary of the Treasury,
Treasury Department,
Washington, D.C.

a

356
December 5, 1938.
12:15 p.m.
HMJr:

Operator:
HMJr:

Hello.
Governor Harrison. Go ahead.
Hello.

Harrison: Hello, Henry.
HMJr:

Hello, George.

Harrison: First of all I want to tell you I was sorry I missed

you Saturday, but a friend of mine was quite 111 with
pneumonia in the hospital and wanted to see me 80 I
had to go up.

HMJr:

That's alright.

Harrison: And
secondly, I think you -- frankly, I think you've
done just the right thing. As you know, from what I
said down there that day, I think this is the best
possible offering you could have made.

HMJr:

I think from what I gather the way the market is taking
that it has worked out beautifully.

Harrison: It is fine, because it is going to make a real demand
for those twos rather than forcing the holders of rights

into the longs which otherwise they would have gone into
and then resold.

HMJr:

I am trying to convince them that there was a demand for

a short-term bond of a fixed date which the pencil and
paper just wouldn't indicate.

Harrison: Well, that's what happened.
Yes. That's what I told them.
HMJr:
Harrison:

With pencil and paper I think your men paid just about

HMJr:

Yes.

one hundred and one twelve. We figured about one hundred and one sixteen up here.

Harrison: That's around the market's talking in terms of one hundred and one twenty-one. If that is true, I think that
you will find that the fair proportion of the conversions
into the two percents.
HMJr:

That's alright.

357

-2H:

Which is what we want.

HMJr:

That's alright.

H:

And
yet the other one - the long one - is priced
well enough.

HMJr:

Yes.

H:

To make over your past success.

HMJr:

It looks awfully good, George.

So
I think you did just the right thing and I'm very
happy about it.

H:

HMJF:

Thank you 80 much. I appreciate your saying 80.

And I don't think there is anything wrong at all in
the three-way thing this time.

H:

HMJr:

Thank you, George.

H:

Fine And on our old conversion I don't know -- have

you got just a minute?

HMJr:

Always.

H:

Last night, or Saturday night, when I went home I was
thinking of -- this 18 just between you andme, because

I haven't talked to the other fellows yet -- of converting half into notes and half into the short bonds
on the theory that we might then be able to pick up
some long ones later on if necessary.

HMJr:

Yes.

H:

I'm rather of the feeling that we had better get a few
of the long ones anyway in case we have to have some-

thing to dispose of. I mean, if insurance companies
and others don't get all the twos and three-quarters
they want. They may make an artificial market unless
somebody is able to provide them.

HMJr:

Can you take a little joking?

H:

What's that?

HMJr:

Oh, I just couldn't think it that the Federal Reserve
system subscribe to a sixty sixty-five bond. I couldn't
take it, George. The shock would be too great ! O.K.

358

-3 Harrison: That's
Butto.
I don't
know
that they
will, but
I think Ialright.
would like
A small
amount
of them.
HMJr:

I don't know whether I could stand the shock The first
thing
I know
Aldrich will take some and then
I will be
sunkWintrop
!

Harrison:

Well, it is especially true if there is a very heavy
subscription
inof.
the twos, which I think we ought to
get
a majority

HMJr:

Well,
I'll be interested what you make up your mind to
do.

Harrison: Alright. Well, I rather think we better wait until

tomorrow, if we are going to have tomorrow for exchanges.

HMJr:

Oh yes, I'll give you until Wednesday night.

Harrison: Just 80 as to see where the pressure 18.
HMJr:
I'll give you until Wednesday night.
Harrison: You think you will?
Yes, because when I put out a notice of close I always
HMJr:
liketwo-day notice.
Harrison:

I think that is very wise.

HMJr:

I think because there 18 a big turn-over you have to let

Harrison:

Yes. Then we have to think of some way we can put a

HMJr:

Oh, really?

Harrison:

Well, I think you're going to take out an awful wad.

HMJr:

Well, if you are worried, talk to me about it.
Yes, we'll work on that. Don't worry about it until
I call you back on it.

Harrison:

those bond fellows make a little money.

little money back into the market over the fifteenth.

HMJr:

Alright, George.

Harrison:

First rate.

HMJr:

Thank you.

359
December 5, 1938.
12:20 p.m.
Ransom:

To be sure that I had the Dow

Jones item that you

referred to Saturday. I couldn't locate it Saturday.

Was it the one signed the Federal Reserve officials

stated today on behalf of Chairman Eccles?
HMJr:

That's right.

Ransom:

With no banking law amendments?

HMJr:
Ransom:

That's right.
That's the one you referred to?

HMJr:

Yes.

Ransom:

Well, you think that is helpful, I take it. You didn't

HMJr:

No, and I'm not going to, if you don't mind.

Ransom:

Surely.

HMJr:

No, because there's another one came out today which

make any comment on it Saturday.

was just handed to me. It says, "Despite Reserve
Board denial on behalf of Chairman Eccles Saturday

it insists in well-informed circles - - it is reported

that I did receive the memorandum." I don't know where

that comes from. No, I just showed it to you, If you

don't mind, I don't want to make any comment, because -Ransom:

Let me tell you the history of it, if I may, because I
think always facts help in a situation of this kind.
Gaston talked to Thurston and Thurston called Kilgore
and talked to him, and Kilgore said, "Well, in view of
your statement I think I should put a correction on the
ticker", and this resulted from that. I just tell you

HMJr:

that 80 you may know the origin.
You mean the one that is out today?

Ransom:

No, the one that was out Saturday.

HMJr:
Ransom:

Oh, I see.
Now the one today -- of course, I take it we've heard

HMJr:

No. Well, I got everything off my chest when you were

nothing about. I haven't.

sitting there.

