Full text of Diaries of Henry Morgenthau, Jr. : Volume 180 : Part 2

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207

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE April 18, 1939

TO

Secretary Morgenthau

FROM Mr. Foley, Acting General Counsel

Re: Authority to close banks and security

exchanges upon the outbreak of war abroad.

I. Proclamation of a general holiday (necessarily including banks and
security exchanges). There appears to be neither statutory nor constitutional authority for such proclamation.

The statutory authority of the President with regard to
holidays relates only to officers and employees of the Executive branch
of the Government, and in that respect is somewhat limited. Act of March

3, 1893, 27 Stat. 715, as amended (U.S.C. title 5, sec. 29); Act of January 6, 1885, 23 Stat. 516, as amended (U.S.C. title 5, sec. 86; Act of
June 28, 1894, 28 Stat. 96 (U.S.C. title 5, sec. 87); see (1923) 33 Op.
Atty. Gen. 485.

Nor does there appear to be any constitutional authority in
the President to suspend the general commercial activity of the nation by

the proclamation of a holiday. In (1911) 29 Op. Atty. Gen. 52, Attorney
General Wickersham advised the President that he was without constitutional

authority, in the absence of a specific act of Congress authorising him

to do so, to issue a proclamation declaring the fiftieth anniversary of
the issuance of the Emancipation Proclamation a national holiday. The

-2 -

208
A

existence of a national emergency would seem not to extend the constitu-

tional power of the President in this respect. It has been pointed out
that the special and extraordinary powers which the President has exer-

cised in times of war have been those given him by statute, thua raising
questions as to the war powers of Congress rather than the war powers of

the President. Willoughby, Constitutional Law of the United States (2d
ed. 1930) page 656.

It is believed that the constitutional authority of the
President as Commander-in-Ohief of the Army and Navy and his inherent

constitutional power over foreign affairs are not a sufficient constitutional basis for a proclamation of a national holiday, under which all
commercial activity would be suspended, in any circumstances now foreseeable.

II. Specific authority for the closing of banks and security exchanges.
A. Banks.

Section 5(b) of the Trading with the Enemy Act of October 6,

1917, 40 Stat. 415, as amended (U.S.C. title 12, sec. 95a), as it appears
in the Code, provides:

"During time of war or during any other period
of national emergency declared by the President,
the President may, through any agency that he may

designate, or otherwise, investigate, regulate, or
prohibit, under such rules and regulations as he
may prescribe. by means of licenses or otherwise,
any transactions in foreign exchange, transfers of
credit between or payments by banking institutions
as defined by the President, and export, hoarding,

209
3

melting, or earmarking of gold or silver coin or
bullion or currency, by any person within the
United States or any place subject to the jurisdiction thereof; and the President may require
any person engaged in any transaction referred

to in this section to furnish under oath, complete information relative thereto, including the

production of any books of account, contracts,

letters, or other papers, in connection therewith
in the custody or control of such person, either
before or after such transaction is completed.
Whoever willfully violates any of the provisions
of this section or of any license, order, rule,
or regulation issued thereunder, shall, upon conviction, be fined not more than $10,000, or, if a
natural person, may be imprisoned for not more

than ten years, or both; and any officer, director,

or agent of any corporation who knowingly participates in such violation may be punished by a

like fine, imprisonment, or both. As used in
this section the term 'person' means an individual,
partnership, association, or corporation."
(Underscoring supplied.)

It should be noted that the bank holiday of March 6, 1933,
was proclaimed under an earlier and narrower version of that section.
Proclamation No. 2039, 48 Stat. 1689. That proclamation was approved

and confirmed by the Act of March 9, 1933, 48 Stat. 1 (U.S.C. title 12,

sec. 95b). After the enactment of the section in its present form, the
President extended the time of the bank holiday. Proclamation No. 2040,
48 Stat. 1691. The statute and proclamations were given effect in several cases. Hardee V. Washington Loan and Trust Co., (D.C. App. 1937)

91 .(2d) 314; City of East Cleveland V. Fidelity and Deposit Co., (N.D.
Ohio 1933) 5 F. Supp. 212; Hanley V. Corwin, (E.D. N.Y. 1936) 15 F. Supp.
396.

From the very terms of the above statute, it is clear that
the President may prohibit most banking transactions of any banks. Even

-4-

210

broader powers are conferred upon the President with respect to members

of the Federal Reserve System by section 4 of the Act of March 9, 1933,

48 Stat. 2 (U.S.C. title 12, sec. 95), which provides:
"Sec. 4. In order to provide for the safer

and more effective operation of the National Banking System and the Federal Reserve System, to pre-

serve for the people the full benefits of the

currency provided for by the Congress through the

National Banking System and the Federal Reserve

System, and to relieve interstate commerce of the
burdens and obstructions resulting from the receipt on an unsound or unsafe basis of deposits
subject to withdrawal by check, during such emergency period as the President of the United States
by proclamation may prescribe, no member bank of
the Federal Reserve System shall transact any bank-

ing business except to such extend and subject to

such regulations, limitations and restrictions as

may be prescribed by the Secretary of the Treasury,

with the approval of the President. Any individual,
partnership, corporation, or association, or any
director, officer or employee thereof, violating
any of the provisions of this section shall be

deemed guilty of a misdemeanor and, upon conviction

thereof, shall be fined not more than $10,000 or,
if a natural person, may, in addition to such fine,
be imprisoned for a term not exceeding ten years.
Each day that any such violation continues shall
be deemed a separate offense." (Underscoring
supplied.)

B. Security Exchanges.

Section 19(a) of the Securities Exchange Act of 1934, 48 Stat.

898 (U.S.C. title 15, sec. 78s). provides, in part:
"Sec. 19. (a) The Commission is authorised,

if in its opinion such action is necessary or appropriate for the protection of investors-*

"(4) And if in its opinion the public interest

so requires, summarily to suspend trading in any

registered security on any national securities

211

-5exchange for a period not exceeding ten days, or
with the approval of the President, summarily to
suspend all trading on any national securities
exchange for a period not exceeding ninety days."

Thus, there is ample authority for the closing of national
securities exchanges.

E.N. Tolyh

Acting General Counsel.

212
JSC. 60M 10 38

37(a)

FEDERAL RESERVE BANK
OF NEW YORK
DATE

April 18, 1939.

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

SUBJECT TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

FROM

I called at 11:30 a.m. and in Mr. Bolton's absence I
spoke with Mr. Hawker. I referred to their order of yesterday for
us to buy sterling at 4.68 1/32 and pointed out that under the market's

regulations here sterling was dealt in in fractions of 1/16 only. If
we had had to operate at his limit of 4.68 1/32 it would have meant
the broker would pay for half the amount he had to buy 4.68 only and

for the other half 4.68 1/16, the latter half free of commission.
This arrangement, however, I thought could not be to the liking of
the British fund in that at least part of the business done here was

put through at a figure below his limit of 4.68 1/32. Besides, the
moment we gave an order at 1/32 everybody in the market knew the

nature of the business, whereas under the old set-up they could only
guess at it. Mr. Hawker replied that under the circumstances the

best thing for them to do would probably be to give their orders
in fractions of 1/16 as heretofore and thanked me for having brought

this matter to his attention.
I referred to the recent two gold shipments on the Manhattan
and the American Trader and pointed out that both of them had contained

a high percentage of Australian bars whose fine contents nad turned

out to be below .995. I referred him to previous correspondence in
which we had explained that on gold shipments below .995, charges

were considerably higher and warned him that future out-turn of such
shipments might be unsatisfactory.

USC. 12 60M4 10 38

DATE. April 18, 1939.

OFFICE CORRESPONDENCE

Subject TELEPHONE CONVERSATION WITH

CONFIDENTIAL FILES

TO

213

FEDERAL RESERVE BANK
OF NEW YORK

BANK OF ENOLAND.

L. W. Knoke
FROM
8

I mentioned that we were going to cable tonight and ask
them to ship another $5,000,000 gold on the American Merchant

scheduled to sail on the 20th, this against their #883/39 giving
us $10,000,000 gold in London today.

LWK:KW

03V13038
app er ace
YAUPAIRT

visions? ed
release all al made Ministral

-

214
PLAIN

RFP

London

Dated April 18, 1939
Rec'd 2:10 p.m.

Secretary of State
Washington

516, April 18, 8 p.m.
FOR TREASURY FROM BUTTER WORTH

1. Phillips tells ME that his information indicates that the unemployment returns which will shortly
be published for SOME date in April will show a considerable improvement. Extensive new orders for ships
are being placed following the Government's announced

subsidy plans. The wool-textile trade is already bEnEfitting from armoment orders and rail traffics are
slightly better. The March steel production figures
WE TE only just under the November 1938 record level and
this sharp upturn together with EXPECTED armament and

air raid precautions and shipbuilding demand has given

rise to talk of the steel industry.soon reaching its
full output capacity. Meanwhile the shortage of scrap
is becoming Evident and increased imports are likely
to show in the April trade returns. The March trade
returns published today do not yet reflect a general
increase

215

RFP -2- 516, April 18, 8 p.m. from London
increase in imports which the accelerated armament

program will doubtless bring about shortly. Exports
were slightly below the February daily average the
figures for the former month being, however, swollen
by the delivery to foreign purchasers of pounds 2
millions worth of ships and war VESSELS. March Exports

of iron and steel, machinery, cotton goods and coal

are down on last year, but wool textiles, non-ferous
metals and chemicals show improvement.

2. The London stock Exchange and the foreign
Exchange market have both been marking time today but

it is noteworthy that the three months' belga has gone
to a 13 per cent per annum discount.
KENNEDY
KLP

03V13338
aroj et non
TM31 YAUBANITY

- will

have

216

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: April 18, 1939, 5 p.m.

NO.: 768
FROM COCHRAN.

Today the exchange market here was very quiet. Some

sterling was gained by the French control. $650,000 which
were offered from Amsterdam were bought for the control

by one Paris-American bank. Belgium is meeting with

some difficulty in completing its Cabinet, and the belga

is still at the gold export point despite the apparently
costly efforts made this morning against sterling to
improve the belga. French rentes and shares had little
trading, because of the hesitancy to make commitments

in present circumstances, and in particular, because there
is increasing concern that Tangier may bring some complication.
Today I had lunch at the Bank of France. Governor
Fournier told me that on the Spanish gold case there was

nothing new. Representatives of two alleged banks of
Spain had drawn his bank into litigation. Simply because
his Government has recognized Franco, he said he cannot now

make a political question of the affair. The Bank of
France will not dispose of the gold until the courts
reach a decision. The amount of gold held is approxi mately 1,600,000,000 current French francs. I understand

that this amount is the principal metallic asset

which

217

-3that

the which Spanish is left to the Bank of Spain, it is urgent

ENDOFinstitution
MESSAGE. recover the cold. so

BULLITT.

03V13338
prof et OCA

-

will
TM3*TMA930
to will

EA:LWW

218
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Enbassy, Paris, France

DATE: April 18, 1939, 6 p.m.

NO.: 769
FROM COOHRAN.

A private Paris banker on March 31 introduced me
to Manuel Arburua, who is the sub manager of the Exchange

Committee of the Spanish Ministry of Finance. For several
years Arburua has been an official of the Bank of Spain.
He told me that he had wanted to come to see me since

he knew that in 1935 I visited the Bank of Spain at Madrid.
He spoke of the general Spanish situation, and particularly

the need for raw materials. He had just been in Italy,
where he had been a member of the Spanish commission

to get support from the Italians and to consider adjusting
obligations toward that country.
Arburua said that 3 or 4 months before the civil
war started in 1936, the Bank of Spain adopted the policy
of assembling practically all the gold and silver reserves
of the Bank in the vaults of the head bank in Madrid.
Therefore, when the civil war broke out, most of the
metallic reserves game into the hands of the Madrid
Government. The Madrid Government used these reserves

to pay for military supplies, and so on. My visitor
stated that now the France Government finds that there

are practically no metallic resources in the vaults of
the Bank of Spain.
During

219

-2During the entire civil war, he said, the Nationalist
authorities had continued to export to Italy and Germany
mineral and other products. They had thereby compensated

to a large extent for the armament materials provided by

these two friendly countries. There are still debts to
these two countries. Germany, he said, has not brought

up the question of debt liquidation as yet; he expects
this problem will be solved without difficulty by exporting
to Germany over a period of years, as in the past Germany
has always purchased from Spain more than she has sold

and is looked upon to continue to be a good customer of
Spain's.

As for liquidation of the Spanish accounts with
Italy, no definite arrangement has yet been made. My
visitor does not expect Italy to press for payment in
any way to embarrass his country. There would be no

trade agreement with either Italy or Germany, he insisted,
which would keep Spain from being free and independent

in making trade agreements with other countries. His
country's broad important reciprocal trade agreement with
Italy, he emphasized, ensues since there is such a similarity
of products in the two countries.
The Nationalists manufactured in Spain a very important part of the goods and munitions they needed during

the war. They paid cash acquired through exporting
Spanish

220

-3Spanish products from the territory their forces controlled,
for the articles which they had to buy abroad. They have
run significant accounts only with Germany, and with Italy
to a lesser extent.
The Franco Government will now have to go slowly in

its tremendous task of reconstruction, since they lack
foreign exchange and gold, and do not have credit facil-

ities. It is planned to increase Spanish exports as much
as possible and to use the foreign exchange therefrom

in importing only necessities such as coal, cotton, oil
and wheat. The Spanish have made an arrangement to import

a large amount of Argentine wheat because last year's

wheat crop was insufficient. They are giving Argentina
in turn a trade treaty guaranteeing an excess in trade in
favor of Argentina which over a few years would permit

the liquidation of the debt incurred for present wheat
importations.

I reminded my visitor that the Franco Government
had not been recognized by my Government at the time we

had our conversation. Arburua replied that we had met

through a mutual friend, and he said that particularly
because he then had no authority to approach any American

officials, he wanted the visit considered entirely
unofficial.
I was visited again today by Arburus, who brought
with

221

-4with him Vicente Taberna Latasa. The latter was formerly
the Spanish Commercial Attaché in Paris and is now in the
Ministry of Industry and Commerce at Bilbao. Also with
him was Jose Maria Sagarra Montoliuan, who is an engineer

in the Ministry of Industry and Commerce, and who also
serves as Secretary of the Spanish Cotton Committee.

My friend told me that after he had been in Paris the
last time he went to Burgos. After he had consulted with
the appropriate officials there, he was sent back to
Paris together with the two officials mentioned above for
the purpose of seeing me and trying to find out whether

there is any possibility of getting credit facilities
from the Export-Import Bank for the purchase of American

cotton, and if so, how the Spanish officials should proceed

with such negotiations. I said that since they requested
it I would pose the question, and then pass on to them such
information and advice as my Government might give me.

These officials will stay in Paris until a reply is received,
and are anxious to have it as soon as it oan be given.
They informed me that they could be reached through their
Paris Embassy.

The following informal memorandum was given to me
by the group:

"Basis of a proposal for credit with the view to
purchasing

222

-5pur chasing raw cotton for the Spanish market".
The memorandum reads in translation:

"One. Spain needs to purchase minimum of 300,000

bales of American cotton for its normal annual consumption.
"Two. Payment for the said bales would be made on

credit for a minimum duration of three years and at a

low rate of interest.
"Three. Payment would be effected by soaled maturities
of a minimum of three years counting from the date of

arrival of the bales in Spanish ports.
"Four. The operation would be concluded with the

rapidity necessary for the first shipment of 60,000 bales
to arrive in Spanish ports the month of May 1939.
"Five. Considering the importance of the stock which

the Government of the United States actually has it is
desired to know quickly whether it would be disposed to

effect these operations and in what general conditions".
END SECTIONS ONE TO FIVE INCLUSIVE.
BULLITT.

03V13038
agon 01 oon
YAUBAYAT
leasing

EA:LWW

223

PARAPHRASE OF SECTION SIX. TELEGRAM NO. 769 OF

April 18, 1939, from Paris.
According to my visitors, the requirements for each
month would be 30,000 bales. The initial amount of 60,000
bales would take care of one month's requirements, and
would leave 30,000 bales on hand for a constant reserve.
I asked my friends whether there were any American firms

which had cotton in Spain now, and was told that the firm
of Anderson Clayton had shipped 13,500 bales to Barcelona,

a free port. 2,000 of such bales.were purchased by the
Franco Government for cash, which leaves 11,500 bales.

However, there is no disposition on the part of cotton
merchants to grant such credit facilities as are required
by the conditions.

I told the group that credits to foreign governments
directly were not given by the Export-Import Bank. They

asked if the credit could be given to the Cotton Textile
Committee, in which all of the industry is represented,
and to which the Government gives support and guarantee.

If this is recommended, they are ready to take the matter
up through Paris branches of American banks. They prefer

to start their negotiations here, as they have no facilities for such negotiations in Burgos and Bilbao.
I asked about the political outlook. These three
men insisted that in the reconstruction of Spain, their

people have a real problem. It is their intention to
rebuild Spain for themselves, and not for foreigners, they
said.

224

-asaid. They added that foreigners will have to leave
Spain, and that Spain will not get entangled in interna-

tional difficulties.
END MESSAGE.

BULLITT.

83413038
DCD et OCA

current a was
valuet 10 at want
EA:LWW

225

April 19, 1939
4 p. m.

Present:

Mr. Basil Harris
Mr. Bell

Mr. McReynolds

Mrs. Klotz

(Miss Chauncey came in after the meeting

had started, so the transcript below

starts off a little abruptly.)

Mr. Harris: We have supplied every Captain
with a secret code word which he keeps in his safe,
under lock and key, and it's got a stamp on it and
the Captain must not take any instructions in the
way of deviating his ship or proceeding on any other

course unless that code word accompanies the message,

because you could see quite easily if we had a ship

coming out of Hamburg and the Captain had a message

to proceed to Zebrugge, he might be proceeding to a

mine. So we have already done that with all our
ships and I think that should be a very good thing
to do with all American ships -- immediately establish a code word.

HM,Jr: That ought to be under the supervi-

sion of one agency.

Mr. Bell: Maritime Commission.
HM,Jr: They don't have any ready.
Mr. Bell: Coast Guard?

HM,Jr: I think Coast Guard. Then another

thing would come up: whether the Navy or Coast
Guard could supply the Government code to the Captain.
Mr. Harris: We don't need the Government code
as
much as we do a very secret identification mark.

226

-2-

Mr. Bell: Each company would have to have
its own?

Mr. Harris: Each company would have to have

its own.

HM,Jr: We are intercepting. We are intercepting, and a German 1s operating a ship -- they
seem to be very interested -- down in Mexico. We
have the message. We have the code. Most likely
in 24 hours we will break it, and they are changing
and, therefore, after the first day they would recognize the word.

Mr. Harris: That's true.
HM,Jr: It's just the way we are working.
Mr. Harris: It was our thought we would only

use it once.

Mr. Bell: You would probably have to have

several words numbered.

HM,Jr: For instance, we have this code and

we change it every time. It's always shifted and
if it is a regular mathematical thing -- but that's
a detail.
Mr. Harris: That's right.

HM,Jr: But the idea is right. I think your

one

message. Once. After every ship got it and

the same word in it, they would say that's the word.
I think they break it after the first day. But I
think it should be all American flag ships and they
should have some arrangement on code.

Mr. Harris: On the larger merchant ships,
it would seem to me, the crew ought to be replaced
with a naval crew. I tam talking now on a war
basis. As you know, most of our crews on our larger
ships are German born. They are all men who have
their first, second, and whatever number of papers

there are. In Many cases they are born in this

227
-3-

country, of German descent. Now there is no doubt
they make wonderful stewards, but I don't know anybody who can tell you the force of their allegiance
if you did have a war. So I think the safe thing
to do would be immediately replace the entire crew
with naval crew and it should be done, I think, with
the greatest secrecy 80 one ship would not know that
the other ship had been replaced until she came in.
Trusted radio Navy operators should be in com-

plete charge of the radio rooms. That's highly important because you don't know what a radio fellow
is up to and unless somebody is right on that thing
24 hours a day, he might just innocently send a telegram or message. They can spot his position just
from the sound and from the strength and what not.
That applies likewise to wireless telephone. That
should immediately be taken in hand by responsible
authorities.
In the last war there was a Ship Control Committee set up in New York and I believe Mr. Franklin
I

was head of that. I think he was. And then
think Mr. Lillie was under him.
Mr. Bell: Mr. Franklin was here a while, but
most of his work in the Treasury was in connection
with Liberty Bonds.

Mr. Harris: The idea of that would be simply
for the allocation of ships and turning them around

80 you don't have overlapping and diverting them to
Portland or Baltimore or Savannah or what not, 80
they simply go in there just as they are needed, take

their cargo and out they go. It's more or less a

transportation thing which works pretty automatically
once you get the Central Committee functioning.
Now, you see what I am recommending?

HM,Jr: Everything you have asked there is

something I don't have the answer to, 80 it's a very

good question.

Mr. Harris: I always have to go back to the

228

last war. Car floats on lighterages and oil

barges -- nobody paid much attention to them, but
those are the key; in other words, you can guard
your shipments from interior to seaboard. Then

it's put on a barge and lightered across the river.
That's your point of sabotage if they are going
to have it -- one point they can go to work, because
it's done at night, no lights, and it's the simplest
thing in the world to put some incendiary into a
package. So where you speak of guarding your piers
and terminals, you should cover it all the way
through; in other words, your lighters, your barges,
your floats.

A competent cargo officer should be stationed

in every hold while a ship is loading, preferably
somebody in the Government service, stand right
there, never be out of that hold while the ship is
loading.

Compulsive use of hatch tents. One of the

greatest causes of combustion on ships 18 loading

of certain cargo in the rain. If you are loading,
say, cotton -- cotton gets wet; only a short time
before you are going to get combustion. That's one
of the great causes of fire in cotton. So it's a
little bit of an effort, but once you have the proper
use of hatch tents -- you know what they are; they
are great tents that are laid over the hatch -- your
stuffs works underneath and you can work in the rain
and no drop of water gets in your hold.
All fire-fighting equipment to be made ready.
All fire hose to be coupled and laid on the deck.
All watching forces to be doubled.

In virtually every fire -- serious fire -- on

a ship, the fire occurs at the dock. Very seldom,

unless you have an internal explosion, you have a

fire at sea. The reason for that -- you have fires

at sea, but you have all your crew moving around,
always on the watch, and you take, for instance, from
New York to California, we have had as many as three

fires, or from California to New York. One case it
was incendiary. Found all the furniture piled up

229
-5-

in a room, blazing, But you have stewards and you
take it up right away, but where you have a ship
loading there are a great many parts of the ship

that are vacant. Men are all off. They go ashore
and either an incendiary or a fire that starts through
a fuse or something, it gets under way and then by the
time it is discovered it is just like the PARIS, and
that's the same idea, that it happened while the ship
was loading; most of the crew ashore or saying goodbye to their wives and children; nobody there; first
thing you know, the thing gets started.

