The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
189
-
laidale
NAVY DEPARTMENT
OFFICE OF THE CHIEF OF NAVAL OPERATIONS
WASHINGTON
9 December 1938
My dear Mr. Secretary:
Referring to my letter of yesterday
in regard to an inspection of the road from
Chungking to Burma, it has been ascertained that
Captain McHugh of the Marine Corps has already
made complete arrangements for the trip to ac-
company Ambassador Johnson on his way home, and
I have directed Captain McHugh to make the inspection and to obtain and report by despatch
the desired information. He will depart from
Chungking on Monday, December 12th.
Most respectfully,
Honorable Henry Morgenthau,
Secretary of the Treasury,
Washington, D.C.
190
December 15. 1930.
My dear Admiral Leahy:
Thank you for your letter of December 9th.
I as gind to know that errangements were se
promptly completed in the atter of Ambassador
Johnson's return trip, and I understand that he
started it on Monday, December 12th.
Sincerely,
(Signed) H. Morgenthau, Jr.
Admiral William D. Leahy,
The Chief of Naval Operations,
livery Department,
Washington, D. C.
GEF/Abs
I
191
-
&
NAVY DEPARTMENT
OFFICE OF THE CHIEF OFNAVAL OPERATIONS
WASHINGTON
7 December 1938
My dear Mr. Secretary:
Referring to our telephone conversation
of yesterday evening, I find upon investigation this
morning that the Gunboat TUTUILA, now stationed at
Chungking, has on board one or more officers who
should be qualified to make an inspection of the motor
road between Chungking and the rail head in Burma.
I have this morning sent a priority
despatch to the Commanding Officer of the TUTUILA
which is quoted herewith following:
"Assign the following mission
to an officer of your command: Proceed
without delay by automobile and examine
the motor road between Chungking and the
railroad terminus in Burma. Inform me the
name of the officer designated and the
date he will depart on this assignment.
All expenses are authorized and when he
returns advise the Navy Department the
total expended. As to the road, advise
by despatch the amount unfinished, its
condition to handle truck transportation,
number of men now being employed to com-
plete it, the probable date of completion
and any other pertinent observations or
information as to its capacity and condition
now and when it is finished."
My adviser in the Department on Chinese
affairs informs me that it will probably require about
three weeks to make the round trip from Chungking to the
rail head and return.
Most respectfully,
Honorable Henry Morgenthau,
Williamsteahy
Secretary of the Treasury.
192
December s, 1930.
Dear Admiral Lenhy:
This will acknowledge your letter of
December 7th, which informs - as to the inspection of the motor read between Changicing
and the rail head in Three
I appreciate your sending a priority
despatch to the Commanding Officer of the
TUTUILA, and shall be very glad to hear from
you farther just as soon as you have word
from the proper officiale in China.
Sincerely,
(Signed) H. Morgenthau, Jr.
Admiral William D. Leahy,
The Chief of Eavel Operations,
Davy Department,
Washington, D. C.
GEF/dbs
Return to Room 285
193
The National
City
Bank
of New York
ESTABLISHED 1812
New York Dec.
9, 1938.
IN REPLYING PLEASE QUOTE INITIALS
CABLE ADDRESS CITIBANK
Dear Henry:
As the figures appear on the ticker this morning let me once more
congratulate you on the success of an issue. It has certainly worked out
beautifully, and you were correct in making the short bonds nine years. It
has been astonishing the way that the intermediate market has moved up. I
wish the whole market were not going quite so fast, but I don't know what
can be done about it.
I have not written you for some time about the new issues market
because there was really nothing important for us to say. There are, how-
ever, two rather interesting events this week. In the first place, $7,700,000
of common stock of the North American Co. was sold successfully in the mar-
ket. This is one of the few issues of common stock which has been disposed
of, and is important because that is the direction to look for increased
financing. The second item of interest is that one of the offerings of the
week has been pretty sour, the issue of $48,000,000 Central Illinois Public
Service Co. Apparently they tried to crowd the mourners too vigorously. It
is a little off prime and was priced too high, so the distribution has been
very slow and some of the bonds are stacked up in dealers' hands. This is
no reflection whatever on the general market, but rather on the judgment of
the issuers in this case.
In general, the volume of new issues is smaller than one might
have hoped. There appear to be two reasons; first, a large part of the
194
-2-
Honorable Henry Morgenthau, Jr.
12/9/38.
necessary refunding appears to have been completed, and second, possible
borrowers are reluctant to issue much more in the way of bonds. They do
not want to increase their debt, but if we had a good market for equities
or second grade bonds we might expect a considerably larger volume of
financing. I am hoping this will come along before many months. If it
does, it would be an important factor toward a real business recovery.
Sincerely yours,
whardough Buyers
Honorable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D.C.
NRB.H
Return
Room
195
December 13, 1938.
Dear Randolphs
It was very kind of you to write me as you
did on December 9th, and I appreciate your communits
on the new financing. as well as those on market
conditions in general. As always, your letter was
a most interesting one.
Sincerely,
(Signed) H. Morgenthau, Jr.
Dr. W. Randolph Burgess,
The National City Bank of New York,
New York, New York.
GEF/Abs
285
196
ade
FEDERAL RESERVE BANK
OF NEW YORK
December 9, 1938.
Dear Mr. Secretary:
The first large corporate security issue, offered to the general public
in over a month, appeared yesterday - $38,000,000 Central Illinois Public Service
Company first mortgage 3 3/4s of 1968 at 100 1/2, rated A, and $10,000,000 deben-
tures of 1939-48 to yield 1.50 to 4.00 per cent, rated Ba. The market thought the
issue was thinly priced and it is reported to be going somewhat slowly - it is
quoted today for "guaranteed investment" at discounts from the syndicate price of
less 1 1/2 bid, less 1 asked. A smaller offering today - 50,000 shares of Monsanto Chemical Company $4.50 preferred stock at $112.50 - is quoted at a premium of
2 1/2 points.
Rights were issued last weekend to stockholders of Commonwealth Edison
Company and Continental Oil Company to subscribe to issues of convertible debentures
The former is offering about $25,000,000 convertible 3 1/28 of 1958, for refunding,
and the latter, for new capital, is offering $21,071,600 convertible 2 3/4s of 1948.
A $4,000,000 offering of 5 per cent convertible "debenture shares" of an oil company
without definite maturity but retirable by a sinking fund, and a $1,000,000 issue of
convertible preferred stock of another oil company bring the week's total of corporate financing to $104,200,000. Of this, $74,900,000 is for refunding, and
$29,300,000 for new capital.
Including about $7,000,000 awards which are scheduled to be made today,
the week's municipal awards amount to about $36,300,000. The largest issue was
$15,250,000 City of Los Angeles Electric Plant Revenue Bonds awarded at an interest
cost to the City of 3.6207 per cent. Due in 1939-78, the bonds were reoffered to
yield 0.50 to 3.70 per cent, and were mostly sold the first day.
197
#2.
FEDERAL RESERVE BANK OF NEW YORK
Secretary of the Treasury,
12/9/38
The largest bona fide railroad financing thus far this year, and the only
railroad flotation not in the special form of equipment trust certificates (except
for the distribution of bonds of a railroad subsidiary of the United States Steel Corporation last March), is expected to reach the market early next week. It consists
of $30,000,000 of Chesapeake and Ohio Railway refunding and improvement 3 1/2% bonds
of 1963 which have already been purchased by dealers and are likely to be reoffered
a point or so above par. The proceeds will meet a maturity falling on May 1, 1939.
This company has, of course, for some time had one of the highest credit standings
among American railroads. Later in the week $55,000,000 of Public Service Company
of Colorado bonds, debentures, and preferred stock will become eligible for marketing,
and two or three smaller issues may be offered.
No noteworthy progress toward raising larger amounts of corporate new cap-
ital is discernible in the recent or prospective figures of corporate issues.
Yours faithfully,
Allan Sproul,
First Vice President.
Hon. Henry Morgenthau, Jr.,
Secretary of the Treasury,
Treasury Department,
Washington, D.C.
198
December 12, 1930.
Dear Mr. Sproul:
For the Secretary I am acknowledging
your letter of December 9th, commenting
on the corporate security issues for the
past week. Mr. Morgenthan is always interested in receiving the information your
letters contain.
Sincerely yours,
H. S. Klots,
Private Secretary.
Mr. Allan Sproul,
First Vice President,
Federal Reserve Bank of New York,
New York, New York.
GEF/dbs
199
TRANSLATION OF CABLE RECEIVED FROM CHUNGKING
Dated Chungking, Dec.9, 1938
Read. Washn.D.C. Dec.9, 1938
FROM: DR.H.H.KUNG
TO: K.P.Chen
Result of T.K.Tseng's trip to Burms negotiating Yunnan-Burma
transportation problems as follows:
1. Yunnan-Burma Highway - Burms Section completed 1st December
while Chinese section estimated to complete end of year (stop)
Through traffic all way expected very shortly (stop) YunnanBurns Railway also proceeding.
2. Steamship Company being contemplated as outlet ocean transportation
from Yunner Province (stop) Negotiations in this connecti on
with British Government through Quo Tai Chi being conducted and
promise of cooperation indicated by British side as well as
Burma Government.
3. Regarding munition transportation, arrangements made to provide
special facilities and precaution.
4. Rebete of duties on goods from Burma to Chine being worked out.
5. Railway freights promised to be reduced (stop) Other problems
relative to warehousing, policing, telegraph, gasoline storage
and banking facilities have all reached stisfactory arrangements.
Please inform Mr. Secretary if convenient.
KUNG
200
December 13, 1938
My dear Mr. President:
I am inclosing herewith a copy
of a cable received by Mr. Chen from
Dr. Kung, on the subject of transportation via the Yunnan-Burna Road.
Sincerely,
The President
The White House.
201
Confidential
PARAPHRASE
A telegram (No. 74) of December 9, 1938, from the
American Consul General at Canton reads substantially
as follows:
On December 8, according to information received
from a reliable source, Walchow (about 100 miles east of
Canton) was evecuated by Japanese troops who burned the
temporary bridge over the East River north of walchow,
destroyed the concrete bridge connecting the two sections
of the city, and withdrew weatward in the direction of
Canton. Report from Chinese sources are to the effect
ir
that Chinese/regulars and possibly other Chinese forces
were about twenty ailes from walchow and it was expected
that they would occupy Waichow on December 9. It la not
known why the Japanese evacuated Walchow. As Kongmoon
was reported recently occupied possibly this move is
preparatory to a Japanese drive up the West River. It
may be remarked in this connection that the Japanese
soldiers evacuated from Walchow are concentrating near
Canton. It is not thought that the Japanese evacuation
was due to any menace from Chinese forces in the Walehow
area. There were indications, according to the Consul
General's informant, that the Japanese were withdrawing
as far as Tsengahing which is about forty siles to the
east of Canton.
793.94/14485
M
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
202
DATE
DEC 9a 1938
Secretary Morgenthau
FROM Mr. Oliphant
For your information
I am attaching a copy of my letter to Under Secretary Welles
in regard to the purchase of Chinese wood oil and the following
papers which supported the letter:
(1) Memorandum regarding financing of purchase
of Chinese wood oil.
(2) Proposed contract between Foo Shing Commercial Company and Universal Trading Corporation.
I do not have a duplicate minute book of the Universal Trading
Corporation which was furnished to the State Department.
human Oereal
203
DEC 9- 1938
Dear Mr. Welles:
Annotating our telephone conversation yesterday after-
noon on the modified form of the set-up of tung oil transaction,
I am sending to you and marking for your personal attention, as
you requested, the following documents which, as originally drafted
or as modified, now conform to the arrangements which we agreed
were satisfactory:
(1) Memorandum regarding financing of purchase
of Chinese wood oil.
(2) Proposed contract between Foo Shing Commercial
Company and Universal Trading Corporation.
(3) Duplicate minute book of Universal Trading
Corporation containing:
(a) Conformed copy of Certificate of
Incorporation.
(b) Conformed copy of Certificate of
Increase of Capital Stock and number
of shares.
(c) Conformed copy of By-Laws.
(d) Conformed copy of organization
minutes and supporting papers.
If there is any further information that you desire,
I shall be glad to supply it.
Very truly yours,
(Signed) Herman Oliphant
General Counsel.
Honorable Summer Welles,
Under Secretary of State.
Enclosures (3)
Typed 12/9'38
204
PANANCING a PURCHASE OF CHILDREN FOOD OIL
The following is on outline of the proposed arrengement to
finance the purchase of Chinese wood oils
(1) The Universal Trading Corporation, a New York corporation,
will contract to purchase from a private Chinese corporation, fixed
yearly amounts of wood oil (aggregating 220,000 tone), but the amount
to be purchased in any one year is to be limited to the ratio which
the amount of wood oil purchased for American consumption in the year
1937 bears to the total amount of oil produced in China during that
year. The amount to be delivered in each year has been fixed at a
figure which is considerably less then the annual amount which has
heretefore been purchased for American consumption. This has been
done with a view toward eliminating any possible question of monopoly
and resulting questions of treaty violation.
(2) On the basis of the arrangement outlined above, the ExportImport Bank will loan to the Universal Trading Corporation an amount
equal to one-half of the total purchase price of the wood oil. (If
the price were fixed at 124 per pound this would mean a loan of
$26,400,000.) The loan shall be for a term of not to exceed five
years " three percent interest. The Universal Trading Corporation
will make an advance payment to the Chinese corporation which will
equal the amount leaned and which will be deposited to the credit of
the Chinese corporation in ea earmarked account in the United States.
The price will be based upon the present market and will be e.i.f.
205
Now York. Provision will be made for adjustments to meet changes
in transportation and other similar charges.
(3) Security for loan.
(a) All inventories and other assets of the Universal
Trading Corporation.
(b) One-half of the proceeds of each sale of oil will
be paid to the Export-Import Bank and the other half will
be credited to the Chinese corporation in the earmarked
account referred to above.
(c) The guarantee of the Bank of China.
(4) The Loan Agreement will provide that
(a) There will be no disruption of the United States
import or jobbing trade.
(b) All United States importers and jobbers will be
treated on a parity.
(e) The one-half of the proceeds of each sale of oil
which is credited to the Chinese corporation by the Universal Trading Corporation will be used for the purchase
of United States goods (arms, assumition and implements of
was excluded).
(d) The regale price in the United States by the Universal Trading Corporation will not exceed the contract
price by more than enough to cover reasonable operating
expenses.
12/8/38
206
CONTRACT between
FOO SHING COMMERCIAL COMPANY,
a corporation organised and existing under the laws of the Republic
of China, called the Seller, and UNIVERSAL TRADING CORPORATION, a
corporation organised and existing under the laws of the State of
New York, called the Buyers
In consideration of the autual agreements and promises here-
inafter set forth, it is autually commented and agreed as follows
1. AGREEMENT OF PURCHASE AND SALE. The Seller hereby agrees
to sell and deliver and the Buyer hereby agrees to buy, receive and pay
for wood oil, in accordance with the terms and conditions of this
Contract.
2. DESCRIPTION AND QUALITY. Ordinary F.A.Q. China wood oil
guaranteed to pass Werstall's or Bacon's test and to conform to the
following specifications:
Appearance
Slightly turbid
Minimum
Specific gravity 15.5°C
Maximum
0.940
Moisture and volatile matter
-
0.2
Impurities
-
0.2
-
Acid number
Refractive indax (25°C)
1.5165
8
1.5200
Iodine number (wij)
163
170
Saponification number
190
195
Worstall's heat test
(Time between
string and jell
78 minutes
(jell)
not more than
35 seconds)
Cake
brown, hard and crumbling well
207
20
3. QUANTITY. 220,000 tons (of 2,000 pounds each) are to be
sold as follows:
First year
25,000 tons
Second year
35,000 tons
Third year
45,000 tons
Fourth year
55,000 tons
Fifth year
60,000 tona
Total
220,000 tons
Provided however, that the amount of oil required to be delivered under this contract in any one year shall not exceed three-
fifths of the total oil produced in China during that year.
4. DELIVERY.
A. Place. Delivery shall be made f.o.b. steamer at Hongkong,
Haiphong or any other seaport, within or without the Republic of China,
most convenient to the Seller at the time of delivery, such seaport to be
selected by the Seller in its absolute discretion, and upon presentation
of complete ocean shipping documents, including insurance, to the Buyer
or his authorised agent at the seaport of delivery, title shall pass to
the Buyer and thereafter all risks shall be assumed by and be for account
of the Buyer. All shipments of wood oil shall be insured by the Seller
in the name and for the benefit of the Buyer and at the Seller's expense
to cover at least the e.i.f. price, as established by this Contract, plue
105.
B. Time. Delivery shall be, as nearly as practicable, continvous throughout each year and approximately one-fourth of the minimum
208
3.
contracted quantity for the year shall be delivered during each quarter
year.
C. War and Transportation Risks. Deliveries shall be subjest to war and transportation conditions existing at the time when
deliveries are due. The Buyer agrees with the Seller to do its utmost
to cooperate with, and assist, the Seller in solving transportation
difficulties with a view to effecting delivery as nearly in accordance
with the terms of this Contract as practicable under the existing aircunstances.
D. Force Majeure. All deliveries are subject to war, strike,
civil commotion, act of God, Government action and any other cause
or causes beyond the control of the Seller.
-
5. PURCHASE PRICE: Except as hereinafter provided the purchase price shall be
cents per pound c.i.f. New York.
If on any shipment the i.f. charges (cost of freight and insur-
-
ance from Hongkong, Haiphong or other seaport to New York) actually paid
shall exceed or be less than cents per pound, then the purchase
price per pound shall be increased or decreased by the amount by which
such 1.f. charges exceed or are less than - cents per pound.
If the inland transportation charges (all transportation
delivery, leading and other such costs or charges necessary to place
the wood oil f.o.b. vessel at Hongkong, Haiphong or other seaport)
-
actually paid for a continuous period of not less than three months
shall exceed or be less than
cents per pound by 25% or more, then
209
4.
the purchase price (in addition to any increase or decrease arising
out of the adjustment for i.f. charges) shall be increased or decreased
by the amount by which such inland transportation charges exceed or are
less than - cents per pound.
The above mentioned purchase price of
cents per pound
c.i.f. New York includes the primary cost of wood oil to the Seller
-
ex-i.f. charges and inland transportation charges. Such primary cost
is herein called the basic price, which is hereby fixed at
per pound. Such basic price of
cents
cents per pound shall be the
maximum basic price during the first two years of this Contract.
On the first day of the third year, and on the first day of
each succeeding year of this Contract, if the average world market price
for the previous contract year shall vary by 1$ or more per pound from
the New York e.i.f. contract price, then the purchase price (in addition
to any increase or decrease arising out of the adjustment for i.f. charges,
or inland transportation charges, or both) shall be increased or decreased
by the amount of such veristion for the ensuing twelve months' period,
or such other lesser definite period as may be fixed by autual agreement
between the Buyer and the Seller.
6. TERMS AND MODE OF PAYMENT.
A. Terms: Upon the execution of this Contract there shall be
,
paid $
-
the reseipt whereef is hereby acknowledged,
representing the payment of
cents per pound, which shall be credited
pro rata on account of the purchase price. The balance of the purchase
price payable with respect to each shipment shall be paid upon receipt
by the Buyer in New York of complete eeean shipping documents, including
210
5.
insurance.
B. Modes All payments under this Contract shall be in
United States dollars and shall be deposited in an account which shall
be maintained by the Buyer for the credit of the Seller at New York,
New York, and shall not be used or disposed of by the Seller except as
provided in Section 7 of this Contract.
SELLER
7. BUYER TO ACT AS PURCHASING AGENT FOR. The Buyer shall
act as general purchasing agent for the Seller in the purchase of
United States goods (arms, ammunition and implements of war excluded).
The payment for such supplies and materials shall be made by the Buyer
out of the account established in favor of the Seller referred to in
Section 6 B above.
8. TERM OF CONTRACT. The term of this Contract shall be for
1938 to
,
a period of five (5) years from
.
1943, and shall continue thereafter until the Buyer and the Seller
shall have satisfied and discharged their obligations hereunder.
9. LAW APPLICABLE. The laws of the State of New York shall
govern and control this Contract in all respects.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands and seals this
. 1938.
day of
FOO SHING COMMERCIAL COMPANY
Attests
By
UNIVERSAL TRADING CORPORATION
Attests
By
211
15(e)
FEDERAL RESERVE BANK
OF NEW YORK
DATE December 9, 1988.
OFFICE CORRESPONDENCE
CONFIDENTIAL FILES
L. W. Knoke
SUBJECT:
TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.
I called Mr. Bolton at 11:30 a.m. They had run into a
dead market at the moment for two reasons, he saids (1) the outcome
of the debate in the French Chamber was as yet unknown, and (2) London
WAS definitely upset by the irritating attitude of the Rome-Berlin
axle. I replied that I had strongly felt that way yesterday on the
Berlin-Rome behavior but that I thought today's news from Rome was
8 little more favorable in that it reported for the first time since
the difficulties arose over Tunisia that anti-French demonstrations
in Rome had been dispersed by the police and that a few people had
even been arrested. Bolton expressed the belief which he stated pre-
vailed in one or two informed circles in Paris, that Mussolini had
been forced into this Tunisia affair by criticism of and opposition
to his policy at home.
Meanwhile Cariguel was doing fairly well and had again
gained a little today. By arrangement with the British he was holding
the French franc down by means of sterling purchases only so that any
dollars which the Continent might wish to sell had to be sold in
London. This arrangement, Bolton thought, helped to keep sterling
fairly steady. There was a little capital moving from London to Paris
now but there was hardly any repatriation, he thought, of money from
New York to Europe. I replied that it was too early for our figures
to show anything one way or the other but that those for November 30,
for the second or third time in November, had shown a small outflow
212
FEDERAL RESERVE BANK
OF NEW YORK
DATE December 9, 1988.
OFFICE CORRESPONDENCE
SUBJECT: TELEPHONE CONVERSATION WITH
CONFIDENTIAL FILES
BANK OF ENGLAND.
L. W. Knoke
2
of capital which was, of course, a reversal, at least temporarily,
of the inward trend which had prevailed since July. Bolton ventured
the hope that this reversal might continue.
He reverted to my question two days ago as to what was going
on in the gold market in Bombay. There was a strong movement going on
in India, Bolton replied, for devaluing the rupee from the 18d to the
16d level and this movement which was partly political, found strong
support among the Indian Congress party, the mill owners and other
native trading interests. Needless to say exporters in general were
also strongly in favor of it and were now being supported by the
speculative element. As a result a strong bear attack on the rupee
had been started and purchases of sterling and gold for forward
delivery were made on a large scale. That then accounted for the
fact that the gold price in Bombay had been driven up to more than
1/2 per cent above shipping parity to New York. This movement might
well last for some time to come, but surely to the end of the year.
Needless to say the Indian Government and the India office in London
were determined to maintain the existing ratio.
I referred to his shipment of old gold coin now on the way
to us and explained that we intended to ask the Assay Office to
deliver to us after melting of the coin,/bars coin (about .899 to .917 fine)
for which there was no Assay Office charge and which the Assay Office
would at any time (barring developments which nobody could foresee)
213
FEDERAL RESERVE BANK
OF NEW YORK
DATE December 9, 1988.
OFFICE CORRESPONDENCE
SUBJECT: TELEPHONE CONVERSATION WITH
CONFIDENTIAL FILES
BANK OF ENGLAND.
L. W. Knoke
8
repurchase as freely as fine bars and at exactly the same gold price
as for the letter. If Bolton wanted fine bars, the charge would be
one cent per ounce extra. Bolton agreed that coin bers was all they
needed. I warned him that if there were many South American coins in
this shipment he might run into some expense for the reason that most
of these South American coins contained silver for an alloy, the
separation of which at the time of selting was expensive. Bolton
replied that as far as he knew there weren't any South Americans in
this shipment, the bulk of which consisted of old German and Austrian
coins.
LWK:KW
214
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
It
DATE: December 9, 1938, 4 p.m.
NO.: 2086
FOR THE TREASURY DEPARTMENT.
Today on the exchange market here the tone was confident, although there were somewhat erratic movements.
Sterling weakened slightly after openin at 177.50, and
moved up to 177.62 thereafter. Now the rate has dropped to
177.48 with francs being offered by the fund. Our market
contact tells us that the fund had a good day, on the whole.
Sterling forward rate is 10 centimes for one month. For
three months the rate is 75 centimes. Today the belga was
weaker.
Rentes made moderate gains on the security market.
There was a great demand for French variable revenue securi-
ties, and substantial advances were made in these securities.
It is expected that during the day the Finance Minister
will reply in the Chamber to the criticism made of his policy
during the debate yesterday. There was comparative calm
and orderliness in yesterday's debate. It is expected that
the debate on the general Government policy will end late
this evening by a vote of confidence in the Government.
The discussion in the Chamber yesterday offered no
special interest from a financial point of view. Socialist
and Communist representatives condemned the recovery program
of
215
-2of the Government, but this had been expected.
There is a report from Brussels in today's AGENCE
ECONOMIQUE to the effect that the group of Amsterdam banks
has extended to March 17, 1939, the banking credit of
35,000,000 florins which they granted last June to the
Belgian Government.
END MESSAGE.
WILSON.
EA:LWW
216
M
Gray
CA
LONDON
Dated DECEMBER 9, 1938
Rec'd 4:06 p.m.
Secretary of State
Washington
1418, DECEMBER 9, 6 p.m.
FOR TREASURY
The Exchange market has been quiet today with the dollar
opening bid at 4.661. Small sales of dollars by British fund
took the rate to 4.67 1/8 but at fixing the rate was quoted
4.66 3/8 when 176 bars were sold, 89 be ng married and the
remainder furnished by the British fund. Theprice was 1495
and was quoted as giving a 1d premium. This afternoon the
market has been quiet with apparently no official operations.
In late dealings the dollar was slightly offered closing
around 4.67.
The franc opened bid and the French authorities are
thought to have gained a substantial amount of sterling this
morning at 177.50 but since they moved their price to .48
they are thought to have nEither bought nor sold sterling and
the rate has remained near .50.
The stock Exchange has shown further weakness with war
loan 31% closing down 3/16 to 98 1/8. The Bank of England
return shows an increase in the note circulation of pounds
7,000,000
217
CA
-2--1418 from London
7,000,000 and an increase in the reserve of pounds 23.1
million as a result of theincrease in the fiduciary note
issue reported in No. 1400, DECEMBER 6, 6 p.m. bankers'
deposits were up by pounds 5.8 million. The clearing banks'
returns for November show as compared with October a decrease
in advances of pounds 7.4 million and in investments of
pounds 3.1 million, deposits being down by pounds 7.5 million
The average trensury bill rate for today's allotment was 19
shillings 2.1 pEncE as compared with 17 shillings 11.03 PENCE
last WEEK. Tenders for next WEEK are announced as pounds
5,000,000 less at pounds 30,000,000.
KENNEDY
NPL EMB
218
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE December 9, 1938.
Secretary Morgenthau
TO
FROM
Mr. Taylor
Bowley called this afternoon at my request and I gave him your
message saying that you would like to have from Sir John Simons his
opinion of the developments of the past week and his general feel of the
situation. I added that whereas I had not discussed the details with
you, I thoug t that you would be glad to have any specific information
on the amount of gold and foreign exchange which the Fund had gained
during the week, the amount of their short position in dollars and other
currencies which they had been able to cover, et cetera. He said that he
would try to get you this information by Monday, but that it might be a
little difficult as the week-end was probably in process of occurring.
lie then had a rather general discussion on the position of the pound
during which he produced a copy of a newspaper article by Clarence Ling
dated December 2nd or 3rd in which Linz mentioned that people here felt
dissatisfied with the manner in which the British authorities had handled
the pound, et cetera, et cetera. The article also mentioned the fact that
the so-called "Committee without a name" had given considerable considera-
tion to the gold holdings and the position of the pound. I told him that
I had not seen the article until he called it to my attention, but that I
could assure him that the committee had not devoted its attention to
either of the subjects which he mentioned. He then went on to say that
he felt that if we did have any feeling such as those expressed in the
219
-2-
Linz article, that he felt that we should discuss them frankly with his
Government. I then told him that your purpose in asking him to come to
the Treasury and to discuss freely with him the various things that you
had on your mind in connection with the pound obviously represented your
attitude and that he need have no fears along those lines. He then
emphasized the desirability of complete frankness on our part if we
should ever feel that matters were not being handled to our mutual
satisfaction, because otherwise the close cooperation and consultation
contemplated by the Tri-partite Agreement and subsequent cooperative
efforts could not be effective. I assured him that we felt exactly the
same way and WO dd not hesitate to tell the British anything we had on
our minds and that they should feel the same way.
He than asked me if there was any more news about China and I told
him that I didn't know of any new developments and that I had not been
in touch with the State Department to find out the meaning of the visit
of Ambassador Johnson. He then mentioned the fact that Victor Mallet was
calling on the State Department with a view to discussing joint action
and that he assumed that we know about that. It then developed that the
joint action contemplated was a credit to the Chinese banks in order to
help maintain the stability of the Chinese currency and that the possible
export credit which had been mentioned in the papers had to do with
financing equipment, et cetera for the Burma Road. I told him that we
ere still considering the tung oil question but that we hadn't completed
the work on it but were inclined to be optimistic.
wef.
220
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Rio de Janeiro, Brazil
DATE:
December 10, 1938, 11 a.m.
NO.:
288
I am told by the Exchange Director that during the
week of December 12 the Bank of Brazil will close exchange
for maturities and daily quotas for the period November 1
to November 7.
Inform Commerce.
SCOTTEN.
EA:LWW
221
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: December 10, 1938, noon
NO.: 2092
FOR THE TREASURY.
Financial circles have received with satisfaction and
relief Daladier's success in the Chamber last evening.
This morning there has been substantial demand for francs
in trading between banks. At opening the fund offered
francs at 177.48. The fund gradually reduced the peg to
177.43, which is the rate now; however, offers of sterling
are halting at this level.