-2Ransom:

HMJr:

Ransom:

HMJr:
Ransom:

360

Well, if I can serve to take some things off your
troubled chest at times, I'm very glad to do 80.
Well, you did Saturday, and I appreciate it, and, oh Let me ask you this -- I am in the process of preparing
a little memorandum for my own information, merely. If
when I have finished that I might have an opportunity
to sit down with you.

I'd love it !
Give it to you, and before I give it to anybody else.
If it isn't going to anybody else -

HMJr:

I'd love it!

Ransom:

I'd like to do that.

HMJr:

You just call me and we'11 fix it up.

Ransom:

Alright, fine.

HMJr:

Thank you.

361
December 5, 1938.
2:48 p.m.

Operator:

Hello.

HMJr:

Hello,

Sproul:

Hello, Mr. Secretary.

HMJr:

Yes, how does it look to you?

S:

It still looks alright.

HMJr:

Good.

S:

The cash offerings are out the window as far as we are

HMJr:

Really? What are the figures?

S:

Well, at 2:30 we had seven hundred and two million on

concerned.

the two and three-quarters; four hundred and forty-six
million on the one and one-eighth.

HMJr:

Two and three-quarters, how much?

S:

Seven hundred and two million.

HMJr:

Seven hundred and two million, yes.

S:

And on the one and one-eighth we had four hundred and

HMJr:

Four hundred and how much?

S:

Four hundred and forty-six million.

HMJr:

I see. Well that looks good, doesn't it?

S:

Yes.

HMJr:

Yes.

S:

HMJr:
S:

forty-six million.

Very good. And on the exchange offering they are still
working with sharp pencils. There 18 not much coming in
on that yet.
I see.

But the market still thinks they are going more heavily
for the twos and for the two and three-quarters, and the
quotations for rights which stays around one hundred one

twenty-two indicates that that might well be the case.

-2HMJr:

362

Well, I thought I'd leave the exchange open until
Wednesday midnight.

S:

Yes.

HMJr:

Don't you think BO?

S:

Well that's the -- you usually give them about that

HMJr:

Yes, the only-- last time we didn't because it was in

much time, don't you?

the middle of the week, you know.

HMJr:

Yes, you were a little rushed for time there.
Yes, and the European thing. I think we'll announce

S:

Close the other tonight and announce the closing of the

S:

Wednesday night.

exchange for Wednesday night?

HMJr:

That's right.

S:

I think that makes a good program.

S:

Fine ! Alright,
I'll let you know later if anything further develops.

HMJr:

Thank you very much.

S:

Good bye.

HMJr:

363
December 5, 1938.
2:55 p.m.

Operator: Alright, Mr. Bell is calling you.
Alright.
HMJr:
0:

Go ahead.

HMJr:

Hello.

Bell:

Bell.

HMJr:

Morgenthau.

B:

Did you get the two o'clock report?

HMJr:

Well, I got the two-thirty.

B:

That's fine.

HMJr:

Two and three quarters, seven hundred and two million;

3:

Well, it's nine forty long.

HMJr:
B:

HMJr:

one and one-eighth, four forty-six.
Nine forty?
Yes. Five seventy notes.
Wait a minute - how much long?

HMJr:

Nine forty.
Nine forty, yes.

B:

Five seventy.

HMJr:

And the short is how much?

B:

Five seventy notes.

HMJr:

Alright.

B:

B:

HMJr:

And twenty-one is on the short notes. No exchange is
in there to amount to anything.

Well, I'd get out the telegrams.

364

-2B:

HMJr:

We'll have them all ready when we get the four o'clock
report.
We'll announce tonight we'll give them until Wednesday
night on the exchanges.

B:

Yes, that's right.

HMJr:

Cash offerings closed tonight.

HMJr:

Alright.
Going very well, isn't it?

B:

Going fine.

B:

365
December 5, 1938.
4:30 p.m.

Farley:

Keep everything under control with Eccles and all the

other boys until I get down there.

HMJr:

No !

Farley:

You can't?

HMJr:

No, I need you badly.

Farley:

How badly?

HMJr:

Oh, very badly.

Farley:

I'll send you a couple of brain trusters.

HMJr:

Gee, don't Jim.

Farley:

How are you?

HMJr:

Well, I'm alright, and some of these fellows are kind
of talking themselves almost out of a job.
Well, I would imagine 80. I've been up here trying
to relax and trying to get a proper prospective on
things. Trying to catch up with my telephone calls
and letters and I am trying to get a little rest. I
haven't had very much of it but I'm alright, I want you

Farley:

to know that.

Farley:

Yes, well, I miss you. I really do, I'd like to see you.
Well, I tell you, when I get down there I'll give you a

HMJr:

We do.

Farley:

Any candidates you want me to promote? I'd be glad to

HMJr:

Well, some of these fellows are sitting so high about the

Farley:

Bad as that, eh?

HMJr:

Yes.

Farley:

How do you feel about things generally, Henry?

HMJr:

Well, I tell you, Jim, I think that things generally are
alright, but I think it is terribly important What the

HMWr

buzz and we'll get together. I thought maybe I might
need a little assistance these days.

be of service to you.

only way you could promote them is out into the vacuum.

366
2-

President's here. attitude is going to be after Congress gets
Farley:

So do I.