All explosive munitions to be definitely assigned berths. In that connection, you might want
to go into the question of re-location in harbore
of fire boats. In other words, if you concentrated
your shipping in certain zones, you could work with
local authorities to have fireboats stationed maybe
at the end of one of the piers. They don't really

care where they keep the fireboats and they could have
them handy, and if you concentrated your shipping more
or less in zones you could undoubtedly work with local

authorities to have special fire fighting squads be
available day and night 80 as soon as there was a fire
they would ship these special men right there.
And then I come to the last one: question of
the refineries who supply the bunker oil. They
should be extremely well guarded because without
bunker oil your ships are useless. You have to
watch that.

HM,Jr: Am I correct? This is divided up
into two parts: routing of merchandise by the rail-

roads up to the port, and that's one problem which
I have got to ask the President about because we
talked about railroads and he does not have in his

mind, very confidentially, of taking over the railroads, so this raises a point.
Mr. Bell: That was a very serious problem.

other

HM,Jr: He has not crossed that. The
point 18 -- what you are talking about -- is harbors,

230
-6-

protection of harbors, protection of ships, allocation of docks, fireboats and crews.
Mr. Harris: There are a lot of these things
that will work automatically, but they are of highest
importance. Take New York Habor. All you have to
do is sink a good sized ship in Ambrose Channel and
New York Harbor is absolutely useless.

HM,Jr: Let me find out from Admiral Leaby
how far they are going; if there is any Committee
working on this. I think there should be a Committee,
Army, Navy, Treasury and Maritime Commission, to
work out this thing.
Mr. Bell: In 1936 there was created the War
Industries Planning Board, composed of the Army and

Navy principally. And as soon as the Maritime Commission was established, it was invited to send a

representative. I find today, in discussing this
insurance matter with Commissioner Moran, that was

a subject discussed over a year ago -- this insurance
thing -- and they have had a man constantly there
studying the maritime problems in connection with
war industries and insurance and I would not be surprised if you find that this Board has had under

discussion many of these -- particularly the piers -problems.

HM,Jr: It's all sweet and lovely. Having

had a year and a half, are they ready to go to work
on a minute's notice?

Mr. Bell: They have a draft of legislation

to submit to the Commissioner. Two days ago they
wanted to submit a piece of legislation to the Com-

mission. As soon as it 18 approved they want to

submit it to the Treasury, Army, Navy, Budget and
Commerce, and they want to go in ten days.
HM,Jr: On the Treasury stuff, the exchange

control, everybody has cleared it. All I have to
do is walk across the street, the President signs
it and we go to work. Everything is done, Dan.
All he has to do 18 sign it. We have worked day

231
-7-

and night to get this ready. They are not ready.
My financial stuff, all my exchange control, all
it needs is the President's signature. I will bet
anybody they have not gotten the Attorney General's
opinion on War Risk.

Mr. Bell: They need legislation.
HM,Jr: But the President did not know about

it yesterday.

Mr. Bell: They need legislation. I can tell

you what they contemplate doing. I think they have
it well in hand and know what they need and want to
do. They have been consulting with the underwriters
in New York and Moran says it's an entirely different

situation in this country today that in 1914. In 1914

80% to 90% of marine insurance was written abroad.
Today we have insurance people in this country who

are capable of writing 80% to 90% of our stuff probably. That might be high, but they are more capable
today than then.
abroad.

Mr. Harris: They write it and then reinsure

Mr. Bell: There is a great deal of reinsurance
in this country. What they are doing in New York,

get a whole group together as a syndicate, something
like the British Government has done, although the
United States Government is not yet in the picture.
Each company will determine what it will take of the

risk; for instance, the North American will take 6%

of the risk, but they have to have the maximum because
of their capital. That is being formed today. What
the Maritime Commission wants is to reopen the old

1914 Act permitting the writing of direct insurance

and also permitting reinsurance 80 the Government
would step in whenever the situation demand war risk.

It has not got to the point where it is war risk.
It's a sort of marine, but it's a high rate. And

that draft will be submitted tomorrow to the Commission and they want the Treasury's cooperation in

drafting the legislation and setting up a fund, what-

ever is necessary. Most of it will be a reinsurance

232
-8-

proposition and if it isn't they will write it
through the same people that would write it originally. It will be a commercial proposition.
They want to do it through regular channels.

HM,Jr: I will tell you who could give me
a quick answer -- General Watson. I will call

him and ask him, on the harbor business, if he could
get on the phone and find out from the Army or the

Navy; on the question of patrol of harbors and
piers, who can I contact? Let me get it started
to find out if there is a Committee. The reason
I am pushing so hard is I want to get the most of
your time. Let me see who is functioning on this
thing?

Mr. Bell: Johnson is head of the War Planning.

The Assistant Secretary of War.

HM,Jri (On the phone to General Watson)

"I want a little help."
The President just called him. He will call

me right back.

Mr. Harris: Let me give you just a little

detail.
If you asked anybody, you would undoubtedly
get the answer 'Yes; that Customs guards the dock
and all that'. Here's an actual situation: we will
have a ship, we will say, that is loading or unloading. You will have 22 men in a gang
HM,Jr: (On the phone to General Watson.)

"Pa, I want a little help. With the Presi-

dent's knowledge and approval, I brought down Mr.

Basil Harris to look over what will happen in case
beenconof war, as far as the Treasury's functions are
cerned -- Customs and shipping. Now, he's

asking me a lot of questions. For instance, take
the New York piers. Which piers are going to the
Army, which are going to the Navy; who is going to
protect the loading of commercial ships, and all the
rest of that stuff. And he's asked me a lot of

233
-9-

questions I can't answer. What I would like to
have you find out for me, is there a Committee;

are there any preparations, and where do we, the
Treasury, come into the picture, because how much
we are going to do through our Customs in looking

after commercial boats, etc., etc.?

"Do you suppose you could find out if anybody has got that and if there are any plans anywhere? I don't know of any Committee and I have
McReynolds and Bell sitting here and he doesn't
know.

"He's asked me a lot of important questions.
H1 s questions are if there is a war in Europe -now there is a question of sabotage and the question
of looking after commercial American shipping;
question of how we are going to handle our harbors,

and what is the Treasury's responsibility, through
Customs, of looking after it both in case there is
a war in Europe or whether we got into a war. And
he's asked me a lot of damn good questions and I
can't answer them. He's down here to give this
thing a "trial run" to see where we have blind spots
and we seem to have plenty.

"Because you happen to be both Secretary to

the President and a General, I want to find out is
there a Committee that the Treasury can contact to
find out what plans, if any, there are. And maybe
you could have your buddy call up the Navy.

"I want to know tonight.
"will you?
Watson.

"You are a Virginia gentleman! Old Dollar

All right. Good-bye.

Maintains that I have lost only once in the

game and that was the last time and he does not
want me to be feeling badly, 80 he does not want to

frighten me. We have these three times a year.

Very amusing!

He's going to get right to work and he says

234
-10-

frankly he does not know and he never heard of it.
This is the President's Military Aide and Secretary
and he does not know a thing about it.
to you.
out.

Mr. Harris: These might seem perplexing
They are very simple; very easy to work

HM,Jr: Quite easy to work out if you have
somebody do them and the thing -- the one -- I most

likely -- the other one, handling railroad traffic
Mr. Harris: That's very vital.

Mr. Bell: They had cargo in warehouses from
New York to Chicago. You could not get a warehouse

anywhere. You couldn't get a car.

HM,Jr: And the time to keep that from happen-

ing is right at the beginning.

Mr. Harris: That's right. I think we have
gone far enough for the first time. You think I
am proceeding along the lines you wanted?

HM,Jr: 100%! Tickled to death! That's

exactly what I wanted!

Mr. Harris: There's an easy answer to practically every one I asked you if your organization

is set up properly. You heard me go into, quite
extensively, on fire. Actually you have two or
three Fire Commissioners who are retired; very able
people; just due to age they are out. One or two
of those men around, you could build a neucleus of
a fine fire-fighting equipment. Same way with your
police.

You think right now -- any of you people connected with Customs think that when shipe are at the
docks in New York they are under very fine supervi-

sion. Theoretically they are, but here's the situation: You have a dock where you have two ships each
side; four ships. You will have 22 men working in
a gang and you will have from 10 to 12 gangs working

235
-11-

on a ship. That's 240 men on a ship. On four
ships that's 900 men. They all knock off -- bing! -at 6 o'clook. With that, 900 men go through the
gate and two guards have got to search them. That's
silly! Your Customs can't have 900 men ready to
search 900 individuals, and likewise when they come

on, and the simplest way to start a fire is drop a
little tube in a packing case with certain chemicals.
I don't think there is any way of guarding against a
thing like that, but you can against the next step
and that is as soon as that tube goes off, get right
after it and put the fire out.
HM,Jr: Mac, got any suggestions? Between
now and tomorrow morning?

Mr. McReynolds: No.

HM,Jr: Maybe we had better wait until we hear

from General Watson.

Mr. McReynolds: Nearly everything that's raised
here, you have a question of complicated jurisdiction;
more than one agency involved. That's the beauty of
raising a question because these things are always
problems and time consuming.

HM.Jr: And that's the purpose of asking Mr.

Harris down. I don't want to wait until Mr. Hitler
pulls the plug and then everything is helter-skelter.
I want to be ready and I am not ready now on this
front.
Dan, any questions?

Mr. Bell: No.
Mr. Harris: As long as you think I am going
along on the right lines, I will go on farther.
HM,Jr: Perfect!
Mr. Harris: And with the idea of bringing up
some suggestions.

HM,Jr: You have everything you want?

236
-12-

Mr. Harris: Oh, I am prince back there!
HM,Jr: That's exactly the way, Mr. Harris.
For one day I think that's wonderful.

(Mr. Harris left the Secretary's office.)
HM,Jr: If this fellow is getting started, he

needs somebody to be given to him who knows this

game, if he stays two days, and to follow through.
Right at
Who are you going to pick as his aide?

the beginning give me some fellow who can work with

this fellow and who can see that these things are
followed through and done.

Mr. MoReynolds: I will get

HM,Jr: The fellow I think is very able is
Bill Wright. He's very good. Not for this, but
he handled the personnel thing awfully well. What

about the fellow who did the whole survey of Customs?
Mr. McReynolds: Ballenger.
tact

Mr. Bell: Charlie Schoeneman is a good conWrites nice reports.

man.

000-000

237
GRAY

JR

London

#

Dated April 19, 1939
Rec'd 2:10 p.m.

Secretary of State,
Washington.

April 19, 6 p.m.

STRICTLY CONFIDENTIAL FOR SECRETARY OF THE TREASURY
FROM BUTTERWORTH.

With reference to your 263, April 16, 8 p.m., and
my 483, April 14, 7 p.m., 501, April 17, 7 p.m., and 510,
April 18, noon.
OnE. Appropros of the two documents referred to in

my 483, April 14, 7 p.m., the British Treasury states
(a) that Bewley is also receiving a copy through the
British pouch which likewise went by the QUEEN MARY

and (b) that although it is not so stated in the
documents the British Treasury's policy will be to
permit foreign balances Et cetera to be withdrawn in an
orderly fashion and to the Extent that circumstances will
permit. The attitude of other countries would also be taken
into consideration, for Example if the French Government
legally commandeered the foreign assets of their nationals
the French monetary authorities would naturally be
consulted.
I

238

-2- April 19, 6 p.m., from London.
I gained the impression that in SOME CASES gold

might be given instead of, say, dollars and the problem
of transporting it would devolve upon the owner of the
foreign balances thus converted into gold. I asked as
to whether the normal profits of American subsidiary
companies operating in England would be transferable

and was told that there was no intention to prevent
the transfer of such funds but that normal working

balances might fall into a different category.
Two. The British Treasury referred again to the
information contained in the 5th paragraph of your 263,
and the first paragraph of my 501 and indicated that they
were anxious to know about the opinion of the Attorney
General and whether a plan had been worked out in Washington

under which British holdings of American S scurities could
be dealt with in the EVENT of war. They went on to say

that when they had information on this point they could
COME to grips with the problem and would be prepared

to supply any available information which was considered
necessary and desirable regarding the type and

03V13038

distribution of such assets.
KENNEDY

DDM

THEM THA970 YEURANT

and
asset

239

April 19, 1939

I telephoned Miss Baumgardner and brought

her ip to date and told her to refer to the letter
we sent on March 24th which inclosed a copy of the
letter to the Secretary of State in regard to licenses for
export of arms and ammunition to Germany.

I also told her that HM,Jr and the Attorney General
had a phone conversation on April 11th and again on April
13th at which time HM,Jr said he would bring it up at
Cabinet and the Attorney General said he would like to
discuss it with Mr. Morgenthau informally after he had
had a chance to talk it over with his people, and that
was the way it was left and the Secretary has been waiting to hear from the Attorney General.

I also told her that I did not listen to the

conversation between the Attorney General and HM,Jr

which they had last night, and did not know who was

confused, but I was just calling her to bring her
records up to date.

HSK

The Secretary of the Treasury
Washington
0

0

P

Y

March 24, 1939.

My dear Mr. Attorney General:

I am enclosing a copy of the letter which
I sent today to Secretary Hull in regard to the
issuance of licenses for the export to Germany of
arms, ammunition and implements of war.

This is the matter I spoke to you about
over the telephone.

Very truly yours,
(Signed) H. Morgenthau, Jr.
Secretary.

The Honorable

The Attorney General

Enclosure

240

The Secretary of the Treasury
Washington

March 24, 1939
C
0

P

Y

My dear Mr. Secretary:

The press release of the Department of State, dated March 11,
1939, with respect to traffic in arms, ammunition, and implements of

war discloses that the Secretary of State is continuing to issue 11censes for the export to Germany of arms, ammunition or implements of
war.

As you know, for some time there has been considerable comment

in the press and elsewhere with respect to the licensing of these exports to Germany in view of the provisions of section 5(f) of the
Joint Resolution of May 1, 1937 (50 Stat. 121). A number of the comments with respect to such licensing have questioned the legal warrant
therefor, and I am advised by the Acting General Counsel of the Treasury
Department that some of these adverse comments adduce a considerable

show of authority. In this connection, and in my capacity as a member
of the National Munitions Control Board, I should appreciate your advising me whether the opinion of the Attorney General on the legal
question involved has been obtained.

Very truly yours,
(signed) H. Morgenthau, Jr.
Secretary of the Treasury.
The Honorable,

The Secretary of State.

241

242
April 19. 1939
To:

The Secretary

From: Mr. Hanes

(n.c.)

I have just had a long talk with Congressman Lindsay Warren.
He told me that he had spent an hour and a half with Cochran and
Jimmy Byrnes and the President last Monday afternoon. The President
told them that before he sent any order for reorganisation down to

the Hill that he would first call them in and show them a copy of the
order. The President told them that he contemplated setting up an
independent agency which would include the R.F.C., H.O.L.C., F.E.A.
and all the lending agencies with the exception of the one under

Nathan Straus.

Lindsay said that he had gotten the impression from his talk
with the President that he contemplated putting all these agencies

under one head, the inference being that that head would be Jesse Jones.
However, Lindsay was very much disturbed because during the day eight
or ten newspaper reporters had come to see him and had told him that
the plan called for the placing of these agencies under the Department
of Commerce.

He said further that Frank Kent had written an article which
appears this afternoon in the Baltimore Sun stating that it was the
intent of the President to put these agencies under the Department of

Commerce. He said that he was very much upset by this news, and that

he was going to see the Vice President this afternoon to find out if
he knew of such information.

Lindsay said he would be unalterably opposed to putting anybody
in charge of these agencies which would mean the removal of Jesse Jones

from the R.F.C. He is a strong admirer and friend of Jesse's.

J.W.H.

243

April 19, 1939

The Finnish Minister came in to see me to-day at
3 o'clock. What he really came here for was to see
informally if they should ask us for a loan whether
they could get one here,
in case
andthe
I said
I
I gave
him of
a war,
talk on
Tripartite
would look into it.
Agreement.

monday 10:30

244

THE UNDER SECRETARY OF STATE
WASHINGTON

April 19, 1939.

Personal

Dear Henry:

The President of Nicaragua, as you know,

18 making the President an official visit during the first week in May and during the time
of his visit various matters which are of d1rect interest to your Department, as well as
to this Department, will have to be settled.
It seems to me that it would be desirable for
us to have an opportunity of going over these
questions with you well in advance of President Somoza's visit and if it 18 convenient
for you and agreeable to you, I think it would
be very helpful if you would call a meeting
at your office of Jesse Jones, Warren Pierson,
Herbert Feis, two other officials of this Department and myself. The questions to be taken
up are more or less similar to the questions
that were dealt with in our Brazilian negotiations and I should like to take up at the suggested meeting also questions of policy involving similar problems in the cases of Chile and
Cuba. Will you let me know if this suggestion
meets with your approval.
Believe me

Yours very sincerely,
The Honorable

Henry Morgenthau, Jr.,

Secretary of the Treasury.

Nets

Dreft

245
April 19, 1939.

When I appeared before this Committee on March 24th, I said
that the Treasury would soon be ready to submit its recommends-

tions for changes in the tax system. Your Chairman, Representative
Doughton, together with Senator Harrison, have expressed a desire

to receive the recommendations for action at this session.
In my statement today I desire to place chief emphasis on

the effects of fiscal policy on business recovery. We must rely
upon the private enterprise of our country to produce most of our
national income and to provide most of our employment. We have

all the physical essentials of economic prosperity -- resources,
labor, capital, managerial ability, and a vast domestic market.
Although we have made a great advance from the bottom of the

depression, we are still in a period of incomplete business
recovery with a low national income and a large volume of
unemployment. An important contributing factor has undoubtedly

been the international economic and political situation.
Reduced world trade, the precarious finances of most European

governments, and fear of war are a drag on our industrial

enterprise. Unfortunately, however, the international situation
is largely beyond our control. We must find such solution as we
can in our own domestic economy.

It is highly important that we increase national income
and decrease unemployment. Not only our material well-being

-2-

246

is at stake -- the future of our system of government rests
largely on the success with which we solve our economic

problems. As Secretary of the Treasury, I want to discharge
my duty and not leave any stone unturned in the fiscal field
that might contribute to complete recovery and continued

prosperity. The basic need is to foster the full application
of the driving force of private capital. We in the Treasury
Department have been studying what fiscal steps might be taken
to that end. We have talked to numerous businessmen and

representatives of business organizations to secure their
suggestions.

One of the basic requirements for full recovery is the
investment of large amounts of new capital. The chief fiscal
obstacle to long-term commitments in private enterprise appears

to be uncertainty over the general fiscal policy of the government. Almost everyone believes that the budget must be balanced

eventually, and, moreover, evidently believes that it cannot be
done without increasing tax rates or cutting the expenditure
program. So long as there is no firm indication of when or
how the balance is to be achieved, investors will be uncertain
what taxes will be imposed or what expenditures will be decreased,
and consequently their investment plans may remain in suspense.

247

-3- -

Furthermore, fear exists that expenditures cannot be kept under

control and that their expansion may have disastrous financial
results.

There is, to be sure, no inherent reason why taxes must
exactly balance expenditures each year any more than each month

or each week. In periods of temporary depression it is inevitable
that there will be deficits. Revenues may decline and expenditures
increase too rapidly to make possible immediate achievement of a

balance by tax increases. In such times, furthermore, it may be

justifiable to permit a fiscal deficit to appear for the sake
of the stimulus which new spending may give to business activity.

It is easy, however, to exaggerate the stimulating effect of such

a deficit. The impact of the flow of Federal funds is encouraging
to business activity, but, as previously pointed out, businessmen

give consideration also to inevitable future taxes for liquidating
these deficits and to the danger of long-continued, increasing

expenditures. To what extent the stimulus is offset by the
depressive influence, I do not know; but I am convinced that the
general prospect of indefinitely continuing Federal deficits and
an indefinitely growing Federal debt is one which on the whole
seriously hampers the full use and development of the industrial
machine.

A logical and necessary counterpart to deficits in
depression is that in years of very active business, an excess

248

-4of taxes above current expenditures should be collected and
applied to reducing the public debt so that the government

is prepared for the strain of new emergencies without the

burden of high taxes for the servicing of debts. Fiscal
deficits are thus defensible only if they are not continuous
and only if there are periods of substantial fiscal surpluses.
The same general principles apply to expenditures for
permanent improvements, such as flood control projects, as to

expenditures for current operations, but the period over which
balancing should be achieved may well be a longer one in the
case of permanent improvements in view of their long useful

life.

Let us be realistic about this matter of fiscal policy.
Balancing the budget this year or next appears to be impossible.
Without attempting to forecast what action Congress will take,

I think it is fairly clear that the appropriations will be in
excess of anticipated revenues. Furthermore, the formulation

and adoption of a financial plan pointing clearly to a balanced

budget in the near future will not be easy. Although the
existing tax system is a powerful one and in years of high
business activity may produce sufficient revenue to balance the

present level of expenditures, there is no reasonable prospect

249

-5- -

that it will produce enough revenue to equal expenditures at the

present level over a period of years, good and bad. If higher
taxes are to be avoided, there must be lower expenditure.
The reduction of expenditures will unquestionably prove

difficult. In 1938 relief and national defense expenditures
accounted for approximately half of the total Federal expenditures.
There seems to be little hope for reduction of arnament expenditures in the near future and we may be faced with necessary

increases. The minimum needs for relief, moreover, are so
dependent on business conditions that they cannot be anticipated
with any high degree of accuracy. Substantial reduction may be
anticipated as recovery proceeds, but the pressures for expendi-

tures for other very desirable purposes are so great that a
definite goal and firm resolution will be necessary to prevent
expansion rather than reduction.

In spite of the difficulties, or for that matter, because of
them, it seems to me that the time has come to face the problem.

A definite policy should be stated and at least first steps taken
to put it in effect. Every proposed expenditure should be
scrutinized with the general fiscal problem in mind, and every
possible effort be made to bring preposed expenditures within
the power of the existing revenue system.

I would like to make it clear that I think the proper way
to reach a budget balance is through reduced expenditures,and,

250

- 6of course, business recovery. If, however, the Congress should

be unwilling or unable to reduce expenditures sufficiently.
there would be, in my opinion, only one thing to do, namely,

to increase taxes. In view of business conditions it is not
desirable that any increases in tax rates should become effective
immediately. The preferable method, if new taxes must be imposed,

would be to place on the statute books this year, to become

effective next year, sufficient levies so that on the average
over the next few years the revenues will equal or exceed

anticipated expenditures - barring, of course, the recurrence
of deep depression.