The official report of the discussion in the Chamber
yesterday has not yet been circulated. However, according
to press reports, Reynaud notably repeated the information
which was provided by him in his statement of the financial and economic situation published at the time the
recent decree laws were issued. The report is that Reynaud
said between the 28th of October and the 1st of December
rentes appreciated in value by 13 billion francs, and
that for the month of November 1938 excess deposits in
savings banks were 347 millions greater than for the same
month last year. He made the announcement that "important
events would take place in the near future as concerns the
credit of France abroad". He indicated that the loan issued
in 1926 in the Netherlands by Poincare, for 7% at 94, will
be
222
-2converted into a 5% issue at 98, and stressed that this
operation "boded well for the near future" - the possibility
of this conversion was referred to in telegram No. 2079 of
December 8 from the Embassy. Reynaud contended that the
financial and economic policy which he was following was the
only one which would permit France to maintain its place
in Europe today.
END MESSAGE.
WILSON.
EA: LWW
CONGRAT. LTRS
223
THE SURGEON GENERAL OF THE NAVY
WASHINGTON
INVOICE
RESIONE
December
10, 1938
Dear Henry,
It was with great pleasure that I
received your telegram of December third and
I want to thank you for it.
If I can do as good a job for the
Secretary of the Navy as my friend Waesche
has done for you, I will be content.
With kindest regards to you and
Mrs. Morgenthau, I am
Sincerely yours,
Rose M.
Honorable Henry Morgenthau
of the
Secretary
Treasury
Washington, D. C.
copy to Mrs. M. at House 12/13/38
as per nmc's instructions - mas
224
December 10, 1938
FOR THE SECRETARY:
Mr. Crowley reports to Cy who reports to me as
follows on the Marshall Diggs' visit to the White House:
Mr. Diggs gave to the President a plan for consolidating the bank supervisory agencies. Mr. Digge told Mr.
Crowley that the plan was submitted at the President's request.
Mr. Crowley said he didn't ask what was in the plan because he
did not want to know.
Also, to use Cy's words, Diggs told the President
"what a fine bank the Bank of America is."
Finally, Mr. Diggs told Mr. Crowley that at Hyde
Park the President had told him that there might be some other place
in the Government for him. Yesterday the President told him, according to the report, that no other place had been found for him and
that he ought to stay where he is.
Gus Folger put the heat on the Giannini people
at an afternoon conference yesterday telling them that, regardless
of whather other officials knew about the Baric or not, he had followed
it for 10 years and knew what had been done to it as well as the
Gianninis themselves knew if they would only admit it. Gus tells me
they refused to budge and that Jesse Jones was with them. Cy thinks
Gue is relying on you to back him up. Leo Crowley tells me that the
Comptroller and Jones left him on a limb yesterday and he did not
attend today's meeting - or did not intend to.
ESD
OFFICE OF THE PRESIDENT
THE JOHNS HOPKINS UNIVERSITY
confidential
BALTIMORE MARYLAND
225
COPY
For Mr.Moryouthan's files
m
December 10, 1938
My dear Mr. President:
I ac sending by special messenger, and through the kindness
of Secretary Norgenthau, the African material which you requested
recently and which deals with the possibilities of white settlement in
that continent.
The material consists of:
1. h comprehensive memorandum of twenty-six pages which summarizes
practically the whole literature on the question.
2. A small map showing the distribution of whites in Africa at
the resent time.
3. A large map of Africa, similar to the one for Northern South
America sent you & few weeks ago, which shows the areas of cooler
uplands where white settlement is fessible and summarizes in typed
panels the number of white settiers which can be accomudated.
terms:
ALL of the above material can be summarized in the following
1. About a half million white settlers could be accommodated in
Central Africa, not counting the Union of South Africa or Ethiopia.
This is maximum white population.
2. Each family would require capital to the extent of 85,000 as an
absolute minimum.
3. The governments concerned would have to embark upon a permilel
spending on railroads to open up the available areas.
4. Concentrated settlement in any one colony on a large scale is
undesirable politically and economically. The white settlers already
in areas in question have great difficulties in putting their export
products upon the world market. Tobacco, tea, coffee, minerals, etc.
are the export goods. There is an International Tea Restriction
agreement, and no expansion of the tea area in a new place would be
ossible without a change in the agreement after protest from settiers
already established. There are similar difficulties with other
products.
OFFICE OF THE PRESIDENT
THE JOHNS HOPKINS UNIVERSITY
President Roosevelt: 2
COPY
BALTIMORE MARYLAND
December 10, 1938
226
The net conclusion from the above facts (which could be
multiplied into books full of words) is that the refugee problem
must be solved by settlement planning on a world scale with absorption
of settlers in limited numbers here, there, and elsewhere, and everywhere,
so 6.8 to produce no shock to the economic structure of the receiving
country. Put in another way, the absorption must be on such a limited
scale in any one area that the people already established in the area will
welcome the new settlers. That welcome will be greater in proportion as
the new settiers are economically well founded, backed up by capital,
and able to supply new skills that are desired in the area. All of this
means special study of many areas, wise selection of groups to fit
perticular areas, and economic backing that will make each settlement
project a sound business undertaking.
I believe that money of the order of $500,000,000, expended on
sound advice and based on the best detailed information, will put the
refugees into new homes with more than a fair chance of successful absorption.
Naturally, I would not want to publish this figure until more work has been
done. Africa is not the whole answer to the question nor is South America.
Southesstern Asia has some possibilities, including Sumatra for example.
There abralso prospects in Australia that are promising if the scale of
the enterprise is kept small. All available areas are required to do the
job with the least friction and the least disturbance of economic conditions
such as would inevitably arouse local hostility.
Sincerely yours,
braich Bomman
President Franklin D. Roosevelt
The White House
Washington, D. C.
Federal Surplus Commodities Corporation
227
Summary of Commodities Procured
Fiscal Year 1938 and Fiscal Year 1939 to date
(Figur in thousands)
Total
Total
fiscal
year
to
ended
36
Buchels
11
74
194
924
576
133
124
89
100
16
17
-
-
-
-
-
5
-
-
-
--
-
-
-
-
-
(19)
500
500
(20)
227
132
5
214
-
84
95
-
-
7
-
(22)
will (Dry skin)
Pounds
21,520
2,681
5,960
Wilk (Fluid)
Quarts
12,497
4,709
509
3,000
394
Oranges
Pounds
Boxes
404
Paper Bage
Bage
Peaches (Dricd)
Pounds
1,932
21,825
2,534
15,560
-
2,550
-
-
515
524
39
53
66
22
415
181
534
551
560
78
153
153
74
65
50
44
35
1,873
913
2,947
652
631
54
64
4,823
12
(26)
15,560
(28)
2.550
8,961
(29)
29,098
(31)
(30)
3,042
4,559
4,107
979
(32)
831
(33)
(14)
(35)
6
-
1,223
4,791
2,300
1,228
9,075
11,100
-
9,075
(25)
-
320
(24
279
(27)
g
lattress Ticking
Labels
Yards
(21)
(23)
-
464
506
-
Labels
279
250
-
Tone
270
-
States
25 (18)
16
-
552
15
--
Cases
22
-
Grapefruit Juice
30
-
401
3
Boxes
-
-
Grapefruit
15
1
-
5
-
3,677
2,699
22
(16)
449 (17)
449
-
Barrels
-
Pounds
Flour
(14)
(15)
-
file
(11)
21 (12)
183 (13)
-
9,780
14
Bage
(8)
153
-
Pounds
Cases
44
29
(7)
30,101
8
&
9
5
-
-
Cottonseed 011
1,133
60
(6)
80
-
3,446
328
265 (10)
22
30
(5)
2,677 (9)
43
47
45
25
1,818
1,773
-
149
Cotton Fabric
Cotton Meet Bags
-
Onions
216
408
Yards
last (Shell)
234
1,938
(4)
(4)
38
-
-
Barrels
Bales
370
2,469
9,790
-
8
Corn Meal
Cotton
15
&
1,174
1,719
36
7
63
19
Sacks
Cort
357
3,804
-
Pound
16
3,783
6
107
134
5,109
1
237
56
3,377
-
417
2,343
5
990
338
1
130
2
Cheese
Snoks
20
67
1
Bunches
Celery
Coreal (Whole rheat)
46
11
2
15,035
Crates
Couldflower
65
39
80
Bushels
Carrots
6,360
3,430
1
Gallons
(2)
548
70
-
Cabbage
Cape Syrup
2
Cases
Bushels
166
-
33
2
Futter
Bushels
Pounds
1939
to date
(3)
56,800
2
Steckberries (Canned)
2,990
198
-
Beeto (Fresh)
year
to
to
to
(1)
110
1
Seate (Snap)
to
-
Beans (Dried)
Pounds
Pounds
14,557
5,625
-
applicate (Dried)
Bushels
3
apples (Fresh)
Pounds
fiscal
11
6/30/38*
unles (Dried)
Total
9/1/38:9/8/38
to
to
to 19/15/38:9/22/38:9/30/38:10/6/38
to to to to 0/13/38:10/20/38:10/27/38:11/338:11/10/38111/17/38:11/24/38:12/1/38
9/7/38:9/14/38:
9/29/38 1:10/5/38 10/12/38
:11/9/3
8/30/38
1/16/38
:11/23/38 11/30/38:12/7/38
10/19/38:10/26/38:11/2/38
7/1/38
-
Commodity
Unit
(36)
243
96
31
(39)
862
-
-
3
-
-
-
3
5
-
5
-
20
1
16
-
Bushels
-
50
145
-
Cases
145
(48)
(49)
114
(50)
-
3,500
-
73,190
Pounds
Department, Division of Research and 282 Statistics 73
Beekly
Fiscal year figures reported by Federal Surplus Commodities Corporation are based on telegraphic reports and are unrevised.
1938 totals have been revised to include all contract cancellations and other adjustments.
(46)
(47)
-
(4g) Tonston (Canned)
Tomatoes (Fresh)
Pounds
-
Tobacco
11
-
(47) Rice (Milled)
-
Tona
15
(45)
-
Raising
11
-
(46)
(42)
13
-
Bushels
(41)
(43)
(44)
-
-
55
378
2,367
12
-
hones (Fresh)
Tona
232
19
-
(44) huses (Dried)
Pounds
42
108
1,907
45
36
-
Potato Starch & Flour
4,315
2,562
122
-
Potatoes (White)
440
204
2
R
?otatoes (Sweet)
(40)
6,000
Bushels
Hushels
Bushels
38)
12
17
73
8
Pounds
318
-
Boxes
Cases
8
Pres (Canned)
Pear (Dried)
Peas (Frech)
Bushels
6
Pears (Fresh)
-
Proches (Fresh)
11
December 10, 1938
n
228
December 10, 1938
To:
The Secretary
From:
Miss Lonigan E.
The total number of WPA workers on
December 3, 1938 is 3,183,418
The decrease during the week from
November 26 to December 3 was 32,146
workers. This is a total decrease of
79,208 workers from November 5 to December 3.
The total increase from the low point of
October 2, 1937 to the high point of
November 5, 1938 was 1,814,215.
229
WORKS PROGRESS ADMINISTRATION
Number of Workers Employed
United States
Monthly V.P.A. Employment
1937
1939
Weekly W.P.A. Employment
NAT
WORKERS
BORKERS
WORKERS
MURRERS
3.5
3.5
3.2
3.4
3.2
3.4
3.3
1.3
3.2
J.2
2.8
3.1
3.1
3.0
3.0
2.4
2.4
2.7
2.9
2.0
2.0
1.6
1.2
2.0
2.7
2.7
2.6
2.6
2.5
2.5
2.4
2.4
2.3
2.3
1.2
2.2
2.2
2.1
2.1
2.0
2.0
1.9
1.9
1.8
.4
1.8
1.7
1.7
11
0
1935
-
1936
Office of the Secretary of the Treasury
1937
1938
1.6
JAN.
1939
SOURCES WORKS PROGRESS ADMINISTRATION
MAY
1930
1939
ter:
111
MM.
1.6
WORKS PROGRESS ADMINISTRATION
Number of Workers Employed - Weekly
United States
Number of Workers
Week ending
1938
(In thousands)
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
2,531
2,544
2,582
May 7
May 14
May 21
May 28
2,607
2,626
2,650
2,678
June 4
June 11
June 18
June 25
2,693
2,712
2,736
2,767
July 2
July 9
July 16
July 23
July 30
2,807
2,853
2,899
2,938
2,967
August 6
August 13
August 20
August 27
2,993
3,017
3,039
3,067
September 3
September 10
September 17
September 24
3,086
3,102
3,114
3,120
October 1
October 8
October 15
October 22
October 29
3,129
3,137
3,167
3,201
3,245
November 5
November 12
November 19
November 26
3,263
3,258
3,244
3,216
December 3
Source: Works Progress Administration
a Confidential
3,183 a
230
WORKS PROGRESS ADMINISTRATION
Number of Workers Employed - Monthly
United States
Number of Workers
(In thousands)
1936
January
February
2,926
3,036
March
2,872
April
2,570
2,340
2,256
May
June
July
August
September
October
November
December
1937
January
February
March
April
May
June
July
August
September
2,249
2,377
2,482
2,581
2,483
2,192
2,138
2,146
2,115
2,070
1,999
1,821
1,569
1,480
1,451
October
November
December
1938
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 figuree are weekly figures for the
latest week of the month.
They include certified and non-certified
workers.
231
232
PLAIN
FS
Hong Kong via N.R.
Dated DECEMBER 10,1938
Rec'd 8 a.m. 11th
Secretary of State,
Washington.
109, December 10, 11 a.m.
FOR TREASURY.
Officially recorded Hong Kong silver statistics in
November 1938 in thousand of Hong Kong dollars: imports
from North and South China nil, Kwongchowwan and Macao 55;
Exports to China nil.
Recorded Treasury imports and Exports first Eleven
months 1938 in thousand of Hong Kong dollars: gold bars
and ingots imports 5557 of which 2583 from India, 1404 from
United Kingdom, 1257 from Siam and 312 from French Indo-
China; Exports 42711 of which 35130 to United States, 7444
to North China and 137 to South China; silver bars and
ingots imports 16 all from Kwongehowwan; Exports 1600 all
to United Kingdom.
Silver coins in thousand of Hong Kong dollars imports
1567 of which 1267 from Kwongchowwan, 279 from middle China
and 21 from Macao, Exports 97601 of which 97849 to United
Kingdom, 476 to Siam, and balance to various countries.
SOUTHARD
EMB
233
M
PLAIN
fs
Chungking via N.R.
Dated DECEMBER 10, 1938
Rec'd 8 a.m. 11th
Secretary of State,
Washington.
591, DECEMBER 10, 11 p.m.
RECENT discussions regarding Far Eastern policy held
in the House of Lords and Commons in London are the subject
of EXTENSIVE contient in the local press.
THE CENTRAL DAILY NEWS says: "The British Govern-
ment's appreciation of the present situation has shown a
certain amount of progress---but Chinese impressions will
be determined by the future actions of the British Government." This journal adds that China requires not merely
sympathy and vocal support but concrete material assistance;
not merely maintenance of theoretical principles but carry-
ing out of original principles; not merely "consideration"
of assistance but information as to the kind, quantity and
time of such help. This paper concluded that Britain must
recognize that principle of balance of power must be maintained in Far East as in Europe in order to SECURE her
rights and interests and that Britain can best preserve
balance of power in Far East by supporting the National
Government which has created the basis of a unified China.
The
234
2-No. 591, DECEMBER 10, 11 p.m. from Chungking
FS
The TA KUNG PAO (which commenced publication at
Chungking on DECEMBER 1) under the caption "It is Time"
states that the Tokyo statement of November 3 is a direct
pronouncement of Japanese "decision to reduce China and also
to eradicate the influence of the powers in the Far East".
This journal comments that recent Japanese pronouncement
as well as recent Japanese press utterances possess a deep-
Er significance than the Amau statement of 1934 and professes to be astonished at alleged American and British
passiviness in the face of obvious Japanese ambitions.
TA KUNG PAO points out that Britain was instrumental in
Japanese rise to power, that Japan has now turned upon her
bEnEfactor and that further assistance by British to Japan
in development of China will ultimately endanger British
interests East of SUEZ. If United States and Great Britain
can take identic or parallel action to apply Economic
sanctions to Japan this paper believed situation in Far
East will undergo immediate change. TA KUNG PAO concludes
with statement: "That present is truly Great Britain's last
opportunity to decide upon its Far Eastern policy".
Repeated to Peiping. PEiping mail Tokyo.
JOHNSON
EMB
235
Structy Confidential
ML
Tsingtao via N.R.
Dated December 10, 1938
REC'D 11:20 a.m.
Secretary of State
Washington
DECEMBER 10, 10 a.m.
The following telegram has just been received here
by mail from Tsinanfu. There is reason bEliEVE Tsinanfu's
mail is being tampered with.
"December 1, 9 a. M. Political summary for November
follows:
OnE. The undersigned was outwardly well received by
Japanese consular officials "advisers" and military authorities at Tsinanfu though they were probably not (repeat
not) pleased at the reorganization of the American Consu-
late here; the Chinese members of the staff of this office
WERE previously under strict surveillance and were EVEN
warned neither to leave the Consular premises nor to send
any reports from Tsinanfu. The Japanese are definitely
suspicious of Americans, possibly because they are usually
not molested by the guerrillas, and a close check is kept
on their movements and activities. The German mentioned
in Despatch No. one was released by the guerrillas who
retained his trunks.
Two.
236
ML -2- Tsingtao via N.R. DEC. 10, 1938 11:20 a.m.
Two That Tsinanfu is to be an important Japanese
military garrison for SOME time to COME is indicated by
the establishment here of Ligutenant General Suwetaka's
headquarters reported in Despatch No. 3.
Three. It is extremely difficult, because of the
propaganda disseminated by both factions and since foreign
observers are greatly influenced by their own sympathies,
to report on military developments with any degree of
accuracy. NeverthElEss it appears certain that a con-
certed drive against guerrillas in Shantung north of the
Yellow River was carried out in November resulting in
the capture of several towns and villages. HOWEVER, in
most CASES the guerrillas simply withdrew and will return
as soon as the Japanese depart; it would not appear
practicable for the Japanese to garrison EVERY town and
hamlet in Shantung. It appears Equally certain that
guerrilla warfare in this province is not proving
Effective in any military SENSE (SEE despatch 2). RE-
peated danger to railways only of a minor nature and at
no time during the month was traffic delayed more than a
few hours. While the Japanese report that SOME 11,000
(bandits) joined their ranks in November are no doubt
exaggerated, the Japanese are known to be employing an
increasing number of Chinese mercenaries.
Four
237
-3- Tsingtao via N.R. . DEC. 10, 1938 11:20 a.m.
ML
Four. In their Efforts to cut off supplies from
the guerrillas Japanese prohibit mony important articles
of trade from leaving the immediate vicinity of the railways while the guerrillas are wherever possible preventing
the transportation to market of cotton and other agricule
tural products in which Japanese are principally interested.
To render business more difficult, (?) of the new regime
are not acceptable in the area under Chinese control while
Chinese Government legal tender notes are disposed of in
Tsinanfu and other occupied areas with increasing diffi-
culty. Considering all the handicaps to trade a surprising
amount of business is being done and Japanese participation
therein is constantly increasing.
Sent to PEiping. Repeated to the Department, by mail
to Tokyo and Tsingtao. Hawthorne".
SOKOBIN
NPL
238
RE FEDERAL BUDGET AND RECOVERY
Present:
December 10, 1938.
2 p.m.
Mr. Hanes
Mr. Taylor
Mr. White
Mr. Gaston
Mr. Magill
Mr. Viner
Mr. Williams
Mr. Hansen
Mr. Currie
H.M.Jr:
Well now, I've got four eight fifty as the tentative
White:
The figure we got was five and a half - five point
H.M.Jr:
Well, this was Bell at 9:30 this morning.
Currie:
We got ours at 11.
White:
The figures which we were given were given tenta-
H.M.Jr:
He mentioned them. What are those figures?
White:
Five point four plus - four hundred and something.
H.M.Jr:
Anybody got them?
Currie:
I've got them.
H.M.Jr:
Where did they come from?
Taylor:
0 Donnell.
Viner:
Haas.
White:
Haas wasn't there, so we got them from O'Donnell.
Currie:
H.M.Jr:
Five four six two.
Five four six two.
Currie:
Six two.
H.M.Jr:
That's based on what revenue?
estimate for revenue.
four something.
tively. They hadn't been given to you yet.
239
-2Currie:
Internal revenue?
H.M.Jr:
No, that's based on what national income?
White:
They wouldn't say. Couldn't tell. Said they didn't
Viner:
They used FRB - the production index.
Taylor:
About 104.
H.M.Jr:
Is that the figure O'Donnell gave?
That's the figure O'Donnell had, which I take it
he was going to give Mr. Haas, then going to give
White:
approach it that way.
it to you, but
H.M.Jr:
Makes quite a difference.
White:
Well, the other figure was the July estimate, and
that figure of five four represents an estimate of
income from - revenue from corporate income which
is substantially different from the Federal Reserve
Board figure.
H.M.Jr:
But we - I mean this is a more thorough figure, because O'Donnell does a lot more work on it; but
we feel pretty strongly that's conservative.
Well, the President will say, "Well, how much national
White:
We asked them that question. They insisted they
Currie:
income is that based on?"
don't know, they don't approach it that way at all.
H.M.Jr:
You know, last year Professor Crum reviewed all of
these for us, and he seemed to think our method
was pretty good.
White:
They didn't just approach it from the point of
H.M.Jr:
He went all over it for us.
Viner:
There is an assumption as to the national income
view of national income.
implicit in the method, but if they wanted to find
out what it was they'd have to do a lot more calculating for that purpose.
240
-3-
White:
But there must be some prior assumption that it's
going to increase or remain the same.
Viner:
May work from the parts instead of the total. It's
White:
That's what they do.
a summation problem.
H.M.Jr:
They do work back some places. I know the President
is going to say that, because I'm talking so much
national income, and when we went over to see him
we were talking in terms of
White:
well, some of us thought that was an important
question, too, but they didn't approach it that
way.
H.M.Jr:
Well, when danes comes he ought to remember that,
because I think we were talking in terms of: if
you had 65 billion national income, the revenue
would be so much, and if you had 70 it would be so
much.
H.M.Jr:
This figure for income taxes of one eight one six
I need a total.
Currie:
Pardon?
H.M.Jr:
I need a total figure.
I'm just pointing out that the figure for income
taxes, one eight one six, is considerably below
1937: two one. That's why we feel it's conserva-
Currie:
Currie:
tive.
(Hansen comes in)
H.M.Jr:
Sorry I'm late.
Hello. Excuse my not getting up.
Taylor:
Lot of deductions you can make this year which you
Currie:
That might have an effect there.
Hansen:
couldn't in that other year, so
241
-4H.M.Jr:
Well, I'll ask Hanes that. I've got a particular
White:
You weren't there yesterday, Mr. Hansen, when we
were discussing the problem of national income
reason for wanting that.
for next year. Did you have any thoughts on that
already?
Hansen:
No, I haven't anything to contribute on it, I think.
H.M.Jr:
Should we wait for Hanes and Magill?
Taylor:
They having lunch together?
Viner:
I think they are, yes.
Williams:
Are they?
Viner:
White:
Yes, they're having lunch together.
Might begin to outline the general conclusion.
H.M.Jr:
Why don't you start?
White:
Want to go around the room?
H.M.Jr:
Well, why not
White:
just summarize what the conclusions were and then
you can check up.
The thought, I think, of most was that there ought
to be an attempt on the part of the Treasury to
secure higher taxes, and that the first
H.M.Jr:
There should?
White:
Should be.
that the first source should be
the estate and gift taxes, and second source the
middle income brackets. Beyond that there was no
specific discussion and there wasn't complete agreement on that. I think that Stewart didn't wish to
commit himself on that. I don't know whether some
of the others might disagree. Magill felt that the
matter would be extremely difficult - to get expect to get a billion dollars of additional
revenue.
242
-5Viner:
He thought it would be impossible.
White:
He said it would be impossible, and that if you could
shoot at - if you got a half billion you'd be for-
tunate; and he thought we ought to make every attempt
to get that.
I think that was the one specific conclusion which
emanated. There was a great deal of discussion, but
I think specifically
H.M.Jr:
Well, let me go back. If I can remember rightly, one
of the things I wanted to ask - in the first place,
this method of analyzing what adds and subtracts to
national income, as presented by Mr. Ruml - has that
been
White:
Definitely out.
H.M.Jr:
What?
White:
Definitely.
H.M.Jr:
Is everybody in agreement?
Taylor:
for the purpose of this particular budget.
H.M.Jr:
I see.
Taylor:
I think that there is a question, or - I wasn't there
at all the discussion, but I think that was the
impression that was very strongly in my mind: that
you shouldn't stop studying it.
White:
No, that it needs a great deal more study.
Taylor:
Needs more work done on it, and that even now if
you wish to say certain types of taxes look as if
they had certain effects and certain types of expenditures look as if they had certain effects, why,
you might be able to say that but it would be a
question of opinion rather than being able to prove
it.
H.M.Jr:
Is that
243
-6-
Viner:
I think that checks. I think most of us, not all
of us - includes most of us, including myself believe that the method is significant enough to
deserve lots of work and internally there ought
to continue to be investigation along those lines
on a larger scale; but that it is not ripe in form
and too doubtful in the validity of the inferences
drawn from it to justify its use in presenting to
the public or to Congress a program for the Federal
finances.
H.M.Jr:
Viner:
Did anybody think other than that?
Well, I think that some expressions - perhaps one or
two who wouldn't - I think, who wouldn't accept it
as a fruitful line of investigation, although I'm not
sure.
H.M.Jr:
Did anybody go the other way - I mean beyond what you
say?
Viner:
Well, I'd like to check up with the others.
White:
Well, I think most of them would have gone the way I
said. I can speak only for myself; they can speak
for themselves. I think that there is a possibility
of a much more fruitful approach from the point of
view of the proportion that goes to consumption,
proportion of the taxes that go directly to consump-
tion, and the proportion of it that does not. And
Viner:
White:
with the presentation of the amount
You mean the proportion of the expenditures.
The proportion of the expenditures that go to consumption and the effect of the particular tax on
the consumption ratio. That is, a sales tax would
hit just where we don't want to in the consumption
ratio, whereas the tax on the estate and gift would
be desirable. It's a little bit more complicated.
But I think there are very definite possibilities.
But it cannot be simply put over, although I'm not
sure that several paragraphs can't be so phrased
generally as to indicate that or to provide enough
basis to justi fy a tax, if you're going to get more
revenue on the estate taxes rather than on sales
taxes. But that's a personal opinion. I don't
244
-7know
Hansen:
One specific tax, Mr. Secretary, that I'd like to
comment on
(Hanes and Magill come in)
H.M.Jr:
Can you hold your thought a minute?
Magill:
Hello. excuse me for not getting up.
Sorry to be late.
H.M.Jr:
Some up here where I can see you. We started kind of
talking already.
Go ahead, Professor Hansen.
Hansen:
I feel that the step-up in the payroll taxes that
is now in the present law to be made as of January
1, 1940 - there is a tax which is definitely on
consumption - I feel that the step-up ought not to
occur.
And there is just one other comment. I think that
we should be as careful as possible to plan not to
have as rapid a decline in 1940 as seems to - in
what Currie has called the net income creating
expenditures, as we had in 1937. That ought to be
borne in mind in the recommendations.
(Gaston comes in)
Hansen:
Now, just say that again, will you?
You mean just that last statement.
H.M.Jr:
Yes.
Hansen:
I was just saying, it does seem to me we ought to
plan as much as possible to plan - or realize this
timing thing is extraordinarily difficult - not to
bring about as rapid a decline in what has been
called the net income creating expenditures of the
Government in 1940 as did take place in 1937. And
fiscal 1940 would certainly be involved there: the
first half of calendar year 1940.
H.M.Jr:
245
-8White:
And the stepping up of the taxes would be just in
Hansen:
The stepping up of the taxes would reduce the net
income creating expenditures.
that line.
Hansen:
That's the stepping of the payroll taxes.
Which I should say ought not to be done as of
H.M.Jr:
Well, now that everybody is here - are you through,
Hansen:
Yes.
H.M.Jr:
I mean put it this way, so I get the benefit; what
we've got here is this: Looking at this picture as
Taylor:
January 1, 1940.
Professor?
a whole - I mean as a whole budget, income and
outgo, I think the first thing I'd like to ask is
whether the people thought that, in view of the
figures that I gave you last night for the deficit,
somewhere between three and four billion dollars did you people come to any conclusion as to whether
we should try to increase the amount of taxes?
White:
H.M.Jr:
Hansen:
That's the first thing.
well, I think most of them felt that you should.
Mr. Hansen - I don't know whether he expressed
himself finally on that point or not.
I want to get that before I g et as to what kind.
I mean that's the first point.
I think it's a question very largely of examining
the kind of tax. I've mentioned one tax that I
think ought not to go up; certain kind of taxes,
I think, might be perfectly all right to step up.
H.M.SP:
Such as?
Hansen:
It's a question of examining
H.M.Jr:
Well, I mean
The estate tax has been mentioned. I would agree
Hansen:
with that.
Pardon?
246
-9White:
But
if it were some other tax, you might wish to
differ.
Hansen:
Yes, I think we should appraise in terms of this
timing problem. I know how difficult that is.
H.M.Jr:
Hanes:
Magill:
Well, the estate and gift - will you (Hanes) give
me a figure?
Yes. (Opens brief case)
About 350 million. You mean what you're getting
now?
H.M.Jr:
No, no, how much more, how much could you get?
Magill:
I should think pretty nearly double it is what you
ought to, as far as yield is concerned.
White:
The Division of Research a while ago gave a figure
of 300 million.
Magill:
What you're now getting or the increase?
White:
The increase.
Magill:
That's about what I've said.
H.M.Jr:
How much now?
Magill:
Around 350 million is what you are now getting.
Hanes:
We got in 1938 from the estate tax 382 million
dollars, and we got in 1937 281 million dollars.
Magill:
There you are.
Hanes:
In the gift tax we got 34 million in '38 and we got
23 million in 137. If you want those
H.M.Jr:
Two together.
Hanes:
Two together in the 1938 - what you want, just 138?
H.M.Jr:
Just 138.
Varies somewhat from year to year.
247
-10-
Magill:
You got 416 million in estate and gift for 1938.
That was probably a big year - probably a big estate.
H.M.Jr:
And a couple good deaths.