HMJr:

And
to be.I haven't got the slightest idea what it is going

Farley:

Well, neither have I. I spent an evening with them
before he went away. He was over there for a few hours.
I was tired; he was tired, and I wasn't even able to
argue. I was 80 damn tired. We just chatted a bit and
I made many observations with the distinct understanding
that I was too tired to even argue in favor of them if
he disagreed with me, but I told him that -- I gave him
some views. I don't know whether he liked them or not.
He probably didn't, but they were honest -- the things
I told him. I thought in the first place he shouldn't
continue this attitude of a purge and trying to knock
over every fellow who didn't agree with him. I said
that these fellows are going to be back in Congress and
in the Senate and there is just no sense in getting in
a fight over appointments and trying to force appoint-

ments of men they won't confirm There is just no
sense in that. Of course, he still has his views on
Carter Glass, Tydings, and a lot of other fellows, and
as I told you I was too tired to argue with him, but,
of course, I don't see any sense in having a fight in
this section of the country. I think that the conditions

HMJr:

Farley:
HMJr:

of the country and the betterment of the country is more
important than whether you or I hold a job.
Much more! And we've got to get things going a good deal
better than they are now or they ever have been before.
I mean, we've got to get business going.

That's right. I don't think we can start kicking people
around. It is just not going to get us anywhere.
Well, I think the next two years, -- as far as I am
concerned, there is just one thing I am interested in
to make this country more prosperous than it has ever

been before.

Farley:

That's right.
And in order to do that -- I mean, we've got to stop
doing a lot of things we are doing now.
That's right.

HMJr:

Unless we do that --

Farley:
HMJr:

367

-3Farley:

You didn't go down below at all?

HMJr:

No, air!

Farley:

Good !

HMJr:

No, sir. I talked to him a couple times, but it was
always
like things
my financing or the pound sterling,
or something
like on
that.

Farley:

Between you and me, I didn't even bother to do that.
Of
80 course,
I didn't.I didn't have anything worth while to bother,

HMJr:

Well, I had to speak --

Farley:

He had a couple notes that I sent to him, and a couple
memorandums, and I heard from him, but I didn't bother
beyond that.

HMJr:

Well, I had a couple calls, all very friendly, but it

was on this financing, you see.

Farley:

Yes.

HMJr:

Or on the English situation, but outside of that, nothing.

Farley:

I kidded him about his Ambassador over there.

HMJr:

Which one?

Farley:

Joe.

HMJr:

OH! He doesn't mind being kidded about it either.

Farley:

No, he is quite annoyed with that.
Because Bullitt was sitting at his elbow and he said

HMJr:

to me, "How 18 the French franc?", and I said, "As long

as you can keep Bill out of France, it will be alright"
He loved that, and I said, "That goes for Joe Kennedy tod,
and he just loved it. He repeated it all to Bill and he
just howled and he thought that was great.

Farley:

Yes, he -- of course, he is terribly peeved with Joe,

HMJr:

Yes, well, I mean he's not --

Farley:

I think when Joe comes back that that will probably be
the beginning of the end.

you know that?

368

-4HMJr:

Don't misunderstand me. I have no criticism of Bullitt,
but
Joe. I was just kidding, but he does seem to be peeved on

Farley:

Terribly.

HMJr:

He's got reason to be.

Farley:

Yes,
of course he has. Are you going in the motion picture business?
Say listen, you're good !

HMJr:

HMJr:

I'm alright today.
You're alright!

Farley:

Take it easy. Have you read Farley as an author?

HMJr:

Farley:

No, but I enjoyed your inscription.
Well, I meant every word of that.

HMJr:

Well, I finally got my picture taken and I'm sending

Farley:

O.K. Well, thanks a million, Henry, and I'll see you

HMJr:

Alright.

Farley:

Thank you.

Farley:

you one.

when I get down there.

Deary
UNITED STATES LINES COMPANY

369

ONE BROADWAY
NEW YORK

OFFICE OF THE
VICE PRESIDENT

December 5, 1938

My dear Mr. Secretary:

I find it a most difficult matter to
try to condense in a few paragraphs the many thoughts

that you and I discussed, and further thoughts which
I have had since my talk with you, but I am putting

these down on a separate sheet of paper, making them

just as brief as I can.

I cannot get it out of my mind that the
real ultimate goal can only be arrived at by a very

close working arrangement between industry, the railroads, and American shipping, and over and above that,
the paternal assistance of the Government in regard to

foreign credits. This is a matter which cannot be
dealt very well in a letter and really requires a great
deal of explanation.
I have an appointment this afternoon with
Mr. Charles Hook, President of The American Rolling
Mills Company, and also President of the American Manu-

facturers Association. After talking with him, and to
without disclosing just what I have in mind, I hope
have a much clearer picture. I have already quietly

sounded out some of the railroad people without conceal-

ing my hand, and I know what can be done with American
shipping.

I think you are proceeding on absolutely

the right lines, although, as I said to you, I am not

sure that you have the right man. However, that is
something that perhaps can be decided a little later.
There are a number of people that I would like to con-

sult but I cannot very well do it without violating

confidence, and as soon as you feel that this with is a
your matter that can be discussed in quiet confidence

three or four people I would like your permission.
Sincerely yours,

Bail Karris
Hon. Henry Morgenthau,Jr.,

Secretary of the Treasury,

Washington, D.C.

370

1. Trade Ship
This is a most excellent idea and undoubtedly
one of the Munson ships, recently taken over
by the Maritime Commission, would be ideal for

your purposes.

2. State Dinners
At least one or two should be given along the

lines which I outlined to you.
3. If serious penetration is to be made in South
America it is absolutely necessary that a wider
knowledge of Spanish and Portuguese be obtained.
Therefore, the question of making this part of
the curriculum in State universities should be
explored.

4. Close cooperation with motion picture industry
most essential for the purpose of showing the
high-lights of South America and this country,
and vice versa.

5. A systematic exploration and educational program followed to break down present general
American feeling of looking down on South
American republics.

6. Cooperation of all Federal purchases and possibly
establishment of a preferred list of bidders,

based on their willingness to give first preference to American ships on all exports.