Talking about balancing budgets is not likely to have

substantially beneficial effects. The real encouragement will
come when Congress has adopted a plan which businessmen

recogni ze to be realistic. A method that might well be of
assistance in arriving at such a plan would be for the Ways
and Means and Appropriations Committees of this House and the

Finance and Appropriations Committees of the Senate to meet

each session as a Joint Committee on Fiscal Policy to consider
the overall aspects of the expenditures and revenue programs.

Another aspect of general fiscal policy that is of
considerable importance to business is the problem of Federal-

State fiscal relations. More than half the national total of

-7 tax revenues is received by State and local governments. There

is no unity or ordered relationship between the Federal fiscal
system and the State and local fiscal systems. Overlapping
taxes have grown increasingly numerous as both Federal and

State governments reached out for new revenue sources. Grantsin-aid are being demanded of the Federal Government in increasing

amounts. The results of our anarchic fiscal relations have
become increasingly unsatisfactory to the governments and

taxpayers. We need a better definition of the place of the
Federal and State governments in the fiscal picture to reduce

the complexities and uncertainties facing business, as well as
for the sake of the governments themselves.

There has been much consideration of this problem but little
in the way of concrete accomplishment. A promising means of

progress is for Congress to create a small, temporary national
commission. Such a commission should be made up of men having

the highest possible level of ability and public confidence and
representing not the Federal, State and local governments as such,

but the national interest at large. Their function would be to
study intergovernmental fiscal policy in its many ramifications
and report to Congress, perhaps in two years. I suggest to
Congress the creation of such a commission at this session.

251

-8I pass now from the problems of general fiscal policy to

those of taxation. The general weight of taxation is in itself
an obstacle to business enterprise. To lower the power of the
tax system to produce revenue at any level of industrial
operation would, however, convince businessmen that there was

no intention of ever balancing the budget. Such action should
not, accordingly, be considered. There appear, however, to be
a number of respects in which obstacles to business enterprise
night be removed by shifts in tax burdens that would not reduce
revenues at any given level of business and also would not
violate any fundamental principles for a sound tax system.
Consideration should be given also to whether some tax rates
may not be too high to produce maximum revenues. I would like
to emphasize four general ways in which such obstacles to
enterprise might be reduced.

(1) The first way is to make the chances for
reward in venturesome undertakings greater than

they now are, compared to safe investments. Our

present tax system, especially in the income tax,
contains features which operate against venturesome investments. There are a number of these

252

- 9which might well be altered without decreasing
the equity of the system and, indeed, with some

resulting increase in equity. I shall not
discuss these features in detail but shall only
indicate some of the outstanding possibilities.
The issuance of tax-exempt securities might be
eliminated. The Treasury Department has already
recommended this action. Allowance might be made

for business losses to be carried forward and

offset against income in future years. Corporations might be allowed to deduct capital losses
from their ordinary income. Somewhat greater

deduction of capital losses, perhaps in the carryforward provisions, might be allowed individuals.
Dividends received by individuals might be made

exempt from the normal tax. The top rates in the
individual surtax schedule might be reduced. The

tax studies that we have carried on indicate that
all of these changes would operate in the direction of removing penalties that are imposed on
investment in new and venturesome enterprise.
(2) A second way in which to make our tax laws

less of an obstacle to investment and business

253

- 10 254
expansion is to avoid heavy taxation on a business

that is suffering loss or is trying to make good
the income drain caused by recent losses. Some
examples of changes which would operate in this

direction are: elimination of the capital stock
tax; allowance of a business loss carryover to

future years; increase in the deductibility of
capital losses by corporations and of capital
losses in general.

(3) A third type of change designed to
increase the relative attractiveness of more
venturesome investments is to remove impediments

to the issuance of capital stock as compared to
the issuance of bonds. When new enterprise is

financed by issuance of securities it is, and
ought to be, by the sale of stock, not of bonds,
hence tax laws penalize them. Among changes

which would tend to eliminate this discrimination
are the elimination of the capital stock and excess
profits taxes and the allowance of a substantial

dividend credit to individuals.
(4) The revenue losses which these steps

would entail could properly be replaced by increases

in the corporation and individual income tax rates.

- 11 -

255

For any new revenues that might have to be secured

through increased taxation the deterrent effects on
enterprise would be at a minimum if such increases
were to come as far as possible from nonbusiness

taxes and if nonbusiness taxes were selected 80 as
to place the least check on consumer spending without
discouraging investment.
Certain revenue-producing changes should be made

in any event to increase the fairness of the system.
One change would be to eliminate excessive depletion

deductions for oil and gas wells and certain types of
mines. As the Treasury has often pointed out, a
large amount of revenue can be recovered by closing

this loophole. The capital gains tax rates on
individuals might well be brought closer to the rates
on other incomes. This could be done without substantial discouragement to investment, provided the
capital loss deductions were made more generous, as

previously mentioned. A desirable change which would

increase the revenue for the future is to coordinate
the estate and gift taxes into one tax.
Beyond the changes mentioned, which are desirable to increase

equity quite aside from their value in increasing revenue, higher

-12taxes which would have relatively little effect in discouraging
investment could be imposed in the form of higher rates of

estate and gift taxes in the middle brackets and higher income
tax rates on the middle brackets.

I think we should continually have in mind that as a general
principle of fairness, we ought to increase the proportionate

part played by direct taxes that can take account of individual
differences in the power to support government. The chief
examples of such taxes are the individual income and estate and

gift taxes. The Federal reliance on such taxes should be
especially great since State and local governments are not able
to use them nearly as effectively as is the Federal Government.
We should look forward eventually to eliminating from our
Federal tax system the manufacturers' excises and -- except for
tobacco and alcohol taxes - other miscellaneous excise taxes

which tend to be shifted directly to consumers. However, in
view of the present revenue needs of the government and the

fact that these taxes have been in operation long enough so
that the businesses affected have in general become adjusted

to them, I recommend that they be continued at this time.

Greater simplicity in the tax system would remove irritants
to business and would also be beneficial to taxpayers and the

256

257
- 13 -

government in general. Our revenue system cannot hope to be

very simple if it is to be equitable and is not to be excessively
burdensome at any point. However, at least one major move in

the direction of simplicity is possible.
This move is to substitute a single corporation tax on net
income for the four different corporation taxes now imposed.
These corporation taxes are a capital stock tax and an excess

profits tax enacted in 1932, a remnant of the 1936 undistributed

profits tax, and the ordinary income tax. The capital stock tax
is not based on the actual value of a company nor is the excess

profits tax actually a tax on excess profits. Both depend
largely on the ability of management to forecast profits. In

its present form, the undistributed profits tax is ineffective
but is unduly resented. The corporation tax system would be

greatly simplified, its justice measurably increased and the
burden on new and uncertain enterprise diminished, if all four
taxes were consolidated into a single flat tax on corporate
incomes with some concession in rate to corporations having less
than perhaps $25,000 net income.

In discussing choices of desirable tax measures, I have
spoken as if we could pick and choose among good tax measures

and bad tax measures. This choosing will always be possible to
some extent, of course, but as the proportions of tax revenues

- 14 -

to national income rise, the choice becomes more restricted.
Already we are more seriously restricted than we are apt to
realize. A wide variety of taxes must be employed or the
rates of any one will exceed the point of maximum productivity
or will be unduly burdensome. Any substantial further growth

of total expenditures, even if only for debt service, will
narrow the choice more and more. It will be a serious matter

if we are pushed to the place where virtually all considerations
of encouragement to business and fairness must give way in order

that we may use every feasible tax to its administratively
practicable limit.
In this survey of possible changes in taxes, I have not

discussed any of them in detail. If you are interested in
following them further, my staff and I are prepared to work
with you and to furnish information as to their operation.

In closing, I would like to stress that if we are to give
businessmen the reassurance necessary to remove obstacles to

investment and expansion, it will be necessary to go beyond a

few specific measures that may remedy points of local irritation.
These are important, but it is even more important to approach

the problem of fiscal policy from the broad viewpoint and to lay
down a well-defined plan leading towards a balanced budget.

Only then will the basic fiscal deterrent to business bo removed.

258

259

April 19, 1939
Mr. Welles called today and he asked me, one, not

to push them on the Italian countervailing duty until
after April 28th. He Then
said, ICan't
you get the Attorney
realized he was not up to date
General's ruling?
and I brought him up to date. I told him we would do
nothing until after the 28th of April and then may be he
would be running over here and asking me to do it the same
evening, the way he did in the German case. He said it is
perfectly possible he might want us to slap it on on the
29th.

But putting Italy on 30 days' notice has been waived

until after the 28th of April.

I read him this memorandum about the Argentine and

was tickled to death. Told me to push it just as hard
as I could. That for over six years they have been promis-

he

ing the Argentines a trade treaty and now they have got
to use Sumner Welles words, "on account of his presidential

everybody to agree exce pt Henry Wallace and Henry Wallace,

ambitions, thinks it will be harmful in the Middle West
and won't play ball."
I told him I was interested in the Argentine and

would go ahead and would cooperate with them in this case.
He said that was most oheerful.

If I don't hear from Mr. Irigoyen by next Monday,

I want to send for Felipe Espil, the Ambassador.
Welles asked me please not to do anything more on

countervailing duties on Europe without first taking it
up with them and I told McReynolds to issue such orders.

CONFIDENTIAL AND PERSONAL -- I told him that Herbert
Feis had recommended Wayne Taylor to head the mission to

Venezuele. Sumner Welles said he knew nothing about it
and as far as he was concerned he just thought Wayne Taylor
was a swine.

260
April 19, 1939.

Secretary Morgenthau
Mr. Blough

Attached is the second draft of your proposed
statement before the Ways and Means Committee.

We have endeavored to incorporate the suggestions
made at the conferences on Monday.

We are continuing to work on the statement and

to make additional revisions.

Attachment

4-19-39

261
April 19, 1939.

When I appeared before this Committee on March 24th, I said
that the Treasury would soon be ready to submit its recommenda-

tions for changes in the tax system. Your Chairman, Representative
Doughton, together with Senator Harrison, has expressed a desire

to receive the recommendations for action at this session.
In my statement today I desire to place chief emphasis on

the effects of fiscal policy on business recovery. We must rely
upon the private enterprise of our country to produce most of our
national income and to provide most of our employment. We have

all the physical essentials of economic prosperity - resources,
labor, capital, managerial ability, and a vast domestic market.
Although we have made a great advance from the bottom of the

depression, we are still in a period of incomplete business
recovery with a low national income and a large volume of
unemployment. An important contributing factor has undoubtedly

been the international economic and political situation.
Reduced world trade, the precarious finances of most European

governments, and fear of war are a drag on our industrial

enterprise. Unfortunately, however, the international situation
is largely beyond our control. We must find such solution as we
can in our own domestic economy.

It is highly important that we increase national income
and decrease unemployment. Not only our material well-being

262

-2is at stake - the future of our system of government rests
largely on the success with which we solve our economic

problems. As Secretary of the Treasury, I want to discharge
my duty and not leave any stone unturned in the fiscal field
that might contribute to complete recovery and continued

prosperity. The basic need is to foster the full application
of the driving force of private capital. We in the Treasury
Department have been studying what fiscal steps might be taken
to that end. We have talked to numerous businessmen and

representatives of business organizations to secure their
suggestions.

One of the basic requirements for full recovery is the
investment of large amounts of new capital. The chief fiscal
obstacle to long-term commitments in private enterprise appears

to be uncertainty over the general fiscal policy of the government. Almost everyone believes that the budget must be balanced

eventually, and, moreover, evidently believes that it cannot be
done without increasing tax rates or cutting the expenditure
program. So long as there is no firm indication of when or
how the balance is to be achieved, investors will be uncartain
what taxes will be imposed or what expenditures will be decreased,
and consequently their investment plans may remain in suspense.

263

-3Furthermore, fear exists that expenditures cannot be kept under

control and that their expansion may have disastrous financial
results.

There is, to be sure, no inherent reason why taxes must
exactly balance expenditures each year any more than each month

or each week. In periods of temporary depression it is inevitable
that there will be deficits. Revenues may decline and expenditures
increase too rapidly to make possible immediate achievement of a

balance by tax increases. In such times, furthermore, it may be

justifiable to permit a fiscal deficit to appear for the sake
of the stimulus which new spending may give to business activity.

It is easy, however, to exaggerate the stimulating effect of such
a deficit. The impact of the flow of Federal funds is encouraging
to business activity, but, as previously pointed out, businessmen

give consideration also to inevitable future taxes for liquidating
these deficits and to the danger of long-continued, increasing

expenditures. To what extent the stimulus is offset by the
depressive influence, I do not know; but I am convinced that the

general prospect of indefinitely continuing Federal deficits and
an indefinitely growing Federal debt is one which on the whole

seriously hampers the full use and development of the industrial
machine.

A logical and necessary counterpart to deficits in
depression is that in years of very active business, an excess

264
-4-

of taxes above current expenditures should be collected and
applied to reducing the public debt so that the government

is prepared for the strain of new emergencies without the

burden of high taxes for the servicing of debts. Fiscal
deficits are thus defensible only if they are not continuous
and only if there are periods of substantial fiscal surpluses.
The same general principles apply to expenditures for
permanent improvements, such as flood control projects, as to

expenditures for current operations, but the period over which
balancing should be achieved may well be a longer one in the
case of permanent improvements in view of their long useful

life.

Let us be realistic about this matter of fiscal policy.
Balancing the budget this year or next appears to be impossible.

Without attempting to forecast what action Congress will take,

I think it is fairly clear that the appropriations will be in
excess of anticipated revenues. Furthermore, the formulation

and adoption of a financial plan pointing clearly to a balanced

budget in the near future will not be easy. Although the
existing tax system is a powerful one and in years of high
business activity may produce sufficient revenue to balance the

present level of expenditures, there is no reasonable prospect

265

-5-

that it will produce enough revenue to equal expenditures at the

present level over a period of years, good and bad. If higher
taxes are to be avoided, there must be lower expenditure.
The reduction of expenditures will unquestionably prove

difficult. In 1938 relief and national defense expenditures
accounted for approximately half of the total Federal expenditures.
There seems to be little hope for reduction of armament expenditures in the near future and we may be faced with necessary
increases. The minimum needs for relief, moreover, are so
dependent on business conditions that they cannot be anticipated
with any high degree of accuracy. Substantial reduction may be
anticipated as recovery proceeds, but the pressures for expendi-

tures for other very desirable purposes are so great that a

definite goal and firm resolution will be necessary to prevent
expansion rather than reduction.

In spite of the difficulties, or for that matter, because of
them, it seems to me that the time has come to face the problem.

A definite policy should be stated and at least first steps taken
to put it in effect. Every proposed expenditure should be
scrutinized with the general fiscal problem in mind, and every
possible effort be made to bring proposed expenditures within
the power of the existing revenue system.

I would like to make it clear that I think the proper way
to reach a budget balance is through reduced expenditures, and,

266

-6-

of course, business recovery. If, however, the Congress should

be unwilling or unable tc reduce expenditures sufficiently,
there would be, in my opinion, only one thing to do, namely,

to increase taxes. In view of business conditions it is not
desirable that any increases in tax rates should become effective
immediately. The preferable method, if new taxes must be imposed,
would be to place on the statute books this year, to become

effective next year, sufficient levies so that on the average
over the next few years the revenues will equal or exceed

anticipated expenditures - barring, of course, the recurrence
of deep depression.

Talking about balancing budgets is not likely to have

substantially beneficial effects. The real encouragement will
come when Congress has adopted a plan which businessmen

recognize to be realistic. A method that might well be of
assistance in arriving at such a plan would be for the Ways
and Means and Appropriations Committees of this House and the

Finance and Appropriations Committees of the Senate to meet

each session as a Joint Committee on Fiscal Policy to consider
the overall aspects of the expenditures and revenue programs.

Another aspect of general fiscal policy that is of
considerable importance to business is the problem of Federal-

State fiscal relations. More than half the national total of

267

-7-

tax revenues is received by State and local governments. There

is no unity or ordered relationship between the Federal fiscal
system and the State and local fiscal systems. Overlapping
taxes have grown increasingly numerous as both Federal and
State governments reached out for new revenue sources. Grantsin-aid are being demanded of the Federal Government in increasing

amounts. The results of our anarchic fiscal relations have
become increasingly unsatisfactory to the governments and

taxpayers. We need a better definition of the place of the
Federal and State governments in the fiscal picture to reduce
the complexities and uncertainties facing business, as well as
for the sake of the governments themselves.

There has been much consideration of this problem but little
in the way of concrete accomplishment. A promising means of

progress is for Congress to create a small, temporary national
commission. Such a commission should be made up of men having

the highest possible level of ability and public confidence and
representing not the Federal, State and local governments as such,

but the national interest at large. Their function would be to
study intergovernmental fiscal policy in its many ramifications
and report to Congress, perhaps in two years. I suggest to
Congress the creation of such a commission at this session.

-8I pass now from the problems of general fiscal policy to

those of taxation. The general weight of taxation is in itself
an obstacle to business enterprise. To lower the power of the
tax system to produce revenue at any level of industrial
operation would, however, convince businessmen that there was

no intention of ever balancing the budget. Such action should
not, accordingly, be considered. There appear, however, to be
a number of respects in which obstacles to business enterprise
might be removed by shifts in tax burdens that would not reduce
revenues at any given level of business and also would not
violate any fundamental principles for a sound tax system.
Consideration should be given also to whether some tax rates
may not be too high to produce maximum revenues. I would like
to emphasize four general ways in which such obstacles to
enterprise might be reduced.

(1) The first way is to make the chances for
reward in venturesome undertakings greater than

they now are, compared to safe investments. Our

present tax system, especially in the income tax,
contains features which operate against venturesome investments. There are a number of these

268

-9-

which might well be altered without decreasing
the equity of the system and, indeed, with some

resulting increase in equity. I shall not
discuss these features in detail but shall only
indicate some of the oustanding possibilities.
The issuance of tax-exempt securities might be
eliminated. The Treasury Department has already
recommended this action. Allowance might be made

for business losses to be carried forward and

offset against income in future years. Corporations might be allowed to deduct capital losses
from their ordinary income. Somewhat greater

deduction of capital losses, perhaps in the carryforward provisions, might be allowed individuals.
Dividends received by individuals might be made

exempt from the normal tax. The top rates in the
individual surtax schedule might be reduced. The

tax studies that we have carried on indicate that
all of these changes would operate in the direction of removing penalties that are imposed on
investment in new and venturesome enterprise.

(2) A second way in which to make our tax laws
less of an obstacle to investment and business

269

- 10 -

expansion is to avoid heavy taxation on a business

that is suffering loss or is trying to make good
the income drain caused by recent losses. Some
examples of changes which would operate in this

direction are: elimination of the capital stock
tax; allowance of a business loss carryover to

future years; increase in the deductibility of
capital losses by corporations and of capital
losses in general.

(3) A third type of change designed to
increase the relative attractiveness of more
venturesome investments is to remove impediments

to the issuance of capital stock as compared to
the issuance of bonds. When new enterprise is

financed by issuance of securities it is, and
ought to be, by the sale of stock, not of bonds,
hence tax laws penalize them. Among changes

which would tend to eliminate this discrimination
are the elimination of the capital stock and excess
profits taxes and the allowance of a substantial

dividend credit to individuals.
(4) The revenue losses which these steps

would entail could properly be replaced by increases

in the corporation and individual income tax rates.

270

271
- 11 -

For any new revenues that might have to be secured

through increased taxation the deterrent effects on
enterprise would be at a minimum if such increases
were to come as far as possible from nonbusiness
taxes and if nonbusiness taxes were selected so as
to place the least check on consumer spending without
discouraging investment.
Certain revenue-producing changes should be made

in any event to increase the fairness of the system.
One change would be to eliminate excessive depletion

deductions for oil and gas wells and certain types of
mines. As the Treasury has often pointed out, a
large amount of revenue can be recovered by closing

this loophole. The capital gains tax rates on
individuals might well be brought closer to the rates
on other incomes. This could be done without substan-

tial discouragement to investment, provided the
capital loss deductions were made more generous, as

previously mentioned. A desirable change which would

increase the revenue for the future is to coordinate
the estate and gift taxes into one tax.
Beyond the changes mentioned, which are desirable to increase

equity quite aside from their value in increasing revenue, higher

- 12 -

taxes which would have relatively little effect in discouraging
investment could be imposed in the form of higher rates of
estate and gift taxes in the middle brackets and higher income
tax rates on the middle brackets.

I think we should continually have in mind that as a general

principle of fairness, we ought to increase the proportionate
part played by direct taxes that can take account of individual
differences in the power to support government. The chief
examples of such taxes are the individual income and estate and

gift taxes. The Federal reliance on such taxes should be
especially great since State and local governments are not able
to use them nearly as effectively as is the Federal Government.
We should look forward eventually to eliminating from our

Federal tax system the manufacturers' excises and - except for
tobacco and alcohol taxes - other miscellaneous excise taxes

which tend to be shifted directly to consumers. However, in
view of the present revenue needs of the government and the

fact that these taxes have been in operation long enough so
that the businesses affected have in general become adjusted

to them, I recommend that they be continued at this time.

Greater simplicity in the tax system would remove irritants
to business and would also be beneficial to taxpayers and the

272

273
- 13 -

government in general. Our revenue system cannot hope to be

very simple if it is to be equitable and is not to be excessively
burdensome at any point. However, at least one major move in

the direction of simplicity is possible.
This move is to substitute a single corporation tax on net
income for the four different corporation taxes now imposed.
These corporation taxes are a capital stock tax and an excess

profits tax enacted in 1932, a remnant of the 1936 undistributed

profits tax, and the ordinary income tax. The capital stock tax
is not based on the actual value of a company nor is the excess

profits tax actually a tax on excess profits. Both depend

largely on the ability of management to forecast profits. In
its present form, the undistributed profits tax is ineffective
but is unduly resented. The corporation tax system would be

greatly simplified, its justice measurably increased and the
burden on new and uncertain enterprise diminished, if all four
taxes were consolidated into a single flat tax on corporate
incomes with some concession in rate to corporations having less
than perhaps $25,000 net income.

In discussing choices of desirable tax measures, I have
spoken as if we could pick and choose among good tax measures

and bad tax measures. This choosing will always be possible to
some extent, of course, but as the proportions of tax revenues

274
- 14 -

to national income rise, the choice becomes more restricted.
Already we are more seriously restricted than THE are apt to

realize. A wide variety of taxes must be employed or the
rates of any one will exceed the point of maximum productivity
or will be unduly burdensome. Any substantial further growth

of total expenditures, even if only for debt service, will
narrow the choice more and more. It will be a serious matter

if we are pushed to the place where virtually all considerations
of encouragement to business and fairness must give way in order

that we may use every feasible tax to its administratively

practicable limit.
In this survey of possible changes in taxes, I have not

discussed any of them in detail. If you are interested in
following them further, my staff and I are prepared to work

with you and to furnish information as to their operation.