Hanes:
Hanes:
Now, if you do the following things - the first full
year of the tax we'11 count on raising 322 million
dollars; however, for 1940, if you're just figuring
1940, the estimate is only 56 million, so you won't
get any appreciable income in 1940. But the first
full year you'll get 322 million, and in order to
H.M.Jr:
Additional?
Hanes:
Additional, yes. That's just from the estate; now
I'm not talking gift. In order to get that you've
got to "change the specific exemption from $40,000
to a specific exemption determined by aggregating the
following exemptions allowable as a deduction from
the gross estate irrespective of the actual nature
of the distribution of the estate to the beneficiaries. If the decedent is survived by: (a) A
Oh, don't go into that.
All right.
Am I right in thinking that that amounts to about
"
H.M.Jr:
Hanes:
Magill:
a $20,000 exemption as a rule instead of a $40,000
exemption?
Hanes:
That's right.
The next is an increase in the estate - you don't
want that.
Hanes:
I just want the dollars you could get out of that.
Another 322 in a full calendar year.
H.M.Jr:
And add the
danes:
And add the gift tax to that; you get 416 million.
H.M.Jr:
Altogether.
Hanes:
No, 416 million additional to that - that is, what
H.M.Jr:
....
we had in 138.
* Gift tax figure is 84 million, so total of
estate and gift should be 406.
248
-11H.M.Jr:
322 plus 416.*
Hanes:
was double it.
H.M.Jr:
Viner:
The first full year. That's what we set out to do -
I see; I got it all right.
Would that be what it would yield in the first full
year?
Hanes:
First full year, L6*million.
Magill:
Full operation. I gather so. And that's a long
postponement, because a man has 15 months in which
to make a return after the death.
Hanes:
For the fiscal year 1940 we figure an estimate of
96 million dollars from this increase, so we aren't
getting much.
Gaston:
In both taxes.
Hanes:
Both taxes.
H.M.Jr:
Well, while we've got the figures out, can you be
giving me a figure of the income for the next fiscal
Hanes:
year of five billion 462 - is it?
That's right, yes. That's recalculated; all our
estimates have been somewhat increased since July.
H.M.Jr:
It would be - it's an increase, roughly, of 600
million.
Hanes:
That's right, that's right.
H.M.Jr:
well, let me just go back a minute, go backwards.
Now, you're talking just about the estate and gift
taxes, and in talking about this thing - I mean again
coming back, approaching it from the effects on
national income, are there - did anybody discuss the
possibilities of substitution of any taxes which we
feel would be - was that question raised?
From checking figures, this should be "416 plus 406."
Should be 406, as per footnote page 10.
249
-12White:
No. The feeling on the part of those who wished
to raise taxes or impose a tax - that of most of
them was that tax revenue should be increased and
that should not be used as a base by implication of
reducing some other taxes. But that specific question was not raised.
H.M.Jr:
I don't know whether I make myself plain, Harry:
that in some particular tax we might all agree it
was highly deflationary.
White:
H.M.Jr:
Excise tax, for example.
That that should be withdrawn and some other sub-
white:
No.
H.M.Jr:
Huh?
Magill:
No, it wasn't - not this morning.
But I take it that the opinion of many, at least,
would be that they would not reduce those taxes,
because the chief justification for imposing an
increase on the estate and duties was to get more
revenue and not to shift the effect.
White:
H.M.Jr:
stituted - was that discussed at all?
But I still think it's worth ....
H.M.Jr:
Very definitely.
exploring; don't you, Ros?
Magill:
Very much so.
H.M.ST:
What?
Magill:
Very much so; no question about it.
Aren't there some taxes which in your mind are
White:
H.M.Jr:
Magill:
Hanes:
deterrent on business?
Why, I should think clearly so.
There are two taxes there that all of us agree ought
to be eliminated.
250
-13-
Magill:
There are a lot of inequities - even assuming you're
going to have excise taxes, there are a lot of
inequities among the excises themselves: not levied
at uniform rates.
White:
We're thinking of the point of view of national
Magill:
I think the same thing is true
H.M.Jr:
On that does everybody agree, John?
Hanes:
No, not this group. "e in the Treasury are more or
less agreed. But those changes have nothing to do
with national income, are not deterrent on the
national income. They're just pin-pricks. We can
change them without lessening the dollar return,
for example, from corporations, but we'll reduce
income, not equity.
the number of income tax returns they send from
five down to two, which would save them an awful
lot of money spent for lawyers and accountants and
so forth, lot of extra work.
White:
H.M.Jr:
But that remains a real question; has to be
Let me do a little more groping. You've all been
rubbing each other's edges and I've got this thing
cold. Let me go at these economists first.
Professor Hansen, if I may pick on you, because
I haven't had a chance at you - you're Secretary
of the Treasury now, see, and you're facing next
year between three and four billion dollars of
deficit, depending upon how much they add. What
would you do about it?
Hansen:
Well, I wouldn't worry too much about it, in the
present state of affairs.
One might repeat very briefly one point that I
emphasized this. morning. The Twentieth Century
Fund's recent study snows that the net debt of state
and local bodies at the present time is two and a
half billion less than it was in 1930, a decline
from 16.5 billion dollars to 14 billion dollars.
Now, it's been traditional in this country that
there are many important public improvements, public
251
-14-
works, that state and local bodies very much need,
and they have financed them in very large measure
by loans. We have had a rising debt of state and
local bodies; in the twenties we had a rise on the
average of about a billion dollars a year.
Well now, if we had had a similar rise of state and
local body debt financing public improvements in the
last eight years, we would have had at the present
moment a state and local d ebt ten and a half billion
dollars in excess of what we now have. Now, the
fact is that the Federal Government has been stepping
in, necessarily, to aid the state and local bodies
at a time when they were no longer able to expand
public investment in the way that they have been.
And as I see it, that's something that's happening
all over the world with respect to federal governments. Australia has the same problem, Canada has
the same problem. Viner and I were just up in
Canada a week ago and just discussing with the Royal
Commission this whole problem. Germany had it before
Hitler came in. And in all f ederal governments, of
necessity, it is the case that state and local
bodies are limited as against the federal government
in their ability to collect taxes and they have all
reached more or less of an impasse.
I think that the future implies that in this country
that type of load, perfectly useful and productive
type of public expenditure, has got to be carried
than it has been in the past. What I am saying is
that traditionally we haven't expected a balanced
budget in the state and local bodies, we have
financed these things by a rising debt, and we
ought at least to take account of that with respect
in the future much more by the Federal Government
to the Federal program.
H.M.Jr:
What we need very baily is a total budget for all
units, Federal, state and local, so we can see what
the whole picture is. And if we did have such a
picture and the whole public had such a picture,
they would really look upon the rise in the last
eight years of the Federal debt in a different
light from that which they now do.
Pardon me - those figures aren't available?
252
-15Hansen:
Those figures are available that I've just cited.
They've just recently been published in a book.
But the figures for a general all-around budgetary
picture, as I understand, are not available. We
have in no place a general all-around budgetary
picture of Federal, state and local bodies. Viner
has been suggesting and I have been suggesting to
various groups that we do get such a general allaround picture, and I think it would be an extremely
important thing to do. I think that the Bureau of
the Budget is at the present moment doing something
about it, as I understand it.
H.M.Jr:
Are they?
Viner:
I don't know whether they are; I hope so.
I was so told.
Hansen:
Viner:
We started that in 1934 - asking for it - and
gestures have been made. But I think it is very
important.
H.M.Jr:
Hansen:
Just - I mean I'll come back to it. I wish - I'll
come back to it, I'll tell you how we could do it;
but I wish you'd continue. I'd say look into this
thing. I don't want to get down to minute details.
I don't want to interrupt your thought.
Well, I think that's one very important approach,
important thing that we ought to bear in mind in
considering this whole question of another continuing
Federal deficit. We have had a continuing local
deficit in the past, taken it for granted, haven't
felt worried about it. I wouldn't worry too much.
So long as we have a situation in which it appears
that private investments are going to be on a relatively low plane, I wouldn't worry too much about a
deficit of about this order of magnitude.
I do think very strongly that the Administration has
been guilty, at the same time that it has engaged
in an expansionist program, of not adequately a ttacking specific problems which could have increased
private investment more than has been the case. That
involves a great many things, various policies,
253
-16-
governmental policies that have raised the cost
structure in the country as a whole so that full
recovery is extremely difficult; as well as a
failure to attack the railroad problem and the
like.
But after taking account of all that - and I would
fully take account of all that - after taking account
of all that, it does seem to me that one can - one
has difficulty in seeing, even though those things
were well taken care of, adequate private investment
outlets.
The areas that were short on investment in '36 and
'37 were residential building, commercial building,
railroads and public utilities. Those are the
four important areas.
Now, residential building - in my judgment, the
overwhelming factors are the following: We had a
tremendous residential building boom in the twenties. You look back over a hundred years; we have
had about an 18-year cycle in building. And what
has taken place now is nothing new in our history.
After a great bulge of residential building, in
general there has regularly followed a long period
of pretty nearly a decade of low volume of building;
and it is always in those periods - every time it
is in those periods that we have had our very serious
and long depressions; and I think that's one of the
important explanations for the long depression that
we have just gone through.
So that that is not a new experience. In other words,
we have had sometimes quite prolonged stagnation in
this long-run downswing of building; at other times
other things have come in to pretty well fill the
gap. In the decade of the thirties this particular
situation was magnified by the fact that this is the
first decade in our history in which we have not had
a growth of our population. We had in the twenties
a net addition to our population of 16 million people;
in the thirties we are having a total net addition
of just exactly half that. And that is a decline
sufficiently important to make, in my judgment, not
only in residential building but in other areas also
a very big gap in investment. As a rough approximation
254
-17-
it takes a long time to go into all the bases for
this sort of judgment, but as a rough approximation
I think it can be said that approximately - that
we have been accustomed in the past - that about
a half of our investment in the past has grown
directly out of population increase and the opening
up of new territory, and a quarter of that has just
dropped out of the bucket in the last decade. A
quarter of that has just dropped right out. So I
conceive of that being a big gap in private investment.
As we come to a time of population S tabilization,
economic progress takes a logical development. New
inventions have got to do double time for investment
outlets. And they may do it, they may do it; I don't
say they won't. But I do think very important is
the fact that toward the end of the twenties, very
definitely, the most dynamic industry that we had,
the automobile industry and all that went with it,
flattened out. I don't say it declined, but it
flattened out just as the railroad construction
flattened out in the seventies. And when an
industry that has been growing and carrying with
it a lot of other things that had to grow in order
to supply it, ceases to grow - even though it remains
on the same level, it ceases to grow - you've got a
serious problem of investment. When the railroad
thing flattened out, we did have in the seventies,
eighties, and nineties a stagnant situation.
So that I regard the private investment outlets in
the immediate future as not very hopeful. I don't
say they're not coming back again, but there are
no - Kettering said the other day, I think quite
rightly, that what this country needs more than
anything else is new industries. I don't say we're
not going to get them, but in the past we have
sometimes waited quite a while for them. They
just don't come automatically in the right volume
all the while.
If that situation is true, I would rather not worry
too much about a reasonable public deficit. I admit
it's all a matter of balance and you can go too far
in one direction and one can go too far in another
direction. I admit that fully.
255
-18H.M.Jr:
Hansen:
I'd like to ask you, have you ever stopped to
think how we can keep a man on the street from
worrying about the mounting public debt?
Well, I think this one item of the situation we
have long been accustomed to in state and local
bodies ought to be rather impressive to the man
on the street. He hasn't worried about that in
the past, and that's something he ought to take
account of.
H.M.Jr:
Hansen:
Do you think it's important to make some of these
snifts in the budget that everybody is talking about?
I mean changing it, setting up some items as capital
expenditures, pay-as-you-go, the way - I mean do you
think that's going to fool anybody, make anybody
feel any happier?
well, I wouldn't like to fool with it if we put it
that way. I think we ought to study it more before
we can say. If setting up a capital budget and a
current budget really clarifies the situation so we
know more what we re doing and the public knows more
what we're doing, let's do it; if, on the contrary,
a study would indicate that it only misleads the
public, let's not do it.
I personally have the view - I may be wrong - that
it would be clarifying; but I wouldn't like to have
it done in a manner that would indicate we're just
trying to fool the public. If it has that effect,
I should rather not do anything at all.
white:
If you carry it back several years, so you restate
the past budgets in the same way, then it wouldn't
fool the public.
How about the outer budget investments? Is that
H.M.Jr:
would you say that again please?
White:
the outer budget investments, like the H.O.L.C., who
Viner:
Hansen:
part of it? Are you
get the funds directly.
I think they could well be outside the budget.
256
-19White:
I thought you meant to include that too.
H.M.Jr:
I'm talking of the things that might be set up
Hansen:
White:
H.M.Jr:
as a capital budget.
You weren't thinking of this railway scheme, then.
No - I mean we've got the public used to not counting
the Government-guaranteed as part of the public debt;
we've just sort of slid into that nicely. I'd leave
that alone. If WE can think up more devices like
that, fine.
White:
You weren't thinking about
H.M.Jr:
That's established. Except for a few Senators, they
very seldom take the guaranteed debt and the regular
debt and add the two. I'd leave well enough alone.
I was thinking of some of the things which were paid
out as a current expenditure, whether some of those
could be capitalized. That's what I mean, Professor
Hansen.
Hansen:
I myself have a view that it would be clarifying
to do so. On the other hand, I have a little the
fear that the public - well, I might say quite a
little the fear that the public needs a good deal
of education along that line. If it were suddenly
sprung on them, it might be interpreted - it would be
interpreted in many quarters as just a trick. That
might be very bad.
Viner:
Wouldn't you want to introduce a depreciation
account if you
Hansen:
If you set up a current budget and a capital budget,
certainly one of the values in so doing is that you
relate the two and you put into your current budget
the depreciation and interest on the items that are
in the capital budget. So at least you have a procedure by which you are
Viner:
White:
It seems to me to be logical you'd have to introduce
depreciation on all your outstanding capital assets.
If you included them in your capital assets.
257
-20Hansen:
Depends on whether you set up a budget from scratch
or one that goes back and attempts to - depends on
whether you do it that way.
Williams:
Doesn't it depend a good deal on whether you're
dealing with items to which you may apply business
procedure, business accounting procedure, or not?
If you have some income-yielding investments, then
all of these considerations apply. If, however, you
find yourself attempting to evaluate assets which
don't yield an income, or to reckon depreciation on
assets
of that sort, I think you get into a frightful
muddle.
Hansen:
You have the cost and you ought to know how to depre-
ciate it. We ought to know how to depreciate our
roads, and this would force us to do it. And we
don't know where we're at on roads, don't know where
Williams:
Hansen:
we're at on public buildings. We certainly ought
to be able to arrive at some reasonable accounting
with respect to depreciation of those things. We
know what the costs are, so that you have that
definite - you've got definite figures. It's not
a matter of evaluation, it's a matter of costs. And
we certainly ought to have a clear picture of what
the depreciation should be on that kind of wasting
asset - clearer than we now have. I should think
there would be clarity there in setting up depreciation on such things as roads and the like.
Trouble is, what do you set over against it?
You set over against it the cost. Of course, the
implication is not that you necessarily ought to
finance all these things out of loan expenditures.
You may want to finance most of these things out
of income. But in so far as you do finance them
out of loan expenditures, you have a cost figure,
and you can set up depreciation against it. The
judgment as to whether you should finance them by
loans or by current income - that's quite another
matter, I should say. But if you do decide that
it is desirable and legitimate to borrow, you set
up in your capital account the cost - what the
cost was.
H.M.Jr:
Well, Professor Hansen, without actually - I can't
258
-21-
Hansen:
get - all I get is your conclusions, without getting
the mass of material that you've collected over a
long life-time. But this is what I g et out of it.
What you are saying to me today - let's see if I've
got it right - is that if you were in my shoes as
to the coming year, you wouldn't worry too much about
a deficit for one more year.
That's right.
Is that right?
That's right.
H.M.Jr:
Furthermore, you also, though, would examine some
Hansen:
H.M.Jr:
Hansen:
things like the gift and inheritance tax and pick
up as much there Any other place?
I wouldn't step up the payroll taxes. I'd leave
H.M.Jr:
Anything else on the taxes?
Hansen:
them the way they are.
I really haven't studied it in sufficient detail to
say.
H.M.Jr:
But just for the general impression, that would be
your advice.
Hansen:
That's right.
white:
and the sales tax should be definitely opposed.
Hansen:
H.M.Jr:
That's right.
I take it that also includes processing tax.
Hansen:
Processing tax - some of those processing taxes I
feel a little differently about. A very difficult
question.
H.M.Jr:
Well, I canget at you on another date. I mean I
don't want to
Professor Williams, do you - would you mind following
the same road, or where do you differ?
*illiams:
I don't think I differ very much. I also feel that
259
-22-
this may not be a good time to start worrying about
depends on the outlook for business in the next year
and a half; and that's always a question mark. I
feel that if what we have ahead of us is a pretty
good recovery, continuation of recovery, we shouldn't
the deficit. I'm not very sure of it. I think much
begin too soon to increase taxes and reduce expendi-
tures; I'd do it moderately and I'd try to taper it
so as to avoid the situation in 137. Part of the
difficulty in '37 was these payroll taxes and so on
that were deflationary, and I would agree in wanting
to avoid a repetition of that. Part of the difficulty,
however, is the increase of revenue that you get from
your existing tax system; that can shut the door, or
can close it part way, if you get real recovery. I
don't know what to do about that. You're in a
dilemma. It may be that we find it very difficult
to avoid these abrupt changes. It may be a very
difficult problem.
But I think I can sum up what I want to say in a
very few words: that in my view it all depends on
the outlook for business. If I had confidence in
the forecast that business next year would not be
very much better than this year, I wouldn't choose
this time to increase taxes.
I do think, though, that I would want to require
that for any additional expenditure money be found;
like to lay that down if I could - that is, going
beyond this point in expenditure - because I think
the time has come to put the pressure somewhere
else. we have gone on with d eficits in a rather
easy-going sort of way, always expecting that it
would eventually balance out, and within limits I
think that was correct. But as you increase your
expenditures, it becomes more and more difficult to
find that kind of an answer.
So I think that some point must be selected - I don't
see why this isn't a good one - at which you put
pressure against further increase of expenditure
and further increase of deficits. And I don't know
any other way to do it than this: say that if you
want to spend more you've got to find the money.
Now, that's awfully difficult, to find the money,
260
-23-
as we find out when we try to go over it, and it
might have some restraining effect, and if it did
have a restraining effect and turned people's minds
more toward these alternative solutions that Mr.
Bansen mentioned, of seeing what could be done
specifically about certain situations in the hope
that it would stimulate investment - I myself
believe it would, quite definitely and quite sub-
stantially - I'd be for it.
Now when it comes down to specific taxes, I really
don't feel that I at least know enough about the
impact of any particular tax. I can see that
some taxes affect consumption very much. Certainly
the estate and gift tax is not one of those, and
on that ground one might select it. But I'm not
sure in my mind at all what other effects on the
economy it might have, and on the general feeling
at this time, to increase that tax as much as you
would be doing. For the sake of a modest increase
in revenue, you are greatly stepping up that tax,
it seems to me, and what the effects of that might
be on the public mind - large questions of where
are we going, or of the more definite question of
its effect on incentive to invest, and so on - I
don't know. I don't feel as clear as some of the
others that it is a desirable thing to do.
H.M.Jr:
Professor Viner?
Viner:
Well, my recommendation would be that, assuming that
H.M.Jr:
We're in '39 now.
in the present picture the budget deficit would be
somewhere between three and four billion, if you
don't do anything about taxes, that you should aim
to present a program which would cut down the
deficit as compared to the fiscal year 1938 by
at least half a billion dollars, and you should
aim to do it without increasing any taxes. Now,
how near, how good the prospect is of doing that I don't see the picture clearly enough of the estimates and of the fiscal year 1938 - I mean '39 fiscal year 1939 situation; I mean we re talking
now of the fiscal year '40.
261
-24-
Viner:
H.M.Jr:
Yes. I don't see what the '39 situation will be
clearly enough, nor what the present indicated
expenditures for 1940 are, to know how serious a
proposal it is that I'm making. It is possible you
could easily do that without doing anything in
particular - I mean maybe if you did nothing.
In
the room here, I'd say it's practically impossible.
Viner:
*o cut the deficit by half a billion?
H.M.Jr:
Currie:
without increasing the taxes considerably.
There's one way, Mr. Secretary, it might be done -
Hansen:
mentioned earlier of shifting certain things over
from the guaranteed debt, making them self-financing.
here is about a billion you could get, with enabling
legislation for the R.F.C., for instance; some other
programs we have explored that could be taken out of
the regular budgetary appropriations and put on a
self-financing basis, which would ease the amount
up to the figure that Jake had in mind.
Phifting of items.
Currie:
Not very many, though.
Taylor:
Dr. Hansen said he didn't think we ought to do that;
Viner:
I'll mention it - and that is by this device you
that would be doing
I'd agree to that if it were done also to this year's
budget, and if on that basis it should show a reduction, as long as it was consistent accounting. You
ought to aim at a genuine decrease, and I've taken
half a billion as - or it would be - 250 million at
least I would want.
H.M.Jr:
At least a tendency.
Viner:
To et the trend that way and make it definitely
know that the objective is smaller deficits rather
than larger; because I think it would be a little
hard to explain to the public why in a year of
improving business you are increasing your budgetary
deficit.
262
-25H.M.Jr:
There's only one answer; that's national defense.
Viner:
But that isn't an adequate answer, because in the
first place the increase is not very marked in the
budget, on that ground; and in the second place,
the expenditures have been swelling year after
year and swelling on grounds of meeting needs
of depression and unemployment and of stimulation
of business. There ought to be something you can
cut at some stage; of all these things that have
been started, there ought to be some place where
you can begin to cut, where the thing would be
justifiable when first introduced but gets wasteful
if you just continue it as a vested interest or as
a routine.
H.M.Jr:
Well, Jake, just take your thought a minute. Without adding anything over and above the present
national defense, which calls for one billion 155
million, see, the deficit for the year '40 would
be three and a half billion.
Viner:
For the year '40.
H.M.Jr:
Yes.
Viner:
What will it be for the year 139?
Over four billion.
well, there you are - over four. Then you have a
little leeway without doing any taxing.
Yes, but we haven't added anything for this airplane
H.M.Jr:
Viner:
H.M.Jr:
program.
Viner:
Bell seems to think it's not going to be anything of
H.M.Jr:
You've got 800 million in here for Agricultural
Hanes:
any proportions.
Adjustment.
The farm program - they're asking for $300,000,000
more.
Viner:
You ought to cut it on the ordinary relief somehow.
263
-26-
H.M.Jr:
Got down 800 million for Agricultural Adjustment.
That's 300 million more than the average.
Supposed to spend five; that's three hundred over.
Hanes:
You've got that figure in there, yes.
White:
end then furthermore, it assumes what apparently is
regarded as a conservative estimate of receipts.
H.M.Jr:
Hanes:
There is a difference, you see, of half a billion
in the estimates of two different - two independent
agencies, which
Viner:
Well, of course, this proposal, to be at all concrete, would depend on very concrete estimates,
figures as to what the data are going to be in the
budget message.
H.M.Jr:
Well, these figures that I've got were checked again
as of this morning, and they're as of today.
Viner:
Yes, but then you say three to four. All I'm suggesting is well within the framework
The reason I'm saying three to four is because if it
H.M.Jr:
Viner:
picked up our revenue might increase 500 million,
and on the other hand we might spend another 500
million for national defense. That's where I get
my other 500 million. So there's a leeway of from
three to four.
My point is that if your estimate - you see, there
it depends on what business estimate you're going
to use. You see, you're going to use one
Viner:
I'm using the one they gave me today.
Which is the lower or higher one?
White:
That's the lower one - 5.462.
H.M.Jr:
I'm using 5.462, and you g et a deficit of 3.464.
Well, all I can say there is that I would hope you
can present to the President a program calling for a
H.M.Jr:
Viner:
264
-27-
reduction in the deficit over the fiscal year 1939.
H.M.Jr:
He goes much further than you do.
Viner:
I'd agree with Hansen strongly that you ought to
postpone that increase in the payroll tax.
The President - what did he say, two and a half?
H.M.Jr:
Hanes:
Two and a half the maximum; preferably one and a
half.
H.M.Jr:
What?
Hanes:
He was talking one and a half.
Magill:
Can't get it.
I wouldn't urge a sharp reduction in the deficit.
We didn't urge anything. I'm just saying for the
Viner:
H.M.Jr:
Hanes:
group that we listened - I just wanted to check and he talked about one and a half to
One and a half to two and a half.
Viner:
What was his notion as to this year's deficit?
Hanes:
We were figuring on three billion four, five, or
six, and reducing that by two would give you one
billion five or six. So he was figuring on a one
billion and a half deficit.
I'd say it would probably be a mistake to cut the
deficit as much as that.
Viner:
H.M.Jr:
There's not much worry; I wouldn't worry much about
that.
Viner:
I know.
White:
You get - the reasons which lie behind that are
significant for the other problem; the reasons
why he wouldn't cut the deficit bear on
Viner:
I think that you don't want to ....
265
-28White:
Same reasons as the ones we were applying to the
H.M.Jr:
What you're saying to me is - again see if I get
this - that you think the thing we ought to indicate
is that we have reached a peak of deficits and we
are going to go down now. Is that right?
Yes, that you had a - last year's program was to
meet a sharp slump, you are now again apparently
on the upswing, and that you don't increase the
deficit on the upswing, but that that from every
point of view is bad.
Have you any feeling as to any particular new
kinds of taxes, or increasing any taxes?
I'd certainly try and find a way out without
Viner:
H.M.Jr:
Viner:
H.M.Jr:
Viner:
increasing any taxes.
At all.
At all. That if you have to increase taxes, I
think the indication there of that proposal - I
think that's - I wouldn't - I don't believe in
doubling any tax in a single year. I think we've
learned already, burnt our fingers finding it
creates all kinds of problems to make a change in
any tax too abrupt; and if we ought to get twice
as much revenue out of the estate tax as we now
do, we ought to take at least five years to get
to that. I think it was a mistake to put the
undistributed surplus tax in as a full-fledged
tax all in one year, without any experience; you
don't know what pressures you uncover. So I'd
say there that that's the first place I'd look
as the least objectionable of all the tax system,
if you have to get increased revenues.
But I don't believe in doubling taxes in one year.
Move gradually, present a program if you like, put
a schedule into effect: so much the first year, so
much the second year. I don't believe in disturbing reasonable expectations suddenly. There may be
some old man who is tottering to his grave, and
his family is expecting so much, and all of a
sudden you come and say you'll take out twice as
much as you would the year before.
(Laughter)
266
-29H.M.Jr:
Viner:
Taylor:
White:
You don't think that's cricket.
I don't think it's good administration and not good
politics.
Jake thinks he won't die.
Doesn't want to increase the incentive to live.
Viner:
I think there's a good deal to be said for scheduling.
If you think you ought to get twice the revenue out
of the estate tax, I think it's probably better to
present a schedule which will eventually get you
there, at once into the legislation, but schedule
it over some years, which enables you to retreat
if you find you've made some mistake or you'v run
into some difficulty; and which also gives warning
to the people concerned. I'd say the same thing for
almost any tax: that even though you have come to
a final conclusion that you'd increase it heavily,
make it gradual over a time.
H.M.Jr:
Professor Hansenchanged his seat because he wanted
Hansen:
(Nods negatively)
H.M.Jr:
dansen:
It has no social significance?
No social significance.
H.M.Jr:
I've seen "Pins and Needles" twice.
Magill:
All right, Professor Magill.
Well, I'd say again what I said this morning in the
same council of statesmen, that I feel like Daniel
in the lions' den, or the small boy amidst his
H.M.Jr:
Magill:
to talk twice.
elders, something like that, because I'm not one
of these economists, I don't know anything about it.
I know. (Smiling)
Well, therefore, I operate in a simple and probably
erroneous manner about it.
On the whole, I think I probably agree with much of
267
-30-
what Viner and Williams have said. The way that the principal factors, it seems to me, are these the ones you can lay your hands on:
First of all, it's very unlikely, in the state of
affairs as we now know them, with legislation as we
now have it and every push that we can think of
that is now in existence, that there will be anything other than a two to four billion dollar
deficit in the affairs of the Federal Government
in the next several years.
Now, various things can occur; but I've never seen
any of them talked about except in realms of the
possible and not in realms of the probable, or in.
terms of understandable movements which were going
to yield other results.
Now, for one thing, I've never seen anything come
out of Washington, either Republican, Democratic,
H.M.Jr:
Magill:
conservative, liberal, or whatever, that really
looked to a reduction in expenditures. I think
you are, for all practical purposes, a voice crying
in the wilderness on that score.
I think so.
Pat Harrison is all in favor of balancing the budget,
but "I need six hundred million dollars additional
for education" - and that's the way it goes all the
way through.
Well, I'm not making any judgments on that one way
or the other, except this: that it seems to me, as
realistically as I can view it, that a series of
Federal expenditures at the rate of eight or nine
billions of dollars is, at the moment at least, the
accepted thing, and it is apparently the accepted
thing for the next several years, and if it isn't
WPA or PWA, why, it's building battleships or
airplanes or some other kind of thing. And I'm
sure that new occasions will teach us new ways in
which to use up the eight or nine billions of
dollars or more.
268
-31-
The revenue system in my judgment is always going
to leave you with this gap of several billions of
dollars as long as it stands the way it is. Well,
consequently, it seems to me more or less inevitable that if one is sitting in your chair you must
contemplate increases in the revenue side of the
picture; and I think, also, sitting in your chair,
you must contemplate decreases in the expenditure
side of the picture, which are much more difficult
to control, because to - just to mention it and
then to quit, I honestly don't know how you would
go a about raising eight or nine billion dollars for
the Federal Government, unless you had a national
income so much greater than anything that we have
now or indeed that we knew in 1928 or 1929 as to
render it other than rather fantastic from .our present point of view.
Consequently, if I were Secretary of the Treasury,
I should certainly contemplate getting that level
of expenditure down, because I don't know how you're
going to meet it otherwise.
Well now, as to next year, it seems to me very much
more important - and I t h ink this is probably what
Jake has in the back of his head - it is very much
more important that there should come out of Washington
something that looked like a program as to revenues
and expenditures than that you should try to acquire
200 million or 300 million or 750 million. After all,
that - as Jake has said, suppose you doubled the
estate tax; it means three or four hundred million
dollars several years from now, if you doubled it
now. Well, that's a drop in the bucket; it's a
pretty good sized drop, but still a drop.