7. The determination of cardinal trade routes.
8. Establishment of a speakers' bureau to furnish

competent orators to various dinners, trade meet-

ings, etc.
9. The question of foreign credits.
10. Joint committee of shipping, railroads and industry for the purpose of being able to quote
promptly through export freight rates.
11. Indirect Trade Routes

To discover some method of preventing Japanese

ships, for example, destroying rate structure
between New York and U.K. ports and possibly

establishing differential favoring national flags

between respective countries.

371

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

CONFIDENTIAL

DATE December 5, 1938

Secretary Mergenthau

TO

FROM

Mr. Haas

Subject: The Business Situation,

Week ending December 3, 1938.
Conclusions
(1)

Industrial production appears to be approaching the
end of its initial rebound from the 1938 depression lows.
A moderate setback may occur during the early part of 1939

while underlying factors develop strength for a further
advance in business activity.
(2)

National income in 1939 seems likely to prove disap-

pointing in comparison with the trend of industrial production, and may show no material change from the 1938 figure.
This is due to the considerable lag between industrial production and national income payments, and to the tendency

for lower commodity prices to offset the effect of business
improvement.

(3)

Both the New York Times index and Barron's index,

seasonally adjusted, declined fractionally during the week
ending November 26. The possibility of some further setback
is indicated by a drop of about 4 points in the New York
Times adjusted automobile index and 2 points in the steel
index during the week ending December 3.
(4)

Our index of consumer buying for October suggests that

production currently is slightly in excess of the actual
"offtake" of goods. A well-maintained level of national
income, and a rising trend in the estimated index of basic
demand, are stabilizing and strengthening factors in the
general business outlook.

372

Secretary Morgenthau - 2

The steel situation
Steel operations are believed in most quarters to have
passed their seasonal peak, though the decline from now until
the end of the year is expected to be less than seasonal. In
line with the belief that steel activity will decline during
the next few weeks, new orders reported by the U. S. Steel
Corporation have fallen off for the third week in succession,
reaching a figure equivalent to about 39 per cent of capacity
during the week ending November 24. Steel operations this
week were reduced further to 60.7 per cent of capacity, which
compares with a rate of 61.9 per cent last week.
Prices on all steel products have been reaffirmed at

present levels for the first quarter of 1939 by the U. S. Steel

Corporation, with other steel makers expected to follow suit.
Since the possibility of some increase in prices had been
rumored, the present announcement should have little or no
effect in stimulating buying. New steel purchases are continuing to taper off, according to trade reports, with many

important consumers following the usual seasonal procedure of
working down stocks for year-end inventory purposes.

The automobile industry continues to take steel in heavy
volume as production expands. Automobile output this week
increased to 98,695 units, a new high for the year, which compares with 84,930 in the preceding holiday week. The output
was less than generally expected, however, due to the curtailment of production by a strike at the Plymouth plant. Operations
at the Buick and Nash plants, and at several plants making auto
bodies and parts, have been curtailed this week by labor troubles.
Not much change in national income in 1939

A level of national income not substantially different
from this year's figure, which is unofficially expected by the

Department of Commerce to be around 64 to 65 billion dollars,
appears indicated for 1939 on the basis of a recent study we
have made. While it 18 possible that 1939 may prove an exception to previous rules, due to such factors as increased wages
under recent labor policies, the study raises the question
whether current estimates of national income which assume a
substantial increase next year may not be too optimistic.

Despite the fact that industrial production during 1939
is expected to be sharply higher than in 1938, two factors will
operate against an increase in national income next year:
(i) A lower level of commodity prices; and (2) the usual lag

373

Secretary Morgenthau - 3

in the effect of business activity and prices on national
income. National income was held up in 1938 by the continuing effect of the high business levels of 1937. It
will
heldindown
low similarly
businessbe
levels
1938.in 1939 by the influence of the
The analysis we have made of the factors causing year-

to-year changes in national income shows it to be strongly
affected by both business activity and commodity prices, but
with a considerable lag. Over the period from 1922 to date,
the level of national income has been closely related to the
levels of industrial production and commodity prices six
months previous, the lag being due to various delays in the
adjustment of wages, employment, farm incomes, dividends,

etc., to changes in business trends. A third factor of less

importance during this 16-year period has been the extent to
which industrial production was concentrated in durable goods.

When industrial activity is featured by a high proportion of
durable goods production, its influence is less strongly re-

flected in national income than when production is more evenly
balanced.

On the basis of this analysis, the national income may
be estimated with a reasonable degree of accuracy from three
factors: (1) The FRB index for the year ending six months
previous; (2) the BLS index of wholesale prices with a similar
lag; (3) the ratio of durable goods production to the production of non-durable goods.
In the upper section of Chart 1 we show the national
income by years since 1929 in comparison with estimates of
national income that we have made from the three factors cited,
based on average relationships existing during the period
since 1922. On the same chart is shown the trend of the FRB
index during the same calendar years, to illustrate the point
that national income does not exactly follow the concurrent

variations in industrial activity. On 1933, for example, the
FRB index showed a sharp rise, while national income showed
a substantial decline.

In the lower section of Chart 1 we compare the national
income figures with the two factors which we have found to be
most influential in causing changes in national income:
industrial production and commodity prices during the year

ending six months previous. In this chart the reason for the
decline in 1933 is clearly apparent since both prices and
production, after allowing for lag, were lower than in the

previous Similarly, in our estimate of national income

for 1939 year. it will be noted that the decline in commodity national prices

offsets the effect of improved business, leaving the
income estimate about the same as in 1938.