In closing, I would like to stress that if we are to give
businessmen the reassurance necessary to remove obstacles to

investment and expansion, it will be necessary to go beyond a

few specific measures that may remedy points of local irritation.
These are important, but it is even more important to approach

the problem of fiscal policy from the broad viewpoint and to lay
down a well-defined plan leading towards a balanced budget.

Only then will the basic fiscal deterrent to business be removed.

275

April 19. 1939

The Secretary

To:

From: Mr. Names

I am setting this down because I think it is in
portant. Yesterday afternoon. April 18th, Eric Friedheim,
a newspaper reported. came to see me around 5:15 with the

following information, and said that he was about to write
& story concerning 11 because he thought it contained a
lot of dynamite.
He said that he had learned that the Secretary of the
Treasury had completed his statement on taxation and would

present it at an early date. He further said that he had
learned the Secretary would say in this statement that it

would probably be the last one he would make before a com-

mittee of Congress on the subject of tax legislation as
there would not be a tax bill in 1940.

I would not pay any attention to this except that such
sentence does appear in one of the earlier drafts of the
statement submitted to you. I pass this along for your in-

a

formation.

JWH:JR

April 19, 1939.

THE

SECRETARY:

is you requested on Monday, I hand you two memorandume

commerating the special functions which would be exercised

by the Customs Service in the event of war, as follows:

I-In the event of a war involving the United
States.

II-In the event of a general European war not
involving the United States.

HNG/mff

GRAVES.

277
FUNCTIONS OF CUSTOMS SERVICE

OF KAR INVOLTER KYO ME

In the event of MP to which the United States is a party, it may
be expected that the Custome Service will be called upon to perform the

following extraordinary functions, in addition to its normal activities
1. Exercise control over importe.
2. Exercise control over importe.
3. Exercise control over travelers arriving and departing.

4. Exercise control over officers and crows of the a
marine and other privately-owned vessels.

5. Exercise control over shipping.
6. Exercise control on land frontiers.
CONTROL OVER EXPORTS

A Mar Trade Board, or other similar organisation, will doubtless
issue permits for exports, (1) to preclude merchandise reaching the

enemy or (2) depleting this country's resources, and (3) to conserve
cargo space. Such export permits will go to the Customs Service,
which will allow only the permitted merchandise, when covered by export

declarations, to leave the country.
CONTROL OVER IMPORTS

Trading with the eneay will be prohibited, and imports must be so
supervised as to proclude aerchandise originating in emery territory
or dealt is by the enemy from entering the commerce of this country.

A permit system similar to that applicable to exports will doubtless
be employed, and this would be administered by the Customs Service.
CONTROL OVER TRAVELKNS ARRIVING AND DEPARTING

All travelers arriving and departing (and their baggage) will be
searched, to prevent contraband articles or communications from reaching

278
-20

the enemy OF enery agents in this country; and to enforce restrictions
on travel imposed by the military branches to prevent espionage, sabotage,
draft evasion, etc.
CONTROL OVER OFFICERS AND CREWS OF VESSELS

The persons and effects of officers and crows of aerebant vessels

and other privately-owned craft arriving and departing will be subjected
to search in the same manner as travelers, and for the same purpose.

Restrictions will be enforced against the employment of alien enemies,
or persons known or reported as unfriendly, in the merchant marine

service. Officers and crows of vessels in port will be closely guarded
and supervised to prevent sabotage and espionage.
CONTROL OVER SHIPPING

(a) All eneay vessels and the personnel thereof, in American
waters, will be seised by Customs officers and interned.

(b) All arriving and departing vessels will be searched for
(1) Communications outside regular mails.

(a) Spies, hostile aliens, or other dangerous persons.
(3) Bombs or other explosive articles or devices.
(4) Injurious matter such as harmful bacteria or

cultures, infected animals or plant life.

(5) Unmanifested and prohibited articles, including

gold, silver, bonds, stocks, securities, or

currency carried contrary to law.
(6) Merchandise not covered by import or export permits.

(c) All vessels will be guarded while in port to enforce wartine
restrictions relating to the lading or unlading of
band, and landing or boarding by unauthorised persons.

(d) Docks, warehouses, and other port facilities, including railway terminals, will be guarded to prevent unauthorised
entrance or exit through customs lines, and to prevent
sabotage and espionage.

279

(a) Wireless equipment of vessels will be sealed on arrival.

(f) Vessels logs, including radio logs, will be examined for
information of military and other value.
(g) Consorship will be maintained over communications and
documents, including photographic films and prints,
found on ships outside regular mails, in baggage or
cargo, and on the persons of passengers or crew.
(h) Control will be maintained over the anchorage and movement

of vessels in territorial waters.

(1) Guards will be placed on vessels proceeding coastwise, when
necessary.

(1) Control will be exercised over small motor craft in territorial waters.
(k) Control will be maintained over commercial and private aircraft in international movements.

(1) Applications will be received for war risk insurance;
policies will be delivered, and premiums collected.
CONTROL ON LAND FRONTIERS

Imports and exports, and travelers arriving and departing, will be
controlled substantially as indicated in the above paragraphs relating

to coastal activities.

HNG/aff

280

STATES

In the event of a general Suropean war in which the United States
is not engaged, the Customs Service will be called upon to enforce

neutrality controls over exports, imports, travelers, and vessels.
EXPORTS

The Customs Service will enforce the licensing and other restrictions
imposed by law upon the export of arms and munitions of war, pursuant to

proclamations of the President.
IMPORTS

The Customs Service will enforce the licensing restrictions imposed
by law upon the importation of arms and aunitions of war, pursuant to
proclamations of the President.

It will enforce any restrictions which may be imposed upon the
importation of goods from a belligerent nation which embargoes imports

from the United States into her own or other territory, or which diseriminates against our commerce.

It will collect such additional duties as may be imposed upon
the products of a foreign nation which discriminates against our
commerce.

TRATELERS

The Customs Service will enforce any restrictions imposed by law

upon travel by United States citizens on vessels of belligerents.

281

The Customs Service will enforce the provisions of law which
prohibit the departure of any armed American vessel engaged in

conserse with a belligerent.

It will enforce the provisions of law prohibiting the departure
of vessels, American or foreign, intended for conduct of hostilities
or to supply warships of belligerents.

It will prevent the departure of any vessel, American or foreign,
when the President directs withholding of clearance because of dis-

erimination against American citisens by such vessel or by a belligerent
government.

Any Treasury regulations which may be promulgated to govern the
anchorage and movement of foreign or domestic vessels in United States

waters, will be enforced by Customs officers, who, with the approval of
the President, will take possession of such vessels if necessary to
prevent injury thereto, or to harbors or waterways, or if necessary to
secure observance of the rights and obligations of the United States.
The Customs Service will enforce neutrality in radio communications
by vessels in United States waters, by sealing the radio equipment of

vessels arriving in port, to the extent which may be required by
instructions of the Havy Department.

HNG/mff

282

April 19, 1939
4:53 p.m.

HMJr:

Robert M.

Hello.

Hutchins:

Hello, Mr. Secretary. How are you?

HMJr:

I'm all right, how are you?

H:

Terrible !

HMJr:

Why?

H:

The rate of interest is still going down.

HMJr:

(Laughter) Well, come on over on my side of the table
and you'll boast about it.

H:

(Laughter)

HMJr:

The reason I'm calling you is this - in case it should
be so unfortunate as to be a war in Europe

H:

HMJr:

H:

HMJr:

Yes, sir.

......I would like to get -- borrow Jacob Viner to

have him come down here and advise me.

Yes, sir.

And I'd like him if -- only in case of war abroad, but
I would like him on a full-time basis.

H:

Yeah.

HMJr:

Now, would you give that consideration?

H:

No, I'll give it my approval.

HMJr:

Swell 1

H:

I should think you were entitled to him. Do I gather
from the ominous tone in your ominous voice that you
expect that this afternoon sometime?

HMJr:

H:

No. It just happens to be five minutes of five and my
voice runs down hill very rapidly around five o'clock.
I see.

283

-2 HMJr:

Then I go home and get a glass of sherry, the voice
rune up again.

I see. Well, I wish you would call me then; I'd feel

H:

better. You discourage me a great deal now.

HMJr:

Well, I didn't mean to do that.

H:

All right.

HMJr:

Well, I'm ever so much obliged and I -- I heard you
were in Washington the other day.

I was there for a few minutes. I -- I made a speech
for -- twenty-minutes long to a parole conference and
got away the -- the sight of those fellows who were
talking about parole in this country is too much for me.

H:

HMJr:

Yeah.

I couldn't tell whether they were ex-convicts or people
who were looking after ex-convicts.

H:

HMJr:

You don't know yet?

H:

No, I got down -- went down to St. Johns College at

Annapolis where I'm on the Board
HMJr:

I know.

H:

and recovered. I felt just the way you do at
five minutes of five.

HMJr:

H:

Well, if you ever come down and have a few hours, let
me know and have either lunch or supper with us.

That will be delightful. Thank you very much, Mr.
Secretary.

HMJr:
H:

HMJr:

Will you tell Viner?

Sure I'll tell him.
I think he'd like to get it directly from you.

H:

Thank you, I will.

HMJr:

I'm ever so much obliged.

H:

The same to you. Good bye.

284

April 19, 1939
10:09 a.m.

Operator:

Mr. McReynolds.

HMJr:

Mac

McReynolds: Good morning.
HMJr:
M:

HMJr:

M:

HMJr:

Mr. Welles is here -- good morning
Yes.

And just to make a hundred per cent sure tell Customs
no countervailing duty should be put on any country
unless it goes out over my signature.

Yes, sir. I'll do that immediately.
Close that door will you -- I mean -- I mean so there
can't be any possible slip. I might -- might be away
on the day or something.

M:

Yeah , I'll

HMJr:

No countervailing duties on any country unless it goes

M:

I'll see that that's done immediately. Yes, sir.

HMJr:

O. K. Thanks, Mac.

M:

over my signature.

Right.

285

April 19, 1939
11:01 a.m.

HMJr:

Herbert

Hello.

Feis:

Mr. Secretary?

HMJr:

Talking.

Right. I have a tip from the White House here from
the Secretary of State. "Will you please be studying
with the Treasury the following in case it becomes

F:

necessary to take some action:

1. Stopping draft payments to Italy, most of
which are sent by immigrant families in the
United States.

2. The same thing in relation to remittances
to Germany."

HMJr:

Now look, Herbert

F:

Yes .

HMJr:

I've only got so many hours to the day

F:

Well

HMJr:

.......and Archie Lochhead is entirely competent to
discuss this with you.

F:

Ah......

HMJr:

And I've asked that he be used as much as possible.

F:

All right.

HMJr:

And that's absolutely his alley, and 1f you don't mind

F:

talking to him -- with him and -- I'd appreciate it.
But I just can't do all these things myself.
Well, you've already -- that's the instruction I felt
I needed.

HMJr:

Well

F:

That's just what I wanted to find out. I -- I didn't

HMJr:

Well I thought that you

dare move without finding out.

286

-2-

Now we've got that payments legislation.

F:

HMJr:

The what?

F:

We have that bill on control of payments and our reply

HMJr:

of what payments?

is going to tend to be.

HMJr:

General control of payments bill.
Oh, I don't know about that.

F:

Oh, it's a major piece of legislation that we drafted

F:

a few months ago, sent it to the Treasury and they gave
us a much more complicated redraft, and we've left the

matter rest. Now this 18

HMJr:

Control of payments?

F:

Control of payments.

HMJr:

To whom?

F:

We once had a talk about it.

HMJr:
F:

I'm not familiar with it.
Well, it's of course -- it was that major piece of

legislation that we had drafted that I was going to
bring across again. I didn't know how you wanted me
to handle it and the very purpose of the telephone
call was to find out how you wanted me to handle it.

HMJr:

Well

F:

I'll get ahold of Archie and we'11 do it.

HMJr:

Well, if it's legislation

F:

It is.

HMJr:
F:

It's legislation?
It -- our suggestion will tend -- say to the President
that you can't do this without legislation. Now we've
legislation.
drafted this simple and comprehensive piece of

3-

HMJr:

287

Well, if you would -- Mr. Foley is sitting here now.
Right.

HMJr:

And I -- I would see Foley and Lochhead together.

F:

All right.

HMJr:

The two of them.

F:

All right.

HMJr:

See?

F:

Right.

HMJr:

Now, what else have you got on your mind?

F:

HMJr:

F:

HMJr:

Well that's -- there are dozens of things that I'd
like to -- a chance to report to you on, mainly in
the developments in the Latin American field, but
having this answer -- what was crowding you, I've
Yes, well, I cleared everything this morning with
Sumner Welles. He came to see me.

That'll help a lot.
But -- you see, it's difficult for me because I -- I
don't -- Mr. Hull delegates this thing all over the lot.
I -- I never know, for instance

F:

HMJr:

I know.

South America. Now Mr. Welles
... Who to talk to on
asked to see me and he had certain things and we agreed
on everything, but I want -- I -- I want to be helpful
within the physical limitations that I

F:

Exactly.

HMJr:

Of my well-being.

F:

Quite. Now, of Latin America, I'm glad that Welles
did it -- in addition, my use would be probably to
give you additional background, you see, on those
situations -- will come before you, if you want me.

-4-

HMJr:

Well, of course

F:

Because I haven't bothered you on that.

HMJr:

No. Well look, would you do this?

F:

Right.

HMJr:

On this piece of legislation

F:

I'll make an appointment with

HMJr:

Foley and Lochhead.

F:

Right.

HMJr:

288

On the South American thing, talk to Sumner. Let him
bring you up-to-date and if he saye that he wants you

in on this thing, I'd be delighted to have you in on it.

F:

You mean on South America?

HMJr:

Yes, on what I'm trying to do in connection with the
Argentine.

F:

All right, I'll talk with him.

F:

Will you?
Of course.

HMJr:

And of course I want your help.

F:

All right. I'11 talk with him.

HMJr:

O. K.

F:

O. K.

HMJr:

Thank you.

HMJr:

So long.

289

April 19, 1939
11:35 a.m.

HMJr:

Hello.

Operator:

Senator Reynolds.

HMJr:

Hello.

Reynolds:

Hello. Henry?

HMJr:

Talking.

R:

How are you, my friend?

HMJr:

I'm all right, and how are you?

R:

Just fine. I'm a little bit tired; I've been down in

North Carolina for about four days making some speeches.

HMJr:

Well, I -- I didn't know there was any election down
there.

R:

HMJr:
R:

HMJr:

Well no, I've been delivering some lectures under the
auspices of the Royal Order of Moose.
I see.

You see, I'm their National Commander.
I see.

R:

And I have to go from state to state occasionally.

HMJr:

I see.

R:

Henry.

HMJr:

Yes.

R:

What I wanted to bother you about this morning, for
which I am apologetic, but this man is a friend of

mine and you can't criticize a fellow for trying to
help your friends. Shep Silberblatt..

HMJr:

Yes.

R:

You know, he is from Silberblatt in Alaeka.

HMJr:

Yeah.

290

-2company

Or the construction/on that Poughkeepsie postoffice.

R:

HMJr:

Yeah.

R:

What 18 the status of that?

HMJr:

Now look

R:

Yeah.

HMJr:

Johnny Hanes is in the room.

Yeah. I phoned him this morning.

R:

HMJr:
R:

John

Hanes:

Well now, can -- can I let him talk to you?
Sure. Righto.
Bob......
Yes, Johnny.

R:

H:

We have had hearings, as I told you, on that Silverblatt
matter for about -- it lasted for about ten days.
We've had the last witnesses. The boys tell me now

that they are in the process of -- of making a decision but we haven't gotten it yet.

R:

H:

I see.

Our Mr. Manning is handling it here who is a lawyer
for the Procurement Division under the Treasury, and
we -- we have given him a very, very complete hearing
as we promised him and you that we would.

R:

H:

That's right.
And he's -- he's had every opportunity. It wasn't in
the nature of a court trial although we did have a

court stenographer and took notes and made it -- gave
him every opportunity to present all the evidence about
the case.

R:

Righto.

H:

And he's going to get a fair -- fair settlement. I -that's what we guaranteed to you.

R:

That's right.

-3 -

291

H:

That he would be given every consideration and the

R:

Well, thank you 80 much, John.

H:

settlement will be fair.

Now, I can't tell you what the final settlement will

be yet because the boys haven't come back with it.
R:

H:

Yeah.

But I checked up after I talked with you this morning
and they gave me the assurance that they -- that they
were pressing the matter and would get the final
answer as quickly as they could

R:

Well, that is fine.

H:

There are a lot of technicalities concerning this
thing.

R:

H:

R:

H:

R:

Yeah.

And we want to give him a good square deal, and I
assure you he will get a square deal.

Well that's fine, John.
He knows that. I told him that he would get a square
deal. That's what the Secretary told him when he
talked with him -- you'll get a square deal.
Well that's fine, John, and I thank you 80 much, old
man.

H:

All right, Bob.

R:

Good bye.

H:

Good bye.

292

April 19, 1939
11:43 a.m.

HMJr:

Frances

Hello.

Berkins:

Hello.

HMJr:

Frances?

P:

Yes. Hello, Henry.

HMJr:

How are you?

P:

All right.

HMJr:

Frances,
I want a little advice. Glenn Martin over
in
baltimore

P:

Yes.

HMJr:

......has part of the order for the French planes

which
I am very much interested in - and the President
is.
P:

Yes.

HMJr:

He is fearful that they are going to call a strike in
Baltimore on Monday, the A. F. of L. and tie it up.

Now -- hello?
P:

Yes.

HMJr:

Now, he makes the point that he is outside the city of

P:

Uh-hm.

HMJr:

And in the case of the Coast Guard once we've gotten

Baltimore. He is not in it.

them

P:

In the case of what?

HMJr:

Coast Guard -- we once get them exempted.

P:

Yes.

HMJr:

Now, I don't want to do anything about it unless you
think it's advisable and would advise me, you see?

But I -- I'd hate to see his plant tied up.

293

-2

P:

What's the name of the plant?

HMJr:

It's the Glenn -- it's the Glenn Martin Aeroplane
Company.

Glen Martin Aeroplane Company.

P:

HMJr:

P:

HMJr:
P:

And he's just outside of Baltimore -- he's in the county,
and not in the city.
Yes, well that wouldn't make any difference.
It's a cement strike, you see.
It's what?

HMJr:

It's something to do with cement.

P:

Cement 1

HMJr:

Yes.

P:

Well, is he building a building?

HMJr:

Yes.

P:

Oh, I see.

HMJr:

He's building -- he's about to complete a building in

P:

I see.

HMJr:

And it's A.F. of L.

P:

Yes.

HMJr:

And it's called for Monday.

P:

which to build these French planes.

Yes. Well, why doesn't he -- why doesn't he settle

with them?
HMJr:

He isn't involved.

P:

Oh, it's the contractors that-that's involved?

HMJr:

Yeah.

294

-3P:

Well, I expect we can get it settled.

HMJr:

It's -- it's -- he has nothing -- it's a contractor

who' 8 building his building.
I see.

P:

HMJr:

And
into -it?would -- is it asking too much to have you look

Oh no, I'll look it up right away. It's no trouble at

P:

all.

HMJr:

Because, as I say, my interest is that I want those

P:

Yes, of course. Well, it's no trouble at all, Henry.

HMJr:

I see.

P:

HMJr:
P:

HMJr:
P:

French planes built.

I mean it's -- there's probably somebody in the office
who knows all about it.
I mean already, and I just don't happen to, but
No, I wouldn't expect you to.

No, but I mean it's -- it's
And I wouldn't ask you if it wasn't
It's no trouble at all and I'11 have it looked up and
we'll see what we can do. I mean, there's probably

reason for calling it off.

HMJr:

Is it -- the contractor involved, his name 18 ArundA1
Brooks Company.

P:

The what - Arundell Brooks?

HMJr:

Yes.

P:

All right. Well, I'll -- I'll have a man look it right
up and we'll see if we can't make a settlement on it
anyhow.

HMJr:
P:

Thank you.
very

And do the/best we can and let you know.

295
4

-

HMJr:

That's -- I'd appreciate it.

P:

Fine.

HMJr:

Thank you.

P:

Good bye.

296

April 19, 1939
4:00 p.m.

HMJr:

Harold.

Harold
Graves:

Yes, sir.

HMJr:
G:

HMJr:

Mr. Milligan is here, U. S. attorney from Kansas City,
Yes, sir.
And he feels that the Treasury could have some more
men.

Yes.

G:

HMJr:
G:

HMJr:

G:

Treasury revenue agents.
Yes.

Internal Revenue. Now, he -- I -- the Governor has
asked him to come in here and I'd like you to listen
to what he's got, take a look at it, look over all
our people we've got out there and see what there is
to it, see?
Yes, sir.

HMJr:

Now, are you available at ten tomorrow?

G:

I am, yes, sir.

HMJr:

What's your room number here?

G:

My room number there is 290.

HMJr:

290?

G:

Yes.

HMJr:

Do you want to see him here or Internal Revenue?

G:

Why I think it would be better perhaps to see him there,
Mr. Morgenthau.

HMJr:

290.

G:

290 at ten tomorrow.

HMJr:

You'll be there?

297

-2G:

Yes, sir.

HMJr:

And I'm still interested.

G:

Yes, sir.

HMJr:

O. K.

G:

HMJr:
G:

I'll be glad to do it.
All right.
Good bye.

298

April 19, 1939

4:50 p.m.
HMJr:

Hello.

Operator:

The Attorney General.

HMJr:

Hello, Henry.
Hello.

Frank
Murphy:

M:

Hello, Henry.

HMJr:

Yes, Frank.

M:

I'm sending right over to your office by special messenger an opinion on this matter of the legality of
the -- of your proposed arrangement for the protection

of our Government bond, security and commodity markets.
HMJr:

Oh, yes.

M:

And it's O. K.

HMJr:

Fine 1

M:

Thehave
thing'sit O.
K. and I'm sending it right over 80 you
will
there.

HMJr:

Fine.

M:

All right, Henry, it will reach you in five minutes.

HMJr:

And you got my phone through your secretary, didn't
you?

M:

Yes.

HMJr:

See?

M:

Yes.

HMJr:

And -- I remembered that you wanted to keep it on an
informal basis.

M:

Yes.

HMJr:

So I'll wait until I hear from you further on that.
Is that right?

299
2-

M:

Yes. Now, you didn't -- did you send any -- had you
ever sent any request for an opinion over here as you
guessed when you talked to me yesterday?

HMJr:

I sent -- I wrote you on March 24th.