Take this business of lowering exemptions that people
talk about. As you know very well, you lower the
exemptions 20 percent, which is what's been normally
proposed, and you get maybe 60 million dollars, which
is another drop in the bucket.
Well, it would seem to me very silly to go out with
sprinkling can in the Sahara Desert. If you're
going to try to meet this situation, why, at least
a
announce some kind of a scheme of meeting it which
bids fair to do the trick; and I don't think there is
289
-32-
any need of annoying people with these small things
which stir up a lot of hell but don't accomplish
much.
Well now, to get that down into terms of concrete
fact, I agree very strongly with John Williams that
(a) - that it ought to be brought home to people as
strongly as you can that we are in this particular
situation, that we are perfectly conscious of it,
that we've got our ways and means in which we're
going about
it; and I would make a start at going
about
it.
I think this time schedule is very important, because
the calculations that I had made for me before I left
the Treasury were all to the effect that if you started
in right now, if you were dictator - if you started in
right now with a view to bringing the level of revenues
up so that the budget would be balanced, that you
couldn't accomplish it under three years to save
your life; that any thought of running this deficit
down to a billion and a half is perfectly ridiculous
no more do it next year than you can fly to the moon.
But I think that you clearly can adopt some program
and snow that this kind of thing just isn't going on
indefinitely, that finally you're getting the thing
under control, you're going to make a start at it.
That's where I think Jake's business is so important.
You're not actually going to be able to do much next
year.
Viner:
Put at least you're going in the right direction
rather than the wrong one.
Magill:
I think all this business of putting these little
index numbers after the taxes and all that is
really small potatoes in the psychology of the
country and the way in which the country's money
is being hoarded or expended. It's small potatoes
as compared with the business of getting before
people that the Administration has now finally got
a grip on the thing and that we're going to put the
thing on a legitimate basis. I don't think that you
can expect happy results from the private expenditure
of the country until something like that is indicated;
and I don't mean indicated: you've got to indicate it
pretty hard, since you've got so many years of the
270
-33-
other kind of business.
H.M.Jr:
Currie:
Currie, would you like to say something?
I've felt myself very much in sympathy with Professor
Hansen's point of view. I think there is - I shouldn't
worry about the size of the anticipated deficit next
year. Personally, I think the Treasury has been a bit
conservative in their estimates and probably also
on the expenditures - that is, overstated the
possibilities there. It may turn out by the end
of the year that the deficit will be nearer the
three billion range than the four billion range.
and I think that without fooling anybody or tricking
anybody it is perfectly legitimate to shift certain
things over on a self-financing basis. It's just a
historical accident that U.S.H.A. should be selffinancing, and some of the R.F.C. and not other of
the R.F.C., or certain other of the recoverable
assets, recoverable types of activities - really
commercial types of activities that the Government
engages upon. That would improve the budget pic-
Viner:
Currie:
ture next year, if we did such a thing as that.
You mean the picture of the budget picture.
Yes, which is an important thing psychologically;
and everything, as you point it out - a steadily
mounting series of deficits - we're not speaking
of that in economic terms so much as people's
reaction to that sort of thing.
*hen I think it is also rather important to distinguish between the two parts of the fiscal year that
overlap the calendar years, and whereas the deficit
we talked about is going to be largely concentrated,
I think, in the last part of 1939 and can be sharply
reduced in the first half of '40, when the additional
taxes come in, and as WPA - well, I don't know if
you'll get much r eduction in expenditures; but no
increase then, I should say.
H.M.Jr:
Biggest deficit, I think, will come in the first six
Currie:
Yes. I was thinking now of the fiscal year '40,
of that deficit in that fiscal year. The ma jor
months of the calendar year 139.
271
-34-
part
will six
be months
in the second half of calendar '39,
the first
H.M.Jr:
Our deficit will begin to mount up rapidly the
first - well, really from April to July first of
139.
Currie:
That's right. That's right. And then, of the next
fiscal year, the bulk of it will be in calendar
year 1939 rather than '40.
H.M.Jr:
That's right.
Currie:
So there is - as Professor Hansen pointed out, we
have to keep in mind the danger of too abrupt a
transition here, and I should be very much in
Magill:
favor of his position of not having that increase
in the payroll taxes take place in 1940, which I
think are the most deflationary of all taxes.
Well, there are also the type of taxes which need
the worst type of study; they've been adopted for
no very understandable reason that I know of as the
proper device to finance Social Security. We need
the money, but don't need to raise it in that particular way.
Currie:
That's right. Finally, I do think we might consider
this estate and gift taxes, not with the idea of
improving the picture very much in 1940, but increasing the potential yield of our general tax base as
the income rises.
And I don't think the situation is really quite as
black as it seems. In 1937 the net deficit of that
year only amounted to less than a billion and a half the cash deficit that year only 448 million. And
that was the first year when you got a fairly decent
income, which was still - the national income was
very poor in comparison with 1929, compared with
what we're really capable of producing. So I think
if we're really going ahead with the goal of 80 or
90 billion dollars national income, this picture
may change drastically.
Finally, I would again like to suggest that I subscribe to Professor Hansen's point of view of the
272
-35-
difficulty of seeing enough new investment all over
the country in new fields in comparison with the
volume of saving that we can expect as income goes
out, to permit us to go to full employment. And
that probably means, if we are really determined
to go to full employment, the necessity of Government contribution. That can either be in the
budget, which means deficits, which has the psychological disadvantages you speak of, or I think
we ought to explore as definitely as we can the
possibilities of providing a contribution outside
the budget, which could be continued, such as
U.S.H.A., that type of activity.
I think that's about all.
H.M.Jr:
Harry?
White:
No, I have nothing.
H.M.Jr:
John?
Hanes:
I haven't got anything to add.
H.M.J.:
Ask any questions?
Hanes:
My only feeling is we ought to go after more revenue,
because I think that we're not going to accomplish
any turn-down in the budget figures. I think they're
going to be more than those figures there. Your
figure there shows three billion four without adding
the national defense or your rearmament program. I
think we're going to have a lot more things to contend with. A hundred eighty-one Congressmen in
there committed to some form of the Townsend plan -
that's going to cost some money. So I'm inclined to
face the problem realistically and go and tell the
Congress the accurate condition. I think as the
chief fiscal officer of the Government you ought to
be in a position of saying, "Here's the condition.
Every dime you add to the appropriation is just going
to make the picture that much worse."
My recommendation to you, being from the Secretary
of the Treasury to the President, would be to ask
for a minimum of a billion dollars more taxes,
hoping that you might thereby end up with probably
273
-36-
enough to cover the rearmament program. Maybe
that's about all you can salvage out of the
Congress, or maybe you won't be able to salvage
any of it. But at least you would have done your
duty, as I see it, in stating the facts, looking
the problem right squarely in the face, not being
wishful in your thinking or hopeful about some
future rise in national income, which if it comes
so much the better, fine.
That's my present opinion, reserving the right to change
it.
H.M.Jr:
Always.
Viner:
I think if it's feasible it would be a good thing
Viner:
if as part of the President's budgetary message
there were a good historical analysis of the allaround budgetary position of the Federal and state
and local governments, as well as you can get it,
over the past ten years.
You can get some figures rather quickly.
Some part of it would work in the direction of
white:
A study has just been published which has something.
Taylor:
Twentieth Century thing is pretty good.
Viner:
You mean that's
White:
+hat's what you signed.
Viner:
Yes.
Taylor:
Did you read it?
Viner:
I put a lot of work in on that.
White:
And there are enough available figures to get some-
Hanes:
I might say that one thing that makes a tremendous
White:
justifying a deficit.
....
thing which would be very preliminary, but at least
will throw some light on the outstanding
274
-37-
impression on my mind is something that you heard
the President say, that this is your last opportunity
to get a tax bill before 1941. That leaves the
country in a pretty - leaves them in a pretty upset
frame of mind. If they're going to do something
about I like your (Viner) idea tremendously
that it you could set out a program from here until
1944 and say, "This is what the tax program is going
to be for the next five years" - God Almighty, that
would go a long way.
Viner:
That's what business men ask for very often. But
there's one other point there - I think I may have
made it, but I would like to make it more clearly and that is that it is desirable, if you're going to
have any new taxes, that you deliberately lag the
taxes after the expenditure which they' re helping
to finance, or you provide the revenue to take care
of them afterwards; so temporarily they'11 create a
deficit. In other words, don't do as the processing
tax did, collect the revenue and then pay it out,
as long as you've got a lot of unemployment. In
other words, deliberately enact now taxes to come
into effect at some future date. Make sure of your
lags: that the lag is in the right direction, not
the wrong one. Also, schedule your taxes ahead.
If you can work out a program for eventual budgetary
balancing in terms of enacting taxes now to take
effect in the future, I'd say there's something to
be said for that.
H.M.Jr:
I might just say in passing, before I call on Wayne,
Magill:
bill to end all tax bills.
I'd still like to see that.
H.M.Jr:
that Magill and I, when we were young and hopeful and
innocent, once had an idea we'd get through & tax
We never got any further than incorporated yachts,
did we?
Magill:
We got into incorporated yachts and we got that on
a reef.
White:
Ros was going to raise all additional expenditures
out of borrowing, end all tax bills? (Smiling)
275
-38Viner:
Have a tax bill which was a permanent thing, which
doesn't have to be touched each year.
White:
Oh.
H.M.Jr:
"ayne?
Taylor:
Well, I think I ought to talk in two ways: one, in
termsthat
of what I think you can do. Would you rather
have
H.M.Jr:
I'd like to have whatever you've got on your mind.
well, in terms of what I think you can do, you can
do your gift tax, inheritance tax. And I don't
agree with Jake on that particular subject; I mean
in talking to a great many people who worry about
things like that, why, that's the last one that they
arag in: worrying about what happens to their great
grandchildren. They'11 usually mention it, but in
terms of their taking a specific action one way or
Taylor:
the other, I find that that's the last one.
Viner:
You mean that it won't have an adverse effect on
Magill:
raised an equity consideration.
If you create enough trusts, you can postpone any
tax for about a hundred years anyway, so it isn't
one of these necessarily immediate worries.
Taylor:
business. I didn't raise that point, Wayne; I
DO I think you can do that. You can double it,
for example, without its hurting anything very much
one way or the other; and if you want to make that
gesture, why, that's a fine thing to do.
The other one is that, regardless of the effect on
the budget presentation, let's say, or what would look
like the cash receipts of a particular year, I think
we ought to change our presentation so that it would
snow far more accurately than it does at the present
time, both what you could describe as your balance
sheet presentation and your income account. It's
completely confusing and misleading at the present
time, and you would get rather good results from
doing that.
Other than that, I don't think it would be
276
-39-
particularly desirable from the whole standpoint
to increase taxes this year - at this time.
H.M.Jr:
Herbert?
Gaston:
I think the alternatives here on this immediate
problem can be stated something like this. You
have the first alternative of doing nothing to
the tax structure. Now, the facts behind that are
something like this: I think Danny Bell's estimates
are probably pretty good - about eight billion nine
of expenditures without your special armament program
and about nine four with them; and the revenue
estimate may be equally good, and it means a deficit
of not between three and four billion, but probably
right around four billion, or maybe over it, and it
will not be an improvement on the deficit for this
year.
The second alternative is moderate taxation.
The third alternative is taxation in the scale of
a billion dollars upwards, a billion to two billion.
I think everybody agrees that that's absurd, that
it just can't be done in the present situation.
First, you couldn't get it through Congress, and if
you could it would be a calamity.
If it were not for one fact, I would say that you
might leave the tax structure entirely alone, and
that fact has to do with Social Security. We're
going to get probably an abatement of this rising
scale of Social Security taxes, and a large part of
that expense, plus some additional expense for more
liberal pensions, is going to be slapped into the
general budget.
I would say that something should be done with the
estate and gift taxes to relate them more closely
together and to increase the over-all revenue, and
probably it would be a good thing to go to Congress
with a proposal for a hundred percent increase all
down the line, which we won't get. We may get
50 percent, and that will be fine.
And then I should think that we ought to dip into the
middle incomes, perhaps, from five thousand up to a
277
-40-
hundred thousand, and some strengthening of the
schedules in that range all down the line to pro-
duce some additional revenue; that will meet Jake's
requirement for delayed collection of taxes to
more or less correspond with the effect of the
expenditures. The revenue in the first year will
not be important, and I don't think we should want
to raise more than two or three hundred, or four
hundred million at the outside, of revenue in the
fiscal year 1940 - or not - yes, the fiscal year
1940, with a considerably increased revenue after
that.
And that's about the way - that's just about the
situation as I see it.
But
about
reclassification
of
the budget, clearly
in mind that what we President's
budget
S
a
statement
of
receipts
and the
Government,
and
it's
not
a
it
can't
be
made
a
If
you
get
the in
accounting,
thatinto
can
tables,
illustrative
tables,
perhaps
accompany or be a part of the President's budget;
and be this in done I field expenditures don't the reference profit profit daily of the think studies have and profit and way tatement to of both loss people loss of the and that statement in statistical statement. Federal loss always might is the keep and
but I don't think they belong in the budget sheet
itself, which is a receipts and expenditures estimated receipts and expenditures budget.
Viner:
But there is one thing that we could do to the
present daily statement and to the present budget
showing, and that is to straighten out this mess
as between loans and grants; to set up in a separate
classification, weed them out, all the repayable
loans for which we expend money, and separately
classify them in the budget; and when they are
repaid, not take them in as a lessening of expenditures, but take them in as realization upon assets
as they are and ought to be.
Hasn't that been done in the past, in the last few
years?
Gaston:
It's still scrambled. We only started to do it.
It isn't done.
278
-41-
Taylor:
That's the type of thing that I was talking about.
Gaston:
Yes.
H.M.Jr:
And then I suppose that thing also - I mean every
time the R.F.C. takes in more than it lends, why, we
show that as a receipt.
Gaston:
Yes, we're now showing it
Taylor:
Only if they pay it over to us.
Viner:
They have a revolving fund.
Taylor:
The whole thing is just as
H.M.Jr:
ae could put R.F.C. off by itself entirely.
You should do that to all of them, Henry, and set
them up on a perfectly established basis. And you
could even go further than that. You could require
them to pay you dividends on their capital stock.
Yes. I think a very good way of setting them up
would be to get them out of the budget entirely
by bucketing all our recoverable loans in the
R.F.C., let just that one agency take every single
recoverable loan and bucket it by having it
handled through the R.F.C.; have them put out
their own securities for it, and get that entire
Taylor:
Gaston:
Viner:
confusing conglomeration out of the budget.
and have H.O.L.C. do its collecting into the hands
of the R.F.C.
Gaston:
Correct - and pay off their loans.
H.M.Jr:
Well
Hanes:
I might say that it will make my problem a whole lot
easier if we don't ask for any taxes at all; that's
the easiest way for me to go.
H.M.Jr:
I'd like to keep this.
Hanes:
....
DO you want this too? It shows the revenue all the
way through each kind of tax.
279
-42H.M.Jr:
The President said if he didn't go to church
tomorrow he'd send for me. So I told him
that's putting the budget on a high plane.
white:
It's in the realm of faith and prayer.
Makes it a substitute for salvation.
I take it, Mr. Secretary, there's no decision -
Viner:
White:
that if you're going to see him tomorrow, can't
anticipate what your other meeting Monday morning
may
when
H.M.Jr:
Never can tell/the President and I g et together
what will happen.
White:
I'm merely throwing that out as a reminder.
H.M.Jr:
You can't tell. I wouldn't guarantee anything. I
mean
White:
well, you have a meeting Monday morning, is all I
H.M.Jr:
As a matter of fact, I don't know what to do with
want to know.
the meeting Monday morning, other than to report
what's been done here.
Hanes:
White:
Report a great difference of opinion.
There is room for further discussion.
H.M.Jr:
I want to do that, want these people to know what
we've done. But I wouldn't know, unless something
developed by Monday morning - developed in that
Monday morning meeting - I wouldn't know what to
go with with that group to the President on Monday
afternoon. would you, Currie?
Currie:
Well, I don't know just what your plans are, Mr.
Secretary.
H.M.Jr:
well, what I thought was - what I wanted - what
we've done is, we've decided that - I take it, that
this idea of using the multipliers on the budget is
not at this present stage worthy of presenting to the
280
-43-
President. Now certainly after listening to this
I wouldn't present it to him.
White:
Well, I don't think that committee would - I mean
I don't think that that would be the chief consideration.
H.M.Jr:
Now, it gets down to what we do and what we're
talking here. Unless that committee has something
original to present, this thing just gets down to
the regular old job and
White:
Yes.
H.M.Jr:
I mean, but certainly when I meet with the committee
Monday I'll report what we've done and where we're
at and ask for suggestions.
White:
That's right.
H.M.Jr:
What?
White:
That's all.
And ask for suggestions. But what I'm trying to find
out tomorrow, if the President will take me into his
confidence, is where he stands on this national
defense program; that's what I'm trying to find out.
And he made the very interesting comment that he
thought he'd be "very ready" tomorrow. Well, at
least we haven't held him back any. I'd like to
get some look-in as to what he's got in his mind
on the extra national defense items, because it's
H.M.Jr:
been three weeks since we've seen them, and we
don't know any more now than we did three weeks
ago.
But as to Monday, either one of you two gentlemen
(White and Currie) or both can say, "This is what
we've done, this is where we're at," and then "Have
you people got any suggestions to make?"
White:
That's all I had in mind.
H.M.Jr:
What?
White:
That's all. I think that if any definitive statement
281
-44-
on your part could be postponed reasonably, I think
there is something to be said for postponement until
Monday afternoon.
H.M.Jr:
well, I've got - I'm no further tonight than I was
three weeks ago. I mean in that I have no positive
program.
White:
Yes.
H.M.Jr:
I've got nothing, I mean. All you people have done
is to make me feel a bit more comfortable in that
you all say to me, "Well, you might just as well
recognize you're going to have a hell of a big
deficit, and don't feel too badly about it."
White:
That's a great achievement.
H.M.Jr:
What?
White:
That's a great achievement.
H.M.Jr:
Well
Hanes:
Didn't say, "You don't feel bad"; they said, "Don't
feel bad."
H.M.Jr:
I recognize it, but 1 didn't realize I had as much
company.
Gaston:
You couldn't report this much positively: that all
this group is in agreement that additional taxation
such as was discussed, in the neighborhood of two
billion dollars for next year, would in their opinion
be harmful to the national economy, that everybody is
against that?
H.M.Jr:
Yes. And the big thing - to be very serious, the
big thing I've got now is that if the President comes
back and says, "What about this sales tax idea for
national defense?" I'll say "No." We talked about
that three weeks ago. So we'd say "No" on that.
Then if he'd say, "Well, can't you give me - can't
Johnny Hanes or you or somebody in the Treasury give
me a tax to take care of the national defense?" - and
the answer on that is "No."
Taylor:
Unless you earmark this inheritance tax, and so on.
282
-45Gaston:
That would just about match your defense figures.
Hanes:
here's no new kind of tax that anybody's been able
to think up.
H.M.Jr:
Go back and say, "If you want to spend a billion
dollars, two billion dollars, for national defense,
we don't know of any particular tax that we'd
recommend to you." Isn't that it, Johnny?
Hanes:
I'm not satisfied with just discarding the idea
of the stamp tax, without having some reason for
it. We're collecting now a billion six hundred
million dollars in sales taxes per annum.
H.M.Jr:
You mean to increase that?
Hanes:
I say we're now collecting that.
H.M.Jr:
Would you increase that?
Hanes:
I don't think those are doing any great amount of
harm. I don't see any great slowing down of
consumption from those taxes.
White:
How could you see them, where would you look to see
them? You'd have to approach that analytically,
wouldn't you, John?
Hanes:
I just say I haven't seen it, haven't seen any
analysis made of what's happened in these states what's happened in Canada, what's happened in the
various states that put on sales taxes, what happened in New York City when they put on a sales
tax. I just don't like to say, "I know a sales
tax is bad" until I do know it, and I don't know
it, and I've never seen anything that would prove
it to me.
H.M.Jr:
Well, the place Ifind myself is this: if he said
to me tomorrow, "Well, have you got a national
defense tax that you can r ecommend?"
Hanes:
H.M.Jr:
the answer to that is "No."
Is "No."
283
-46Hanes:
Sure.
Williams:
Trouble with the sales tax, it seems to me, is that
if you had it, it might be quite useful, you could
move it up and down; but the difficulty is when to
impose it. If we take very seriously this question
of impact on consumption, why - then if we think
that next year may not be too good, why, you'd hate
to come out with that at that particular juncture.
That's the difficulty, as I see it.
White:
Hanes:
Viner:
Difficulty, John, is that it would be extremely
difficult, if not impossible, to trace the impact
so that you could see it. It has to be approached
on an analytical basis.
All I'm saying is that I haven't seen anything that
proves anything to me. Everybody says these things
and just discards it like that.
Supposing you have a working class family with, say,
$800 of working income, and something even cuts the
income $50. How would you see it in cutting that
Hanes:
much income? It's the same thing as when you take
away something like that from them. How would you
see it? They'd feel it. The housewife could tell
you that her bread and milk costs her more and it's
lawfully hard for them to make ends meet.
You would doubtless take the tax off of necessities
of life, I should think. That's what - everything
I've ever heard discussed eliminated and exempted
those things. But what I'm saying, Jake, is that
you're now collecting a billion six hundred million
dollars in sales taxes.
Gaston:
From the things that are not necessary, from the
luxuries; we've got them covered now.
Hanes:
You've got a lot of necessities in there too.
I think there are some bad ones that ought to be
Viner:
removed.
Hanes:
You've got a tremendous sales tax on the income of
the low-income groups now. You're getting about
67 percent of your taxes from them - hidden taxes,
one form or another.
-
284
-47Gaston:
Too much, probably.
Hanes:
The point I make is that it isn't a question of if you're talking about revenue - being in a
situation now where we say, "We've got to balance
our budget and it's a billion dollars out of
" The choice
balance; now it's the choice
isn't, "Here's a good tax." None of them are good;
they're all evil, because they every darn one of
them are hard to pay; nobody likes them, as far as
that goes. But the choice is as to which kind of
tax in order to raise a billion dollars are we
going to take? We've got to do one or the other
thing. Now here we've got only a few sources of
revenue that are open to us. It seems to me that
the choice comes down, narrows itself down to a very
few choices and it's a question of which one of
those choices are you going to take.
Viner:
Well, I'd say if the Government had to get a billion
or two more in revenue, the big source would be the
middle incomes
Taylor:
Yes.
Viner:
which are lightly taxed as compared to other
countries and as compared to the rest of the
American tax system.
Magill:
Viner:
danes:
That's right.
The poor are heavily taxed - state and local.
Certainly no question about that. I'm a hundred
percent in agreement with that. They certainly are
too heavily taxed, far too heavily taxed.
H.M.Jr:
It's too bad - I mean inasmuch as we're going to
have a national defense program, that there isn't
some tax which could be labeled for that.
Hanes:
Everybody could feel that they are being a part of
H.M.Jr:
It's too bad we've got to go back to him and say
we haven't anything.
it.
285
-48White:
It seems to me that the state of business activity 1 think if business were good you'd be able to
find several good tax sources that you could label
and get across and reduce the dislike on the part
of the individuals to pay it, because it would be
identified with this protective tax. Your chief
objection lies not in the field that people will
dislike paying it, but rather in its effect on the
economy. Therefore, the thing which is too bad is
that our national income is so much lower than we'd
Williams:
Viner:
Magill:
Viner:
Williams:
Viner:
H.M.Jr:
like to see it.
The difficulty is partly that, but partly that it
is so hard to see what lies immediately ahead of
you. Now, I think anybody who ever made any forecast will confess that he's made some mistakes.
There's the nature of your problem: trying to do
this thing up and down. If it's a good year next
year, why, I wouldn't have any hesitation in saying,
"Why, yes, increase your taxes substantially, reduce
your expenditures" - if there's a good year. Now,
it might be - it's an open question. But if you're
confronted with these forecasts that indicate it may
not be - seems to be quite a concensus on that down
here - why, then you get a totally different slant
on it. And I don't know that we can ever progress
beyond that difficulty; it's inherent in what we're
trying to do.
That is, practically, the trouble.
As long as you've got this uncertain budgetary
situation, you have not got the conditions that
make for better business conditions.
In a budget that is heavily loaded with what are
supposed to be relief items, it's too bad that
there really aren't flexible items there that you
can cut off quickly and vice versa.
That's where your sales tax would help.
That's on the revenue side, but I mean expenditures.
You take here, for instance, an item of carry-over
from 1938 - 833 million - I mean it's these damn
286
-49-
carry-overs from one year to another which make
it very difficult to adjust ourselves in times
either good or bad.
Viner:
You mean they don't have to be re-appropriated.
H.M.Jr:
Viner:
No, they're there.
And they can't be cut off.
H.M.Jr:
No. I forget the figure here, on November 18 -
of the new money given to Mr. Ickes, on November
18 - it was given to him last June - he had spent
34 million dollars. And Straus had drawn on
November 18 - had drawn on the Treasury for four
million dollars; I'm using November 18; maybe by
December 1 he had spent five million dollars. And
Viner:
ickes, with D billion and a half, had spent 34.
Well, that's an old story.
H.M.Jr:
I know it is. But that's - I mean it's those kind
of things that when you make - when you talk about -
and those appropriations will hit us just the way
the bonus did. and then you people say, "Taper
off." Well, I agree with you. But they're going
to come at the end of this fiscal year, they're
going to hit like hell, and we're going to go way
up and then she goes down. And it isn't because
we sit here and figure it that way, but it's because
it's the kind of expenditures which I don't think
should be in the budget.
Viner:
Well, you ought to point that out, that part of the
thing that takes the situation out of your hands is
the fact that the relief expenditures were put into
a form in which they're really inflexible and you
can't cut them off.
H.M.Jr:
You remember I once did, Jake, so many months ago.
Viner:
Here's a chance to say, "I told you so."
H.M.Jr:
Well, we did it in a letter very politely.
Viner:
I remember you also did it in '34.
H.M.Jr:
well, I want to say this, so that you people - I've
287
-50-
gotten real guidance. I've got this feeling, which
I'll report to this Fiscal and Monetary Committee
Monday, and also to the President if he sees me
tomorrow: that this question of raising a lot more
taxes at this time, we all think is inadvisable.
I've got the feeling, which I think is almost
unanimous, that if we could indicate that from
now on the deficits will become less, that that
would be something. And when we talk of raising
another five hundred million dollars in taxes,
that's pretty near the outside.
Magill:
That's the most you can do.
Gaston:
The first year.
White:
That would be for the second year.
H.M.Jr:
And you wouldn't get much of that in the next fiscal
year.
Viner:
Gaston:
H.M.Jr:
About the most you could put into the tax system
would be something which in a later year would produce five hundred per year.
Two hundred this year, maybe two fifty.
I do think what Herbert and other people have said;
it ought not to be too difficult to set up the
budget and take out these self-liquidating things.
Gaston:
Yes.
Taylor:
No, that's really a very simple thing to do; and
in fact, we've got one pretty good report on that,
what what's-his-name
H.M.Jr:
... Himmelblau did.
Taylor:
Himmelblau did it.
H.M.Jr:
Northwestern University.
Taylor:
You might go a little further than that in some
places. Instead of doing this practice run which
he recommended, I think you could do it tomorrow
and you'd get the same result.
288
-51H.M.Jr:
You don't think we need any law.
Taylor:
Well, that I don't know.
Gaston:
You could do it through R.F.C. right now: lift them
bodily right out of the budget and bucket them in
R.F.C.; let them do their own financing.
Oh, from that standpoint you can, as far as R.F.C.
Taylor:
goes. But, for instance, we're going a little bit
the other way - take this Commodity Credit model;
if you put them in under R.F.C., you see, why then
you get away from that thing. But the same principle applies. I mean you'd have Commodity Credit
doing its own financing - Home Owners Loan
Gaston:
But you ought to have R.F.C. do all of it with the
Treasury.
Viner:
Don't have too many Federal debts.
Taylor:
Well, I'd like to argue about that a little bit.
Gaston:
It's the Government financing corporation, that's
what it is.
289
December 12, 1938.
GROUP MEETING
Present:
9:30 A. M.
Mr. Oliphant
Mr. Gaston
Mr. Taylor
Mr. Hanes
Mr. Haas
Mr. Duffield
Mr. Upham
Mr. White
Mr. Gibbons
Mr. Bell
Mr. McReynolds
Mr. Lochhead
H.M.Jr:
Good morning.
The thing that I asked Upham for - we'll get
this straightened out while he's here. He's
again Acting Comptroller, and will be for some
time, I guess. My only information is from
Jesse Jones who called on me last night. He
thought Preston Delano would be ill maybe a week,
maybe two weeks, maybe three weeks. That is my
only source of information.
So I don't know what's going on, but I think the
Banking Committee better get together with Cy
so they can inform each other of what is going
on, so he will know; so if it is convenient for
Hanes, convenient for you, Cy, will you ask Hanes
to move together.
Upham:
Any time.
H.M.Jr:
And if Mr. Giannini makes any more remarks about
my being an influence in the treatment of the
Bank of America or any other bank, I'd like to
know about it first hand, because in the first
place it is defamation of character. He's made
it, and in front of Cy, and he's made it to Leo
Crowley; and I don't know how many more times,
Herman, we should let him make remarks without
90
2-
taking possibly legal action. His father has
made a statement, and I wish you'd examine it,
will you, please?
Oliphant:
Yes, sure.
H.M.Jr:
He did apologize to Cy, which is nice, but that
isn't apologizing to me. And I just don't know
how long we want to let that son of a bitch do
business in the Treasury, and if he continues
that way I am either going to take legal action
or instruct the Treasury representatives not to
do business with him. I am certainly not going
to let anybody in the Treasury continue to talk
with him, to do business with him, if he continues to lie and misrepresent the facts; and the
Comptroller's office is in the Treasury, and if
this man continues to talk that way, I'll instruct
the fellows in there not to do business with the
Bank of America until they can send somebody out
here who is unbiased and who will deal with the
Treasury on the basis of fact and not on the
basis of prejudice; and I want to congratulate
Cy on his attitude, and thank him. At least there
is one man who wouldn't stand there and take
this thing. And I - I am not - I am not in any
kidding frame of mind, either.