374

Secretary Morgenthau - 4
Basic demand improves further

A further rise in basic demand is indicated by our estimates for October, which show a rise in the combined index
paralleling the rise in industrial production (See Chart
This was largely due to an estimated increase in basic demand 2).
for steel, textiles and lumber. We have extended the estimates
of basic demand tentatively through November for steel and
automobiles, as shown on the individual charts for these two
groups in the lower section of Chart 2. A sharp upturn in
November
for steel. is indicated for automobiles and a slight downturn
Confirming our belief that a second advance in the production of non-durable consumers' goods may become a supporting business factor during the next few months, the basic
demand for textiles and leather products continued to rise
during
October, contrary to the trends of production in those
industries.
Consumer buying increasing

Our combined index of consumer buying (in physical volume,

seasonally adjusted) increased 2 points to 96 in October
(preliminary), continuing the rise which began in August. (See
Chart 3.) It has not increased as rapidly as production, however, and industrial production in November is apparently at
higher level than the level represented by the movement of
a

goods into consumption during October.

In past years, as indicated on the chart, industrial pro-

duction has usually turned down shortly after exceeding the
level of consumer buying, and has renewed its rise only after
production had been brought into adjustment with the actual
"offtake" of goods. This provides some ground for our belief
that industrial production is approaching the end of its
initial rebound from the 1938 depression lows.
While a moderate setback in production may follow early
in 1939, the underlying situation continues to favor a further

recovery, probably after the first quarter of 1939. National
income payments (shown in the lower section of Chart 3) remain
at a relatively high level in relation to the present rate of

consumer buying.. The estimated trend of basic demand, as previously mentioned, likewise remains higher than production.

These would indicate that any setback in industrial production
is likely to be moderate and of a temporary nature, assuming
that nothing occurs to turn basic demand and national income
trends downward. This unforeseeable development might conceiv- unably arise if commodity prices, under the influence of the
favorable situation abroad, should continue to decline.

375

Secretary Morgenthau - 5
New orders decline

Our weekly index of new orders (See Chart 4) declined
sharply during the fourth week of November, largely because

of downturns in steel orders and textile orders. Holiday
influences, and a tendency in some industries to postpone
orders at this period of the year in order to keep year-end
inventories at a low level, were probably responsible in
large part for the decline in new orders. The somewhat less
optimistic business sentiment recently, which 18 influenced
by (and reflected in) the declining trend of stock prices,
may also have been a factor.

The Business Survey Committee of the influential National

Association of Purchasing Agent s continues to recommend a

conservative buying policy on the basis of its analysis of

the business outlook. It reports that "there is insufficient

demand in many circles and too much lethargy in others, to
bring about any marked quickening in the industrial price
structure". Inventories at the coming year-end are expected

to be at the lowest point in several years, and no efforts

are being made to increase supplies on hand, according to

this report, owing to the stable price outlook.
Weekly business indexes lower

Some tendency for business to turn downward from present

levels is suggested by a fractional decline in the New York
Times index and in Barron's index for the week ended November
26, and the prospect of a further decline the following week.
The New York Times index of 92.7 for that week represented a

loss of .4 point arising from substantial declines in the

seasonally adjusted figures for lumber production and miscellaneous carloadings, which were not entirely offset by improved

figures for steel production, automobile production, and "all
other" carloadings. It 18 worthy of note that cotton mill
activity held its gain of the previous week, which had carried
the adjusted index to the highest figure since August.

For the week ending December 3, a decline of about 4 points
in the adjusted index of automobile production and 2 points to the in

the estimated steel production figure tentatively point
possibility of a further downturn in the New York Times
combined index.

75

NATIONAL INCOME, PRODUCTION AND PRICES
PERCENT

(IND. PROD.)

DOLLARS

BILLIONS

(NAT'L. INCOME)

120

80

110
75

INDUSTRIAL PRODUCTION. F.R.B.

EST

CALENDAR YEARS

1923-'25 100

100

70

90

...
65

EST

80

ESTIMATED NATIONAL INCOME
60

70

55

60

50

ACTUAL NATIONAL INCOME
50

45

40
40

1929

1933

1931

1935

1939

1937

PERCENT

PERCENT
DOLLARS

(IND.

PROD.)

(PRICES)

BILLIONS

(NAT'L. INCOME)
120

95

110

90

100

85

WHOLESALE PRICES. B.L.S.

80

FISCAL YEARS

1926=100
75

INDUSTRIAL PRODUCTION. F.R.B.
FISCAL YEARS

70

...

1923-25=100
⑉

65

90

80

80

75

70

70

60

65

50

60

EST

60

55

ACTUAL NATIONAL INCOME
50

45

55

40

40

1929

1931

1933

1935

1937

1939

NOTE: 1938 FIGURES ARE PARTLY ESTIMATED

of - - -

of the Secretary of the Treasury

C 243

Chart 1
CONFIDENTIAL

ESTIMATED BASIC DEMAND COMPARED WITH PRODUCTION. BY INDUSTRIES
1923-15 100. Adjusted

-

1936

1937

1938

CENT

CENT

Combined Index

PER
DENT

120

120

110

110

100

100

90

My "BASIC DEMAND

90

PRODUCTION

80

80

70

70

60

1936

1936

PER
CONT

1937

(93)

60

Selected
Industrial Groups
1938

Iron and Steel

1936

PER
PER

CENT

REIGHT 19.8g

CENT

1937

1938

-

Text !