M:

Yes.

HMJr:
M:

HMJr:
M:

HMJr:

And I -- we gave you another copy, see?
Yes.

I mean the copy -- you have my correspondence.
Yes.

And I never asked for a formal opinion because, as I
remember it, you asked me to keep it informal until

you could take a look at it.

M:

Yes.

HMJr:

You see?

M:

Yes.

HMJr:

And then you said, after you had looked at it and found
out which is legal and which isn't, then you wanted to

talk it over with me.

M:

HMJr:

Yes.

And if you remember, I asked about taking it up in
Cabinet and you said, "No, please don't. Let's have

a dress rehearsal. Is what you said.

M:

Yes.

first. You see?

HMJr:
M:

Yes.

HMJr:

Now the only thing I've ever written you is what I

wrote you on the 24th of March.
M:

HMJr:

Which isn't -- which doesn't constitute a request for
a formal opinion.
It does not.

300

-3 M:

HMJr:
M:

HMJr:

M:

HMJr:
M:

No.

No, it does not.

Yeah. All right, that record's right.
No, it does not. But I -- but I am waiting to hear
from you on it informally.
Yes.

Is that -- is that right?
That's right. That's right.

HMJr:

And the other thing is coming.

M:

Yeah, all right.

HMJr:

Thank you 80 much.

M:

All right.

LEGISLATIVE DEPARTMENT

MUNDRY BUILDING

GENERAL OFFICES

WASHINGTON D.

E. WASHINGTON ST.

CHICAGO ILL

AM

30

from

M.R.Oqg

ARMENTA
INFEDERATION
TELEPHONE NATIONAL 3342

WASHINGTON, D.C

April 19, 1939
TO ALL MEMBERS OF THE
HOUSE OF REPRESENTATIVES:

I am writing to convey to you the support of the American Farm Bureau
Federation for the extension of the President's power to change the gold

content of our dollar provided for in the Somers Bill. H.R. 3325 which is

now under consideration by the House of Representatives. We respectfully
urge your support of the continuance of the power to revalue our dollar in
order to protect our currency and to safeguard our exports and our domestic

markets. This is a matter of vital importance to 30 million farm people.

At the last annual meeting of the Federation held at New Orleans,
Louisiana. December 11, 12 and 13, the voting delegates from 39 member
State organizations representing through their membership approximately 1

million farm people asked for the continuation of this power, pending an
investigation and report on the whole monetary problem by a joint committee
of Congress. A oopy of the resolution is appended. Senator Bankhead and
Representative Steagall have already introduced resolutions in the Senate
and House which embody our recommendation for such a study; the Somers Bill
continuing the power to revalue the dollar embodies our other recommendation.

The power to revalue our dollar expires on June 30, 1939. unless ao-

tion is taken by Congress to renew this authority. Failure to act now would

be calamitous. Perhaps at no time since the close of the World War has the

international situation been more unstable. It is imperative, particularly

under such conditions of international insecurity, that we maintain these

powers to protect our markets from the disastrous consequences of monetary
manipulation and exchange fluctuations by foreign countries. Now that we

are a creditor nation with huge surpluses, especially of wheat and cotton,
it is vital that we protect our export trade from adverse currency manipulation by competing nations.

Practically every important nation of the world has abandoned the fixed
gold standard. The Executive branch of practically every nation of the
world has been given the power to depreciate its currency if it so wishes
and to do so without public discussion and debate. In the world today when
currencies of competitor nations are in a state of constant flux it would
be suicidal to tie the hands of our government and prevent it from adjusting our currency in such a way as to protect our export markets and prevent
foreign produce from being dumped into our domestic market.

If the existing power to revalue the dollar within the specified limits
is not continued it really means putting the United States back on the fixed

302

-2gold standard. It means tying our dollar to a fixed gold content. We would
be virtually the only country in the world that would be doing so. By tying
our currency to the gold dollar while the other countries are permitted to
depreciate their currencies at will, we are deliberately sacrificing the one

weapon which prevents foreign countries from actually carrying out the
depreciation of their currencies. We would be giving up the one weapon which
would restrain these competing nations from getting a competitive advantage

in the agricultural and industrial markets of the world.

The attempt to maintain a fixed value for our gold dollar regardless

of changes in our economic and monetary conditions was an important factor in
bringing about the most disastrous and far-reaching depression in our history

in 1929-1932. Because our dollar was rigidly bound to a fixed quantity of

gold and because other countries depreciated their currencies, basic commodity
prices dropped almost one-half. That meant we had to produce twice as much
to obtain the same dollar income as in 1929. Our dollar became so dear that
it could no longer serve as a fair medium of exchange for goods and services
and the payment of debts. Our whole economic structure was brought to the
brink of ruin.
Farmers who must exchange their commodities for dollars suffer the most
from a fixed gold dollar. For example, in 1929 a farmer could exchange less
than one bushel of wheat for a dollar but in 1932 the farmer had to exchange

three bushels of wheat for our gold dollar with its fixed value. Likewise,

the cotton farmer who borrowed $100 in 1929, borrowed the equivalent of 1-1/6

bales of cotton but if he had to pay back this debt in 1932, he had to pay
back the equivalent of four bales of cotton.

The abandonment of the fixed gold standard in 1933 followed by the revaluation of our dollar stopped the ruinous process of deflation and proved
a major factor in starting our nation back on the road to recovery. TO
abandon now the power to revalue our dollar means once more subjecting the
millions of our farm people to the merciless consequences of a fixed and rigid
gold standard at a time when our competitor nations can, at will, change the
value of their currencies.
We have made much progress towards a managed currency which can serve

as a fair medium of exchange and as a protection to the farmers of our nation.
We should go forward and not backward. We therefore respectfully urge the
continuance of the power to revalue our dollar.
Sincerely yours,

Ein Nother
Edward A. O'Neal, President.

303

Resolution adopted by the annual meeting of the American Farm Bureau
Federation, New Orleans, Louisiana, December 11. 12, 13, 1938.

Money and Price Level

The American Farm Bureau Federation has repeatedly urged

Congress to exercise its constitutional obligation to

regulate the value of money by establishing and maintaining a managed currency, regulated on an index of basic
commodity prices which will maintain a dollar with a
oonstant purchasing and debt-paying power.
The American Farm Bureau Federation urges Congress to

oreate a special Congressional committee to study the
problem of fluotuating basic commodity price levels and
the effect of such fluctuations on farmers, producers
of other basic commodities and the economic life of the
country. We urge also that such a Congressional committee study the monetary systems of this and other countries

in an attempt to ascertain the effect of monetary policy

on basic commodity price levels and based on these studies
to propose effective methods of achieving a greater

stability in basic commodity prices and that Congress
enaot such legislation as will achieve this objective.

Pending the completion of this report to Congress, we urge
the continuation by Congress of the President's authority
to change the gold content of the dollar.

304

April 19, 1939
FOR THE SECRETARY:

Leo Crowley said today that he was sure, after
talking with Senator Glass, that Senator Glass would not let
the Wagner resolution for an investigation be reported out
and that Senator Wagner would go along with Senator Glass.

Senator Glass is against letting the Reserve Board "come up
and make speeches," Mr. Crowley said. On the other hand,

Mike Flynn said that Senator Glass would be willing to see
an investigation by the Senate Committee, but not by
a joint House-Senate Committee. Mr. Crowley says that the

Senator no longer is willing to see even this.
As to the Brown Bill, Mr. Crowley says the Banking
Committee has persuaded Senator Brown to postpone hearings

until May 10 and at that date to agree again to a further
postponement. Mike says Senator Glass is disturbed " about

Morganthan moving in putting Inphan in there."
ESD

305

April 19, 1939
FOR THE SECRETARY:

Secretary Wallace has a dinner engagement

Thursday evening which he can not break and, therefore,

will be unable to attend the Fiscal and Monetary meeting.
Under Secretary Noble who has been invited in
Secretary Hopkins' absence also has a dinner engagement,

but said he would like to come late if the Fiscal and
Monetary Committee discussion is going to last for some
time.

Mr. Delano will be unable to attend.
Mr. Leon Henderson, like Mr. Noble, can only
come later in the evening.
Do you wish to postpone the meeting?

ESD

of

306

GRAY

JR

Berlin
Dated April 19, 1939
Rec'd 1:27 p.m.

Secretary of State,
Washington.

262, April 19, 4 p.m.
No. 16. FOR TREASURY FROM HEATH.

The Reichsbank statement for the second WEEK of

April reports that the Government hns fully repaid

its operating credit possibly indicating that with the
heavy tax payments at the End of the quarter the Government

has sufficient funds to carry on until the introduction
of the "new financial plan" on May 1. It is understood
that taking advantage of the liquidity of the money
market the Government has been issuing considerable

amounts of treasury bills and of course is still
continuing to make payments for much of its orders in

"delivery bills", Partly explanatory of the liquidity
of the money market is the fact that the Reichsbank during

the first half of April has indulged in open market
operations to the Extent of purchasing 110,000,000 marks
of "miscEllaneous securities".
Total

307

-2- #262, April 19, 4 p.m., from Berlin.
Total currency circulation declined 445,000,000
marks during the WEEK to a figure of 9,906,000,000
marks which compared with circulation of 9,656,000,000
marks at mid March and 7,479,000,000 marks at mid April
1938.

GEIST
DDM:HTM

03V13038
opo; CI OCA
THEM YAUFAHRT
All

308

PLAIN

PAP

LONDON

Dated April 19, 1939
Rec'd 1:58 p.m.
SECRETARY of State

Washington

519, April 19, 6 p.m.
FOR TREASURY FROM BUTTERWORTH

1. Although the city regards the announcement

that Hitler will make a speech before the Reichstag
on the 28th as meaning that no war will occur in the
interim neverthElEss real apprehension and nervousness

are on the increase, EVIDENCE of which is multivarious.
For instance dollar notes are in decided demand and are
being sold at around 4.65 delivery after the AQUITANIA

arrives on Friday. War loan closed at 93 3/8; it will
be recalled that a minimum price of 93 was set during

the worst days of the crisis of last September.
2. The foreign Exchange market has been more active

today the demand for dollars being not Extraordinarily

large but continuous. Again the belga has been freely
offered, the three months' forward rate moving to 1.
102 bars were sold at gold fixing of which 32 WERE
married. ThE market gave all and buyers were pro-rated
on a 33 percent basis. Incidentally SOME American
arbitrageurs

309

PAP -2- 519, April 19, 6 p.m. from London
arbitrageurs are querying whether the current insurance
facilities which are made available through arrangement
with the British Government Ensures payments in dollars.
3. The clearing banks decided yesterday not to

advance rates for short loans though with bill rates
at OVER 1à percent, loans at 100 percent against bills are
undeniably cheap. The clearing banks have been charging

3/4 percent for new day to day money against bills but
continuing old loans at 1/20 percent and probably the

chizf factors influencing yesterday's decision not to
increase the minimum rate were (1) the substantial bill
holdings by the market houses of bills taken up OVER the
past two months at just OVER 1/20 percent and (2) the view

that the present conditions causing credit tightness and
dearer money are not of a permanent nature. Clearing
banks have not yet recovered from the withdrawal of

foreign deposits; the first half of April represents nearly
the peak of withdrawal of deposits due to tax payments;
Easter currency demands coincided with the approach of this

tightness and finally the political tension became acute
at the SOME period. Government disbursements are now

increasing and foreign deposits are so reduced that EVEN

if international tension is not relieved a moderate
Easing of conditions is Expected.

Bill rates are Easier today following the clearing
bank's

310

PAP -3- 519, April 19, 6 p.m. from London
bank's decision while loan money was also Easier,
KENNEDY
HPD

03V13038
and €1 CCA
TM3*THA930 YAUGAHT
edit to willing
Think NET . Includes Mandal

311

REB

GRAY

Berlin

Dated April 19, 1939
Rec'd 3:53 p. m.

Secretary of State,
Washington.

265, April 19, 7 p. m.
No. 17. FOR TREASURY FROM HEATH.

Consul General in Prague reports that Slovak

currency unit will be the crown with Exact parity with
the CEECH crown or ten crowns to one mark. Old Czech

banknotes will simply be stamped over. Coin will
remain in circulation with the EXCEPTION of the 25

heller piece.
HE further reports that Slovak Government intends

to add an additional two hundred million to the Exist-

ing three hundred million of circulating coin. The
total currency circulation of Slovakia is Estimated to
be about fiftEEn hundred million crowns assumed to

correspond to the normal requirements of this simple

agricultural Economy. The additional two hundred million
crowns in coin may be EXPECTED to have a certain in-

flationary Effect.
The Slovak National Bank is to have a capital
of
one

312

REB

2-#265, From Berlin, Apr.19,7p.m.

one hundred million crowns. The shares will presumably
largely be held by the Government and dividends will be

limited to 6%. The bank will be obliged to make loans
without interest to the Government up to a total of
one hundred million crowns. The statutes of the bank
are reported not to establish the fixed percentage of
coverage but the crown is to bE backed by an unstated

reserve of foreign currencies freely Exchangeable for
gold. The bank will have a governor, vice-governor and

Eight directors.

It is reported that the deficit on the ordinary
provisional Slovak budget before the break up of
Czechoslovakia was about three hundred million crowns

per annum to which had to be added deficits on special
budgets for public works and state-owned enterprises.
GEIST

NPL
EMB

03V13038
ocop CS SHA
THEY THA930 VAURAGE

gratures ed la will
N a) technical could

313

PARAPHRASE OF TELEGRAM SENT

TO: American Embassy, Paris, France
DATE:

April 19, 1939, 6 p.m.

NO.:

279

Reference is made to your telegram of April 18, No. 769.
It is requested that Cochran inform the individuals

who inquired of him about the possibility of cotton sales
to Spain being financed by the Export-Import Bank that
only upon regular presentation can this matter be considered in Washington. When Cochran conveys this message

he is to give no sign as to whether this Government would
or would not find that consideration of such financing
was feasible.

The following is for your information:
The preceding reply was agreed on by both the Treasury

and the Export-Import Bank. A variety of sources has
now put the same question before the Bank.
HULL

(HF)

03V1333R
94A

EA: LWW

314
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: April 19, 1939, e p.m.

NO.: 782
FROM COCHRAN.

Very quiet exchange market here, with the

French control gaining some sterling this morning.

A fair amount of sterling was lost by the Belgians,
despite completion of Pierlot two-party cabinet.
The Belgians had to let the belga recede to a slightly
lower level than that at which the peg was placed
at first. In other words, an attempt was made to
create a bid market, but the result was the opposite.
The Dutch currency and the Swiss franc were rigidly
held. There was not much trading in French rentes
and shares, with practically no change in quotations.
Spain's assurance that there will be no aggression
against Gibraltar or Tangier has made the market a

little more cheerful.
The market is not worried very much over the
idea that Danzig may go to Germany before April 28.

That such a step is probable is indicated by the order
at Dansig for turning in of foreign exchange and gold.
The 88 PARIS being destroyed has caused nervousness
and

315

-2and shipping at Le Havre, especially the berthing of the
NORMANDIE, may be seriously inconvenienced.

The European financial press has given much publicity
to meetings held in Washington by the President and his
advisers upon measures to regulate finances and markets
in case a war does break out.

There is speculation in the press as to whether the

Belgians will be able to hold the present level of the
belga and carry out a deflation program in the present
situation wherein extra expenses are incurred by Belgium,

and foreign export markets are being curtailed by the
war scare.
END OF MESSAGE.

BULLITT.

03V13338

EA:LWW

316

April 20, 1939
9:20 am
Present:

Mr. Lochhead

Mr. Foley

Mrs. Klotz

HM,Jr: I am in a kind of a "tither" this morning.
And here is the Attorney General's opinion upholding
the hand of the Acting General Counsel. It has not yet

been acknowledged.

My thought was when I went over to Cabinet I would

take a cable along, something like this: Referring to

my 80-and-so and 80-and-so, where I say the Treasury Counsel

has advised me that it is legal, but we are waiting to hear
from the Attorney General, I would say we have now got a
formal opinion from the Attorney General that it is legal.
And that's all! That does not say what we are going to
do. It is what 18 known as

But think it over. All night I thoughtit was smart.
We don't cross the bridge "Are we going to loan money or
aren't we? We referred it to the Attorney General. He
said it's legal. I want to show it to the President at
Cabinet and I want my last cable and then we send another
cable "now it's legal" and then let them come to me, see,
and tell us what they want.

Dr. White: Do you want to include the original request to you? Otherwise they might say why do you offer
this?

HM,Jr: You can have it -- yes, that's all right.
But I just want to show him, and it's easier for the President. I will simply say, This is what I did Sunday
night. You O. K'd it. Now I just want to send word
over that it's legal. I will tell Jesse Jones that we
are going to do it and then tell Herbert Feis we are doing
it and tell him we are going to show it to the President
at

2 o' clock. Does that make sense?

317

-2-

Mr. Foley: Yes.
Mr.

twice.

Lochhead: Yes. They asked that question

HM,Jr: Just to digress a minute, if German stocks
are continuing to go up, it's highly significant because
they can only go up for one reason -- because they are
betting there is not going to be any war.

How does that thing hit you? Because this is the

only chance you will have to see me before 2 o' olock.

Mr. Foley: I would not go any further.
further.Mr. Lochhead: That's right. I wouldn't go any
Dr. White: Yes. I think many of them misunder-

stand the Johnson Act and I think they will be surprised.

HM,Jr: Then -- you think it over -- there is no

reason to send it to the French?

Mr. Foley: They have not raised the question.
Mr. Lochhead: On the question of the French, Dutch,

Swiss, etc., it looks as if they all have rather diversified

opinions. It does not look as though they want to go ahead
the way the British go ahead and we were wondering two
things; first, whether you should not have Cochran thank
them for giving consideration and ask them to notify him
if anything further comes up and then it is open, but we

have not made any commitment.

HM.Jr: Put it this way: tell Cochran to sit tight
but sit tight; not to push it.

and let all additional overtures come from these countries,

Dr. White: On second thought, I wonder if it would
be desirable to let it leak out to the French.
Mr. Lochhead: The French have just backed away from

everything. The other suggestion I had was that whether
or not you wanted to talk to Cochran on the phone, cover

318
-3-

any questions he might bring up, rather than just cable.

HM.Jr: I am all sewed up until four o'clock, but
I do want to get off an answer to the British.
Dr. White: If the French thought it was a possibil-

ity, they might be more pleased.

Mr, Lochhead: I don't like to make overtures to

the French.

Mr. Foley: On the letter that came over from Jesse

Jones, he said it might be a good idea to amend the Johnson
and Neutrality Acts 80 private bankers could make these

loans. I think we ought to reply to Jesse's letter and
we ought to tell him that this prohibits it, and make it

stiff.

I said to Berle and Feis last night -- they thought

we had to have legislation to do what the President said
in his chit to them. Berle had the wrong statute. That's
why he thought new legislation was necessary. And then
they went through an act of how all these things ought to

be pretty clear and Congress ought to be consulted. I

made the point if we went to Congress and got turned down,
we would be in a worse position.

HM,Jr: Strictly for Treasury information, I would
tell Jones no differently. But don't make it seem that
I don't want him to consult. I would put it this way:

he ought not to make this move without he and I seeing
the President.

I found that the President, this last time we went
over to see him on this question of handling our own markets, has it very definitely in mind that he wants to. As
far as the cash and carry, that the carry thing bothers
him much more. In other words, he is not going to do -there is a Woodrow Wilson policy that if, as he used the
thing, Mr. Sowab went over on a boat to sell munitions
and this boat got torpedoed (which it did when Scwab was
on) and Mr. Sohwab was injured, that's just too bad! In
other words, he does not expect to have a cassi belli because some American citizen wanted to go into the war zone
and gets sunk, and he's going to make it easy for the Allies

319
-4-

to buy here. (That must be kept here.) Because this was
news to me, but that's B the way. He's going to make it
easy for them -- and he went 80 far as to say -- on the
lending end, but he isn't going to make it a cassi belli
if some fellow wants to go into the war zone. And he also

says that he is going to have a patrol from Newfoundland
down to South America and if some submarines are laying

there and try to interrupt an American flag and our Navy

sinks them, it's just too bad. What are they going to
do? In other words, he is going to play the game the way
they are doing it now. If we fire and sink an Italian
or German, well, it was just as he said, we will say it

the way the Japs do, "So sorry". "Never happen again.
Tomorrow we sink two. We simply say, "So sorry, and next

day we go ahead and do it over again. But it's very important. But you fellows must not breathe it to a soul.

It is what he has in mind, because you fellows are dealing
with the State Department and they don't know it.

Dr. White: Do you think this would have any influence if it got out -- would make more difficult his preliminary building up of his neutrality policy if it got out
that we can make loans? I mean if it gets out to the public?

HM,Jr: But it must not! It isn't going to Cabinet.

I never take up anything at Cabinet which is important.
Dr. White: I misunderstood you.

HM,Jr: No. No. No. This is doing what the Pres-

ident wants and following his policy that he is going to be

not too strict on lending money to buy our goods, merchandise,

which isn't talking in terms of munitions. He's going to

follow the new moden method of when someone gets in your way

you sink them and apologize and do it again next day. The
So sorry" policy. Which is the modern way. The Japanese
come and deliberately have three airplanes and machine gun
the British Ambassador traveling from Shanghai to Nanking.
They apologize. "So sorry. "We thought it was an ambulance.
Mr. Foley: Or a whale!

HM,Jr: Now listen. You are getting the inner, inner-

innermost stuff.

000-000

320

TREASURY DEPARTMENT
WASHINGTON

April 20, 1939.

MEMORANDUM FOR THE SECRETARY:

Pursuant to your instructions, I interviewed Mr. Milligan,
United States Attorney at Kansas City, this morning at ten o'clock.
At Mr. Milligan's request, Mr. Irey was present during the

latter part of the interview.

The subject of discussion was (a) the Pendergast case, and (b)
a case involving income-tax violations by a number of well-known
Kansas City gamblers. As you know, these cases are under active

investigation by the Intelligence Unit at Kansas City at the present
time.

Mr. Milligan expressed himself as being generally well pleased
with the work of the Treasury agents on both these cases.

With respect to the Pendergast case, he stated that the investi-

gation was well in hand and that the Treasury personnel assigned was
adequate to conclude the investigation.
With reference to the case involving the gamblers, he made two
requests, as follows:

(1) For the assignment of six additional internal revenue
agents; and

(2) For authorization which would permit the investigating officers to communicate the results of their

investigations directly to him as the investiga-

tions proceed, instead of awaiting the completion

of the investigations and the transmittal of the
usual formal reports to Washington.