It's a question of - I mean, just how far these
two Gianninis can go in defaming my character.
I am not going to stand for it. I am perfectly
willing to tell it to him to his face and then
kick him out of the place. He's just got to behave
like a gentleman or else I am not going to let
anybody in the Treasury do business with him, Cy.
I am not going to stand for it any more; I have
reached the end. Either this Giannini will
conduct himself like a gentleman and stick to
facts or I am going to issue instructions that
we are not going any further in this negotiation.
He apologized to Cy; it's very nice, but he hasn't
apologized to me.
Now you people doing this banking stuff can talk
it over and I wish you'd advise me. Any more
remarks like that from Mr. Giannini, and he can
go back to the Coast. I am not going to have
291
-3anybody connected with the Treasury talk with
him. Never, in the five years I have been here nobody's ever questioned my integrity and
sincerity, and I am not going to let a little
fellow from the Coast do it. And I again thank
Cy for acting like a man.
Cy, you get in touch with Johnny, will you and
Mr. Hanes, and bring them up to date.
Have you talked to Mrs. Delano today?
Upham:
Mrs. Delano called me this morning, and said she
H.M.Jr:
thought he'd be ill two or three days.
Think over that suggestion I made, will you?
Upham:
Surely.
H.M.Jr:
Mac, you, or Archie, I asked to give me a couple
names for manager of this Chinese company that's
formed in New York. Did I ask you?
McReynolds: what you said, you said "Archie and I."
Lochhead:
I spoke to Mr. Peoples after I left you this
morning - Admiral Peoples - and he was getting
somewhat tied up with will Captain Collins was
H.M.Jr:
for the settling of the contract, but he said he
was thinking it over and it would be rather hard thinking about the proper men. I said you wanted
action. He's going to call me again this evening.
Mac, I am going to pin you to the responsibility.
I want, tomorrow at this hour, the names of three
people, either ex-Army or ex-Navy men, and if
Peoples can't do it, to hell with him. I want
two retired Army or Naval men. If Peoples can't
do it, let Peoples go, if he's so busy. Call
up Admiral Leahy for me; ask him to give me the
names of three ex-Navy officers. Tell Leahy I'm
asking for them.
You spoke to Peoples?
Lochhead:
I spoke to him this morning.
McReynolds: We'll have them. Collins wanted to know if you
292
-4wanted any more information from him. He said
he told you yesterday what the situation was.
H.M.Jr:
Hanes:
Did you ?
I was going to ask you what time these meetings
were this morning so we can arrange with Cy to
get together with the banking group. You've got
a meeting here?
H.M.Jr:
Ten thirty, I think, You'd better get busy on
Hanes:
Better say ten o'clock, and try to get a half hour
in with Cy before ten thirty.
H.M.Jr:
When are they meeting on the Bank of America?
Upham:
That, I don't know; I am not informed on that.
the phone and make sure that goes to Delano.
And then two o'clock, at the White House, you
(Mr. Hanes) definitely, anyway.
What happened Saturday, I don't know what the
situation is.
H.M.Jr:
Well, Jones told me last night that he spent all
of yesterday trying to put down on paper what
he felt the position was of Hanes, Crowley, Preston
Delano, Giannini, and himself. He said he had
been listening to five people; said he locked
himself up for six hours and tried to put it down
on paper to see what it looked like. I suppose
he was going to do something with it. That's
what he told me yesterday. I think
I think ten o'clock would be good.
Hanes:
Ten o'clock.
H.M.Jr:
Dan?
Bell:
Some time ago I took up with you the question of
increasing the deposits in those two California
banks, and you asked me to discuss it with Hanes
and Taylor, and also Mr. Upham and Mr. Delano.
And in addition you asked me to explain to Mr.
Delano, the complete depository procedure. I
have done all of that and everybody agrees that
we should not let this present situation stand
293
-5in our way of designating these depositories
for additional amounts of money to carry on the
Social Security's activities.
H.M.Jr:
And you so recommend?
Bell:
Yes. It is well secured.
H.M.Jr:
Mr. Putnam would like to have a meeting of the
Library of Congress Trust Fund Board.
I can't meet with them.
Bell:
You want to tell him to wait?
H.M.Jr:
Until after the first of the year.
Bell:
You'll be interested in a couple of items.
(Mr. Kieley comes in; leaves note.)
We have a list here - just one little section,
where the Resettlement - Farm Security Administration is making loans to farmers. This is just a
matter of interest. They run from $16.50 to
$57.89 a piece. Those loans are to be repaid
over a period of forty years, and the repayments,
the monthly repayments run from 27c to 96 a
month. The accounting in that costs more than
Bell:
the loans.
McReynolds: Much more.
Bell:
Here is a letter you will be interested in,
which was sent to our accountant in charge, on
December 3. We had sent him a bill, and he said:
"I am forwarding to you hereby a money order for
$5.00 through your agent at Patchogue, Long Island,
Mr. L. Towsley, my monthly repayment on my loan.
"I am very sorry at present not to be able to
contribute more.
"When I was obtaining a loan, I applied for the
amount of $600.00 which would be quite sufficient
to buy baby chicks and raise them, but Mr. Thompson,
the agent at Bridgeton, New Jersey, insisted on
294
-6taking $1,758.00 instead and building an additional
chicken coop, 20' x 50' at a cost of $500.00.
"I did not want to do it because the farm was not
my own, I was only renting it, but Mr. Thompson
insisted on taking that amount or nothing, so I
was forced to consent against my own will.
"Later on when the farm was liquidated, I realized
from the sale of the flock and equipment $600.00
which was immediately given to Mr. Thompson.
Had I been given the amount I applied for at the
beginning my debt to the Government would have been
paid. I was left with $30.00 on hand. The above
mentioned coop was not covered by Mr. Thompson
in the mortgage.
"So what happened is this: The coop being built
good and solid as requested and fastened to the
ground, became the property, according to law,
of the owner of the farm, Mr. LeGore.
"But where do I come in? Why should I make a
present to the owner of the farm, Mr. LeGore, of
a new chicken coop at a cost of $500.00 and pay
for it myself?
"I would like to be relieved of this amount and
my indebtedness to the Government reduced accordingly. Why should I pay for the oversight of
Mr. Thompson?"
H.M.Jr:
What agency is Thompson working for?
Bell:
He was the Farm Security Administration agent.
H.M.Jr:
Of the Tugwell era?
Bell:
He doesn't say what the date of the loan is.
H.M.Jr:
Have you got any more bedtime stories?
Bell:
I thought you'd be interested in that.
Taylor:
It's a fair question.
Dan, that stuff that Eddie Bartelt, you and I -
H.M.Jr:
when will we have that?
-7Bell:
H.M.Jr:
Bell:
295
Right after this meeting I am going over it; it
is in rough draft form. We will have it by ten
thirty, if you want it five minutes before.
Anyway,
Hanes, you, and I definitely will have
two o'clock
All right.
whether the others go or not.
H.M.Jr:
O. K. One thing, for you and Gaston - I want
to say here and now I know nothing about this
story the Herald-Tribune had: Eight and a
half billion due for '40 - and it goes on with
lot of talk. This is the second one; this is ,the
Herald-Tribune Bureau, and it uses these words,
"The first official sources." It refers to
official sources here. " marked as it has been
a
by the second depression encountered by the New
Deal, was indicated for 1940 today in authoritative Administration quarters."
Bell:
H.M.Jr:
What do they say?
It just goes on - "Eight and a half million
Budget is due;" then it goes on: "Although Presi-
dent Roosevelt recently has toyed with the budget-
"
ary principles advanced by David Cushman Coyle
Bell:
The fellow Jones called me last night about; he
didn't talk about the amount of the budget, but
he talked about the changes in the form.
H.M.Jr:
Should I worry, or is that a White House story?
Bell:
I shouldn't think you should worry. I haven't
read this. He asked me if there was any chance
of material changes in the budget. I said I
couldn't tell him except for time elements
involved, and he could draw his own conclusions.
in accordance
(Several talking together)
with the daily statement put out on July 1.
H.M.Jr:
Whose?
Bell:
National Resources.
296
-8H.M.Jr:
Will you find out? Everybody tells me he's on
a different payroll.
Bell:
Maybe he's on several.
H.M.Jr:
Will you make a note?
Bell:
Yes.
H.M.Jr:
That gives us a lead on this stuff. Well, this
stuff, I haven't got it in my hand; the stuff I
showed you yesterday - trying to find out who
wrote it. It's all about the Swedish, and that
stuff.
White:
David Cushman Coyle would be in sympathy with that,
Bell:
He's on the National Resources Committee, isn't
so that could be right.
he?
White:
I don't know that.
Haas:
He was on the P. W. A.
H.M.Jr:
I was told he got ten thousand dollars from
(name of organization not heard clearly.) Just
for fun, find out - just for ten thousand dollars.
Lochhead:
The market continued quiet, but the sterling
was inclined to ease off to 4.66 3/8 because
of
There's
this European memo and Lithuanian
not a very good impulse in the market.
White:
This man, Mr. May, you asked to help us, is
scheduled to return on Wednesday. He has given
us everything he says he has. We are having some
questions prepared for him so when he goes back
he will be able to look up the answers. If that
is all right with you that can go forward and he
can go back.
H.M.Jr:
That's all right.
White:
There was an outflow of capital for the weekend
of November 30 of about eleven million dollars.
H.M.Jr:
I didn't get that. Would you have somebody in
your office read - no longer Warren and Pearson;
297
-9it's Pearson and Myers now. This Farm Economics
Bulletin.
I read it - entitled "Prices," and it's
on this new General Motors.
White:
H.M.Jr:
Yes, we have a lot of material on that.
I've read it, and I hate to say this about my old
chum, Bill Myers, but I couldn't understand
Pearson and Myers any better than I could Warren
and Pearson on this stuff. I'd like to write
Bill Myers and say, "I read ten pages, and so
what?"
White:
I'll draft a letter.
H.M.Jr:
Will you? I've got - I've got high school
intelligence, but I can't get through that. Have
you seen it?
Taylor:
Yes. Harry, on that, I've got a letter from
H.M.Jr:
That all feeds in there - all this -"so I'd like
Edgar Smith, with some other stuff.
to know, in a hundred words, what you recommend
to do about it." I have never been able to get
Edgar Smith or his boss, Mooney, to say what they
want to do about it. I am going to write a letter
to Bill Myers: "Dear Bill: I have read this
thing, without worrying about what the facts
are; directly, what do you recommend on the facts
in this Bulletin?"
Gaston:
He wrote me a letter; he sent me two copies; one,
I gave to George. One thing he deduces from it
is that the various devices adopted by the Department of Agriculture, the compensation payments
and so on have had no substantial effects on
farm prices.
H.M.Jr:
Well, he won't say that publicly. The trouble
is, these people publish a ten page bulletin;
they cite the facts and won't draw any conclusions.
Gaston:
That's scientific.
Oliphant:
Maybe Myers would say that publicly.
H.M.Jr:
No he won't; he never has; he wouldn't all the
time he was here.
298
- 10 Oliphant: He's "Dean" now.
H.M.Jr:
This
is all under-ground publicity. I want to
smoke it out.
White:
General Motors is giving that a lot of publicity.
H.M.Jr:
I know it; I'd like to get it out in the open; I'd
like to write a letter to those people and I'd
like to write a letter to Chairman Sloan, of
General Motors. I'd like to ask them what they
want the Government to do.
White:
They want an open gold market, in order to
Oliphant:
I asked him a question and smoked him out on
that one; he backed out.
H.M.Jr:
Let's try in the not too distant future to smoke
out Bill Myers on this thing.
Taylor:
General Motors would tell us.
White:
They wouldn't tell us here. He did tell me, in
H.M.Jr:
the back room, and he wouldn't say so here.
I want a letter to Chairman Sloan and Bill Myers,
a letter asking what do they want us to do differently than we are doing now.
Oliphant:
Parity among all forms of coin and currency.
H.M.Jr:
I'd like to write a courteous letter; say, "What
do you people want us to do differently than we
are doing now?" Why not just write that for me,
Mac? Just write a letter
I think, possibly, it might be accompanied by,
White:
H.M.Jr:
"We understand from the letter
"
No, just, "Dear Bill: I have read this latest
bulletin and statement by you and Professor Pearson.
I would appreciate your advising me what you
think the United States Government should do
differently in handling of gold than it is doing
now."
299
- 11 White:
Gaston:
H.M.Jr:
It presupposes that you accept whatever they
say here. Is that the implication?
No. I shouldn't think so.
No. Just - just send it off to him.
McReynolds: You just want to write to Bill, not to Sloan?
H.M.Jr:
Not to Sloan; they are doing the work, aren't
they? They are doing the research work?
White:
This is issued.
H.M.Jr:
Let's just - what is it called?
White:
The Department of Agricultural Economics and
Farm Management Bulletin.
H.M.Jr:
Give the Bulletin to Mac and let him write this
letter.
H.M.Jr:
Steve, did I ask you?
I have nothing.
Gibbons:
Hanes:
Guy Helvering called me on Saturday and said he
thought he was going to the White House on Tuesday and amongst other things, he was going to ask
for a million four hundred thousand dollars more
for the Bureau of Internal Revenue.
H.M.Jr:
Why does he ask the White House for that?
Hanes:
I don't know; that is just the message he gave me;
said he wanted to post us on the fact he was going
to ask for a million four hundred thousand more.
H.M.Jr:
He shouldn't ask the President for that. Will you
tell him before he asks the President for an
increase in appropriation
Hanes:
To check with you.
to speak to me. Will you?
H.M.Jr:
Hanes:
Yes.
- 12 H.M.Jr:
300
And when you have your banking meeting at ten o'clock,
I wish you'd please take up and report back to
me why the Anglo-California Bank situation is not
cleaned up and settled. I mean, I'd like a report
from my banking committee why the Anglo-California
Bank - why it isn't settled, and who is holding
it up. I'd like it in writing.
Hanes:
I can give it to you in writing now, if you
want.
H.M.Jr:
You have it? All right.
White:
Incidentally, they send me daily cables giving me
H.M.Jr:
In view of all these statements being made around,
Hanes:
(Hands H.M.Jr: a memorandum.)
H.M.Jr:
Thanks. I'll read it out loud. This is from
the very latest on this; actual telegrams.
I want something in writing, to show I've got
nothing to do with it, and in the second place,
that I am not holding it up.
Duffield to Hanes.
"December 10. On the question of insisting upon
a reduction in the Anglo-California National Bank
from $10,000,000 to $5,000,000 the Banking Group
lines up as follows:
"Mr. Taylor - All right to leave the common at
$10,000,000. He would prefer to have it cut, but
if the people who 'have the feel' of the stock's
market insist repeatedly, as they have done, that
the cut will hurt the stock, he is willing to take
their advice.
"Mr. Foley - Saying that he has no information which
would enable him to refute the argument that the
stockholders will be injured, he votes 'pass.' He
was present in Mr. Taylor's office during the discussion leading to Mr. Taylor's opinion.
"Mr. Oliphant - Takes the same position as Mr.
Foley. He called on the telephone during the discussion in Mr. Taylor's office.
301
- 13 "Mr. Delano - Believes that consummation of a deal
is the most important consideration and therefore
believes reduction in the common should be foregone.
"Mr. Upham - Believes the cut should be forced
and Mortimer Fleishhacker eliminated.
"Mr. Duffield - Agrees that, if the responsibility
were wholly his, he would forego the cut in the
common stock but can not agree to let it slip in
this case because of the belief that the result
will be slandering of the Secretary and the Treasury.
"Mr. Gaston - Agrees with this point of view."
Johnny, get a vote in your Committee on what to
recommend. Will you?
Duffield:
You see, that is, in effect, a vote, and that is
what Mr. Hanes asked me to get, and it is a majority
in favor of letting it go.
H.M.Jr:
Hanes:
Yes, but Hanes has a right to ask Oliphant to
vote, if he is a member of the Committee. I don't
know who is officially a member of the Committee.
Oliphant:
I'll vote on it.
H.M.Jr:
What?
Oliphant:
I'll vote on it if you want me to.
H.M.Jr:
This is
Hanes:
We can meet at ten o'clock. I think we ought to
settle that one.
H.M.Jr:
If you did settle it, Johnny, has Jesse Jones
fixed it up with the Standard oil that they are
or will not take out those assets of Mortimer
Fleishhacker's?
Hanes:
I understand, at the moment, the way that statement
is that the Standard oil have agreed to do just
what Jesse has asked them to do. Now, that involves
taking out about a million four hundred thousand
dollars of his securities, but they agreed, with a
- 14 -
302
string attached to it, that this cut-back would
not take place. Jesse said that if he insisted
on it, if we insisted on it, they will do it.
There is no question in his mind this will not
stop the deal if we insist on it going back to
five million, but the Standard oil crowd and all
the directors in the Bank are terribly opposed to
it on account of the small stockholders. There
are lots of ten and twenty share stockholders in
there. They think this thing will upset the stock
market so badly they think it will be a bad
influence on the whole thing, from the Bank's stand-
point.
It is just a question of judgment whether you are
going to do the innocent bystander any harm. You
gain nothing by it except making an honest estimate.
That is desirable. The statements have been so
undesirable and misleading, and I think it would
be a drastic step, granted that it is the proper
thing to do. I don't think we would argue ten
minutes about it if we didn't have this horrible
other situation on the other side, pointing a finger
at this deal. I think that is what influenced so
many people's judgment on it.
Before the situation became so acute I think we
all agreed one Saturday afternoon when we had a
meeting that after all, it would be desirable but
not necessary to have this cutback.
H.M.Jr:
Hanes:
Am I not correct, the last time I discussed this
with you, you said Jesse Jones would come over and
talk to you about it?
Yes, but I thought it would be a mistake to have
him come over, so I didn't insist on it.
H.M.Jr:
Why?
Hanes:
Jesse, sometimes, gets a little rambunctious in
his talk and I didn't want to start a fight with
Jesse and the rest of us. I thought it best to
keep him over there and let us decide the question
here.
H.M.Jr:
Gene, why do you think if you had the cutback it
would be slandering to myself?
- 15 Duffield:
303
I thought if you did not have the common stock
cut-back Mr. Giannini would be very industrious
in pointing out that you allowed this bank to
publish statements showing the bank had ten million dollars of common stock and it's not any-
where near that. You can argue for a five million
stock business.
H.M.Jr:
And Upham thinks - he's not here now - that
Fleishhacker should be eliminated.
Hanes:
Of course, the five million dollar valuation, Mr.
Secretary, isn't a true statement. You won't have
five million dollars of valuation either. The
Bank will be telling a lie if it puts out five
million because I don't think they've got two.
I'd like to continue on this just the way I have
up to date, and that is, if you people, this morn-
H.M.Jr:
ing, would meet and try to give me a clean-cut
recommendation on the Anglo-California - yes or
no. And I'll do just the way I have always in the
past; I'll listen to your recommendation, and the
chances are that I will most likely accept them,
but I want a clean-cut recommendation so that you
can phone Jesse and talk to him. "This is the
Treasury's position; we are waiting on you."
Now - and I think I would simply say in this case,
we have decided, and this is our position; we
don't want to argu about it, but this is our
Hanes:
H.M.Jr:
position.
Our understanding, Mr. Secretary, is that everything is ready and the notices put out to stockholders and they immediately put their hands on
this point.
Why not take this thing up first? Before you
discuss anything else, try to take this thing
first and clean it up, today. I'll say to you
people now, I will accept any recommendation you
people give me.
Duffield:
May I ask, do you want that a unanimous recommenda-
H.M.Jr:
No. No.
tion?
- 16 -
304
Hanes:
I'd like to have a unanimous recommendation, because
Oliphant:
What is it, Johnny? If it's a question of
Ion.think it's a thing we ought to be able to agree
judgment, I think it is wholesome if we continue
to have around here differences of opinion on
questions of judgment. It is just a question of
business judgment. People will weigh those things
differently and I think it is best to dispose of
it on the way we vote.
H.M.Jr:
Let me ask you, Herman, don't you think, in view
of everything, that I should accept a recommenda-
tion of this committee - whatever it is? Don't
you think so?
Oliphant:
I think so.
H.M.Jr:
That's what I think. We'd simply announce whatever
they recommend and I'd accept it.
Oliphant:
And I'd like for Johnny just to formally transmit
it in a memorandum to you that we met and so and so
and so on - formal transmission of a little memorandum.
H.M.Jr:
I think so.
Hanes:
The point I was trying to make before, Herman,
this is simply a business question and I don't
like to mix it up with the squabble on the Bank
of America.
Oliphant:
H.M.Jr:
We'll take it up first.
I think it ought to be today, and if it is settled,
and they are mixed up, they can take it to Cy:
We did what we thought was best, and we used the
criticism, as long as it is hones and based on
facts. I am willing to take criticism on the
judgment of the question, but I refuse to take it
on the basis of my personal beliefs and religion.
0. K.
305
MEETING OF FISCAL AND MONETARY ADVISORY
BOARD
Present:
December 12, 1938.
10:30 a.m.
Mr. Eccles
Mr. Delano
Mr. Bell
Mr. Ruml
Mr. Haas
Mr. White
Mr. Currie
Mr. Hanes
Mr. Taylor
Mr. McReynolds
Mr. Gaston
H.M.Jr:
Hello, Marriner.
Eccles:
Good morning.
H.M.Jr:
I've got Hanes meeting with his group, my so-called
banking committee, and they know this anyway - I mean
what we're beginning. So if it's agreeable to you and
Mr. Delano, I'm going to ask Mr. Currie and Mr. White
to report on the result of - how shall I say? - well,
what we were doing the last couple days in regard to
the study which was presented to us a week ago Monday.
So if either Mr. Currie or Mr. White - whichever way
the team works
White:
Well, I'll run very briefly over it and he'll make
H.M.Jr:
And may I say that Mr. Delano and Mr. Eccles may
White:
The men who were here, Mr. Viner and Mr. Stewart and
such additions and emendations as he wishes.
interrupt and ask questions, so I mean it's - I'm I've been steeped with it, so they're at your disposal.
Mr. Williams, with Mr. Hansen participating the
second day but not the first, considered in detail
the basis of numerous estimates that were being made
and the general proposal that we discussed the last
time.
I presented a brief agenda for their consideration.
First was a discussion of the probable index of
industrial activity and of the national income and
of the level of unemployment. There was no contribution there. They merely listened to what was stated
306
-2-
at some time or another here and asked a good many
questions and volunteered some comments, but didn't
H.M.Jr:
White:
disagree with the estimates or indicate that the
estimates were too high or too low.
Pardon me - I didn't mean that Mr. Ruml shouldn't
question them either.
Then the rough estimates of what we thought would be
the budget deficit for 1939 were indicated, so that
it would give them some idea of the problem before
the Treasury. And then we considered the specific
proposal as to how might the analysis of the budget
and the recommendation which they might make be
presented to the President. And it was at that
point that we presented first the chart with the
multipliers, and so forth, that we had seen here,
with the statement that they were very preliminary
and that the figures were not accurate, but that it
presented a fundamental idea and it was the consideration of that fundamental idea that was in order.
Their reaction to that was as follows:
Mr. Viner - they all felt that the information available and the statistical data upon which that was
based was not nearly adequate enough to justify presenting to the President or to the public any recommendations which would be based on an analysis of
that kind. Mr. Viner felt that it was definitely
worthwhile to continue with the studies and push
the thing very much further, but that we ought not
make any attempt to utilize it until we were much
more certain of our ground.
Mr. Williams likewise thought it might be pushed
but was a little bit skeptical as to any results
we might obtain.
Mr. Stewart didn't think it was even worth pushing.
He didn't think that that approach promised any
results at all.
The second approach was presented in which the pro-
portion of expenditures and the proportion of receipts
going into investment, going into hoarding or idle
savings, was considered. There, too, somewhat the
same conclusions were reached, but though the
307
-3-
information might be a little more adequate, it
was not nearly sufficiently so to justify that
approach any more than the first approach.
Then a third approach was presented, namely, the
proportion of the particular sources of revenue
and the proportion of the particular types of
expenditure that go for consumption as against
investment. That was prepared and there Mr. Currie
presented a great deal of data. We spent the better
part of a day going over all the data that Mr.
Currie had for them bearing on this particular
point and there was a good deal of interesting
discussion on it. Obviously the data was far
more adequate, but there arose a difference in
fundamental philosophy and fundamental interpretation which led them to the conclusion that that
likewise was not an appropriate approach for
defending any particular action.
The inadequacy of the data, as I said, was not the
chief reason, although at times it appeared as though
that was the basis for their conclusion. But what
actually was the case is that when we were discussing
whether a particular type bore on consumption or
investment, or whether it retarded or increased
investment, the fundamental cleavage of opinion
appeared, which could be briefly expressed in the
difference between those who felt that anything
which would be done to tax the business man at all
or reduce the profits or reduce the incentive for
investment, or which would reduce confidence, or
which would increase the budget deficit, would ipso
facto reduce business activity; as against the
other view of examining each specific item and
seeing its relationship to the national income, to
consumption, and to investment.
Curiously - I think curiously; I'd want Currie to
check on this - when it came to a specific recom-
mendation to be made in response to the Secretary's
request which he made to them the evening of that
day, that they consider whether or not the Treasury,
confronted with this deficit, should recommend
increased taxes, and if so what taxes, and if they
recommended any specific form of taxes or the lack
of it, what would be the best method of presenting
a defense for that decision for the President - when
308
-4-
confronted with the necessity to make that specific
decision, as I said, everybody seemed to come out
at the same end.
Present the next day were Mr. Magill and Mr. Hansen,
who weren't able to be there the day previous, and
the conclusion was that if additional taxes were to
be sought, that possibly the least harmful place to
get them was from the estate and gift taxes, which
might yield an additional 300 million in the second
year, though not in the first; and a second alternative, and less desirable
H.M.Jr:
Pardon me - that figure was 416 in the second.
White:
416 - I see - and about 80, I think, the first year.
H.M.Jr:
Oh, nominal amount the first year; the second year
White:
416.
H.M.Jr:
Just double the present one.
White:
I see, just double the present one. And that a
second source, which was less desirable, would be
the middle brackets of the income tax, though the
exact gradations were not specified. There wasn't
complete agreement with respect to that point.
Stewart didn't feel that sales taxes were necessarily
out. The rest of them did, with the exception possibly of Mr. Hanes. Mr. Magill felt that we ought to
shoot at as high an income - as high a revenue as
possible, but didn't feel optimistic about getting
anything more than this particular estate tax and
therefore felt that we should compromise with that.
was 416.
And Mr. Viner felt that it would be a little bit
undesirable, in view of the state of business and the
likely state of business, to attempt to increase
revenue too much at this stage of the game; that
would fall on consumption. Yet he did think it
would be highly desirable to have the deficit, the
real deficit, smaller so as to indicate that we had
reached a peak and were on the way down.
the thing that's worth emphasizing and noting, I
think, is that in their defense and arguments as
309
-5-
to the desirability of the estate tax, the idea
implicit in their objection to a sales tax and
their practical unanimity in favor of the estate
and gift taxes, if anything, was the very idea
which was implicit in these charts, namely, that
certain taxes have a greater effect on reducing
the national income than others, and that expenditures have different effects. So that the fundamental objection to that manner of presentation,
very reasonably, lies in the inadequacy of the data
and lack of certainty. They felt you oughtn't to
go to the President with any S tatement involving
quantitative estimates that you couldn't defend,
although Mr. Viner, I think, suggested the possibility of making it qualitative, high, low and
medium; but nothing much was done on that.
On the whole, on the matter of presentation to the
President and to the people, there was no constructive suggestion. They merely disapproved of this
approach.
H.M.Jr:
There was one thing which you may mention which I
White:
total collection of taxes in the United States
that they felt that that was very necessary in
considering any such problem, and that we were only we were talking only about the effect of Federal
taxes, which is only a small part. And then the
question of debt, Federal, state, and municipal
debt over a definite period. And that those figures
ought to be gotten together as rapidly as possible
in considering this thing and if we went to the
President with what we had here a week ago - we'd
only given him not even half of the picture.
They did stress that.
considered was very important. They said that the
terrific importance of the need of a summary of
-
H.M.Jr:
And Viner said he'd been S tressing that since '34
and he thought that that was something which was a
blind spot, - he didn't use that language, but
that's what he said - in considering any problem
that we might have: the lack of that information.
And what I wanted to suggest was that you gentlemen
take it up - George too - how that study can be
made and who is best able to make it and how we
will pay for it.
310
-6-
Haas:
Currie, isn't there a good deal of information
available now with reference to at least the total
public debt, both state and municipal and Federal?
We get that every year.
White:
We have some figures right here on that now.
Eccles:
And also the total taxes collected.
H.M.Jr:
Well, they may be there, Marriner, but that group
Eccles:
Eccles:
didn't have them at their fingertips.
What I meant was that I think it could be gotten
together in a hurry. I think the information is
available.
Haas:
It's in the annual report each year - Secretary's
White:
Delano:
The first step we have - already have a table
collecting that information, which we just got
that morning. That's the first step, but there
still remains
All the material we have now is past material,
and it would be highly desirable if we had current
material and even estimates for the next fiscal
year to fit in with our Federal estimates.
Mr. Delano, I think that would come well within
the scope of that group, to collect those things,
don't you think so?
I should think so.
H.M.Jr:
What?
Delano:
I should think so.
H.M.J.:
I mean if we're going to - I mean the movement of
Delano:
Awfully important.
H.M.Jr:
Don't you (Ruml)?
Ruml:
Oh, I agree.
Currie:
H.M.Jr:
annual report.
the debt of the country, the public debt.
311
-7Eccles:
H.M.Jr:
It seems to me that it's fundamental. After all,
it isn't a question of what the total of the
Federal debt alone is; it's a question of the
total debt, both private and public.
Well, if it's agreeable to you people, I suggest
that Haas and Currie and White put their heads
together and find out who can do it, where we can
get it, huh? Will you three men do that please?