PER

My

CENT

WEIGHT 17.8g
140

140

120

120
120

100

120

100

DEMAND

100

100
80

80

PRODUCTIONAL

80

BASIC DEWARD

60

80

1936

PRODUCT

1937

60

1938

Lamber

60

00

*EIGHT

60

60

60

40

1936

1937

200

40

1938

BASIC
200

PRODUCTION

40

Crude Petroleum

1936

1937

160

40

1938
180

Automobiles

180
180

160
160

PRODUCTION
160
160

Dood
140

140

140

WHASIC DEMAND"

Basic DEMAND
140

120
120

120

1936

120

1938

220

220

100

Petroleum Refining

100

200
200
so

100

January

PRODUCTION
180
60

60

VOSSIC

WRODUCTION

160

1936

160

1937

1938

40

1936

100
100

1937

40

1938

140

Consent

140

Leather

January

-r
1936

1937

1938

to

60

120

100

he -

1/0

100

PRODUCTION

40

ARE NETWARY is MUST Cases

a

1936

1937

8

1938

Tacture .. CUMMINED INDER

the Secretary of the Treasury

C-211

378

CONSUMER BUYING COMPARED WITH INDUSTRIAL PRODUCTION

AND WITH NATIONAL INCOME
SEASONALLY ADJUSTED

PER

PER

CENT

CENT

120

120

110
110

CONSUMER BUYING

1923 '25 100
Est.

100
100

90
90

80
80

INDUSTRIAL PRODUCTION. F.R.B.

1923 '25 100

70
70

60

60

50

1933

1934

1935

1937

1936

1938

50

1939

PER

PER

CENT

CENT

(NAT'L. INCOME)

(CONS. BUYING)

120

100

110

90

CONSUMER BUYING

1923-125-100

100

80

NATIONAL INCOME PAID OUT

1929 100

90

70

80

60

70
50

60

musu
1933

I--

Office of the Secretary of the Treasury

1934

1935

1936

1937

1938

40

1939

C - 2 236

Chart 3
CONFIDENTIAL

INDICES OF NEW ORDERS
Combined Index of New Orders and Selected Components
1938

THE THE
JULY

MAY

MAR.

JAN.

PERCENTAGE T

SEPT.

POINTS

NOV.

III

JAN.

939
MAY

MAR.

TT

PERCENTAGE

POINTS

100
100

90
90

TOTAL (COMBINED INDEX)
1936 =100
80

80

70
70

60

60

50

50

TOTAL EXCLUDING STEEL AND TEXTILES

40

40

30
30

STEEL ORDERS
20
20

10

10

TEXTILE ORDERS

0

0

JAN.

- of - - -

Office of the Secretary of the Treasury

MAR.

JULY

MAY

1938

SEPT.

NOV.

JAN.

MAR.

MAY

1939

I as A

380
December 5, 1938.

MEMORANDUM

At twelve noon today I talked, at the request of the Secretary of
the Treasury, with M. Cariguel of the Bank of France by long distance
conversation with Paris. Cariguel told me that since I had seen him
last, which was November 25, he had doubled the amount of gold and
foreign exchange in the French Stabilization Fund. The amount which

Cariguel had at the time I last saw him was slightly over five billion
francs, calculated on the basis of the latest revaluation of the gold
stocks of the bank of France. The French Stabilization Fund had,
therefore, acquired another five billion france since November 25,
or more precisely, since the market turned with the favorable outcome
of the suppression of the general strike attempted on November 30.

In addition, Cariguel told me that he had acquired over four million
pound sterling so far today, December 5. The rate was 177.62. I asked
Cariguel as to the nature of the transactions which yielded him so much
foreign exchange. He said that at the beginning of the movement there
had been the usual covering of short positions and speculative operations.
There had now set in, however, a bona fide repatriation by banking clients.

Both sterling and dollars were offered, but the latter in small quantities.
The strike situation had been awkward but was not endangering progress.

Cariguel said the public was paying no attention to the Italian bluff
in regard to Tunisia, etc. He said that important demands for francs

had come from London, Zurich and Amsterdam. When I asked Cariguel about

sales of dollars to the fund, he said these had not been important and
that he had been converting such dollars into gold on the London market.
He took particular pains to explain this feeling, I suspected, that we
might be a little unhappy because he had not been working directly with
us on his dollar account. He said that Bolton of the Bank of England
was very happy to have him operate this way since it relieved the
pressure on sterling somewhat. If this policy had not been followed,
Cariguel said Bolton had expressed the opinion that the sterling dollar
rate would have declined to 4.60. I assured Cariguel that we were delighted to know of his success and that his method of operating over
London in dollars was entirely satisfactory to us.

381

18(e)

FEDERAL RESERVE BANK
OF NEW YORK

DATE December 5, 1938.

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

SUBJECT TELEPHONE CONVERSATION WITH

L. W. Knoke

BANK OF ENGLAND.

Mr. Bolton called at 11:40 today. The atmosphere in Paris
was still very good and there was a very much greater feeling of con-

fidence, the public apparently taking little or no notice of the strike
situation. The Italian demands were treated with complete contempt.
Quite obviously the French were acquiring much more faith in themselves

and more confidence in the general situation. As a result of this
change, money was going to Paris in fairly big quantities. Cariguel
had acquired £5,000,000 today. What we were witnessing today was real

repatriation, no longer just a movement of professional money. That
was proven by the fact that the discount on forward francs was gradually
narrowing down and the premium on foreign gold coin dropping. For once
France seemed to be able to take a certain amount of trouble in her

stride without worrying too much. People were beginning to feel that

France had definitely turned the corner.
The sterling squeeze in the London market was not showing
so much in the forward rates because what they were getting now was

liquidation. So far he had taken in $20,000,000 but of course lost
it to Cariguel to whom he had to give gold against the £5,000,000 purchased by the letter. The price of forward gold had dropped from 8d

for three months to 1 8/4d for three months. They felt that they would
be able to keep this up through the rest of the months at the beginning
of the new year the position, however, would probably have to be

MISC 3.1 60M-6-38

382

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
TO

CONFIDENTIAL FILES

FROM L. W. Knoke

DATE December 5, 1938.
SUBJECT: TELEPHONE CONVERSATION WITH

BANK OF ENGLAND.

reconsidered. Time was probably in their favor and the longer they
could keep going the better. The Italian situation had caused some

uneasiness in political circles in London but Paris seemed to think
it was largely an isolated action due to the French willingness to
give Jewish emigrants from Italy French citizenship in Tunis, thus
throwing out of balance the claim that Tunis is primarily colonised

by Italians. It was probably safe to say that what the Italians
really wanted was to retain their nuisance value.