With reference to the first of these two requests, I informed
Mr. Milligan that since his departure from Kansas City four additional internal revenue agents had been assigned to the investigation of the case involving the gamblers, and that they would report at Kansas City Friday morning, April 21. I suggested that
Mr. Milligan contact the officer in charge of this investigation
upon his return to Kansas City, and that should it be the opinion

Memorandum for the Secretary -2.

321

of that officer that personnel in addition to these four agents was
needed, this would be immediately forthcoming. This was satisfactory
to Mr. Milligan.
With reference to the second request, I called Mr. Milligan's
attention to the fact that the requirement for the formal transmittal

to Washington of reports of investigation in income tax fraud cases
was a requirement of the Department of Justice, which desired to review such reports prior to the institution of criminal proceedings,
and I advised Mr. Milligan that if the Department of Justice desired
to waive this requirement with respect to the present case and would
so advise this Department, instructions would be issued that the reports of the investigation would be submitted directly to him instead
of through the usual channels. Mr. Milligan stated that he would
take up this matter with the Department of Justice.
On the same point, Mr. Irey advised Mr. Milligan that he would

instruct the officer in charge of the investigation of the gambling

case at Kansas City that he should confer freely with Mr. Milligan
as the investigation proceeded and keep him posted from day to day
regarding all important developments.

Mr. Milligan expressed himself as being entirely satisfied with
the attitude of the Treasury Department with respect to the cases
discussed.

GRAVES.

322

Arril 20, 1939
10:13 a.m.

HMJr:

Dr. Roswell

Hello.

Magill:

Hello.

HMJr:

Yes.

M:

Good morning, Henry.

HMJr:

How are you?

M:

Pretty good. I got a little piece of gossip yesterday

here
in New
I thought
I would pass on to you
because
you York
mightthat
want
it.
HMJr:
M:

HMJr:
M:

HMJr:
M:

HMJr:
M:

HMJr:

Please.

And he
thatiswas that -- that Randolph Paul -- you know
who
Yes.

Might
interested
that'sbe
still
open. in the General Counselship if
Oh, really?

Yeah. I hadn't supposed at all that he would be.
Uh-huh.

I understood the things in his firm were in such a
position
in doingthat
it. -- that he might very well be interested

Is that right? Now is this -- how -- how direct is

this gossip?
M:

Well, I got it fairly direct. I got it from someone
that had been talking to him. I didn't talk to Paul
myself.

HMJr:

I see.

M:

But -- and I -- I more or less confirmed it last night.
I talked to some other people that know him fairly well

and they seemed to think that that was probably true.

-2-

323

HMJr:

Well,
that's very interesting. Would you feel he'd be
a good man?

M:

Well, of course, Paul is -- 1 should think he would be.
of course, Paul's experience 16 mainly tax experience.

HMJr:

Yeah.

M:

Not so much, I think, general law. On the other hand,
Paul is a person who is -- with very high ideals. He
certainly is sympathetic with the aims of the -- of
the Administration generally.

HMJr:

Yeah.

M:

And I think he's a very sound man.

HMJr:

Yeah.

M:

So I would think that it would be well worth your while
to consider him and -- in the event you haven't got
somebody else in mind that you think would be better.

HMJr:

Well, the man that you recommended

M:

Magruder.

HMJr:

Magruder, very much between us, they're going to offer
him a second -- second Judgeship up in Boston.

M:

I -- I didn't hear you, Henry.
They're offering him -- to make him a -- a judge -- a

HMJr:

Federal Judge of the Circuit Courts

M:

Oh, I see.

HMJr:

......in Massachusetts.

M:

Yeah.

HMJr:

They want him for that.

M:

Yeah.

HMJr:

So I can't compete with that, can I?

M:

Yeah. Yeah.

324

-3 HMJr:

M:

But I know Paul and -- and I'm glad to get it and I'll I'll most likely get in touch with him.
Paul is -- you can talk to Eddie about him, he knows

him too, of course. I -- I think that Paul is -- I
think his integrity is a hundred per cent.

HMJr:
M:

Yeah.

I think he would -- I know he's generally interested in
some kind of public work if he could afford to do it,
and apparently the situation is that he thinks he can,
and would rather like to.

HMJr:

O. K.

M:

So

HMJr:

Well, he is Johnny Hanes' -- was Johnny Hanes' lawyer
up to the time he came down here.

M:

I believe that's true.

HMJr:

Yeah.

M:

So that -- it ought to be easy enough to find out about
it and -- and see whether or not he'd be interested in
doing it.

HMJr:

O. K.

M:

How's everything else, Henry?

HMJr:

Pretty well. I'll be having something in the mail for

M:

Well, that would be good. I -- I've kept in touch with

you Friday night.

Shoup about it and I gather you've talked to Earle.

HMJr:
M:

HMJr:

M:

Yes.

But I -- I hope that you can get something worked out
as I wrote you.

Yeah. Well, I appreciated your note. I'm not very good
at answering the longhand, 80 I sort of stall them.

Well, don't bother to do it - I just.....

325

-4HMJr:

But I -- I'll get something in the mail Friday night
and if it isn't rushing you too much I'd like your
suggestions and criticisms Monday morning.

M:

HMJr:

M:

Well, you can have them. I've got nothing special on

Saturday and I'll be glad to go over it.
Well,
office?shall we send it to you at your house or the

I expect better -- well, I expect perhaps the office

is all right if it gets off Friday night.
HMJr:

Right.

M:

All right, Henry. Well, good luck to you.

HMJr:

Thank you 80 much.

M:

All right.

326

April 20, 1939
11:37 a.m.

HMJr:
Sumner

How goes it?

Welles:

Fine. I have a little difficulty here that I wanted

HMJr:

Only one?

W:

Only one. Espil has just left me and he told me he
was talking to you last night.

HMJr:

Yeah.

to ask you to help in.

He finds himself in a very embarrassing situation, because his Treasury Department and his foreign office
hasn't told him anything at all about what Irigoyen

W:

HMJr:

has been talking to your Department about.
I see.

And he fears that Irigoyen may go beyond what he's
supposed to do and he's a little concerned about it.
I wondered, in order to make it possible for him to
know exactly and in greater detail than I was able to
give him, just what the subject of the conversations

W:

would be, if you could have one of your people send
me an entirely confidential memorandum telling me the
main points that would be discussed 80 that I could
let him have them.

HMJr:
W:

HMJr:

Sure. Sure, I'll work it any way you want.
If -- if you could do that I think it would probably
help him to clarify
I know he was embarrassed. When he got embarrassed,

I got embarrassed, but after all that was over his
Government and

W:

Why sure.

HMJr:

And

W:

HMJr:

But I would like to help him out because it's confusing
for him and then he's really worried about it.
I'll have a memo -- what you want me to do is to have
a memorandum prepared the kind of things that we are
thinking of discussing wi th

327

-2-

W:

That's it exactly.

HMJr:

Right?

W:

HMJr:
W:

HMJr:

That's it exactly.
O. K.

Thank you a lot. Did you get my note this morning
about suggesting a meeting in your office?

Yeah, but I -- I put it to one side because I have
something which I had to do this morning.

W:

You bet.

HMJr:

But I have got it here and I -- I just needed to -- a

W:

Right. Well any -- anytime that it's convenient for

breathing spell.

you let me know.

HMJr:

Thank you, Sumner.

W:

Thanks a lot, Henry. Good bye.

328

TREASURY DEPARTMENT
WASHINGTON

April 20, 1939
TO THE SECRETARY:

In accordance with your request for a memorandum on the

organization of the War Loan Staff of the Treasury created during
the World War period, I find that there is no organisation chart
available and no outline of the duties performed by the various

individuals on that staff. I find that there was no set plan of

organization but that the Secretary asked certain people to come
to Washington as particular jobs came up to be performed. I also
find that many of these people gave their services free of cost

to the Government for the first several months, but that after they

were here a while the Secretary insisted that they accept some compensation for their services. These individuals were added to
what was then known as the War Loan Staff of the Secretary's Office
and their expenses were paid from "Expenses of Loans," which at
that time was an indefinite appropriation, the amount of which was
controlled by taking a percentage of the proceeds of the sale of
securities made by the Treasury and setting it aside in the appropriation account to meet the expenses of the Treasury in connection

with the financing of the war.

There were several outside organizations, such as the War
Industries Board, the War Trade Board, the Purchasing Commission,
and the Capital Issues Committee, the duties and functions of
which concerned the Treasury and in almost every case I am certain

that the Treasury designated some one to act as alimison officer
between those agencies and the Treasury although the record is not
clear as to who the limison officers were in every case.

I am attaching hereto a copy of a memorandum prepared in
1918 which indicates the matters in which the Treasury was interested

during the period of the war. The following is a list of the names

of some of the individuals who helped the Secretary conduct the
fiscal operations of the Government during that period:

Frank Vanderlip had charge of the sales of war savings and
thrift stamps.

Lewis B. Franklin worked on the financing and particularly
the allotments of Liberty Bonds sold under the Liberty Bond Acts.

329
2-

George O. May considered problems of revenue taxation.
He was also consulted a great deal on the accounting involved in
reports made by foreign governments on their purchases made in
thisthecountry
and Commission.
their requests for purchases which were approved
by
Purchasing
Norman H. Davis, who later became an Assistant Secretary

of the Treasury, acted as a lisison officer with the State Depart-

ment and worked with Mr. Rathbone in making arrangements for
advances of funds to our army abroad.

Albert Rathbone, who later became an Assistant Secretary of
the Treasury, made contacts with financial missions from the allied
governments and made arrangements for loans to those governments.

Albert Strauss was liaison officer with the Federal Reserve
Board on foreign exchange and related problems. The Federal Reserve
Board handled foreign exchange matters for the Treasury.
Paul Warburg, who was a member of the Federal Reserve Board,

worked with Mr. Strauss in handling foreign exchange and related
problems and was also the Federal Reserve representative on the
Capital Issues Committee.

Russell C. Leffingwell, who later became an Assistant Secretary of the Treasury, worked on financial and legal problems,

drafting circulars offering Liberty Bonds for sale, acts of Congress,
foreign loan and other fiscal matters.
Edward Clifford, who later became an Assistant Secretary of
the Treasury, was the limison officer with the War Trade Board.
S. Parker Gilbert was the lawyer who assisted Mr. Leffingwell
in the financial-legal problems. He later became Assistant Secretary
of the Treasury and afterwards was made the first Undersecretary of
the Treasury.

Nicholas Kelley assisted Mr. Rathbone and Mr. Davis on legal
problems concerning foreign loans and payments to our army abroad.
He later because Assistant Secretary in charge of foreign loans and
also in charge of payments and loans made to railroads under Sections
209 and 210 of the Transportation Act of 1920.
George Franklin, Jerome Hanauer and Richmond Weed were all

lawyers and assisted in the legal problems concerning various matters
which the Treasury was then handling.

330

-3There were many others who came in for a short period and

those who operated in the field in connection with the Liberty

Bond campaigns.

In the event of hostilities involving the United States,
all Treasury activities would have to be enlarged. If you would

like to have a memorandum on this I shall be glad to prepare it.
Also, it may be necessary to give consideration to the creation of
additional agencies such as those which functioned during the last
war. This would, of course, depend upon the extent of our activity
in any hostilities. Some of the war agencies for consideration are:
War Finance Corporation

(Probably R.F.C. could handle this)

Capital Issues Committee
(Probably Securities and Exchange Commission

could handle this)

War Industries Board

War Trade Board
Purchasing Commission

War Credits Board

U. S. Grain Corporation

owf
Enclosure

331
C

Y

CLASSIFIED SUMMARY OF THE PRINCIPAL WAR
ACTIVITIES OF THE TREASURY DEPARTMENT.

(More fully detailed in memorandum of June 12, 1918)

Purely Treasury Activities:
I. Financing the War.

(A) Internal:
(1) Formulation of policies as to taxation and
borrowing for recommendation to the Congress.

(2) Dissemination of information to encourage
thrift and investment.

(3) Flotation of loans and adjustments to prevent
financial stringency resulting from such loans
or from taxation.

(4) Restriction of non-essential industry by (1) taxation (2) control of capital issues.
(5) Facilitating production of essentials by
financial assistance.
(B) External: Co-belligerent countries.
(1) Financing, auditing, and recording Government

expenditures at the seat of war.

(c) External: Neutral Countries.
(1) Regulation of foreign exchange

(2) Negotiation of foreign loans

(3) Co-ordination of activities with those of cobelligerents.

(4) Control of gold exports.
(D) Loans to co-belligerents.
(1) Formulating policies as to amounts of loans.
(2) Making of loans, determination of terms thereof,
and obligations to be received therefor.

332

-2(3) Control of the expenditure of the proceeds of
such loans.

II. Insurance of War Risks.
(A) Ships and cargoes

(B) Personnel of the mercantile marine.

(c) Naval and Military forces.

III. Activities of the Public Health Service.
(A) Health service in extra cantonment areas.

(B) Sanitation and Health Service in relation to War Industries.
(c) Miscellaneous health activities and hospital services
arising from the War.

IV. Activities falling to the Treasury by reason of its possession
of machinery to deal therewith.

(A) Employing machinery of the Customs Service.

(1) Control of movement in and out of the United States
Persons
Commodities

Communications other than mail or cables
(B) Employing machinery of the Internal Revenue Bureau.

(1) Restriction on the use of grains for alcoholic
beverages.

(2) Control of traffic in narcotics.
(3) Special production of glycerine.
(c) Employing machinery of the Secret Service.

Investigations for
(1) State Department

(2) Food Administration
(3) War Trade Board

also for
which are themselves
(4) War Risk Insurance Bureau, and)
Treasury activities.
(5) War Finance Corporation
)

333

-3(D) Employing machinery of the War Risk Insurance Bureau,

(1) Assistance in private insurance of Naval and
Military Forces.
(2) Liquidation of enemy insurance companies.

(3) License of foreign insurance companies.

July 17, 1918.

334
C

0

P

Y

CABLE TO AMERICAN EMBASSY

STRICTLY CONFIDENTIAL

LONDON

FOR BUTTERWORTH FROM SECRETARY OF THE TREASURY

PLEASE CONVEY THE FOLLOWING TO THE BRITISH TREASURY

In answer to your cable No. 501 of April 17 and your cable
no.520 of April 19, Secretary of Treasury has been advised by
Attorney General that Department of Justice conours in the informal
opinion of Treasury counsel expressed in our cable No. 263 of April 16
to the effect that the Reconstruction Finance Corporation has the

legal authority to make loans to a corporation organized in this
country and acti ng on behalf of British Government in the event of
war in Europe in which Great Britain is one of the belligerents;
such loans to be secured by British-owned American securities requisitioned by the British Government and such collateral to have a
value in excess of any such loans; and that such loans would not be

prohibited by Johnson and Neutrality Acts and international law of

neutrality. It should be pointed out that this is merely the confirmation requested by the British Government as to our legal authority to
make a loan of this character.

EHF:6 Typed 4/20/39

335

April 20, 1939
4:15 p. m.
Present:

Mr. Lochhead

Dr. White
Mr. Foley

Mrs. Klotz
Mrs. McReynolds (for part of the meeting)

HM'dr: I showed this cable to Mr. Hull before Cabinet

and he said if we sent that, it might hurt (if it got out)
the possibility of the neutrality legislation and he wished
I would let it rest for a couple of days. I said I would
let it go over until Monday. And then I showed it to the
President and the President's reaction was just the same
(80 he said). But I think you ought to get it over as
long as they have asked us 80 often, but tell them if it
gets out you will deny it. So I said rather than send the
cable, what do you think if I tell Bewley verbally and tell
him if it gets out we will deny it. So he said, well, make
that suggestion to Mr. Hull.
(To Mr. Foley) Why don't we change the letter to

Mr. Jones and just send him the Attorney General's opinion;
not say anything about the proposed cable to Nutterworth.

Mr. Foley: All right. When I read it to him over

the phone he said O. K.

HM,Jr: I don't know whether I should call up Hull
then it
tonight or tomorrow. What do you think? Do you think
would be any great harm to wait until Monday? And
take it up Monday. Last couple of days with me he has
been, on the surface, terribly nice and why not let it go
until Monday and I will call him up Monday.
(Gave papers to Miss Chancey and said, "Hold everything
until Monday. )

Send it to the General Counsel of the R.F.C. (Gave that
back to Foley.)
(To Mr. Foley) The President wants us to look up and

336

-2-

see what 18 left, if anything, of the Director General
of Railroads besides the title. Have they all died?
Now here's the thought that Mr. Basil Harris has. Gosh!
He's a swell guy! He put up more questions than anybody
can answer. Got them all woozy, especially the Navy.
You see, during the war they had what they called

a permit system for railroads. In other words, you could
not ship a carload of anything to any port, I take it,
without getting a permit. Of course, what happened, everything got bogged down and then they did it. Now he has
brought this thing up. I want you to find out under what
kind of legislation
(Mr. McReynolds came in at this point.)

Dr. White: Wasn't the Secretary of the Treasury the
Director of the Railroads?

HM,Jr: Yes. I am Director General of the Railroads.
I told the President about Basil Harris raising the question

about the permit system and the President wanted us to look

up to see what was left, if anything, of the Railroad Administration.
What he is thinking of is how many freight cars we
would need in case of war, and 80 forth, and I raised the
question of the permit system. He does not want to take
over the railroads, but the permit system, it seems to me,
18 very important and what do we need?

Now the other thing the President raised. He said

when he was Assistant Secretary of the Navy he grabbed every
sea-going tug there was and sent them all down to Norfolk
and the next thing he knew Boston had no coal and he had to

get half of them back and if you are not careful the Navy

will do it again. She, he said, make an inventory of tugs.
That will be just down Basil Harris' alleys. I would love
to suggest one to him that he has not thought of. I will
raise the President one; I will include barges, both seagoing and harbor, coal barges and domestic and railroad
barges.

But this fellow! Gosh! He comes down here and

337
-3-

General Watson calls up all over -- what wharves are
allocated to the Navy and what to the Army and what to

private traffic? And then he said to the Admiral, Why
should the QUEEN MARY come into the Port of New York?
And Admiral Leahy says, Why not? He said, Well, suppose they sink her at Ambrose Channel. What would
happen to the Brooklyn Navy Yard? I would send it to
Boston or Montauk Point. So take the Paris and the
Normandie.

This whole question of police. He is just clicking. What I am thinking of doing -- I didn't have a

chance today. You can't say anything at Cabinet. Every
Cabinet member except Hull asked for a minute afterwards.

Hull said he did not want any time. I said, I guess you

have had yours.

But I have a fellow, Mr. Graves of the Union Pacific,

retired -- possibly somebody like that. But I am thinking
all the time in terms not in terms of the Treasury, but in
terms of what we can do to help the President and the first
is what is left of the Railroad Administration? What would
you have to do to ressurect it, after the President said, he
declared a national emergency?

Dr. White: Astudy of available and needed freight

cars has already been made.
HM,Jr: That was in terms of $80,000,000,000 income

and not in terms of war.

Dr. White: No. I think both. I think it was

being made by one of the men in the War Department.

HM,Jr: The thing -- it's just shocking.
Dr. White: They are not taking it seriously.
HM,Jr: What the hell are they taking seriously?
Mr. McReynolds: I think the Departments aretaking

it seriously; the problems that would come up in case of

hostilities. They are thinking of it locally, within

their own channels, but nobody has stopped to think what
would happen if something had to be done this afternoon.

In other words, they have not got it down to the point

338
-4-

Mr. Foley: You are much farther ahead in your
thinking than any of these other fellows.

HM,Jr: I will give you an example. We dig up

the war risk insurance.

Mr. Foley: Sure! I was thinking of that.
HM,Jr: Well, they find out -- the Maritime Commission finds I am interested 80 they go to work and
they quickly get a meeting and they are going to bring

it up before their Commission and maybe in ten days they

will have a bill, and will we help? In other words, they
have been studying it for years but have not even passed
a resolution in the Commission.

Mr. Foley: That's something that ought to be done
80 when it comes we have the legislation.
HM,Jr: I want things done, but I am not thinking
everything should be in the Treasury. As a matter of

fact, I don't want anything more than I have. I have
more than I can handle. I don't want to grab anything
off. But I do want to help the President and we will
just tick. For one thing, we have learned this: there
was a Harbor Commission or something like that -- one
that controlled the harbors and one that controlled the
railroads and the two things ought to be working together
and be set up and have these "trial runs".
You like Harris, Mac?
Mr. McReynolds: He's grand! I left him and Graves
together a while ago. They were having a grand time.

HM,Jr: Did you pick a fellow yet to help Harris?
Mr. McReynolds: No. I told him all the chores

he needed done, following up contacts with the Departments,
I would have Charlie Schoeneman do, because he knows the

Departments and he's a good contact man and totally reliable.
HM,Jr: You will have to dig up some new ones, because you will need have a dozen Charlie Schoenemans before
you are through.

Just so you boys don't get rusty! But this is fun!
000-000

o

339

April 20, 1939.
Secretary Morgenthau

E. H. Folay, Jr.

In accordance with your suggestion, I have drafted the

attached eable for Butterworth in reply to the British Government's

request for confirmation of our informal opinion as to the legal
authority of the RFC to make the proposed loans. This draft has
been approved over the telephone by Mr. Jones, and initialed by
Lochhead, White, Bernstein and me. Mr. Feis has informed Mr.

Lochhead that it will be necessary for him to clear the proposed
eable with the legal adviser to the State Department and with

the Secretary. Mr. Feis was of the impression that such clearance
could not be obtained before the Cabinet Meeting this afternoon.
However, he promised Mr. Lochhead to get in touch with him before
2 o'clock.

For your convenience, I am also attaching the cables referred

to in the attached draft and have marked in red the relevant portions.

Attachments

Typed 4/20 39

no copies made
of cable rejunets

in hant paragraph

(Initialed) B. y. P., Jr.

Suy inoth inis

maurial to cavenet

muling
inday
ah
a or

TREASURY DEPARTMENT

340

INTER OFFICE COMMUNICATION
DATE

April 20, 1939.
Secretary Morgenthau

E. H. Foley, Jr.

In accordance with your suggestion, I have drafted the
attached cable for Butterworth in reply to the British Government's

request for confirmation of our informal opinion as to the legal
authority of the RFC to make the proposed loans. This draft has
been approved over the telephone by Mr. Jones, and initialed by
Lochhead, White, Bernstein and me. Mr. Feis has informed Mr.

Lochhead that it will be necessary for him to clear the proposed
cable with the legal adviser to the State Department and with
the Secretary. Mr. Feis was of the impression that such clearance
could not be obtained before the Cabinet Meeting this afternoon.
However, he promised Mr. Lochhead to get in touch with him before
2 o' clock.

For your convenience, I am also attaching the cables referred

to in the attached draft and have marked in red the relevant portions.