(They nod acquiescence)
White:
In view of the fact that they didn't have an
opportunity to discuss any method of preparation
of their recommendations to the President, and I
repeat that their recommendation was that no new
taxes be sought except in the estate and gift tax,
and I think in the main, although this would by
no means be unanimous, at least the majority appeared to take the position that you shouldn't
worry too much about the budget deficit for this
year, in view of the next year, in view of the
business conditions - so that suggested the
desirability possibly of some kind of a draft
statement that might accompany that recommendation,
if the Secretary wants to make either that or some
other recommendation similar to it to the President.
And so Mr. Currie and I worked over a couple of
rather different drafts which are preliminary
drafts, which we have here, of what might be the
basis for a prepared statement that you might wish
to take over. And if later you want that read
H.M.Jr:
Well, now, before we go any further, let's see
Delano:
No, I think not. I think Mr. White's made a very
H.M.Jr:
There's nothing you want to ask him at this time?
Delano:
No, I don't think so.
H.M.Jr:
All right.
Delano:
Dr. Ruml might have something.
whether - go around and let's see whether Mr.
Delano wants to ask Currie or White any questions.
clear statement.
312
-8H.M.Jr:
Mr. Eccles?
Eccles:
No, I spent about three hours with Currie yesterday,
so I had a chance to ask all my questions and I
think
H.M.Jr:
You've done your home work.
Eccles:
I've done my home work; I'm like you.
H.M.Jr:
Eccles:
Delano:
Well - yes - well, you're all right then.
I think I'm familiar with it.
I think this, Mr. Secretary. I think the hardest
problem about this thing is - I've listened in and
discussed the subject for the last five or six years,
I suppose I can say I'm fairly indoctrinated, but I
think we've got to get this thing stated in such simple terms and present it to the people in such simple
terms that they will get on to the fact that balancing
the budget of the nation is a different problem than
Mr. Glass's idea of balancing the budget of a farmer
or individual, his living expenses and so forth. But
that idea is not across, I'm afraid. I'm afraid I don't know - I asked Dr. Ruml one day how many
people he thought really appreciated this problem,
whether it was ten thousand or a hundred thousand.
Haas:
Well, he said - I think he was optimistic to say
it was over a hundred thousand. I'm not at all sure
that that's true. But the hundred thousand out of
130 million isn't a very big percentage.
I think he's 99 percent exaggerating.
I agree with you.
I agree with you.
H.M.Jr:
And no offense meant.
Ruml:
Mr. Delano says that isn't many out of 130 million.
H.M.Jr:
Well, I still think you're exaggerating about 99
White:
There were two other points I might mention. One was
H.M.Jr:
Eccles:
percent.
with respect to the difference in presentation of
313
-9-
the budget. The question you asked: was there any
opinion with respect to presentation of the budget
in a different form so as to distinguish between
investment and current expenditures. And there
were several there that thought there was a good
deal of educational work that might be done, and
Currie:
that that might be attempted. I don't know whether how they all felt about that.
I think, Harry, there was one other rather crucial
point - difference of opinion in the group. That
is, I think there was general agreement on the one
hand that it was proper to include the excess of
Government expenditures over receipts as something
which was of a character of private housing expenditures and business expenditures, inventory increases,
as a generating, as a stimulating, as a changing
dynamic part of the picture in changing national
income. There was general agreement on that.
When it came, however, to a thesis which I tried
to develop, that probably on the upswing of the
cycle, as we go up, the proportion of the income
the community was going to save will increase
and therefore we'll need progressively more capital
investment to give us the same increase in income Hansen agreed with that strongly; Williams was a
little bit skeptical, said I only had two cases,
pulling up from the 1920 depression and again from
the 1931 depression, and it might not work out,
might not have an increase in proportion of income
saved.
Hansen took a gloomier view than almost anybody
there, that not only did he feel that the savings
would increase, not only absolutely but in proportion to the income, which would call for the necessity of more and more capital investment, but that
the outlook for capital investment was very gloomy.
He stressed the decline in population, various other
factors. So he came over to the final conclusion
that he thought that probably if you wanted to
achieve full employment, we were faced with the
possible necessity of a continuing Government
deficit which could be either inside or outside
the budget, as well as the necessity of taking
special measures to stimulate private capital
investment.
314
-10-
Is that what
White:
That was his view.
Eccles:
Or to reduce savings by taxes.
Currie:
Yes, that's the third way.
That's the third alternative.
Eccles:
White:
Eccles:
White:
There was a definite cleavage of opinion there,
with Magill and Viner and Williams and some of
the others holding
... to the orthodox
... to the opposite view. It's the same fundamental
cleavage, I think, which has run through the thinking
of both groups, and it merely manifests itself in
various types of discussions on various points; but
the same underlying thesis is there.
The second point of possibly some interest was the
Currie presented some figures which they had made estimates that they had made of the budget deficit
the next year, and he has a feeling that the budget
estimate of the Treasury is conservative; that is,
they feel it will be smaller than the budget official
figures, which is of some significance in taking
into consideration the recommendation which will be
made with respect to the budget for next year, particularly in view of Viner's point that he thought
it was important to show that the budget deficit
has reached a peak; and according to the Treasury
figures it would make a substantial difference from
that point of view if the figures prove to be the
accurate ones or whether they will prove to be conservative.
H.M.Jr:
Were you through, Marriner? I mean on this par-
accles:
Yes, I
H.M.Jr:
No question you want to ask?
Eccles:
I think the point Currie brought out is extremely
important, because that's really - that's the line
ticular
315
-11-
of cleavage between the private business activity,
the assumption being that leave them alone and
they'11 be able to utilize all the savings and
put it into investment and give employment - and
the other is that they won't and therefore the
Government through its deficit has to borrow the
savings and invest it. I think that's the fundamental difference in this whole consideration or
discussion.
Haas:
Eccles:
Or do things like F.H.A. or that railroad thing.
That's right, they musteither do directly - use
up savings, or they must stimulate through a
railroad program that we discussed or through
other means that would bring forth private investment. The savings must be utilized; otherwise you
get huge idle funds and you get unemployment and
the national income drops and you get all these
troubles. The fact that we have foreign capital
savings in here as well to seek an outlet only
accentuates the problem.
H.M.Jr:
Let's see - Bell, do you want to ask something?
Bell:
No.
H.M.Jr:
What?
Bell:
No.
H.M.Jr:
Dr. Ruml?
Ruml:
Well, I get this impression - I'd like to know
whether it's accurate or not - from White and
Currie: that with the exception of Walter Stewart,
whose views I don't get very clearly from this
statement, the significant thing to me would be
the points of agreement rather than the points
of difference, if you look at the thing in the
broad. I'd sum those up from this statement about
like this: In the first place, everyone agrees that
we have to take an all-over point of view toward
expenditure, debt, taxes and so forth; that is, that
the thing is an all-over problem. Second, that the
operations of the Federal Government, fiscally, both
within and outside the budget, are important with
respect to the national income. That the present
316
-12-
national income is unsatisfactory - I'd deduce that
from the fact that they do not propose to balance
the budget this year, which of course could be done
by arithmetic and by strong-arm methods. I would
also gather that, regardless of the methods by
which they come to specific determinations, they
come to the same determinations. I would also
gather there is a general concensus of them and of
us as to the preliminary character of the quantitative data that we have at our disposal and the
desirability
of pushing those investigations further.
So I mean that would seem to me to - is that -
would that be a correct statement of the agreements
and the - and that the disagreements lie primarily
with respect to our knowledge, with respect to what
these effects are, the best ways of stating them,
the most fruitful methods of analysis, together
with a very Oh, and this would be another
point of agreement: that business confidence is
very, very important; the question as to how you
get it might again be a question of difference of
opinion, difference of experience, difference of
outlook.
And then there would be a difference of opinion, I
should gather from what you say, as to the capacity
of private enterprise at the present standard of
living to utilize the amounts that will presently
become available for investment. Is that right?
White:
I think that probably overstates the degree of
unanimity of opinion. That is, for example, Mr.
Magill felt that the limitations to balancing the
budget are not economic in the sense that they're
not desirable. I think that was his view: that
you couldn't get it if you wished to, though whether
he would go on to say that it would be desirable if
you could, I'm not sure.
And then Mr. Williams felt that you can't tell how
much investment private industry will take up; that
the data presented by Mr. Currie was not sufficiently
conclusive, although I think he would admit that the
data upon which he rests his own assumptions that it
might be enough are far less adequate.
317
-13-
With those two exceptions, that would be my view.
Bell:
White:
However, I think it might be desirable if Danny Bell
checked up on us, because Currie and I rather have
one slant at this thing and we may be doing less
than justice to the opinion of some of those who
disagreed bluntly with us.
I agree with what you said. While I was there I didn't attend all the conferences, but for the
two hours I was there I think that expressed it
very well.
Well, the previous day's discussion didn't bring
out those differences. They were more a question
of going over the technical bases, and so forth.
So you were present at most of it.
Bell:
Well, I think that's correct.
H.M.Jr:
Mr. Delano says that he'd like to make a short
Delano:
Well, usually before I make any S tatements I get my
friend Ruml to check with me; but here's one of the
statement, so the floor is his.
things that I thought about. I was very much
impressed, in the first place, with the suggestion,
I think, by Mr. White that we show on the chart just
what happened in the years, say, of '28 - and what
was the build-up to create the condition that happened then in 128 and 129.
I can't help feeling that we were due in this
country, and perhaps all over the world, for a
terrible panic in about 13-'14, and that what
arrested that was the World War. That isn't a
good way to arrest it, but it did arrest it.
And the enormous expenditures for war materials and
extension of credit brought on a - together with
arresting the normal developments, repair work and
all that sort of thing, brought on a tremendous expenditure in our country, and through us as the
great creditor nation at that time, in all countries. We, as you all know, increased our foreign
trade enormously by subsidizing Europe and South
America to buy from us.
And then about simultaneously with that we had been
doing - we concluded that our population was as big
318
-14-
as we wanted it to be. We shut off all immigration.
But during the war we had developed our ability to
produce. Well, now we find ourselves with a great
deal more capacity to produce than capacity to consume, unless we subsidize our own people to consume
more. And I'm not at all sure that much thought is
being given to this question of immigration. I
would hate to go back to a wide-open immigration,
but I think that an immigration that would - that
was carefully supervised, you might say, might be
exceedingly profitable. If you would require that
only adults with infant children, with $200 in
their pockets, come to this country and that they
be people of certain minimum education and perfect
physical requirements, I think that you would help
our consuming, our producing problem here very much,
help agriculture enormously, and you'd help a good
deal of manufacturing.
But that all goes back to a study we've been thinking
of projecting in the past; but perhaps the best way
of educating the people is to show them what
happened - I mean we've been projecting in the future
and the thing to do, it seems to me, as the simplest
lesson, is to show them what happened in the past,
show them how much of our credit we spent in Europe
lending it to them so that they might buy from us,
and then after the war was over we gave credit to -
extended credit, eight or ten billions, to Europe
and South America.
H.M.Jr:
Delano:
H.M.Jr:
Delano:
H.M.Jr:
Excuse me for talking so long.
No, no, I just would mention - I don't know whether
you saw, I think, the editorial Thursday or Friday
in the New York Daily News, the cartoon on that did you see that?
I did, and I was glad to see that.
It was along the same line that you're talking.
I thought it was a good thing.
Well, I think it's worth considering.
Well, Mr. Delano, this is what we're faced with. The
President will be glad to receive this committee at
319
-15-
two o'clock if we have something to say to him.
Now,
the question is, have we anything to say to
him, see?
And I asked Currie and White, in view of this what's happened and everything - to try and put
something down on paper to present to this committee. I haven't seen it. Have you people
got anything?
White:
H.M.Jr:
White:
We have, but as I say, you haven't seen it yet
and it's very tentative.
Well, we'll all take it together.
In a sense they both are complementary, or there
may be portions of both which - and no one has
seen these except Mr. Currie and myself, so feel
perfectly free to throw them in the basket.
H.M.Jr:
If you will wait just one second before you start.
(On phone) Mr. Hanes, please. - Hello. How
you coming? - I think you ought to hear from
this point on what's going on. The others too they're coming. So if you don't mind - this is,
so to speak, review up to this; now we're taking
All right.
White:
There are a few charts that, if you should want
them, provide the supporting statistical data
for this.
Would you be inclined to think you might want to
look at them?
H.M.Jr:
Yes.
Well, Marriner, we came through on the bonds between
the long and the middle
Eccles:
H.M.Jr:
.... beautifully.
beautifully. What?
320
-16Eccles:
vetting back to this question of excess savings,
you know - the Treasury is furnishing a return on
money that otherwise would get no return.
Ruml:
I was much interested on the train last night reading
Reynaud's statement on the French program, in which
he pointed out that their great difficulty about
borrowing money by the French Government was due
to the fact that every dollar - every franc they
borrowed came out of what would have been available
for private investment, and interest rates running
Eccles:
at eight or nine percent for mortgages.
That's because the capital has gone out of the
country.
Ruml:
That's what I mean - striking difference from our
situation.
Eccles:
If our savings were running out of the country here,
there would be a very, very different picture.
Much more difficult problem.
White:
Eccles:
Our problem is simple - simple compared with theirs.
Ours is a problem of arithmetic, almost.
H.M.Jr:
We've got a new name for this committee - "Peaks
and Valleys."
White:
Glad to see some of the peaks.
Ruml:
Depends on where you start in your valley.
Delano:
I think the trouble with most people is they don't
want anything taken off the peak, but they'd like to
have the valley filled up.
(McReynolds comes in)
(Messenger brings in charts)
White:
How long is your statement, Harry?
Little more than two pages single-spaced; and the
other is one page of single-spaced.
H.M.Jr:
Is it by joint operation?
H.M.Jr:
321
-17-
White:
Yes, practically - joint ideas expressed. They're
somewhat complementary; one is a little more
specific than the other. They do involve a
very definite philosophy and provide possibly the
justification for the recommendation which I
thought possibly you were going to make with
respect to taxes. But it's a matter that would
have to be carefully considered.
H.M.Jr:
Well, just as soon as this group comes in, we'll
go
this.into it; but I want Hanes and Taylor to hear
White:
I think they all should.
I don't doubt but that if the general tenor is
satisfactory you could boil this down to half,
at least, in space without much trouble.
H.M.Jr:
(On phone) Tell Hanes and Taylor and Gaston
we're waiting for them, please.
(Hanes and Taylor come in)
Hanes:
I'm sorry.
H.M.Jr:
It's all right. O.K.
Eccles:
Hello, Johnny, how are you?
Hanes:
Fine, thanks.
what we've done up to this time is, we've simply
reviewed what happened up to Saturday. But now
these people here have got some suggestions for
a possible resolution or - anyway, go ahead - so
I wanted you people; we're in new territory now
H.M.Jr:
White:
and I wanted you fellows to hear it.
This is something that nobody has seen, so - just
very preliminary.
"This calendar year our national income will be
about #62 billion. Yet to absorb our unemployed and
to utilize our idle plant capacity it is necessary
to have a national income of from $90 to $100
322
-18-
billion. We are, therefore, some $30 billion
below our goal of an adequate national income.
"Careful estimates for the next year have been
made by government economists. They report that
according to present prospects our national income
for the year 1939, using optimistic assumptions,
will be no more than $70 billion.
"A national income of $70 billion is not enough.
It would still leave a large number of unemployed;
it would still leave idle plants, idle savings and
inadequate farm incomes; it would still leave us
with an unbalanced budget.
"There are only two ways in which we can get our
national income up to the level at which our unemployed will be absorbed and our idle plant utilized,
and our budget balanced. First, investment must be
increased and secondly, the flow of purchasing
power into consumption must be increased.
"How can we put our idle savings to work; how can
we increase consumption?
"In the relatively prosperous years 1922-1929, when
our annual savings were being absorbed by expanding
industry there were certain conditions present which
are no longer present.
"In the first place our population was increasing at
a rate double the present rate of increase. From the
years 1922-1929, our population increased at the
average rate of 10.6 percent. In the years from
1930-1937 the ratio of increase in population was
only 5.3 percent."
(Gaston comes in)
"In the second place, the years 1922-1929 witnessed
a large volume of foreign investments each year.
About one billion dollars in goods and services
were invested abroad annually by Americans. These
investments proved to be bad investments, but at the
time they created a demand for capital, they put idle
savings to work. As you know, no significant amount
of foreign investments are now being made.
323
-19-
"In the third place, our forty-eight states and
thousands of counties and municipalities were
borrowing capital at the rate of over one billion
dollars a year. They were building roads and
schools, hospitals and city halls, bridges, water
works, etc. Had they continued to borrow at the
same rate they would have put to work some $16
billions of additional capital during the past
eight years. Instead of that, they not only
stopped borrowing almost completely, but as a
whole they have paid back several billion dollars
of their outstanding debt and so have added to the
stock of idle savings.
"In the fourth place, new giant industries grew to
maturity in the '20's -- the automobile, oil, dyes
and chemicals, rayon, radio, electric power, rubber,
aluminum, movie industries. All absorbed many
billions of capital in coming to their full growth.
Doubtless there are new industries in the making
now -- no one can say what is in store for us in
television, in airplanes and new textile products
but we do know that neither the new industries nor
the old industries give promise of automatically
absorbing our current idle savings in the next few
years.
"If progress is to be made in solving this problem,
substitutes for the conditions which automatically
it is necessary that our Federal Government supply
absorbed the savings in the post-war decade. The
burden of the problem will be lightened to the extent
that new industries do arise. The public utilities
have already taken steps to expand during the coming
months. The government is making every effort to
stimulate investment in new housing. The railroads
badly need new and better equipment, and the govern-
ment is preparing a plan whereby such equipment may
be produced and used by the railroads. But all of
these, together with the expected demand for capital
by private industries, cannot absorb our idle savings.
"Not only have the areas for new investment been reincrease the annual volume of savings. Growing
depreciation charges, the spread of the practice of
duced but changes have come about which tend to
amortization of outstanding debt, is gradually
324
-20-
reducing volume of outstanding debt and forcing
savings into idleness. We, therefore, are confronted with increased proportion of savings on
the one hand and decreased areas for investments
on the other. The result is savings forced into
idleness. Every dollar saved and not put to work
is more than a dollar cut from the national income,
is more than a dollar's worth of purchasing power
lost,
is a cut from the worker's payroll and wages
lost forever.
"Therefore, it is imperative that the government
adjust its policy to the new circumstances. To
increase the national income there are two things
the government must do and two things that it must
not do. (1) It must increase the demand by consumers for the products of industry; (2) it must
provide opportunities for idle savings to be
employed. It must not reduce the consumption
power of the people by imposing taxes which curtail purchases of consumption goods; it must not
disturb investment opportunities by imposing taxes
which substantially reduce the demand for products
of industry."
That's that. There might follow some specific
recommendations.
If I read the other, we'll see in what nature it's
complementary.
H.M.Jr:
Is one by one of you gentlemen and the other is by
White:
Well, half and half; we both - but Currie did most
of the one I'm going to read and I did most of the
one I just read.
the other, is that it?
"The members of the Fiscal Advisory Board are in
substantial agreement on the following points:
"1. The degree of recovery that can reasonably be
expected in 1939 will still leave us with a substantial excess of plant capacity, a large volume
of unemployment, and a national income no higher and
probably lower than that of 1937.
"2. In order to achieve a higher national income it
is necessary to secure a larger volume of private
capital expenditures.
325
-21-
"3. The single most important factor in stimulating
for the products of industry.
private capital expenditures is a growth in the demand
"4. When the Government pays out more to the community
than it collects in taxes, it adds to the demand for
the products of industry. These additions are greater
in proportion as the Government collects its revenues
from idle funds and its expenditures go directly for
increased consumption.
"5. Considering, therefore, on the one hand, the
deficiency of consumer buying power during the next
fiscal year in relation to our productive capacity,
and, on the other hand, the inadequacy of existing
outlets for the volume of accumulating savings, a
continuing contribution by the Federal Government to
the growth in buying power and the provision of an
offset to savings, through deficit financing, is
economically justifiable and desirable.
"6. If, therefore, it is felt that the proposed
increased expenditures on armaments must be met by
additional taxes, it is essential that the increased
taxes must not reduce consumption.
"7. Whatever the deficit in the fiscal year 1940,
it will be much less in the second half than in the
first half, or, in other words, the contribution
to buying power will be sharply curtailed in the
first half of 1940.
"8. This sharp curtailment in buying power suggests
the desirability, on economic grounds, of commencing
old age annuity payments at the beginning of 1940,
which would not increase the bookkeeping deficit,
and of postponing the 50 percent increase in old age
payroll taxes scheduled to begin in 1940.
"9. For the purpose of adding to the national income
next year, and of preventing what promises to be a
serious bottleneck within the next year or so, action
should be taken to stimulate a large railroad equip-
ment/through a self-financing Government corporation.
program
"10. Finally, the bookkeeping deficit for 1940 could
be reduced by shifting certain assets to self-financing
Government corporations and by shifting certain appropriations to self-financing Government corporations,
326
-22-
and by stimulating recovery through an extension
of Governmental activities financed outside the
budget."
H.M.Jr:
Here's the problem. As I said before, we can see
the President at two if we have something, but on
the other hand if we don't have something that
we've all agreed on, I think we don't want to take
up his time. And we - do you want to discuss first,
Mr. Delano, this memorandum?
Delano:
Well, I think I'm in favor of not making a final
report but making a report of progress to the
President at this time. I suppose in the next two
or three weeks he'11 be preparing his message to
Congress, and I think it's exceedingly important
to say something on this subject and it would be a
good thing if he knew how our minds were running.
I think this first paper, for instance, is an
exceedingly illuminating and clear statement, and
I'm sure the President will take it all in.
I don't know that the general public would take it
all in. I think that, for instance, there are an
awful lot of people who don't understand what is
meant by the national income. I've tried to think
of a different phrase that would be understood.
What you really mean is the aggregate income of
all nationals. But most people hear the words
"national income" - they think that's the income
taken in by the nation, by the government of the
nation.
White:
That's true.
Delano:
Perhaps Federal, state and all that. But we mean
a great deal more than that.
Now, the second paper, I think, is a little more
closely reasoned, perhaps, and closely S tated. It's
a little harder to understand in the reading. There
again
Currie:
I may say
Delano:
about I have the subject no doubt so that that the it President won't be Greek knows enough to him,
even though it is Greek to some others.
327
-23H.M.Jr:
Including myself.
Currie:
Not knowing exactly what the committee might like,
Delano:
we thought of doing two things. One - the first
statement was designed more as background material
for incorporation in the budget.
I think that's of great value, and I think the
President
material. ought at least to have that background
Currie:
And the second one was designed more in the line
of specific recommendations on next year's budget.
White:
I'm very skeptical of going forward with this as
is. There's been very - too little work done on
these two drafts to justify presentation to the
President, even if there were complete agreement.
It isn't polished.
H.M.Jr:
I wanted to hold mine to the last.
Eccles?
Eccles:
Well, the question is a question of time. The
President's annual message and the budget message
have got to be prepared pretty soon, and I somewhat
feel like Mr. Delano, that if we're going to be of
any service at all, of any influence with reference
to the approach to these vital problems, it might be
well today or certainly soon to have a - make a
preliminary report to the President, with the idea
first of seeing whether or not the approach to the
budget problem is going to be one of recognizing
the compensatory nature
of government
activity,
The next
one is whether
or not
whether that's
there's an excess of savings, funds for investment,
beyond what can be profitably used; therefore, you
have an unbalanced condition between the savings investment on the one hand and consumption on the
other. And that being the case, if you accept that,
then what can the Government do through the budget
and through its indirect influence on stimulating
private activity?
It seems to me that those three questions come in
somewhat of a logical sequence and we should try to
answer them for ourselves as a committee. Do we, can
328
-24-
we agree upon those fundamental questions first;
and if we can, then the thing is to go to the
President and, it seems to me, to make a statement
as to what our views are reference to this
subject, and the budget - the budget statement
should take that - should take into account then
this general idea, this general philosophy as a
need, not the idea of excusing the deficit. It
seems to me that we've got to approach it from a
standpoint of its absolute necessity. It's an
economic necessity. I'm not speaking of political
aspects. It's an economic necessity. And why is
it an economic necessity, if it is one; and if
we're going to have a deficit, what size deficit
is likely to be the minimum or the maximum that
could be considered, and how - then you get into
the question should you increase taxes, and if so
what taxes, in order to reduce the deficit, or
should you increase or decrease certain expenditures?
But the broad principles involved in this thing
seem to me to be the primary or the first essential
of recognition.
And the point that Dr. Ruml brought up with reference to the multiplier - it seems to me that about
all we can say in that connection is this: that
certain types of Government expenditure do stimulate
activity more than other types. As to what extent,
why, we're not in a position to know with any degree
of accuracy. And that certain types of Government
receipts may tend to reduce economic activity, such
as sales taxes, taxes on consumption.
H.M.Jr:
That's - I've said all I want on that.
Bell? As to this
Well, I'm just going to
Bell:
I beg pardon?
H.M.Jr:
As to this afternoon, do you think we have something
to show the President?
Bell:
No, I don't. I don't feel that - or I feel that
afternoon?
we haven't anything on which we can base any specific
recommendation for a future policy or for inclusion
in the budget, except rather generalities maybe in
329
-25-
the budget; and I think maybe the statements that
have been prepared might be used as a basis for some
part of the budget message, unless between now and
the time the budget message is prepared we've got
something else. I don't think we can go any farther
than that at the present time. But I wouldn't be we could make & preliminary report at this time and
say how far we've gotten, but I don't think that think there is anything we can base specific recom-
mendations on.
H.M.Jr:
Well, what I'd like to ask Mr. Delano and Mr.
Eccles, because I don't want to be in the position
that I'm keeping this committee in any way from
contacting the President - so I'd like you two
gentlemen, if you don't mind, to decide whether
we should use this opportunity this afternoon or
ask for another one. And whatever you two gentlemen
decide is agreeable to me; whatever you two people
decide is all right with me.
Ruml:
Mr. Secretary, could I just state my views?
H.M.Jr:
Please.
Ruml:
I think there's an unknown factor, Mr. Secretary,
that you can perhaps enlighten us on. We'v been
meeting here now for some weeks and we've got a
common, basic, general understanding so that we
can talk about details without going back to our
common basic understanding on very, very broad
general questions.
The question in my mind is whether, when the time
comes to present something concrete to the President,
we will have made a certain progress that perhaps he
may not be informed of in terms of general back-
ground. The only thing that I'm afraid of is the
absence of that sort of thing.
Now then, if there's no danger from that point of
view, it would seem to me better to defer any
presentation to the President until these statements
are terribly carefully studied from the standpoint
of implications of various words, phrases, and so
forth, that are going to receive, if they become
public, extremely hostile analytic criticism.
330
-26H.M.Jrl
Now I've got to cross-examine you. You used the
word "danger." I don't know what you mean. I
mean danger of what? Be a little franker or a
Explain
little
more explicit. I don't quite
it to me.
Ruml:
Dangers in these statements?
H.M.Jr:
No, no, no, no. I mean you said the question
Ruml:
I may have used - the word "danger" may be too strong
a word, but I think that sometimes when a group has
been meeting over a period of weeks and has come to
sort of a common general understanding on assumptions
that they never explicitly raise in future discussions,
that when you go fresh to a mind that has not had that
background, the reaction may be one that could be
avoided if there was more of an attempt to keep
these individuals currently up to date with the
general thinking.
Now I think 1 appreciate the difficulty of doing
that, but - and if that isn't so, if that isn't
a problem, then I certainly should favor not meeting
this afternoon, and I would not be in favor, I think,
of presenting these statements unless more can be
done with them between now and two o'clock. I think
H.M.Jr:
it is humanly possible.
Well, it gets down to this. As to what Mr. Delano
has in his mind as to the philosophy of spending,
I don't know what opportunity he's had to talk
to the President. Mr. Eccles did have such an
opportunity, I take it, at Warm Springs. Is that
right?
Delano:
I've never talked to the President on this subject
Accles:
The President down there
at all.
I didn't raise the
question at all; I felt it was the business of this
committee. But he wanted to talk about the whole the budget problem, as I reported to you when I got
back. And it seemed to me that he was thinking
along the line of not having - of avoiding the
budget being any more - any higher than could be
avoided; and yet he recognized - I mean that was
from a political point of view - then he recognized,
331
-27-
of course, the need of the deficit. On the question
of taxes, he didn't know; he had the idea that
the armament program should be financed currently,
but not with any sales or consumer taxes that bore
on
consumption, but taxes that would bear less upon
consumption.
He seemed to have in mind the necessity of a
different approach to the budget from the stand-
point of an explanation to the public of what -
of the deficit, the idea of its justification as
a means of helping and stimulating business
activity rather than retarding business activity.
That just - and also the public consider all
deficit spending as more or less waste, and he
felt to the extent that it goes into roads, it goes
into public buildings, it goes into flood control,
that items of that sort might be separated and
shown, not necessarily rom the standpoint of the
bookkeeping change but largely from the standpoint
of the budget presentation, that "Here's a public
investment of merit that adds to the national
wealth, as against the payment of interest on the
public debt, for instance, or as against the
benefit payments to farmers, or as against bonus
payments" - that one added to the wealth in tangible assets, and yet from a public point of view they
looked at it all as just so much money gone.
That's just briefly sort of stating the
H.M.Jr:
Well, do you - again I - I want to be very meticulous about this. Well, do you and Mr. Delano feel
that we should as this group go over and see him
at two? Have we got something to present to him?
I'd like you two gentlemen to decide it if you
don't mind.
Eccles:
I don't believe - it seems to me that when we go
over there we ought to be - we ought to be a
little better prepared than we are today. That
is, we should be together on some specific, definite
approach. "hether we make definite recommendations
or not is another thing, but at least it seems to
me that before we take the valuable time of the
President we should be able to have a picture there
and discuss it point upon point as coming as a preliminary report rather than as a definite recommendation. Now, that's
332
-28H.M.Jr:
Well then, just - do you mind if I pin you down?
-
mean do you think we should see him today or
ask him, say, maybe to see us Thursday or a week
from today or whatever
Eccles:
H.M.Jr:
Delano:
Well, I would think that later would - I think
would be better. That's my feeling.
All right. Mr. Delano?
Well, I - my mind is running, from listening to
this talk, about half-way between. I should hope
that you could - you might say to the President
that we don't feel justified in asking for a
haven't finished our studies yet; but in order that
meeting with the committee because we're not - we
he may know the way our minds are running you
might hand him this two- or three-page memorandum,
which would give the background. I think if we
agree to it - think it honestly states the background of this problem, and I think it would be
helpful. what I fear - I think just what Dr.