LWK:KW

383

GRAY

EDA

LONDON

Dated DECEMBER 5, 1938

RECEIVED 3:15 p.m.

Secretary of State
Washington
1395, DECEMBER 5, 6 p.m.
FOR TREASURY.

The dollar has been offered all day opening 4.68 1/(#)
and moving gradually to its present rate of around:4.69 1/2
with the British authorities Easing the movement and buying
a fair amount of dollars. An Exchange market source re-

ports signs of fairly heavy liquidation of dollars from
Switzerland. The rate was 4.69 1/8 at the forming when
only 49 bars WERE sold at 148 shillings 3 1/2 PENCE giving
about one penny premium.

The franc was bid fairly heavily all day with the Bank
of France buying sterling starting at 177.76 and moving

gradually to .60. A feature of the day has been the
weakness of the belga due to rumors of Belgium joining

the sterling area and probably also influenced by the

limitation of arbitrage operations resulting from the
French shipping strike.
The stock market closed weak with British Government

securities generally down, war loan 3 1/2% being3/8
down

384

EDA - 2 - #1395, DECEMBER 5, 6 p.m. from London

3/8 to 98 11/16 and British industrials generally lower.
KENNEDY
CSB

(*) Omission.

385

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: December 5, 1938, 5 p.m.

NO.: 2051
FOR TREASURY.

Today on the exchange market in Paris there was

again a very substantial demand for francs. It is believed
that during the day the fund acquired about fivemillion
pounds at rates varying between 177.72 and 177.62. One

month sterling rate is between five and ten centimes; for
three months it is about sixty centimes. Our market con-

tact tells us that today substantial amounts of dollars
were bought by the British control. Moderate pressure again
on the belga; some gold was lost to both London and Paris.
Some irregularity on the security market in rentes

and other French securities.
The Chambers are to reassemble on the eighth of

December, but as yet the parliamentary groups have not

reached an agreement regarding the order of discussion for
important questions on the agenda. Certain of the groups
it appears demand precedence for the electoral reform law;
immediate discussion of the budget is demanded by others.
The Chambers could express their views on the decree laws

if the budget were discussed. In financial circles the
impression prevails that if the Government will agree to

modify certain of them, particularly the special tax on
earnings of two percent, there would be less opposition

to

386

-2to these laws. There are rumors that the Government is
prepared to consider such modification.
There has been such improvement in conditions on the
money market that the Government has been able to reduce

the interest rate on ordinary Treasury bonds once more.

Beginning with the fifth of December, instead of being
2.25 percent the interest rate of 75 to 105 day ordinary
Treasury bonds will be 2 percent. The new rate is one-

half point below the official rate of discount.
Yesterday's NEW YORK HERALD carried a telegram under

a Washington date line to the effect that Secretary Morgenthau had started an extensive examination of the financial

situation of Europe with the first of a series of
conferences with Mr. Coohran and Mr. Butterworth; the tele-

gram said that officials of the Treasury had emphasized
that the meetings do not indicate that any changes in the
monetary pact are being contemplated. The New York office
of AGENCE ECONOMIQUE telegraphed a similar report to Paris.

So far there has not been any press comment here.
END SECTIONS ONE, TWO, THREE.
WILSON

EA: LWW

387

PARAPHRASE OF SECTION FOUR OF TELEGRAM NO. 2051

of December 5, 1938, from Paris

Today's FINANCIAL TIMES gives some notice to the

"elastic" policy which the French fund adopted in recent
movements. The TIMES suggests that the French authori-

ties apparently have yielded to the argument of those who

have insisted that elasticity is better calculated than
stability to stimulate and sustain the inward movement
of capital and promote a general money cheapening. It

is not considered likely, however, that there will be very
considerable appreciation of the franc versus sterling.
The TIMES points out certain objections to a policy of
paying steadily less for sterling. One objection mentioned
was that the fund does not buy dollars and that it takes
gold from the British fund whenever it sells france. It
claims that the practice also has a tendency to encourage
speculation.
END MESSAGE.
WILSON.

13413032

EA:LWW

CABLE

From: Bankers Trust Company, N.Y.
London Office

Date: December 5. 1938.

398.

LIQUIDATION OF BULL POSITION IN DOLLARS CONTINUING.
PRINCIPAL SELLERS FRANCE AND SWITZERLAND. CONTROL BUYING

AT RISING PRICES. FORWARDS STEADY. SPOT FRANCS WANTED
FORWARDS STEADY.

CONFIDENTIAL

388

ABLE
389

From: Bankers Trust Co., N. Y.
London Office

Date: December 5, 1938

#407

DE CASTELLANE REPORTS CONTROL RECEIVED TODAY POUNDS

THREE MILLION BOURSE ACTIVE WITH SMALL CHANGES SOME
PURCHASES BONDS AND SHARES EMANATING ABROAD LIQUIDATION

MOSTLY FROM COMMERCIAL FIRMS INDIVIDUALS STILL HESITATING.
CALL MONEY VERY EASY RATE TREASURY BILLS AGAIN REDUCED.