E.N.7h
Attachments'

D
341

CABLE TO AMERICAN ENRASSY
LONDON

STRICTLY COMPIDENTIAL

FOR BUTTERMORTE FROM SECRETARY OF THE TREASURY

PLEASE CONVEY THE FOLLOWING TO THE BRITISH TREASURY

In answer to your cable No. 501 of April 17 and your cable NO 520
of April 19, Secretary of Treasury has been advised by Attorney General

that Department of Justice conours in the informal opinion of Treasury
councel expressed in our cable No. 263 of April 16 to the effect that
the Reconstruction Finance Corporation has the legal authority to make

loans to a corporation organized in this country and acting on behalf
of British Government in the event of war in Europe in which Great Britain
is one of the belligerents; such loans to be secured by British-owned
American securities requisitioned by the British Government and such

collateral to have a value in excess of any such loans: and that such
loans would not be prohibited by Johnson and Neutrality Acts and inter-

national law of neutrality. It should be pointed out that this is serely
the confirmation requested by the British Government as to our legal

authority to make a loan of this character.

Hits Typed 4/20/39

BK180
342

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

TO

FROM

April 20, 1939.

Secretary Morgenthau

Mr. Harris

This morning I saw Colonel Watson. He in turn arranged an appointment with Admiral Leahy, whom I saw in conjunction with Commander Hamilton

Bryan and another gentleman whose name I did not get. I discussed with

the Admiral quite fully the points which I thought were most important
and he then turned me over to Commander Bryan with whom I spent considerable
time, and also in the company of Commander DeBarbey.

I find that each person I talked with is well aware of the problems
and seriousness of his own particular field or department, but at the
present moment there does not seem to be any coordination of interests.

Not that there is any conflict, but apparently no one has thought it
necessary to draw these various interests into one cohesive unit.

I am working steadily on this and will have further to advise you
shortly. I now propose to return to New York this afternoon and to endeavor
to ascertain just how the Shipping Control Committee was set up during the
World War and how the General Operating Committee, which took care of the

inland railroad transportation end, functioned, and my present plans are
to return to Washington next Tuesday night and spend Wednesday and Thursday

here. Meanwhile, I can be reached at my office, 1 Broadway, New York,
telephone Digby 4-5800 or over the weekend at Rye, New York, telephone Rye 38.

343

see

4-18

Orig

attn

gents
opinion

on

Ryb
loan

344

April 20, 1939.

My dear Mr. Assorney General:

Receipt is acknowledged of your opinion

of April 19 relative to loans by the Reconstruction
Finance Corporation.

I approciate very such your promptness and
cooposation.

Very truly yours,
(Signed) H. Morgenthau, Jr.

an

Secretary.

The Honorable

The Attorney General.

Typed 4/2003

Ly And x

depar

345

Office of the Attorney General
Mashington,D.C.

April 19, 1939.

The Honorable

The Secretary of the Treasury.
My dear Mr. Secretary:

I have your letter of April 18 in which you say that with
the approval of the President you are conducting negotiations with
certain foreign governments as to courses of action which may be
adopted for the protection of our Government bond, security and commodity markets, etc., from the impact and consequences of a war in
Europe; and you further state that the President has asked you to ob-

tain my opinion as to the legality of the loan involved in the proDosal described by you as follows:
"One course of action which is under consideration involves the Reconstruction Finance Corporation
making loans to Great Britain or one of its agencies,

or a corporation acting on behalf of Great Britain,
in the event of a war in Europe and in which Great

Britain is one of the belligerents; such loans to be
secured by British-owned American securities to be
requisitioned by the British government, and such col-

lateral to have a value in excess of any such loan.

The purpose of such a loan would be to prevent such

liquidation or threat of liquidation of British-owned

American securities as would adversely affect our markets and our economy." "

The Johnson Act (48 Stat. 574), forbidding loans to foreign

governments in default on their obligations to the United States is in-

346

-2applicable by reason of the express provision in section 2 thereof,
excepting from its operation "a public corporation created by or pursuant to special authorization of Congress, or a corporation in which
the Government of the United States has or exercises a controlling interest through stock ownership or otherwise."

Section 3 of the Neutrality Act (50 Stat. 121, 123) makes it
unlawful for any person "to make any loan or extend any credit" to "the

government of any belligerent state * or of any person acting for or
on behalf of the government of any such state." The act defines "person"
as including corporations, and contains no express exception concerning

corporations owned and controlled by the United States. It is, nevertheless, a general rule that statutory provisions such as these do not
apply to the Government in the absence of language clearly indicating

an intention that they shall so apply--and I find no such language in
the Neutrality Act.
A corporation owned and controlled by the United States may
for some purposes be considered as an entity apart from the Government

and not fully endowed with the immunities of the Government, as pointed
out by the Supreme Court in Keifer and Keifer V. Reconstruction Finance

Corporation et al. (February 27, 1939); and it has also been declared

that "the rule of exclusion of the sovereign is less stringently applied
where the operation of the law is upon the agents or servants of the Gov-

erment rather than on the sovereign itself" (Nardone V. United States,

302 U.S. 379, 383). It is sufficient to say, without undertaking here
to analyze these opinions in detail, that the question now under con-

3-

347

sideration presents no such factors and extraneous evidences of prob-

able legislative intent as those relied upon by the Court in the cases
mentioned-one involving a claim of immunity of a Government-onned cor-

poration from suit, and the other involving a claim that the statute
forbidding wire tapping was inapplicable to the tapping of wires by a
Federal agent.

Furthermore, it is an important and persuasive factor that the
Neutrality Act was not really purposed to forbid governmental transac-

tions wholly foreign in purpose and in ultimate result to loans of the
character contemplated by the Congress when the act was passed.

I therefore concur in the conclusion of the Acting General
Counsel of your Department, as set forth in the opinion submitted with

your letter, that the plan described is not forbidden by the Johnson

Act or by the Neutrality Act; and for like reasons I conour in his conclusion that the proposed transactions, although partaking of the form

of loans, do not represent a voluntary extension of aid to a belligerent

under the rules of international law relating to breach of neutrality.
The Acting General Counsel has also concluded that the Recon-

struction Finance Corporation is authorized to make the loans contemplated

under its general authority to make loans "to aid in financing agriculture,
commerce, and industry, including facilitating the exportation of agricultural and other products" (U.S.C., title 15, sec. 605), and the General
Counsel of the Reconstruction Finance Corporation in an opinion trans-

mitted to you by the Chairman indicates his concurrence, provided (as
stated by the Chairman in his letter to you) "the loans are made to domes-

348

tic corporations not up for that purpose." I concur in this conclusion.
Respectfully,

Transmently
Attorney General.

349

April 20, 1939
11:55 a.m.

HMJr:

Hello.

Operator:

Congressman Doughton is not in the office but she's
going to locate him and have him call you.

HMJr:

Thank you.

0:

You're welcome.
11:57 a.m.

HMJr:

Hello.

Operator:

Congressman Doughton.

HMJr:

Hello.

Robert
Doughton:

All right, Mr. Secretary.

HMJr:

How are you?

D:

HMJr:
D:

First rate, thank you. I hope you got entirely well.
I'm feeling pretty well. And you?
Yeah, I feel excellent, thank you.

HMJr:

Your voice sounds strong.

D:

How's that?

HMJr:

Your voice sounds strong.

D:

Yeah, I'm all right. I've never felt better. I went

my -- I had a mean attack of the flu and bronchitis,
you know, but I've thrown it entirely off and feeling
good.
HMJr:

How's Mrs. Doughton?

D:

Well, she's much better thank you. She appreciated
those flowers and those fine messages from Mrs.

Morgenthau.
HMJr:

Yeah. Well, she was.....

-2D:

350

She's still in bed, but I think she'11 be out now in

a few days.
HMJr:

Well that's nice.

D:

Yeah. Thank you.

HMJr:

You've had more than your share of sickness, haven't
you?

D:

How's that?

HMJr:

You've had more than your share of sickness.

D:

HMJr:

It looks like we've been pretty heavily loaded with it
for the last few months, yes.
Bob, when do you think you're going to get your decks clear
for me?

D:

Well, I would think, Mr. Secretary, that we will be at
least three weeks getting that bill through the House.
Now that's my opinion - it's a mean bill to handle,
that Social Security, you know.

HMJr:
D:

Yes.

It's a headache and a backache and a jawache and a
toothache and a earache and a bellyache and all.

HMJr:

(Laughter)

D:

Yeah.

HMJr:

Well now, I've got a calendar here before me and it's

D:

Yes.

HMJr:

When do you think you'd start hearings on a tax bill?

D:

Well, I couldn't tell you yet.

HMJr:

Well, I mean

D:

the 20th of April. Hello--

Approximately I'd think -- say the 10th to the 15th
of May.

HMJr:

The 10th or 15th of May?

-3351
D:

Yeah.

HMJr:

That would be the earliest?

D:

I believe so. I'm going to try my best, but I believe

that would be as safe -- as near as we could safely
estimate.
HMJr:
D:

The 10th to the 15th.
Yeah, but we'd be ready to confer with you, a few
of us, 80 any time

HMJr:

Yeah.

D:

If we have to confer some evening or sometime.

HMJr:

But actually -- I mean, my public appearance up there
would not -- the earliest would be between the 10th
and 15th.

D:

That's the best impression I've got now. If I can
revise that any I'll let you know.

HMJr:

Well

D:

How are you getting along about getting your program
in shape 80 that it'11 come up from down there with

united support of your -- all your people that are
interested in it?

HMJr:

Well, I'm -- I'm to come up -- I'm not quite ready yet,
Bob.

D:

Well, I knew there's some things that need to be ironed
out.

HMJr:

Yeah. But I -- I'm spending an awful lot of time on it.

D:

Well......

HMJr:

And I've never worked any harder on anything than I've
worked on this.

D:

Well

HMJr:

And

D:

that's fine. Anytime you can use me about anything
now I'm ready with you to help you.

-4 HMJr:

Well, nothing could be fairer.

D:

If I can get to it.

HMJr:

Nothing could be fairer.

D:

Yeah.

HMJr:
D:

HMJr:

352

Well, we'll -- let's keep in touch with each other.
Yeah. That's -- that's fine, and you -- I guess
that'11 -- that's the next thing we want to take up
now.

Yeah. Well -- well, I'll -- I'll be ready whenever you
are.

D:

HMJr:
D:

All right.
In fact, I'm looking forward to coming up there.
If you want to have any preliminary discussion about
it before we even ask you to come, why we'll be at --

be at -- at your call.

HMJr:

O. K.

D:

All right.

HMJr:

Thank you.

D:

Thank you very much. Good bye.

HMJr:

Good bye.

353

April 20, 1939
4:27 p.m.

HMJr:

Hello.

Allan
Sproul:

Hello, Mr. Secretary.

HMJr:
S:

HMJr:
S:

Hello. What's your worry today?

None. There's nothing at all.
Good 1

The market is on the strong side again with not a great

deal doing.
HMJr:

Yeah.

S:

We were able to sell two million more of those 41's

so we've now sold eight million of the fifteens for

which we have authority.
HMJr:
S:

HMJr:
S:

Good 1

The market has been taking them on after the first sale
which knocked it off a point. They've been taking it
on without any price concession.
Uh-huh.

So I think it's in very good shape and that transaction
is going ahead all right.

HMJr:

You sold two more today.

S:

Yeah.

HMJr:

Well that's -- makes eight in all.

S:

Eight out of the fifteen which we are now working on.

HMJr:

Fine. And they're taking it nicely?

S:

Yes.

HMJr:

So this call you just wanted to be a little sociable,

huh?
S:

That's all.

354

-2HMJr:
S:

What are you, lonesome up there?

No, not exactly. When we got through with our directors

and -- sort of a let-down, as you say. I wanted to talk
to someone.

HMJr:

All right. Well, that's nice. I -- I feel complimented.

S:

(Laughter).

HMJr:

All right. Keep up the good work.

S:

All right. We'll keep right on with it and let you
know how we -- as we go along.

HMJr:

O. K. Thank you for calling.

S:

All right.

HMJr:

Good bye.

355
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

April 20, 1939, 6 p.m.

NO1 793
FROM COCHRAN.

Considerable sterling was gained by French control

this afternoon, with very quiet Paris exchange market.
The more cheerful atmosphere resulting from calmer views

of international situation caused advance in French
rentes and shares. However, French business is prac-

tically at a standstill, with not much except foodstuffs
being sold in retail stores.
April 13 statement of the Bank of France showed that

circulation was up one and three quarters billion francs.
Coverage was down to 62.35 from 62.75. The belga continues weak, with nervousness apparently coming from

the Belgians themselves who are exporting capital they

hold; therefore in Brussels money is tight.
Today there was a cablegram from New York published
in AGENCE ECONOMIQUE with regard to the regulation of

markets in the United States in case a war breaks out.

It stated that:
"It is generally admitted that the great
publicity given to the official conferences
was done more with the intention of reassuring
the public than with that of formulating a
preestablished action".

BULLITT.

EA:LWW

N6-

356

MISC, 11 60M 1038

88(e)

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
TO

FROM

CONFIDENTIAL FILES

L. W. Knoke

DATE April 20, 1939.
SUBJECT TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

Mr. Hawker called at 12:45 today. He was anxious to
know whether the Queen Mary would arrive today and the proceeds of

the gold shipped on her by the Bank of England be credited to

their account today. After checking with the foreign department
I assured Mr. Hawker that the gold was now on the way to the Assay

Office and proceeds would be definitely available to the Bank of
England today.

They had had another fairly bad day, Hawker continued,
having sold about $10,000,000 on balance. 011 and tobacco companies

had been steady buyers for awhile now, acquiring from $2,000,000 to
$4,000,000 per day - so-called commercial requirements. The Dutch,
he thought, had been losing at the rate of $500,000 to $1,000,000

a day this week, the Belgians at the rate of £500,000 to £750,000 a
day, but today £1,000,000. The Swiss franc's undertone had been weak

the French franc firm, with the French gaining from £250,000 to
£500,000 a day.

and IS.ASA.
thinks sat In
SAI K technical

Noted

F. Dietric

357

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

Mr. Foley, Acting General Counsel
FROM

APR 21 1930

Mr. Tietjens, Acting Assistant General Counsel

Re: Government operation of railroads in
time of war.

During the World War operation of the railroads was assumed by
the United States Government pursuant to the authority contained in
a provision of section 1 of the Army Appropriation Act, approved

August 29, 1916 (U.S.C. title 10, sec. 1361), which is still in effect and, as it appears in the Code, provides as follows:

"The President, in time of war, is empowered,
through the Secretary of War, to take possession and
assume control of any system or systems of transpor-

tation, or any part thereof, and to utilize the same,
to the exclusion as far as may be necessary of all

traffic thereon, for the transfer or transportation

of troops, war material and equipment, or for such
other purposes connected with the emergency as may

be needful or desirable."

Pursuant to the foregoing authority, the President by Proclamation
of December 26, 1917 (No. 1419) took over the operation of the railroads
and provided that control and operation should be exercised by and
through William G. McAdoo, who by the Proclamation was appointed and

designated Director General of Railroads.
Shortly thereafter Congress passed the so-called Federal Control
Act, approved March 21, 1918 (40 Stat. 431). This Act covered such
things as compensation to be paid to owners of the railroads, taxation,
maintenance, repairs and depreciation, claims against the carriers,

dividends, issue of securities, fixing of rates, penalties for violations

of the Act, and the establishment of a revolving fund composed of appropriations by Congress to pay the expenses of Federal control, and to make
advances to carriers for additions, betterments, and extensions.
Section 8 of the Federal Control Act provided that the powers conferred on the President by the Act could be executed by him through such
agencies as he might determine. By Proclamation, dated March 29, 1918

358
2-

(No. 1438), the President authorized William G. McAdoo, Director General
of Railroads, to cxercise the powers and duties which the President was
authorized to do and perform under the Federal Control Act. Walter D.
Hines succeeded William G. McAdoo as Director General of Railroads purswant to a Proclamation, dated January 10, 1919 (No. 1507).

Termination of Federal control of the railroads on March 1, 1920
was provided for by the Transportation Act, 1920, approved on February 28,
1920 (41 Stat. 456). The Transportation Act, 1920, provided rather extensive provisions for winding up all matters and disputes arising out
of or incident to Federal control and provided that within a period of
two years from the time of passage of the Transportation Act causes of
action arising from the Federal operation might be brought against an
agent designated by the President for that purpose. By Broclamation of
March 11, 1920 (No. 1559), Walter D. Hines, Director General of Railroads, and his successor in office, was designated as the agent against
whom such suits might be brought.

In view of the disrupted financial condition in which the various
railroads found themselves at the end of the war, the Transportation Act,
1920, contained broad authority for the Government to make loans to help

rehabilitate the carriers. There is still owing to the Government under
sections 207 and 210 of the Transportation Act, 1920, a total of approximately $40,000,000 principal and accrued interest, which the Treasury
Department is attempting to collect.
The office of Director General of Railroads has been continued up

to the present for the purpose of liquidating the various items result-

ing from Federal control. Since the appointment of Andrew Mellon as
Director General of Railroads by Proclamation of December 14, 1925
(No. 1760) the various Secretaries of the Treasury have served as Director General of Railroads. Mr. Morgenthau was appointed Director General of Railroads by a Proclamation, dated February 7, 1934 (No. 2074),
and was appointed as the agent provided for in section 206 of the Transportation Act, 1920 by another Proclamation of the same date (No. 2075).
Mr. Morgenthau, as Director General of Railroads, by an order, dated
March 2, 1937, designated Messrs. D. W. Bell, E. F. Bartelt and Maurice

Collins as Assistants to the Director General of Railroads. It appears
that at a later date W. T. Heffelfinger became an Assistant in place of

Maurice Collins.

In view of the countless difficulties involved in Government operation of the railroads during the World War and the disrupted condition in
which the carriers found themselves after the War, if it is contemplated
that the railroads are to be operated by the Government if and when another
war comes, steps should be taken now to prepare a comprehensive law cover-

359

-3 ing such operation. The drafting of such a law would require the

assistance of experts in the field of railroad administration. The
least that should be done at this date is to canvass various officials for constructive ideas along this line.

nor

FEDERAL RESERVE BANK

360

OF NEW YORK
April 21, 1959
Dear Mr. Secretary:

The only sizable piece of corporate financing to reach the market
during the past week was the public offering at $112.50 of 223,063 shares of

4 1/2 per cent cumulative preferred stock of the Consolidated Gas, Electric
Light, and Power Company of Baltimore. This offering, amounting to about
$25,095,000, was originally scheduled for last week, but was delayed because

of market uncertainty generated by unsettled conditions abroad. Sale of the
issue to the public is subject to the exchange rights offered to stockholders

of outstanding 5 per cent preferred stock, and in view of the fact that the
5 per cent stock will be redeemed at $110 a share, as against the offering price
of $112.50 on the new shares, it is expected that a substantial amount of the

new stock will be taken by the holders of the outstanding preferred. It is
felt that whatever part of the issue remains, after the subscription rights
expire on April 21, will be easily distributed. There was also an offering of
$1,545,000 of Jamaica Water Supply Company $5 cumulative preferred stock during

the week, which presumably was entirely sold on the day of issue.
The large contemplated refunding offering of the Gatineau Power
Company, a Canadian corporation, was again postponed and is now expected to

reach the market next week. Also scheduled for the coming week, international

conditions permitting, is the National Steel Corporation offering, consisting of
$50,000,000 of first mortgage bonds of 1965 and $15,000,000 of serial notes of
1940-1949, most of which is for refunding purposes.

-2-

Secretary Morgenthau

4-21-39

FEDERAL RESERVE BANK OF NEW YORK

38

In the municipal field, $20,000,000 of New York State 1 3/4 per cent 361
serial bonds maturing 1940 to 1979 were awarded on April 18 at a net interest

cost of 1.7398 per cent, a new record low. (It is felt, in the market, that
these bonds offer a good test of the value, in terms of the interest rate, of the
tax exemption privilege, when their yield is compared with yields on Treasury
bonds of similar maturities.) These bonds were subsequently reoffered at prices

to yield 0.20 to 1.85 per cent, depending upon maturity. Nearly three-quarters
of the issue was reported to have been disposed of on the first day, but the
remainder, consisting mainly of the intermediate maturities, is moving rather
slowly. Other municipal bond awards during the week totaled $8,500,000, of which
$7,500,000 was for new capital.

With the possible exception of the award of $17,500,000 of Port of
New York Authority bonds, which was held up last week pending more favorable

conditions, no large municipal offerings are expected in the coming week.

Yours faithfully,

Alian Spreal,

First Vice President.

Hon. Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D. C.

382
PERSONAL AND CONFIDENTIAL

April 21, 1939.

When I appeared before this Committee on March 24th,

I said that the Treasury would soon be ready to submit its
recommendations for changes in the tax system. Your
Chairman, Representative Doughton, together with Senator
Harrison, has expressed a desire to receive our recommenda-

tions in time for consideration at this session of Congress.
In my statement today I desire to place chief emphasis

on the role of fiscal policy in business recovery.
We must rely upon the private enterprise of our country
to produce most of our national income and to provide most

of our employment. We have all the physical essentials of
economic prosperity - resources, labor, capital, managerial
ability, and a vast domestic market. Although our progress
from the bottom of the depression has been great, we are still
in a period of incomplete business recovery with an inadequate
national income and a large volume of unemployment. An

important contributing factor has undoubtedly been the

international economic and political situation. Reduced
world trade and fear of war are a drag on our industrial

enterprise. Unfortunately, however, the international
situation is largely beyond our control. We must find such
solution as we can in our own domestic economy.

363

-2-

It is highly important that we increase national income
and decrease unemployment. Not only our material well-being

is at stake -- the future of our system of government rests
largely on the success with which we solve our economic

problems. As Secretary of the Treasury, I want to discharge

my duty and leave no stone unturned in the fiscal field that
might contribute to complete recovery and continued prosperity.
As I said in November 1937, "The basic need of today is

to foster the full application of the driving force of private
capital." One of the obstacles to long-term commitments in
private enterprise seems to be an uncertainty over the general
fiscal policy of the government. Almost everyone believes
that the budget must be balanced eventually, and, moreover,

evidently believes that it cannot be done without cutting

the expenditure program, or, if this fails, increasing tax
rates. So long as there is no firm indication of when or
how the balance is to be achieved, investors will be uncertain
what taxes will be imposed or what expenditures will be
decreased, and consequently their own business plans remain
uncertain.

There is, to be sure, no inherent reason why taxes must
exactly balance expenditures each year any more than each

month or each week. In periods of temporary depression it

364

-3- -

is inevitable that there will be deficits. Revenue decline
and expenditures increase too rapidly to make possible
immediate achievement of a balance by tax increases. Relief
must be given to human needs caused by the depression. In

such times, furthermore, it may be justifiable to incur a
fiscal deficit for the sake of the stimulus which the spending
of newly created money may give to business activity.