Ruml does, that we keep enlarging our thought
on this subject and finally come to conclusions,
say, in twenty or thirty days and he will not be
in thorough touch, he won't have known what has
gone before.
H.M.Jr:
Excuse me just a minute. You can continue talking;
maybe you'll come to a decision. (leaves room)
Delano:
Well, that's all 1 have to say. This problem
grows. I think you'll agree with that, won't you,
Mr. Bell, that it's a complex problem and as we
talk and thinkabout it you make progress. And
- welcome this statement that's been read because
I think it gives an honest picture of
MCR:
Do you think it would answer the same purpose, Mr.
Delano, if you ave Harry and the boys another day
or two to
Delano:
Oh sure.
McR:
to clarify their own thoughts on the memorandum
before ... it's handed to the President?
Delano:
Sure.
333
-29Eccles:
It seems to me that we haven't done what is
essential - and I realize that a certain amount
of preliminary discussion, as we might call it,
lost motion, and yet it isn't in a way, because
it's intended to develop background - but now
we've reached this stage, it seems to me that we
should - we should have a general broad formula
that - with reference to this problem that we
should be able to agree upon.
Ruml:
Eccles:
Wouldn't you say formulation rather than formula,
Marriner?
You can call it formulation, whatever it is.
And
then the whole thing, it seems to me, should be
measured by that. We should have, in other words,
some sort of a yardstick here. I don't mean a
slide-rule type, that accurate, by any means.
do mean that when it comes to this whole budget
question we've got to ask ourselves whether or
I
not the question at issue fits into this - a
formula.
(H.M.Jr returns)
H.M.Jr:
Well now, where are we on this?
Delano:
Well, I think the concensus of opinion is that I should say, from what I've heard, the concensus
of opinion is that we do not want - we don't feel
warranted to ask a meeting with the President at
this time. I think that also the opinion was
expressed, and I believe it would carry here,
that perhaps Mr. Currie and Mr. White ought to
be given another day or two or three to make this
statement into the very best form that we can put
it, as support - as a statement of our thinking
on this problem, background material so that the
President may have the benefit of it.
Would it be possible, you think, to see the
Eccles:
H.M.Jr:
Eccles:
President Wednesday or Thursday?
Yes. Yes, I do.
I would like to suggest that we do it this week,
because important decisions likely are being made;
334
-30-
at least he's getting so close to this whole
picture that he must be formulating in his own
mind
H.M.Jr:
I'll ask him; I'll see him.
Eccles:
I think we may be derelict if we don't get to him
before he's crystallized certain views with reference to this problem, and I think that by certainly with the preliminary work we've done, that by Wednesday,
if we went right to work on the thing, we certainly
ought to be prepared to go over there with a statement.
H.M.Jr:
well now, the reason I wanted to do this thing in
this way - I don't know that I ever can subscribe
to certain statements in there. I mean I doubt
whether you gentlemen - so that maybe - but what
I want to do very, very carefully - it may be
necessary that two statements go over, one which
will express - I don't know whether Mr. Bell and I
are in agreement; we can find out - but I want to
be very, very careful as chairman and I want to
lean over backwards, or fall over backwards, if
necessary, to keep the avenues open to other
members of this committee as to what they think.
But I'll certainly - but the reason I'm taking -
I don't want the people to say, "Morgenthau agrees
if he doesn't say something" - there are certain
things in there I don't think I'll ever agree on.
But on the other hand, I'm willing to be argued at.
But I mean the fundamental - I mean I'm not - I can
say it very, very simply. I saw the President
yesterday and we had an hour and a half, and there's
no disagreement that we're going to have a deficit.
I hope that the deficit for the next fiscal year
will be less than for the one that we're in now,
and I think that that will be so. I don't think
I'll ever sign a statement that I think that we need
deficits; that's where Mr. Eccles and I, I think,
will part company.
Delano:
1.4.Jr:
I don't believe it's necessary to say that, even
if you think so.
I mean I just can't subscribe to a statement that
we need deficits.
335
-31Ruml:
That's as of today.
Eccles:
I'm not saying that we should issue a statement
H.M.Jr:
We're coming - I'm willing to go along, and I
told the President yesterday I'm willing to go
along, and take these recommendations which
Currie, White and these other five or six people
to that effect. The point I'm making is on the
economic aspects of it. In other words, we've
got a deficit; now, if we don't need it, it
isn't - the question is, is it desirable? If
it isn't desirable, then we shouldn't have a
deficit; we should increase taxes or reduce
expenditures so as to avoid it.
made, as I got them: We won't ask - we may ask
for, oh, maybe $500,000,000 worth of new taxes I don't know whether that expresses you (Currie)
or not - but at least as a maximum, and then if
they are they will be in the category of the estate
and gift taxes, and the middle income groups between
five and a hundred thousand dollars. That's about
what we're going to look for. I'll say my philosophy in two minutes, if I don't bore you. That is,
$500,000,000 would be about the limit. I think
that the way the thing stacks up depends upon how
much the President puts for his extraordinary
national defense budget; but if it stays within
the limits that he talked about yesterday, I think
the next year's deficit will be less than this. I
believe it's good to let the country know that the
deficit will be declining.
But to come out and sign a statement that I think
we need deficits, and boast about deficits - I just
couldn't do it. I just couldn't do it. But I
went through this because I - I want you people to
feel your own responsibility, that the avenue to the
President is open, and I'm not going to do anything
to close it. In fact, I'll facilitate it, I'll give
up my own appointments, if necessary, in order that
you gentlemen can see him and express whatever is
in your mind, because I want to be terribly clear
so that there will be no misunderstanding as to what
it is.
Now, there's no reason why - there are four of us there's no reason why, if necessary, three statements
336
-32-
shouldn't go to the President over our own names.
But he knows where I stand, and I stand just where
I say now. and I - I mean so I'll urgently ask
him please to see us Wednesday or Thursday after-
noon.
But do I make myself very clear, Mr. Delano?
Delano
Perfectly clear.
H.M.Jr:
And if after my statement you still want to see him
this afternoon, why, the appointment is still there,
so I mean - but I don't want any possible misunder-
standing as between you gentlemen and myself, because..
Is that all right with you, Bell, as a member of this
committee?
Eccles:
Yes, sir.
What, is that all right?
Yes, sir.
You don't feel, Mr. Delano, we ought to see him this
Delano:
I do not.
Eccles:
At all. You don't, Beardsley?
Ruml:
No, the Secretary's statement makes me all the
clearer on this point, because it seems to me that
there is a very large concensus of opinion that can
be expressed and that the points of difference are
points of difference as to tactics and methods and
that until we have thrashed that thing out and show
what the concensus is, that it would be confusing
Bell:
H.M.Jr:
Bell:
afternoon?
to the President to think that there was a difference
of opinion when it applies to methods and what is
essentially detail.
I - just to illustrate my point Mr. Secretary: I
haven't talked to Mr. Eccles, but I'm sure he would
concede that on a national income of 80 billion
dollars a balanced budget would be eminently
desirable, provided it were not deflationary and
it can be made not deflationary. Is that correct?
337
-33Eccles:
I'm not - I've been, of course, misquoted and misunderstood. I'm not advocating an unbalanced budget,
but neither do I think that where you get a given
condition, such as you have now, that we should
apologize for it. It seems to me that it can be
thoroughly justified, and it ought to be done in a
manner of economic justification rather than put
upon any basis of weakness or apology; that we
have an excellent case, the President has an
excellent case, to make to the country on this
issue. And I don't think that he ought to let
business put the blame - we'll say the criticism on him, on the Administration, entirely for the
deficit; that the deficit by the Government is it merely means a question of the Government
borrowing to do what private business fails to
do. And it is far more desirable, it seems to me,
to do everything possible to make it possible
for private business to give employment than
it is for the Government to go out and to try
to do what we'd like private activity to do.
So that I don't think that there is any - you
(H.M.Jr) and 1 have any disagreement on that
question.
H.M.Jr:
Eccles:
If we haven't - I mean, fine, and I've got nothing
which is as important as this, and I'm available and
I'd be glad to continue the discussion. But as I
say, I don't - I'm only repeating myself
You don't feel that an effort should be made at
this time to bring about a balanced budget, as
I understand it, by either an increase in taxes
that would do it or the reduction of expenditures;
but that whether or not there is a deficit depends
a good deal on what the national income is at a
given time.
H.m.dr:
I recognize the fact that the only way we can get
this country out of the present mess is to get a
national income up to around 80 or 90 billion
dollars. And what I told the President yesterday -
he's going to use it, if you don't mind, in this
discussion - he ought to weigh every proposal
that comes in to him - "Will this add or subtract
from the national income?" When I made that statement, Viner said, "You mean recovery before reform.'
338
-34-
I said,to"No,
what Ireform."
want to see is recovery in
order
maintain
Ruml:
That's right; that's a correct statement.
That's right.
H.M.Jr:
Recovery in order to maintain reform.
Ruml:
You can get a very concrete case of that on this
question of the wages and hours thing.
Eccles:
H.M.Jr:
that's what I told him; I'm telling him every
single proposal should be examined: will this add
or subtract?
I told him - I'm just using George Haas's figures
until somebody can give me some better figures,
because George has been righter than everybody
else as to the figures - that the national
income - I told the President the national
income, taking George's, will be the same as
this year's, taking the Federal Reserve's will
be three or four billion larger. So I said,
"Split the difference." I said, "We might get
67 or 68 billion - is the best we can hope in
splitting the difference between Federal Reserve
and the Treasury."
Eccles:
Of course, that's dependent upon certain assumptions,
the assumption, for instance, of what Hopkins spends.
H.M.Jr'
I know. So - but I'm just saying what I feel. But
everything that I told him I've told you people.
I haven't told him anything else.
The only other thing is something on the technique,
and if we're not seeing him then Mr. Bell and I
will have to see him, because we just don't know
where we are on our figures, our totals; we don't
know where we are on our totals. But if I had
anything at this time that I thought would be
helpful to you people, I'd tell you. Now, I
haven't got anything to help you; but on the other
hand, I would like to go with you gentlemen and
have a unanimous front.
Ruml:
Sure.
339
-35H.M.Jr:
But as of this morning, I'm afraid we'd go over
and have an argument. But I didn't want you
people to think, "Well, darn Morgenthau, he's
blocking us from getting what we'd like to get
to
theinPresident."
thing
this way. That's why I went at this
But I just say again, I'm convinced we've got to
get this thing going on an 80 or 90 billion dollar
basis. How to do it, I don't know, but certainly
there
to be brains enough in this country
to
findought
a way.
Now, if we can rub off the edges and get together
on a statement that the other people here - Mr.
Bell and Taylor and Hanes - will go along with us
on, why, fine. But we're available and this is,
as far as I'm concerned, of first importance.
Delano:
I think, if I may say so - I think this committee
can be of tremendous value if it didn't do anything
else but examine the policies that are being sug-
gested by important committees. Now, I may say,
when the Federal Reserve System took over the
direction of the banks, one of the troubles we had
the first ears was that the national banks, to
compete with the state banks, were all paying
interest on deposits that had grown up to be a
terrible evil. I know in the Pouth, why - I had
some work for the Government in Texas, Oklahoma -
the common rate of interest for deposits was four
and six percent all through 124, 125, 126. Well,
now they're not allowed to do that. When they paid
that big interest on deposits, it compelled them
to be adventurous, it compelled them to do the very
thing that none of them will do today. They all
want to bet on a sure thing; they're not willing to
put any money out except on Mr. Morgenthau's bonds
and things like that. Well, it's completely changed
the picture, and I think nobody foresaw it at the
time it was done.
H.M.Jr:
All right; then we meet again when somebody's got
something; I'm here.
Prepared by Cunic t 340 white
December 12, 1938.
(Read at meeting 12-12-38)
The members of the Fiscal Advisory Board are in substantial
agreement on the following points:
1. The degree of recovery that can reasonably be expected in
1959 will still leave us with a substantial excess of plant capacity,
a large volume of unemployment, and a national income no higher and
probably lower than that of 1937.
2. In order to achieve a higher national income it is necessary
to secure a larger volume of private capital expenditures.
3. The single most important factor in stimulating private
capital expenditures is a growth in the demand for the products of
industry.
4. When the Government pays out more to the community than it
collects in taxes, it adds to the demand for the products of industry.
These additions are greater in proportion as the Government collects
its revenues from idle funds and its expenditures go directly for
increased consumption.
5. Considering, therefore, on the one hand, the deficiency of
consumer-buying power during the next fiscal year in relation to our
productive capacity, and, on the other hand, the inadequacy of existing
outlets for the volume of accumulating savings, a continuing contribution by the Federal Government to the growth in buying power and
the provision of an offset to savings, through deficit financing,
is economically justifiable and desirable.
341
6. If, therefore, it is felt that the proposed increased expenditures on armanents must be met by additional taxes, it is essential
that the increased taxes must not reduce consumption.
7. Whatever the deficit in the fiscal year 1940, it will be
much less in the second half than in the first half, or, in other words,
the contribution to buying power will be sharply curtailed in the
first half of 1940,
8, This sharp ourtailment in buying power suggests the desirability, on economic grounds, of commencing old age annuity payments at
the beginning of 1940, which would not increase the bookkeeping deficit,
and of postponing the 50 percent increase in old age payroll taxes
scheduled to begin in 1940.
9. For the purpose of adding to the national income next year,
and of preventing what promises to be a serious bottleneck within the
next year or so, action should be taken to stimulate a large railroad
equipment program through a self-financing Government corporation.
10. Finally, the bookkeeping deficit for 1940 could be reduced
by shifting certain assets to self-financing Government corporations
and by shifting certain appropriations to self-financing Government
corporations, and by stimulating recovery through an extension of
Governmental activities financed outside the budget.
342
December 12, 1938
To:
The Secretary
From:
Mr. Hanes
At the White House today in conference with the President we
made the recommendation that in view of the belief there would not
be another tax bill before 1941, that we go to the incoming Congress
for an increase in taxes in the amount of one billion dollars. The
President agreed to this recommendation, saying that it was his belief
also that we should endeavor to collect that additional amount. We
recommended that the additional money be collected through an increase
in the middle brackets of the income tax and the gift and estate taxes,
lowering the exemptions in each case, and by increasing and extending
to other fields the excise taxes. The President did not agree to the
excise suggestion fully, but did say that there should be an increase
in certain transfers of ownership of personal property.
For your information, I am having prepared certain estimates on
what would be necessary in the above fields to produce the additional
amount of one billion dollars. I hope to have this ready by Wednesday.
J. W. Haves
OK. Heyagouth an h Willo
343 thr
12/12/38
FOR SECRETARY MORGENTHAU:
Objectives:
I.
Business man's budget: (a) To provide A business man's budget
by excluding from the budget capital outlays for loans and
stock investments. (b) To make an annual appraisal of assets
and liabilities of all governmental corporations and lending
agencies. (c) To appropriate annually for impairment of
capital. (d) To include in the annual budget losses causing
impairment of capital.
II. Administrative expenses of corporations: (a) To require
Budget Bureau approval of all estimates for administrative
expenses of all corporations. (b) To include them in annual
budget for consideration of Congress. (c) To set authorized
amounts up on books of Treasury as appropriation accounts,
subject to audit and settlement of General Accounting Office
in accordance with rules and regulations applicable to appropriations of executive departments and establishments.
III. Civil service: (a) To cover employees of governmental corporations into the United States civil service. (b) To make future
appointments in accordance with civil service laws, rules, and
regulations.
Explanation:
I,
BUSINESS MAN'S BUDGET.
On July 1, 1938, the Treasury took the first steps to
provide a business man's budget. It went as far as it could in
that direction under existing law. At the coming session of
Congress it is proposed to ask for the necessary legislative
authority to enable it to complete the job. The proposition
involves -(a) Exclusion from budget of capital outlays for
loans and stock investments: and
(b) Inclusion in budget of losses, 1f any, arising
from such loans and investments.
344
-There are two classes of funds from which loans are made -(a) Corporate money. These were removed from the budget
on July 1, 1938, as already indicated. They include RFC, ccc,
Export-Import Bank, and other loans from RFC money.
(b) Appropriated money. This includes PWA, FSA, FCA,
REA, and Maritime Commission. It also includes the Farm Tenant
Act, and loans by Housing Authority from old balances. The
total amount involved is about 233 millions for 1939, and about
214 millions for 1940. Total budget expenditures for these two
years would be reduced accordingly.
A draft of legislation for the purposes indicated is now
being prepared.
Self-liquidating projects. Consideration is also being given
to the proper treatment of expenditures and recoveries in con-
nection with self-liquidating projects, such as the Boulder
Dam. and other reclamation projects. This involves a much
more difficult problem than the handling of loan transactions
since the Treasury would have to rely for information on other
departments. The Treasury does not have authority either to
prescribe or supervise accounting procedures in the several
departments. It would be unable to exercise accurate account-
ing control on the basis of its own records which must be kept
strictly according to appropriations.
345
-3 II, ADMINISTRATIVE EXPENSES OF CORPORATIONS.
The Budget Bureau now reviews the estimates for ad-
ministrative expenses of all governmental corporations for
inclusion in the annual budget.
The First Deficiency Act of 1936 provided, with respect
to the various governmental corporations, that they could not
incur obligations for administrative expenses except pursuant
to annual appropriations. However, in the annual appropriation
acts for 1939, instead of providing annual appropriations from
the Treasury. Congress merely placed limitations on the amounts
which the corporations may expend for administrative expenses
from their own funds, as follows:
Reconstruction Finance Corporation
Home Owners' Loan Corporation
Federal Housing Administration
Federal Farm Mortgage Corporation
Export-Import Bank of Washington
Electric Home and Farm Authority
Commodity Credit Corporation
Federal Savings and Loan Insurance
Corporation
$ 9,250,000
26,500,000
8,500,000
10,000,000
50,000
400,000
520,288
277,000
Congress also provided, except as to RFC. that the
amounts so authorized were to be set up on the books of the
Treasury as appropriation accounts. Accordingly, except as
to RFC. administrative expenses of corporations are now handled
by Treasury and audited by the General Accounting Office the
same as appropriations of executive departments and establish-
346
-4 ments. There appears to be no good reason why RFC admini
trative expenses should be excepted from the usual accounting
requirements.
AWB S
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
AM
347
DATE: December 12, 1938
Secretary Morgenthau
To
FROM
M. A. Harris
W. H. Hadley
A short review of the government security
market for the week ending December 10. 1938
Successful flotation of the new Treasury issues was the principal
feature of the government security market last week. When the final
terms of the offering were made public on Monday the market held firm
and,unlike the June and September financings of this year, all issues
gained strength as the developments of the financing week took place.
One development that seemed to disprove calculations was that the
price of both the new 2-3/48 of 1960/65 and the new 2a of 1947 were
practically identical all week, both issues tying their prices directly
to that of the "rights" in spite of the fact that, on a yield basis,
the new 2s were thus quoted at a yield basis substantially out of line
with other non-callable bonds.
On Monday the new 2-3/44 bonds and 1-1/8% notes were not quoted
but, unofficially, it appeared that the 2-3/4% remained around
101.20/32nds as did the new 2s, while the new 1-1/8% notes remained
around 101.2/32nds. Tuesday the prices of the bonds declined in early
trading as some speculative selling took place but, thereafter, the
bond issues steadily advanced and at the close Saturday the 2-3/40 were
102.1/32nd bid, the 2s 101.31/32nds bid, and the new 1-1/8% notes
101.7/32nds bid.
-2-
348
The exchange offering wherein almost $700 million of the $922
million notes turned in were exchanged for the new 2s of 1947 confirmed
the pre-offering opinions that there would be heavy bank demand for a
9-year bond. On the other hand, the turn-in for the new 1-1/8% notes
was extremely light, which fact is partially a result of the premium
differential between that issue and 2% bonds.
Proportionate strength was displayed by the outstanding bond issues
callable or due after 1946. This demand came both from banks and
insurance companies, with the banks preferring those issues in the
10 to 14-year group and insurance companies and savings banks the
longer issues. Buying was particularly pronounced when it was
realized that the allotment percentage on the new 2-3/48 would be
small, as well as the turn-in of March notes for this issue.
For the week as a whole, Treasury bonds showed an average gain
of about 1/4 point, while notes showed mixed tendencies, the shorter
issues being unchanged to 3/32nds off, while the longest note issues
were up 1 to 2/32nds. The shortest bonds were slightly lower for the
week, while intermediate and long bonds were up 7 to 12/32nds. Guaranteed issues were up 1 to 9/32nds.
Dealers' Portfolios
Dealers' holdings rose about $25 million on Monday when the new
Treasury offering was announced. During the week portfolios varied
from a high of $136 million to a low of $119 million and closed the
week at $128.9 million. The principal changes for the week as a whole
were the result of dealers' subscriptions, both cash and exchange.
Bonds rose from a net short to a $39.2 million long position, a gain
349
-3-
of almost $52 million. Long notes rose almost $14 million while
short notes declined about $26 million. The other changes had little
significance.
(millions of dollars)
Holdings
Dec. 3
- 12.5
Treasury bonds
Treasury notes (1 year)
Treasury notes (1-5 yrs.)
Treasury bills
H. O. L. C. bonds
F. F. M. C. bonds
72.4
22.9
16.2
1.4
3.5
103.9
Holdings
Dec. 10
39.2
46.6
36.6
5.4
-1.2
2.3
128.9
Net Change
+ 51.7
- 25.8
+ 13.7
- 10.8
- 2.6
- 1.2
. 25.0
Dealers' activity was considerable, turnover (purchases plus sales)
averaging about $300 million each day except Saturday.
New Security Issues
of the week's $104 million new corporate financing, about $75 million
was for refunding. The offering on Thursday of $38 million Central
Illinois Public Service first mortgage 3-3/48 of 1968 moved very slowly,
although a $10 million debenture issue of 1939-48 of the same company
realised rapid acceptance. By Saturday, however, dealers' shelves were
believed to be fairly clear of this issue. Municipal bond awards
totaled about $35 million.
Today (Monday, December 12) a $30 million issue of refunding and
mortgage bonds of the Chesapeake & Ohio Railway Company 3-1/28 due 1963,
rated AA, was reported doing very poorly early in the day with no out-
side bids in evidence on offerings at 1/2 point below the original
offering price of 101-1/2.
Corporate Bond Market
There was a moderate reaction in the bond market last week. Moody's
BAA average declined about 5/8ths of a point further, placing this index
-
350
1-1/2 points below the November 12 high, while AAA bonds dropped
about 1/4 point. The decline in second grades was weighted heavily
by rather siseable declines in medium and speculative grade rails,
Utilities and industrials were about unchanged on the week while the
majority of foreign bonds closed the week with lower prices.
Federal Reserve System Account
The System replaced its holdings of $57,230,000 maturing
December 7 Treasury bills with $44,745,000 of the new bills maturing
March 8, 1939 and $12,485,000 of various other maturities ranging from
December 14, 1938 to March 1, 1939.
On the exchange subscription, the System exchanged its holdings
of March 15, 1939 Treasury notes ("rights") for the new Treasury
offering as follows:
$30,000,000 1-1/8% Treasury notes due 12/15/43
35,000,050 2% Treasury bonds due 1947
18,566,000 2-3/4% Treasury bonds due 1960/65
$83,566,050
Treasury Investment Accounts
There were no purchases or sales made in the New York market
for investment accounts during the period December 5 through December 10,
1938, However, cash subscriptions were entered for the new 2-3/48 of
1960/65 by both the Postal Savings System and Government Life Insurance
Fund, the former subscribing for $50 million and the latter $5 million.
Allotiments on the basis of 7% were $3.5 million and $350,000,
respectively.
Government Life Insurance Fund continues to hold $4.1 million
in special 2% 5-year Treasury notes.
351
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
CONFIDENTIAL
DATE December 12, 1938
Secretary Morgenthau
TO
CA
Subject: The Business Situation,
FROM
Mr. Haas
Week ending December 10, 1938.
Conclusions
Art
(1)
As the year end approaches, seasonal factors provide
cross-currents in business activity that increase the
difficulty of appraising the underlying business trend. In
steel operations, for example, the proper allowance to make
at this time for seasonal influences is unknown. Actual
data on business activity provide grounds for optimism, but
a widespread belief exists that a temporary let-down in
activity 18 in prospect at the beginning of the new year.
This has been reflected in a decline in new orders, in
reduced demand for industrial commodities, and in a sagging
trend of stock prices.
(2)
Weakness in commodity prices has been in the foreground
of this week's business picture. For some months the trend
of prices for sensitive commodities has been able to resist
the pressure of the unfavorable foreign situation through the
counteracting influence of improving industrial demand. Some
recent slackening in demand, accompanied by renewed weakness
in sterling exchange, has upset this balance and turned
sensitive commodity prices at least temporarily downward.
(3)
The trend of imports, seasonally adjusted, has turned
upward in recent months, in line with the rising trend of
industrial production in this country. Export demand, however, has been affected by the unfavorable foreign situation,
and our exports (after seasonal adjustment) have continued
to decline.
352
Secretary Morgenthau - 2
The general business picture
At this time of year it is difficult to determine the
basic trend of business activity from current data, owing
to seasonal influences which increase activity in some
lines and reduce it in others, and which cannot be adequately
allowed for by any rigid method of "seasonal adjustment".
Steel output, the most important factor in the FRB index of
industrial production, has begun its usual year-end decline,
but at a lower rate than usual, hence the seasonally-adjusted
indexes of steel activity continue to rise. This may not
indicate a continued improvement in the steel industry, however,
since operations currently are being supported by the block
of orders from the automobile industry booked at cut prices,
on which delivery must be made before the end of the year.
An example of the unreliability of year-end seasonal
adjustments is seen in the drop in the FRB index from 121 in
December 1936 to 114 the following month, while the unadjusted
index was reduced only from 114 to 112. The seasonally-adjusted
textile index at that time was dropped from 139 in December to
124 in January, while actual textile activity 88 shown by the
unadjusted index declined from 132 to 130.
Bearing in mind that seasonally-adjusted indexes may be
somewhat misleading, the New York Times adjusted business
index for the week ending December 3 rose fractionally to a
new high of 93.0. Declines in the adjusted indexes of steel
production, automobile production, and electric power production were offset by increases in the figures for lumber production, cotton mill activity, and both miscellaneous and "all
other" carloadings. For the week ending December 10, preliminary data indicate an upturn of 2.0 points in the adjusted
index of automobile production and an upturn in the adjusted
steel production index of 4.5 points.
Cotton mill activity (See Chart 1) has borne out our
earlier expectations by rising to a new high level for the
year, the seasonally-adjusted index equalling the highest
figure reached since early September 1937. It is providing
support to business somewhat earlier than we had expected,
however, which will tend to reduce its effectiveness as a
business factor in the first quarter of 1939, unless the volume
of new orders improves. Orders have fallen off in the past two
weeks according to our confidential reports from three textile
manufacturing companies. Trade reports indicate that the
market situation this week has been rather unsatisfactory, with
print cloth sales slightly less than 50 per cent of production,
and prices easier as mills sought to reduce inventories.
353
Secretary Morgenthau - 3
The price situation
Commodity prices have recently turned noticeably weaker,
with extensive setbacks in important industrial raw materials
which had previously been rising against the trend of other
commodities. The Standard Statistics Company attributes this
tendency in large part to the effect of weakness in sterling
exchange on dollar prices of commodities with an international
market. For several months the commodity price trend has
reflected only to a slight extent the deflationary influences
originating abroad, since it has been supported by a counteracting influence in the form of improved industrial demand in
the United States. Despite the severe decline in sterling,
prices in recent months have held at a relatively stable level
(See Chart 2). This stability, however, could only be maintained 80 long as the deflationary and the inflationary forces
in the price situation balanced each other.
More recently the price situation has been weakened by
increased pressure from abroad, marked by a severe decline in
sterling at a time when industrial demand has been reduced by
a rather widespread expectation of some slackening in business
activity next month. The BLS price index of 30 sensitive com-
modities, as a result of these influences, has declined to a
new low since September. Prices of industrial materials (See
Chart 3) have been sagging for several weeks. Agricultural
prices, however, have improved somewhat from their relatively
low levels of recent months.
The Dow-Jones index of commodity futures prices, shown in
Chart 2, reflects only partially the downturn that has occurred
in prices generally, since it has been supported by upturns in
grain prices, which are heavily weighted in this particular
index. Wheat has been relatively strong because of the renewed
threat of war in Europe, and more importantly because of low
private estimates of the domestic winter wheat crop for 1939.of
An average estimate of 524,000,000 bushels is made for the
crop, which compares with this season's winter wheat harvest
688,500,000 bushels. The one private bureau which published
condition figures placed the December 1 winter wheat condition
at the lowest figure on record with the exception of that in
the drought season of 1932-1933.
Cotton prices this week have suffered the most severe
decline since early August, despite a reduction of 129,000
bales in the Government estimate of the crop. A poor export
demand for American cotton, partly due to the availability of
foreign cotton at lower prices, has prevented a normal movement of the crop into consumption channels. An additional
354
Secretary Morgenthau - 4
factor tending to disrupt trade buying has been the large
premium on near-month futures resulting from the small
supply of cotton outside the Government loan stocks, which
prevents normal hedging operations. The total loan stocks,
including an estimate for that portion not yet reported by
the lending agencies to the Commodity Credit Corporation, now
approximate 10,400,000 bales.
Exports continue to decline, though
foreign production improves
Industrial production in nine foreign countries turned
upward in September from the low reached in July and August,
according to the seasonally adjusted composite index published
by the Department of Agriculture, which rose 7 points in
September to 142. Greatest gains in indexes for individual
countries were made in Italy (18 points) and Canada (11 points).
The index for Great Britain rose 2 points and for Germany 4
points.
Exports from the United States, seasonally adjusted,
which are related in a general way to business activity abroad,
have so far shown no response to this business improvement,
though export data for November are not yet available. (See
Chart 4.) The decided improvement in exports during 1937, as
shown on the chart, was concentrated largely in steel and steel
products, machinery, petroleum, and certain other non-agricultural products.
The trend of imports, on the other hand, has closely
paralleled the rising trend of business activity in the United
States, to which imports have in the past been closely related.