CONFIDENTIAL

390

TREASURY DEPARTMENT

them

OFFICE OF THE DIRECTOR

PROCUREMENT DIVISION
WASHINGTON

December 5, 1938

MEMO. TO MR. MC REYNOLDS:

Subject: Public hearing of Temporary National
Economic Committee

The third public hearing of the National Economic Committee was
held in the Senate Caucus Room at 10:30 A.M. Saturday. Mr. Leon
Henderson, Executive Secretary, addressed the meeting on an analysis

of subjects pertaining to national economy as part of the ground work
of subjects for the committee's consideration.
The fourth public hearing was held on Monday, December 5 at
10:30 A.M. continuing session until about 4:45 P.M.

The subject of this meeting was the use of patents in the automobile manufacturing industry, and following a general statement by
Mr. Thurman Arnold, the following sitnesses were called in turn to the
stand:

Mr. Edsel B. Ford, President Ford Motor Company
Mr. Joseph Farley, Patent Counsel,Ford Motor Company

Mr. Alfred Reeves, Vice President - General Manager
of the Automobile Manufacturers Association
Mr. Alvan Macauley, President Packard Motor Car Company

The Committee was again called to meet at 10:30 A.M. for the fifth
hearing tomorrow, Tuesday, December 6.

Director of Procurement

391
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE December 5, 1938

To Secretary Morgenthan
FROM M. A. Harris

W. H. Hadley

short review of the U. S. Government

security market during the past week
The dominating influence in the market continued to be adjustments

of portfolios by outside investors as well as government security dealers
(see figures below for changes in dealers' holdings) in anticipation of
the Treasury quarterly financing program. As a result of preliminary
announcements on Wednesday and Friday giving the amount of new cash and

the types of securities to be offered respectively, the market was able
to adjust itself rather smoothly. For most of the week trading was rather
widespread although on particular days banks and some insurance companies

appeared to be the principal participants.
Wednesday's announcement of $700 million new cash had no material

effect on the market which showed strength at the time. On Friday the
market turned strong and fairly active in response to announcement that
there would be offered a 2-3/4% long term bond and a 5-year note for cash

($400 million and $300 million respectively) and in addition a 2% shorter
term bond to be offered only in exchange for maturing March, 1939 Treasury

notes. The long bond and new Treasury note were also to be included in
the exchange offering. The market continued exceptionally strong and

moderately active up to the close on Saturday.
Reversing the downward trend which started the last week in October,

prices of all Treasury issues, except for the longest issue (the 2-3/40 of

-3-

392

1958/63, which declined 1/32nd) rose 1/32nd to 15/32nds for the week

as a whole. The greatest gains were in the intermediate bond issues
with callable dates from 1946 through 1951 which showed an average rise

of 10/32nds. This gain in intermediate bond prices may be attributed in

the main to the fact that the Treasury offering did not include a 2-1/26
intermediate bond, which some segments of the market had been expecting.

Treasury notes showed gains up to 6/32nds for the longest issue. The
March, 1939 "rights" also gained 6/32nds, closing the week 101.22/32nda

bid, 101.24/32nda offered. Guaranteed issues were up 2 to 9/32nds.

As a result of these changes, the average price of all Treasury bonds
rose 9/32nds to 107.12/32nds, only 1/4 point below the recent October high

point. The five longest bonds showed a gain of 10/32nds, despite the decline of 1/32nd by the 2-3/48 of 1958/63, and closed the week only 14/32nds
below the October high.

Dealers' Portfolios
Dealers increased their portfolios $30.3 million during the week in

preparation for the quarterly financing. In contrast to the previous week,
when holdings of "rights" were reduced about $4 million, net position in
1-year notes was increased almost $20 million. This change was counterbalanced in part by a $17.5 million reduction in Treasury bond holdings,

thus giving a net short position in bonds of $12.5 million, apparently in
anticipation of exchanging the "rights" for new bonds. Holdings of 1-5 year
Treasury notes, on the other hand, were increased almost $22 million from

a minimum point of $1.1 million at the close of last week. This latter
change would seen to indicate that dealers do not plan on exchanging many

of their #rights" for the new notes and are building up their long note

-3-

393

position with outstanding issues.

(in millions of dollars)
Holdings
Nov. 26

Treasury bonds

Treasury notes (1 yr.)
Treasury notes (1-5 yrs.)
Treasury bills

H. O. L. C. bonds
F. F. M. C. bonds

5.0
52.7
1.1

12.8

-1.4
3.4
73.6

Holdings
Dec. 3
-12.5
72.4

Change

- 17.5
. 19.7

22.9
16.2
1.4
3.5

+ 21.8

103.9

+ 30.3

+ 3.4
+ 2.8
1 0.1

New Security Issues

Corporate security financing this week consisted of several small
issues totaling $28,600,000, all of which were well received. Only
$3,600,000 was for now cash. Municipal bond awards amounted to $54,000,000

and municipal temporary borrowing to $30,900,000.
Corporate Bond Market

High grade corporate bonds reversed their downward trend of the
previous two weeks with gains which brought Moody's AAA average back to

the high point of the year reached November 12. However, second grade

bonds continued to decline with Moody's BAA average falling 1/4 point to
close the week 1 point below November 12. There was no indication of a

definite trend in the list as a whole. There was a slight appearance of
strength in the rail groups toward the close of the week; utilities and
industrials showed irregular tendencies, while listed foreign issues
showed an excess of gains over losses.
Federal Reserve System Account

The only transaction in the System Open Market Account during the
past week was the replacement of $53,293,000 maturing Treasury bills by

the purchase in the market of a like par amount of the new Treasury bills
due March 1, 1939.

394

Treasury Investment Accounts

There were no purchases or sales made in the New York market last

week. However, an investment of $300,000 in 26 special 5-year Treasury
notes was made for the account of the U. S. Government Life Insurance

Fund. This account now holds $4,100,000 of these special 2% notes.