A slight downturn, however, appears in the adjusted index for
October, which contrasts with the sharo rise in industrial production (See lower section of Chart 4.
Current business news
New steel orders during the first week of December
reversed the declining trend of the previous several weeks,
increasing to the equivalent of 52 per cent of capacity. (See
Chart 5.) Orders at the low figure of 39 per cent of capacity
the previous week were affected by the Thanksgiving cent holiday. of
Current operations of the industry at about 60 per of
capacity, as shown on the chart, are somewhat in excess the
recent rate of new buying.
355
Secretary Morgenthau - 5
Various items of business news have appeared more
optimistic this week. Weekly automobile production has
risen to above 100,000 units, with a total of about 1,060,000
units now indicated for the fourth quarter, approximating
that of last year. An improving railroad situation 18 sug-
gested by upward revisions in fourth quarter estimates of
railroad earnings, a pronounced contra-seasonal rise in
weekly carloadings, and an increase in railroad equipment
buying. Reflecting the increased demand for building
materials, new orders for lumber during the week ended
December 3 were the heaviest reported since July, nearly
every region reporting a large gain over last year.
COTTON MILL ACTIVITY
PER
Est. Normal = 100, Adjusted
CENT
140
120
36
37
100
38
80
60
N. Y. Times
40
JAN.
MAR.
MAY
JULY
SEPT.
NOV.
Office of the Secretary of the Treasury
Division of R Statistics
G-4-3
357
STERLING EXCHANGE AND PRICES OF COMMODITY FUTURES
M
hh
Sterling Exchange
wh
on-Jones Futures
W/M
ver
with
4.52
4.50
PRICES OF INDUSTRIAL MAT BRIALS AND FARM PRODUCTS
1926 = 100
1938
JAN.
FEB.
1938
MAR.
APR.
MAY
JUNE
JULY
AUG.
SEPT
NOV.
OCT.
DEC.
PER
PER
CENT
CENT
80
80
75
75
Farm Products
70
70
65
65
60
60
55
55
Industrial Materials
50
50
45
JAN.
FEB.
MAR.
1938
APR.
MAY
JUNE
JULY
45
AUG.
SEPT.
OCT.
NOV.
DEC.
1938
3
5
8
SOURCE: BUREAU OF LABOR STATISTICS
Office of the Secretary of the Treasury
Division of - - Statistics
P 171
U.S. TRADE AND 1923
FOREIGN
AND DOMESTIC PRODUCTION
- '25 - 100. ADJUSTED FOR SEASONAL
PERCENT
(PRODUCTION)
PERCENT
(EXPORTS)
U.S. Exports and Foreign Industrial Production
150
90
140
FOREIGN INDUSTRIAL PRODUCTION
PHYSICAL VOLUME
80
130
70
120
60
110
50
VALUE OF EXPORTS
100
40
90
30
80
20
1933
1932
1934
1936
1935
1937
1938
1939
PERCENT
PRODUCTION
PERCENT
(IMPORTS)
U.S. Imports and U.S. Industrial Production
120
90
110
INDUSTRIAL PRODUCTION, F.R.B.
PHYSICAL VOLUME
80
100
70
90
60
80
50
VALUE OF IMPORTS
70
40
60
30
50
20
1932
1933
1934
1935
1936
1937
1938
1939
TOTAL STEEL INGOT PRODUCTION AND U.S STEEL CORPORATION ORDERS
Expressed in Percent of Capacity
1938
PER
SEPT
MAR.
NOV.
MAY
JULY
SCPT
TTT
JULY
TITTIE
III
NOV.
PER
CENT
CENT
140
140
120
120
100
100
TOTAL STEEL OUTPUT
80
80
60
60
ORDERS, U.S. STEEL CORPORATION
40
40
IN TERMS OF U.S. STEEL CAPACITY
20
20
0
JAN.
MAR.
MAY
JULY
1937
SEPT.
NOV.
JAN.
0
MAR.
MAY
JULY
1938
SEPT.
NOV.
Office of the Secretary of the Treasury
Division of - - -
I - 48
,
1937
MAY
MAR
JAN
361
December 12. 1938
To:
The Secretary
From: Mr. Hanes
At the White House today in conference with the President we
made the recommendation that in view of the belief there would not
be another tax bill before 1941, that we 8 to the incoming Congress
for an increase in taxes in the amount of one billion dollars. The
President agreed to this recommendation, saying that it was his belief
also that we should endeavor to collect that additional amount. We
recommended that the additional money be collected through an increase
in the middle brackets of the income tax and the gift and estate taxes,
lowering the exemptions in each case, and by increasing and extending
to other fields the excise taxes. The President did not agree to the
excise suggestion fully, but did say that there should be an increase
in certain transfers of ownership of personal property.
For your information, I am having prepared certain estimates on
what would be necessary in the above fields to produce the additional
amount of one billion dollars. I hope to have this ready by Wednesday.
J.W.H.
JWH:ce
362
3:15 P.M.
December 12, 1938
(Immediately after Secretary returned from White House)
Present:
Mr. Hanes
Mr. Bell
Admiral Waesche
H.M.Jr:
Admiral
Waesche:
H.M.Jr:
Admiral, I am telling you so that Bell and Hanes
can hear. I am sorry to have kept you waiting.
That's all right, sir.
The President said - on your three cutters nine million dollars. The money won't be passed
until the middle of spring. Don't you think
if you got the thing authorized after the first
of the year - fiscal year '39 - that a million
for each cutter would be of good use?
Admiral
Waesche:
Yes sir.
H.M.Jr:
You have asked for nine.
Waesche:
H.M.Jr:
That will be three million dollars.
On the Air Station at Kodiak - two million two.
He said, "Please see the Navy". In his plans,
Waesche:
Navy will have a small seabase there.
We have worked with the Navy on that.
H.M.Jr:
Why do you need two docks?
Waesche:
I see no reason why we should need two.
H.M.Jr:
How much is the dock?
Waesche:
The dock was $450,000. We would cut that out.
The Navy is planning a dock-one thousand foot
dock - one thousand feet wide. That will take
care of the Navy as well as us. They might not
have to enlarge it.
-2H.M.Jr:
363
The President said O.K. on the planes.
On the Kodiak business, talk to the Navy to
see if one dock won't do - one ramp for the
plane. He said the Navy will have an amusement
hall.
Waesche:
We
eliminated that. That covers recreation for
the men.
H.M.Jr:
Well Bell will see that someone will give you a
Bell:
hearing.
If that's all settled, what's the use of a hearing?
I don't think the Coast Guard ought to be in the
National Defense Program at all. They are a
Treasury activity.
H.M.Jr:
These planes will be armed.
Bell:
They will be armed for Treasury purposes.
H. M. Jr:
No, no - we are putting in bomb sights, etc.
This is to do the spotting of submarines and
so on and will be taken over by the Navy in
case of war. Anyway, how do we do this officially?
Officially, it would be submitted to the Budget
and we would hold a regular hearing. I don't
Bell:
know what will be done on the supplemental.
H.M.Jr:
Bell:
This will be part of the X X X.
I assume that will all come to the Budget - I
don't know whether it will or not. If the other
is not, the only thing we do is to see that the
Coast Guard should be included.
H.M.Jr:
Bell:
H.M.Jr:
Waesche:
He (Waesche) cries about 200 men and I told him
not to cry, but to go and see you.
Take over the Maritime - - that will give him his
200 men.
You (Waesche) will ask for your appointment?
Yes sir.
-3Waesche:
(Turning to Mr.Bell). "Mr. Bell, when can I
see you?"
Bell:
You can't see me before January 1 on this.
Waesche:
January 1.
364
365
12 December 1938.
MEMORANDUM FOR
---
The Secretary of the Treasury
In accordance with instructions received at your home yesterday
afternoon, the following information is submitted regarding the cost of
the following additional facilities for the Coast Guard:
$ 9,000,000
3 cutters of the BIBB class
15 seaplanes, completely equipped and fitted,
2,490,000
including gun mounts and bomb racks
2,262,000
Air Station and Base at Kodiak, Alaska
TOTAL
$13,752,000
The three cutters of the BIBB leass (327-feet long, 2,000-tons
displacement, 20-knots plus) are needed to replace the old 10-knot cutters
UNALGA, OSSIPEE, and TALLAPOOSA - two of which are 23-years old, and
one 26-years old. The new type of cutter will perform Coast Guard peacetime duties much more efficiently than these old cutters and, in addition
thereto, are valuable vessels to the Navy for national defense in time
of war.
The fifteen long range seaplanes, in addition to planes of this
type now in service and under contract, will give the Coast Guard a total
of twenty-eight planes of this type - two for each Coast Guard Air Station,
two for the proposed Coast Guard Air Station at Kodiak, Alaska, and four
spare planes to provide replacements for crashes, and during major overhaul periods. The estimated cost provides for planes completely equipped
with - radio, spare parts, and other equipment - including gun mounts and
bomb racks. The characteristics of these planes are as follows:
cruising speed
maximum speed
cruising range
landing speed
time of takeoff (calm)
useful load
95 mph
167 aph
2500 statute miles
60 mph
13 seconds
9631 pounds
366
- #2 -
These airplanes are designed and constructed especially to
withstand the loads imposed during landings and takeoffs at sea.
Planes of this type now in operation have been landed in the
open ocean in rough seas eight and ten feet in height while on rescue
missions. Takeoffs have actually been accomplished in eight seconds
in a light wind. One report is on file describing an emergency take-
off on one engine of one of these planes from a rough sea.
The Air Station and Base at Kodiak, Alaska, consists of two
parts, namely - air station proper, and base for Coast Guard cutter
SPENCER (BIBB class) now stationed at Cordova, Alaska. Kodiak is the
proper location for this cutter, but due to no living facilities ashore
for officers and men, it has been stationed at Cordova - which, while
having much better facilities than Kodiak, still is not a satisfactory
station for this vessel. The need for a cutter of this class in
Alaskan waters, in connection with the seal, halibut, and salmon fish-
eries, is essential. The detailed estimates are as follows:
BASE FOR COAST GUARD VESSELS
COAST GUARD AIR STATION
hangar, ramp, fueling facilities,
barracks for enlisted men - complete
and fully equipped (the same as other
present Coast Guard Air Stations)
900,000
three duplex sets of quarters for
commissioned officers
dock for berthing vessels,
including storeroom
500,000
four sets of duplex quarters
for commissioned officers
172,000
129,000
one set of duplex quarters for warrant
37,000
two sets of duplex quarters
for warrant officers
74,000
officers
apartment for 44 families of enlisted
men (20 for Air Station and 20 for men
450,000
of outter)
apartment for families of
enlisted men --- included
under Air Station.
Total cost Coast Guard Air Station
Total cost Base for Coast Guard vessels
TOTAL
$1,516,000
746,000
$2,262,000
The need for a Coast Guard Air Station in Alaska for the peace-
time duties of the Service, is urgent. Not only is such a station needed
for the Coast Guard patrol to protect the seal and halibut fisheries
and the many other duties in Alaska, but the recent threatened encroachment upon our salmon fisheries by the Japanese, has made an air patrol
by the Coast Guard, almost imperative,
367
- is -
The prices quoted in this monorandum are estimated on
approximately a 50% increase over construction costs on the West Coast.
MRWARCH
R. R. WAESCHE
Rear Admiral, U.S. Coast Guard,
Commandant.
368
December 12, 1938.
3:21 p.m.
HMJr:
Hello.
Operator:
Secretary Wallace. Go ahead.
Wallace:
Hello, Henry.
HMJr:
I'm sorry, Henry, but I've had just one impossible
situation after another.
I just -- I just visualized your day.
W:
HMJr:
Yes.
W:
I knew you must have had some unusual things on. We've
HMJr:
got a matter that I wanted to check with you -- first,
is there any reason why we shouldn't sell two million
pounds of sterling for three month's delivery?
Well, Henry, I don't know -- I -- I - I asked you whether
Archie Lockhead, in charge of the stabilization fund --
W:
Yes.
HMJr:
And I asked your man to contact him.
W:
HMJr:
That's right - I -- it just reached the point where I
just simply thought I had better tell you about it.
Well, if he's acquainted, that's all that is necessary.
I -- I don't know what he advised you, but we are not
selling any sterling for future delivery. Didn't they tell.
didn't they advise against it?
W:
Well, you see what -- I haven't -- I haven't heard about
that recently.
HMJr:
Well, if your man, whoever is handling it, will deal with
Archie Lockhead, he's got authority to act.
W:
Yes.
HMJr:
Definite authority.
W:
Yes.
HMJr:
And 11 they'11 see them, why that will save you a lot of
W:
Yes. Well, now, is there any reason why I shouldn't call
time.
him direct myself?
-2HMJr:
369
None
whatsoever, if you want to do it personally. He's
available.
Yes. Now, one other thing, Henry. On this matter of
getting these war surpluses moved into use by the people
who need them most.
W:
HMJr:
Yes, Henry.
W:
Ah -- we've been developing a lot of ideas of one kind or
HMJr:
Yes.
W:
And I want to come out with a definite statement of some
another.
kind within the next two or three weeks. Before I do that
I want to have our technicians have a meeting or two with
someone that you would appoint and someone that Harry
Hopkins would appoint, 80 that the three of us see eye to
eye.
HMJr:
On surplus war materials?
W:
No, no, this is surplus food materials needed by our own
needy people.
HMJr:
W:
Oh - our own needy people?
Yes - the thing in which you are 80 much interested,
HMJr:
Well, then the person is Dr. Towne.
W:
Yes.
HMJr:
Dr. Towne.
W:
Well now, you would designate him then to meet with our
people?
HMJr:
W:
Yes, definitely.
Alright, if you'll tell him that -- that Mr. Waugh will be
calling him up then?
HMJr:
That who?
W:
Mr. Waugh -- Dr. Waugh -- W-A-U-G-H.
HMJr:
W:
HMJr:
Yes, I'll get word to him.
Alright, thank you.
Yes -- I'm sorry I've been delayed, but I just couldn't
help it, Henry.
-
W:
Yes, alright.
HMJr:
Thank you.
3
-
370
371
REB
GRAY
London
Dated DECEMBER 12, 1938
REC'D 3:25 p. M.
Secretary of State,
Washington.
1425, DECEMBER 12, 6 p. m.
FOR TREASURY.
After a quiet day on Saturday when both sterling and
the franc were (*) the market opened with little change
but before fixing both the pound and the franc WERE
supported by their respective official funds. NinetyEight bars of gold WERE sold at the fixing at 148 shillings
101 pence giving a 1/2 pence premium at 4.67-1/16, fiftyone bars being married and forty-seven furnished by the
British fund; SOME of the dealings WERE for arbitrage.
There was little gold dealing after fixing, the British
fund as in past WEEKS not giving any further gold.
Sterling this afternoon was supported by the British
fund which made a stand at 4.66-3/8 but dealings WERE not
heavy until the late afternoon when a rumor from Switzerland,
evidently given SOME credence in Paris, that Italy is
mobilizing, disturbed the market and the British authorities
sold dollars fairly heavily the rate closing around 4.66-1/4.
The
372
REB
2-#1425, From London, Dec.12,6p.m.
The franc was also more heavily supported by the banks in
the late afternoon and the one month's forward franc which
had opened at par went to 1/16 discount and the three
months' discount went from 5/8 to 1. The 'franc spot rate
closed around 177.62.
JOHNSON
WWC
PEG
(*) Apparent omission
373
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: December 12, 1938, 5 p.m.
NO.: 2099
FOR THE TREASURY DEPARTMENT.
Today the franc has been under pressure in a weak
and nervous market. We understand this has been due to
uneasiness felt regarding developments in the international
political situation, particularly the Italian claims and
attitude. A fair amount of sterling has been paid out by
the fund in an effort to maintain the franc rate. At opening it offered sterling at 177.45 but could not keep the
rate from sliding to the present level of 177.60. Forward
rate for three months increased to one franc. Dollar
quotation strengthened to 38.9.
Variable revenue securities and rentes were generally
lower. The reported Italian demands concerning the Suez
Canal apparently affected the market, for Suez lost
15,000 francs.
Reynaud's statement in the Chamber on Friday that
shortly important events would take place relating to France's
credit abroad - reference, telegram No. 2092 of December 10 has been given considerable notice in the financial press
and various interpretations have been put on it.
END SECTIONS ONE AND TWO.
WILSON.
EA: LWW
374
PARAPHRASE SECTION THREE, TELEGRAM NO. 2099 OF
DECEMBER 12, 1938, FROM PARIS.
A member of the Embassy staff was told in confidence
by an official of the Finance Ministry this morning that
for the time being the present conversion operation in
Amsterdam of the 1926 loan was the only one envisaged,
but that the Ministry hoped that with regard to other
French loans issued abroad similar operations would be
possible in the near future. However, it was indicated
that they had not yet drawn up precise plans in this regard. It was the opinion of this official that Reynaud's
statement did not have any other significance.
Mention was made during the talk of the recent
announcement which the Finance Minister made that
6,000,000,000 francs had been repatriated since November 1 reference telegram No. 2079 of December 8 from the Embassy -
and indications of surprise in certain financial papers
that more capital had not been repatriated. According
to this official, there was no error in the announcement
of the extent of the capital which had returned, and the
Ministry was wholly satisfied with the present tendency
and especially with the persistence of the trend. The
official added that no special preoccupation is felt
regarding the outcome of the forthcoming discussion in
the Chamber of Deputies of the 1939 budget, although the
Government does expect to pass through troubled waters.
END SECTION THREE.
WILSON.
EA:LWW
375
PARAPHRASE, SECTIONS FOUR TO SEVEN, INCLUSIVE.
Telegram No. 2099 of December 12, 1938, from Paris.
In this regard it may be said that many financial papers
express similar views, emphasizing that in view of the inter-
national political situation and the difficult internal
affairs, the Chamber's moderate and conservative elements
are not likely to do anything just now which might lead to
the downfall of the present Government. On the other hand,
here and there it is believed that the qualified nature of
the support given to Daladier on Friday last by various
Right deputies may render his majority somewhat precarious.
The Finance Committee of the Chamber on Saturday
examined a proposal by Deputy Malvy which the Government
had accepted providing for certain modifications in line
with the special tax of 2 percent recently decreed on all
wages, salaries, and revenues of a professional and commer-
cial character. It appears that the Government has decided
to exempt the first 6,000 francs from all incomes from
liability to the tax, and for all taxpayers with more than
three children, to increase this exemption to 10,000 francs.
It seems the Government intends to raise the surtax on
revenue from 30 to 33 percent in order to compensate in
part for the loss of income from the 2 percent tax. It is
expected that this concession will remove a certain amount
of opposition which several deputies expressed concerning
the decree laws. The Communist Deputy Duclos proposed at
the same meeting to cancel the special 2 percent tax en-
tirely, but this proposal was rejected by a vote of 24 to
376
-218 with two abstentions.
Today the Chamber Finance Committee is expected to ex-
amine Article Two of the 1939 Finance Law; in this article
the total amount of budgetary revenue will be fixed.
Approval of this Article will apparently indicate indirect
approval of the decree laws, for the reason that such
budgetary revenue includes resources counted upon from
these measures. With regard to discussion in the Chamber,
on the other hand, it seems that direct debate of the decree
laws will not be officially on the agenda before the thirtyfirst of December. The Government will lay them before
the Chamber on that date.
the JOURNAL OFFICIAL of December 11 carried notice of
a further reduction in the interest rates of Government
securities. Beginning with the twelfth of December, the
interest rate on eighteen month national defense bonds
issued by the autonomous national defense board and the
national defense bonds for two years issued by the amor-
tization fund will be 3 1/4 percent. Previously the rate
was 3 1/2 percent.
1 1/2 percent has been fixed as the rate on 75 to
105 day ordinary Treasury bonds instead of 1 3/4 percent,
the previous rate. The rate of 6 months ordinary Treasury
bonds has been fixed at 2 1/4 percent instead of 2 1/2 percent, and that for one year bonds 2 3/4 percent instead
of 3 percent.
The
377
-3The JOURNAL OFFICIAL for December 12 published a
decision offering to accept against one year Treasury bonds
the 5 percent 5, 10 or 15 year bonds issued in 1934
repayable on January 5 next. 4,066,000,000 france was
the total amount of the 1934 issue.
END MESSAGE.
WILSON.
EA:LWW
378
REB
PLAIN
Chungking via N. R.
Dated DECEMBER 12, 1938
Rec'd 3:33 p. m.
Secretary of State,
Washington.
597, DECEMBER 12.
Semi-official Central NEWS published following release
December 11.
"When approached by the Chinese press with regard
to the reported Japanese intention of asking for a revision of the Nine Power Treaty, Doctor Wang Chung Hui,
Minister of Foreign Affairs, yesterday made a statement to
the following Effect.
'Press despatches state that, in separate conversations with the British and American Ambassadors at Tokyo,
the Japanese Foreign Minister maintained that present
changed conditions necessitated a revision of the principle
of equality of opportunity or the open door in China, as
formally Embodied in the Nine Power Treaty.
Though the above report lacks official confirmation,
it would not be surprising, in view of Japan's flagrant
violations of the Nine Power Treaty in recent years, should
she advance a step further and demand the revision or
abrogation
379
REB
2-#597, From Chungking, Dec.12.
abrogation of the said treaty.
I will, therefore, to declare ONCE more that the Nine
Power Treaty was the result of careful deliberation at the
Washington conference of 1921-22 and was Entered upon
freely by all its signatories, including Japan.
The object of the treaty was primarily to define the
principle and policies to be pursued by the powers in
matters concerning China, with a view to bringing about
conditions of stability and security in the Pacific area.
The treaty has neither a time-limit ior any provision
concerning its termination, thus showing that the two
great principles Embodied therein -- namely, respect for
the sovereignty and territorial and administrative integrity
of China and preservation of the open door or commercial
Equality in China -- WERE intended to SERVE as lasting
principles to be faithfully observed by the powers in
matters concerning China.
In other wods, the treaty was designed to bring about
a lasting order of peace in the Pacific area which could
not be legally terminated by any single country.
Furthermore, it is to be pointed out that the "new
situation" in East Asia, as alleged by Japan, has entirely
been brought about by her violations of the Nine Power Treaty
The
380
REB
3-#597, From Chungking, DEC.12.
The contention that a treaty is to be revised or
abolished because of fait accompli brought about by acts
in violation of that treaty is absolutely untenable. I'll
Repeated to PEiping, Shanghai. Peiping please mail
to Tokyo.
PECK
CSB
381
December 12, 1938.
3:42 p.m.
HMJr:
Hello.
Operator:
Governor Ransom.
HMJr:
Hello,
Ransom:
Hello, How are you today?
HMJr:
Oh, about sunk.
R:
Well, that's too bad. What's up?
HMJr:
With work.
R:
Too much work?
HMJr:
That bond issue went nice.
HMJr:
I think it went fine.
It didn't flood you?
R:
No, we haven't had any trouble at all that I know of.
R:
Have you had any?
HMJr:
None.
R:
It looks like it hit it right on the nail.
HMJr:
Yes.
R:
HMJr:
R:
I wondered if you were going to have some spare time this
week, or if you'd prefer next week for me to sit down and
talk to you for a little while about this bank situation?
Right. Well, I tell you what I'll do, Ronald. I'll give
you twenty-four hours' notice - how's that?
That suits me fine!
R:
And just 8.8 soon as I can.
Whenever -- at your own convenience.
HMJr:
Right.
R:
Alright, I just didn't want your thoughts to crystalize
too much until I did have a chance to talk to you.
HMJr:
Thank you.
R:
Thank you.
HMJr:
QK. Heyand an I Dills the
12/12/38
FOR SECRETARY MORGENTHAU:
Objectives:
I.
Business man's budget: (a) To provide A business man's budget
by excluding from the budget capital outlays for loans and
stock investments. (b) To make an annual appraisal of assets
and liabilities of all governmental corporations and lending
agencies. (c) To appropriate annually for impairment of
capital. (d) To include in the annual budget losses causing
impairment of capital.
II. Administrative expenses of corporations: (a) To require
Budget Bureau approval of all estimates for administrative
expenses of all corporations. (b) To include them in annual
budget for consideration of Congress. (c) To set authorized
amounts up on books of Treasury as appropriation accounts,
subject to audit and settlement of General Accounting Office
in accordance with rules and regulations applicable to appropriations of executive departments and establishments.
III. Civil service: (a) To cover employees of governmental corporations into the United States civil service. (b) To make future
appointments in accordance with civil service laws, rules, and
regulations.
Explanation:
I.
BUSINESS MAN'S BUDGET.
On July 1, 1938, the Treasury took the first steps to
provide & business man's budget. It went as far as it could in
that direction under existing law. At the coming session of
Congress it is proposed to ask for the necessary legislative
authority to enable it to complete the job. The proposition
involves -(a) Exclusion from budget of capital outlays for
loans and stock investments: and
(b) Inclusion in budget of losses, if any. arising
from such loans and investments.
-2
There are two classes of funds from which loans are made -(a) Corporate money. These were removed from the budget
on July 1, 1938, as already indicated. They include RFC, CCC,
Export-Import Bank, and other loans from RFC money.
(b) Appropriated money. This includes PWA, FSA, FCA,
REA, and Maritime Commission. It also includes the Farm Tenant
Act, and loans by Housing Authority from old balances. The
total amount involved is about 233 millions for 1939, and about
214 millions for 1940. Total budget expenditures for these two
years would be reduced accordingly.
A draft of legislation for the purposes indicated is now
being prepared.
Self-liquidating projects. Consideration is also being given
to the proper treatment of expenditures and recoveries in con-
nection with self-liquidating projects, such as the Boulder
Dam, and other reclamation projects. This involves a much
more difficult problem than the handling of loan transactions
since the Treasury would have to rely for information on other
departments. The Treasury does not have authority either to
prescribe or supervise accounting procedures in the several
departments. It would be unable to exercise accurate account-
ing control on the basis of its own records which must be kept
strictly according to appropriations.
-3 II. ADMINISTRATIVE EXPENSES OF CORPORATIONS.
The Budget Bureau now reviews the estimates for ad-
ministrative expenses of all governmental corporations for
inclusion in the annual budget.
The First Deficiency Act of 1936 provided, with respect
to the various governmental corporations, that they could not
incur obligations for administrative expenses except pursuant
to annual appropriations. However, in the annual appropriation
acta for 1939, instead of providing annual appropriations from
the Treasury, Congress merely placed limitations on the amounts
which the corporations may expend for administrative expenses
from their own funds, as follows:
Reconstruction Finance Corporation
Home Owners' Loan Corporation
Federal Housing Administration
Federal Farm Mortgage Corporation
Export-Import Bank of Washington
Electric Home and Farm Authority
Commodity Credit Corporation
Federal Savings and Loan Insurance
Corporation
$ 9,250,000
26,500,000
8,500,000
10,000,000
50,000
400,000
520,288
277,000
Congress also provided, except as to RFC, that the
amounts SO authorized were to be set up on the books of the
Treasury as appropriation accounts. Accordingly, except as
to RFC. administrative expenses of corporations are now handled
by Treasury and audited by the General Accounting Office the
same as appropriations of executive departments and establish-
-4ments. There appears to be no good reason why RFC administrative expenses should be excepted from the usual accounting
requirements.
swig
of
386
m
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
DEC 12 1938
TO
Secretary Morgenthau
FROM Herman Oliphant
For your information
To-day's public hearing before the Temporary National
Economic Committee involved the patent situation in the
glass container industry, with two representatives of the
Hartford-Empire Company as witnesses. The most significant
feature of the testimony was the frankly paternalistic
attitude of the Hartford-Empire Company (which practically
controls the industry through license agreements covering
machinery on which it holds patents). The witnesses
testified to the effect that their company has the power to
control production policies of their licensees, that they
exercise the power to "stabilize" conditions, and that the
situation depicted shows a socially desirable situation.
The public hearings on the glass industry will take
at
least all of this week. I understand that representatives
of Owens-Illinois Glass Company will appear tomorrow.
1/2
387
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
December 12, 1938
Secretary Morgenthau
TO
M
Herman Oliphant
FROM
For your information
You gave me this morning Under Secretary Welles' suggestion
to you by telephone that the arrangement of the tung oil matter be
changed to provide that title to the tung oil pass to the buyer in
the United States rather than sooner, and that the obligation of the
seller to deliver oil be changed by eliminating all references to
specific amounts and substituting the phrase, "quantity lawfully
available * * * for export." Both of these changes have been made,
and I telephoned Mr. Hamilton (with Foley on the phone), whom Welles
had sent over, reciting the changes to him. He said that these
were entirely satisfactory and that the whole matter was now in
satisfactory form from the State Department's point of view. I asked
him if I should so advise Welles and he said no, that he would do
that.
M
388
JR
Hong Kong via N. R.
Dated DECEMBER 12, 1938
REC'D 2 a.m., 13th.
Secretary of State,
Washington.
122, December 12, 5 p.m.
Eurasia Aviation Corporation is now operating
an irregular (repeat irregular) SERVICE between
Chungking and Hong Kong carrying passengers, mail and
frEight. This in addition to the irregular SERVICE
operated by the Chinese National Aviation Corporation
between Chungking and Hong Kong.
SOUTHARD
EDA:CSB
389
JR
PLAIN
Hong Kong via N. R.
Dated DECEMBER 12, 1938
Rec'd 2 a.m., 13th.
Secretary of State,
Washington.
114, December 12, 6 p.m.
Provisional statistics of long Kong trade with
South China for November 1938 show a decrease in total
trade of Hong Kong dollars 16,100,000 as compared with
November 1937 imports into Hong Kong from South China
dropped from 12,000,000 Hong Kong dollars to 4,300,000
Hong Kong dollars during the two months mentioned while
Exports from Hong Kong to South China dropped from
12,300,000 Hong Kong dollars to 3,900,000 Hong Kong
dollars average value of imports into Hong Kong from
South China during first nine months of 1938 was
10,000,000 Hong Kong dollars while average monthly value
of Exports from Hong Kong to South China was 13,800,000
Hong Kong dollars for purposes of official statistics
the six cities of Canton, Kongmong, Yunnanfu, Hoihow,
Vuchow and Kungchow are regarded as South China average
Exchange rates for November 1937 and 1938 WERE point
3087 and point 291 United States cents respectively
to one Hong Kong dollar.
Repeated to Peiping. By mail to Chungking.
SOUTHARD
DDM