If the deficit is long-continued, however, the depressive
effects of uncertainty increasingly tend to nullify the stimulus
of the spending. Furthermore, a necessary sequel to deficits
in depression is that in years of very active business an
excess of taxes above current expenditures should be collected

and applied to reducing the public debt. In this way the
government can be prepared for the strain of new emergencies

without the burden of high taxes for debt service.

Fiscal deficits are thus defensible only if they are
followed within a few years by substantial surpluses and only

if they are the result of a carefully formulated program
announced in enough detail to remove major uncertainties and

fears concerning fiscal policy.
I wish to be completely realistic about this matter of
fiscal policy. Balancing the budget this year or next appears
to be impossible. Without attempting to forecast what action

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-4- -

Congress will take, I think it is abundantly clear that the
appropriations will be vastly in excess of anticipated
revenues. Furthermore, the formulation and adoption of a

financial plan pointing clearly to a balanced budget in a

later year will not be easy. Although the existing tax
system is a powerful one and in years of high business
activity may produce sufficient revenue to meet expenditures,

there is no reasonable prospect that it will enable us to
reduce the public debt substantially in such years.
Consequently, if higher taxes are to be avoided, the total
of expenditures must be sharply lowered.
To reach the goal in this way, we must force ourselves

to realize how difficult will be the task of getting a net
reduction in expenditures. The present task is doubly
difficult because a large and growing part of our expendi-

tures is controlled by forces entirely outside our power.
I refer to the armaments race abroad and its inevitable
reaction on our own expenditures for defense. The German

366

- -5 -

national government has been devoting from 40 to 60 percent

of its total outlays in the last few years to armaments.
Great Britain has recently departed from a long-established
tradition of annually balanced budgets and in the fiscal
year 1940 is spending 1580 million on armaments, most of

which, 1352 million is to be borrowed money. Forty-three
percent of the French budget in 1939 is for the same

kind of expenditure. In Italy, 50 percent of the 1939
national budget is to be devoted to this purpose.

367

-6-

It is not easy to grasp at once the full implications that
these facts carry for our own budget. While we fortunately
need not go to such extremes, we cannot avoid going part

way; and that in turn means that we must stint ourselves

on other expenditures if we are to maintain fiscal sanity

in a fiscally desperate world. We are in the position of a
family whose house is suddenly threatened by a hurricane.

The efforts and financial resources of the family must first
of all be devoted to strengthening the shelter against the
storm for which they are not responsible and which they

cannot control. As a result, many of the luxuries of life
must be foregone for the time being, and there may have to be
curtailment of what are normally considered necessities.

The alternative is one that, I take it, we cannot consider:

fiscal irresponsibility, and a failure to look beyond the
next month or next year.
The minimum needs for recovery and relief depend on

business conditions. Expenditures for these purposes can
decline as recovery proceeds. On the other hand, even in
such a period we must expect a perfectly understandable

pressure for a number of other worthy expenditures having

nothing to do with national defense or relief.

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-7-

Finally, it is desirable to keep in touch with reality
by reminding ourselves that any chance of budget balancing
over the long term through expenditure reduction involves

a reduction on the order, not of a few hundred million
dollars a year but of more -- perhaps appreciably more --

than a billion dollars a year.
I emphasize these points, not to indicate any feeling
that a sound fiscal goal through reduction of the expenditure
total is beyond our reach, but to emphasize my belief that

a definite policy and firm resolution to give effect to it
are necessary. If Congress should, however, find it
undesirable to reduce expenditures sufficiently to reach that
goal, there would remain, in my opinion, but one alternative
-- increased taxes. The points at which, apparently, any
such increases might best be made will be indicated in a later

portion of my statement, dealing specifically with taxation.

I should like to make it clear, however, that I think the
preferable way to carry out the general fiscal policy is
through a reduction in the total of expenditures, and that

the time has arrived to take the first steps in this direction.
Every proposed expenditure, without exception, should be

scrutinized with the general fiscal policy in mind.

-8- -

Mere talk of such scrutiny, of a definite policy and

a firm resolution, is not in itself likely to give our
economy the reassurance it needs. The real encouragement
will come when a plan has been adopted that the community

recognizes to be realistic. The Congress will know what
mechanism is best suited to the development of such a plan.
As far as I know, the committees charged with considering
appropriations and revenues work independently of each

other. I know from conversations with many of you that

the lack of consultation makes it difficult to bring about
the objective that both you and I desire. A method that
might well be of assistance would be for the Ways and Means
and Appropriations Committees of this House, and the
Finance and Appropriations Committees of the Senate to
meet each session as a Joint Committee on Fiscal Policy

to consider the overall aspects of the expenditures and
revenue programs. In this way each expenditure proposal

could be compared with all others in the light of the
total resources available. I understand that a method
similar to this joint-committee suggestion has been in
successful use in the State of Wisconsin for a quarter of a
century. Another method of value would be to follow the

procedure that no tax bill shall be brought up until the

369

370
-

last appropriation bill has been passed. This method,
believe, is in use with good results in Sweden. 1/

Thus far I have been dealing with the fiscal policy of
the Federal Government alone. There is, however, another
highly important problem which concerns both the Federal
and the State Governments. We should bear in mind that

more than half the total of tax revenues is collected by
State and local government s. There is no unity or ordered
relationship between the Federal fiscal system and the State

and local fiscal systems. Overlapping taxes have grown in
number and size as both Federal and State Governments have

sought new revenue. Grants-in-aid are being demanded of

the Federal Government in increasing amounts. The results

of our anarchic fiscal situation have become increasingly
unsatisfactory to both the State Governments and the Federal
Government, and are becoming intolerable to many taxpayers.
There has been much consideration of how order can be

introduced into the Federal-State fiscal picture. For
example, the Treasury Department has been studying aspects

of the problem for several years. It is, however, a problem
of such great scope that special methods will be required
for substantial accomplishment. A suggestion that has merit
1/ Footnote to be checked.

I

- 10 -

is for Congress to create a small, temporary national commission.
Such a commission should be made up of men having the highest

possible level of ability and public confidence and representing
not the Federal, State and local governments as such, but the

national interest at large. Their function would be to study
intergovernmental fiscal policy in its many ramifications and
report to Congress, perhaps in two years. I suggest that
Congress create such a commission at this session.

I pass now from the problems of general fiscal policy to
those of taxation.
Some people say that the way to stimulate business is to
cut taxes. That would be an easy and popular thing to do and

I should like to be able to agree with it, but I must instead
condemn it with all my strength. A country that is facing the
deficit that we face and that has been passing through a
series of deficits, as we have, should not even consider such
a move. Its adoption would convince everyone that there was no

intention of ever balancing the budget.
This does not mean that no changes should be made in the

present tax system. On the contrary, there appear to be at
least four general ways in which obstacles to business enterprise
might be removed by shifts in tax burdens that would not reduce
revenues and would be fundamentally sound.

371

372

- 11 -

(1) The first way is to make the chances for
profit in new and therefore venturesome undertakings
greater than they now are. Our present tax system,

especially in the income tax, contains features which
operate against new enterprise. There are a number of

these which might be altered with, in my opinion, an
increase in equity. Future issues of government obligations, Federal, State, and local, might be made fully
taxable under the income tax. The Treasury Department
has already recommended this action. Allowance might

be made for business losses to be carried forward and

offset against income in future years. Corporations
might be allowed to deduct capital losses from their
ordinary income. Somewhat greater deduction of

capital losses, perhaps in the carry-forward provisions,
might be allowed individuals. Tax penalties on the
issuance of capital stock as compared to the issuance
of bonds might be removed through elimination of

the capital stock and excess profits taxes and a

substantial dividend credit to individuals. The top
rates in the individual surtax schedule might be

reduced. I shall not discuss these features in

373
- 12 -

detail. If you are interested in further information
concerning them, or any other aspects of this statement,

my staff and I are prepared to furnish it and will be
happy to work with you to the extent you may desire.
(2) A second way in which to make our tax laws

less of an obstacle to investment and business

expansion is to avoid taxation of a kind that may

impair a business firm's working capital -- a result
that may occur when the firm is operating at a loss
or is trying to make good a cash drain caused by
recent losses. Some examples of changes which would

operate in this direction are: elimination of the
capital stock tax; allowance of a business loss

carryover to future years; increase in the deducti-

bility of capital losses by corporations and of
capital losses in general.
(3) Other changes that would help business are

those which lessen the complexity of the tax

structure. A highly productive tax system such as

ours cannot be very simple if it is to be equitable
and not excessively burdensome at any point.
However, we can continue to move towards simplicity

- 13 -

in both administration and legislation. I believe
the current decentralization of the operations of
the Bureau of Internal Revenue to permit tax

differences to be settled close to the taxpayer's
residence is an administrative move in that

direction.
(4) A major legislative move in the same direction

would be to substitute a single corporation tax on
net income for the four different corporation taxes
now imposed. These corporation taxes are a capital

stock tax and an excess profits tax enacted in 1932,

a remnant of the 1936 undistributed profits tax,
and the ordinary income tax. The capital stock tax
is not based on the actual value of a company nor

is the excess profits tax actually a tax on excess

profits. Both depend largely on the ability of
management to forecast profits. In its present form,

the undistributed profits tax is ineffective but is,
unduly I think, resented. The corporation tax system

would be greatly simplified, its justice measurably
increased and the burden on new and uncertain

enterprise diminished, if all four taxes were consolidated into a single flat tax on corporate incomes
with some concession in rate to corporations having
less than perhaps $25,000 net income.

374

- 14 -

In the previous section I have discussed the types of
change in the tax system that would remove obstacles to

enterprise. Since most of those changes will reduce the
revenue-producing power of the system, we must find ways

of replacing the lost revenue. Furthermore, if additional
taxes should prove to be necessary due to an insufficient.
reduction in the expenditure program, they should be imposed

in ways that would be equitable and would have the least

harmful effects on business. I suggest the following brief
summary of methods for your consideration.
(1) Certain changes that would increase
revenues should be made in any event because of

their effects on tax equity. Excessive depletion
deductions for oil and gas wells and certain
types of mines should be eliminated. As the
Treasury has often pointed out, a large amount
of revenue can be recovered by closing this

loophole. The capital gains tax rates on individuals might well be brought closer to the rates
on other incomes. This could be done without
substantial discouragement to investment, provided
the capital loss deductions were made more generous,

375

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as previously mentioned. A desirable change that

would increase the revenue for the future is to

coordinate the estate and gift taxes into one tax.
(2) The revenue lost owing to adjustments in
taxes on corporations could properly be replaced by

increases in the corporation income tax rate, while
revenue lost due to adjustments in taxes on

individuals could be replaced by increases in the

individual income tax rates, particularly in the
middle surtax brackets.

(3) If additional revenues are needed, the
least discouraging effect on business would probably

result from further rate increases in the middle
brackets of the personal income tax and the estate
and gift taxes, accompanied by a reduction in the

exemption for estate and gift taxes and elimination
of the $40,000 insurance allowance for the estate

tax. In view of present business conditions the
economic impact of any such increases should be

postponed for a year or so. This postponement

will come almost automatically for the estate tax,
owing to the long period of time allowed for
payment, but for the income tax some special provisions might be desirable.

376

377
- 16 -

I think we should continually have in mind that as a

general principle of fairness, we ought to increase the
proportionate part played by direct taxes that can take account
of individual differences in the power to support government.
The chief examples of such taxes are the individual income and

estate and gift taxes. The Federal reliance on such taxes
should be especially great since State and local governments are

not able to use them nearly as effectively as is the Federal
Government. We should look forward eventually to eliminating
from our Federal tax system the manufacturers' excises and,
with two or three important exceptions, other miscellaneous

excise taxes that tend to be shifted directly to consumers.
However, in view of the present revenue needs of the government

and the fact that these taxes have been in operation long enough
so that the businesses affected have in general become adjusted

to them, I recommend that they be continued at this time.
In discussing what revenue sources are most desirable --

or least undesirable -- I have spoken as if we had free choice
between good tax measures and bad tax measures. To some extent

we do have it, but as we seek more and more revenue, the choice

becomes increasingly restricted. Already we have less real
choice than we are apt to realize. Any tax, however good, if
pressed too far, becomes unduly burdensome or goes beyond the

378
- 17 -

point of maximum revenue, or both. It will be a serious matter

if we have employed our taxes so fully that virtually all
considerations of fairness and effects on business must give way

in order that every feasible tax may be used to its practicable
limit.
In this statement I have discussed four matters which seem

to me to be of very great importance. The first related to the
imperative desirability of planning expenditures to the end that
the Federal budget may be really balanced within the next few
years, and suggested some means for attaining this end. The
second related to Federal-State fiscal relations and suggested
a commission as the most promising method of solving the complex

problems involved. The third suggested changes in taxation that
would remove specific burdens on enterprise; while the fourth
indicated the possible sources of replacement revenue and of new

revenue if it should prove essential.

In closing, I should like to stress that if we are to give
businessmen the reassurance necessary to remove obstacles to

investment and expansion, it will be necessary to go beyond a

few specific measures that may remedy points of local irritation.
These are important, but it is even more important to approach

the problem of fiscal policy from the broad viewpoint and to lay

379

- 18 -

down a well-defined plan leading towards a balanced budget.

Only then will the basic fiscal deterrent to business be
removed. Unemployment and lack of investment are doubtless

traceable to many things besides fiscal matters, and there
can hence be no assurance that a sound fiscal policy alone

will bring complete recovery, but without such a policy the
chances for recovery are materially lessened.

April 21, 1939.

GROUP MEETING

Present:

380

9:30 a. m.

Mr. Hanes

Mr. Bell

Mr. McReynolds
Mr. Gibbons
Mr. Graves

Mr. Duffield

Miss Chauncey

Mr. Foley
Mr. Gaston
Mr. White

Mrs. Klotz

Mr. Lochhead
Mr. Haas

H.M.Jr:

When are you fellows going to see me on reorgan-

ization? I'm going to leave around noon.

McReynolds: I don't know, but I find out from the Budget Bureau
that they are not going to dispose of these bureaus
as a matter of this week end.
H.M.Jr:

Tell that to Hanes.

McReynolds: I find out from the Budget Bureau that they are not

planning to dispose of the reorganization memorandum
this week end.

H.M.Jr:

Well, when you're talking - you two guys (McReynolds

and Bell) talk about that. Did you (Hanes) hear
what he said?

Hanes:

I didn't get the last part.

McReynolds: I say they are not planning to dispose of the reorganization memoranda this week end, as they had

intended. That's the last information I get.

H.M.Jr:

You don't get the impact of this, do you?

Hanes:

No, I don't.

H.M.Jr:

The impact of this means that Mac can play golf
tomorrow.

McReynolds: What do you mean tomorrow?

Bell:

This afternoon.

Hanes:

Mac, you were counting on his going at 9:30 this

morning, weren't you?

-2H.M.Jr:

381

Everybody has beer trying to find out when I'm
leaving, and it's almost like the tax story it's almost as hard - a cloud has descended on
the Treasury.

Hanes:

Have you changed your mind?

(hearty laughter)
McReynolds: I don't know where Herbert is, but
Hanes:

Herbert thought you were going at daybreak.

McReynolds: I think Herbert, Dan and I had planned for the
afternoon. We weren't sanguine enough to believe
you would leave at 9:30 this morning.
H.M.Jr:

The plane was only ordered for 10:00.

Hanes:

Mr. Kieley said he had the automobile ordered for

H.M.Jr:

Most unpopular man in the Treasury on Friday.

Springfield at 9:30 this morning.

You two gents (Lochhead and White) have something

for me, if you can, by Monday. Now, Mr. Welles
is coming in Monday at 10:30 with a whole group
on Nicaragua, and if Archie and Harry and you
(Hanes) will see me at 10:15 and at least tell

me what it's all about.
White:

Nicaragua.

H.M.Jr:

I mean they're bringing a big group - Export-

Import

White:

Want Foley?

H.M.Jr:

Foley, yes. Evidently Welles isn't satisfied. He
wrote me a formal letter about it. Give these
people copies of that formal letter from Welles
on

Chauncey:

On

H.M.Jr:

On Nicaragua. Mrs. Klotz has it. She has it.

?

She's coming in Monday. Then we might as well do
Bolivia at the same time.
White:

First I've heard of Bolivia.

-3H.M.Jr:

382

Lochhead:

Well, it's just - I just handed it to you.
It's Colombia, isn't it?

H.M.Jr:

Colombia.

White:

Guess I've heard of that too. Then Argentine is

not coming - going to come up Monday?
H.M.Jr:

Well, I'm going to bring it up.

White:

Monday?

H.M.Jr:

Yes.

White:

We'd like to have something for you before you
bring up Argentine.

H.M.Jr:

Evidently you haven't been talking to Archie on
the Argentine. Will you get together on the
Argentine?

White:

Colombia and Nicaragua.

Lochhead:

Taking all the South Americans that have seaports
for Monday; leave Bolivia

White:

If you can postpone the Argentine for another day

H.M.Jr:

or two, until we can get
It's been postponed plenty. After you read the
telephone conversation, you'll see. I sit down
next to Espil the other night and I say, "I think
it's fine that your financial attache came in and
talked to me. We're waiting to hear from them.
Glad to see him. We're waiting to talk business."
He said, "Huh?"

I repeated. He said, "Huh? Was he in to see you?

I've got to tell you, I'm terribly embarrassed.
He hasn't reported the conversation. I didn't
know he had been in to see you."

So I said, "Well, why don't you cooperate the way
we do in Washington? Everybody let's the other
fellow know."
McReynolds: Sometimes.

-4H.M.Jr:

383

Did you see the latest? You may not have seen that.
(hands a newspaper clipping to Hanes)

Hanes:

Barney Kilgore called me up yesterday and told me

that it was all over the place, that the news
fellows all had it.
H.M.Jr:

Jesse Jones for Secretary of Commerce and Harry

Bell:

I expect that's the only way they could hold R.F.C.

for Secretary of Navy.

and Commerce together.

H.M.Jr:

Well, its all right. As I said yesterday, I can't
argue with ghosts.

Johnny, got anything?
Hanes:

No, I haven't anything this morning.

Duffield:

Nothing.

White:

This is the letter here from the American Farm
Bureau Federation. They did a very nice job,

much better than appeared from the way they taxed
that other thing and the statement they made.
H.M.Jr:

I'd like to take it with me.

White:

Yes.

Then here is - you asked for a report on this
"Economic Program for American Democracy" by
this man from England.

And here is a report on Vice President Garner's
request that you asked about.
H.M.Jr:

How many delegates has he got?

White:

He won't get any on this report.
All right. The American Farm Bureau thing I'd
like to takewith me.

H.M.Jr:

Where is everybody today? God, these fellows can't

take it the way I can.

(on phone) Find out whether Mr. Gaston and Mr. Foley

are sick. I'd like to know. Please.

5White:

H.M.Jr:
White:

H.M.Jr:

384

I think that this - if you get a chance to look
at
some
this report, first four or five pages
would
be of
helpful.
I'm taking some light reading matter with me.

Parts of it are light.
I'm going to read "Disputed Passage" first, so

I don't know whether I'll get to that.

Haas:

Eight hundred pages - by Douglas.

White:

That's all I have.

Lochhead:

One mystery story.

H.M.Jr:

(to Miss Chauncey) Fish me out Hansen's letter. Is
Hansen's letter there?

Hanes:

Now listen, Danny, you get me all worked up, you
and John Hanes, to sign a memorandum that I didn't
believe in, had grave doubts about; but you say
you and Hanes want me to do it and I do it, and
you set up a new corporation to guarantee farm
mortgages and I sign on the dotted line, and you
fellows - Dan came in here and said you fellows
had worked on it about a week, and I sign the thing
the Lee plan, you know? I thought it was a phony.
Are you in trouble?

H.M.Jr:

No.

Bell:

I think it doesn't follow the indications there.
You said "if."
I mean I just play ball, I'm just a good fellow,

H.M.Jr:

and here it comes back from the President - "For
the Secretary of the Treasury, Secretary of
- have you fellows seen this?
Agriculture

Bell:

I haven't seen it.

H.M.Jr:

Here's a memorandum signed "F.D.R.' It says; "Do

Bell:

Gee, that's easy. I think that was a swell job,
if you ask me. If you get a reply back like that,
write "No" on it quickly. I see where Josh Lee is

you think anything better be done about this, or
do you think better let the whole thing ride?"

the fair haired boy at the White House now, so that
makes it simple.

-6-

385

H.M.Jr:

I wrote: "My dear Mr. President: As far as I am
concerned, let'er ride." 0. K.?

Bell:

Is he going to send my memorandum to Wallace on

H.M.Jr:

Well, will you take care of it? I won't send it
that way. But that's what I'll send the President.

it?

O. K. - unless you want to over-rule me. Last
chance.

Hanes:

H.M.Jr:

No, sir, let her ride.
Don't send that. I mean I'll send it formally

Chauncey:

to the President, see?
Hansen's letter.

H.M.Jr:

But get it from Wallace. Will you carry it for me?

Bell:

Yes sir.

H.M.Jr:

I'll take that with me too.

White:

Did you intend to do anything with respect to the
plan suggested by Wallace about the exchange of
commodities? You said you would like to hear about

it. He sent you a letter explaining it and I have

it.

H.M.Jr:

That's all Wallace - I asked Wallace, "What's this
barter plan?" and I said, "Won't you put it on a
piece of paper?" and he did.

White:

I'll have a little memorandum on it merely for your
information.

(Foley comes in)
Foley:

Good morning sir.

H.M.Jr:

Good morning. You're all right. You were all set for
me to leave at 9:30 this morning. I've been feeling
that the word was around that I was to be in Springfield
at nine o'clock.

Mac's golf clubs are all out, Ed's got on his nice
spring country gentleman suit - kind of tough.
Bell:

Should change your plans, Mr. Secretary.

-7-

386

H.M.Jr:

Has anybody heard from Congressman Somers? Does
anybody know how it went?

Foley:

Well, it went fine, and they're meeting at eleven

H.M.Jr:

Would it be appropriate if I called him up now and

o' clock this morning.

asked him how it was going?

Foley:

Sure.

H.M.Jr:

(on phone) Congressman Somers of New York.

White:

Clerk of the Committee said that things looked better
than they had been and they were very optimistic.
Well, being serious, that's sort of why my plans are
uncertain, because I didn't know how this thing was
going to go.

H.M.Jr:

H.M.Jr:

They are going to vote today; they're finished with
the debate and they're starting at eleven o'clock
on the amendment, with five minutes to each amendment. They're going to try and get a vote,so they
can all go to the ball game.
That's pretty good.

Foley:

They're meeting at eleven o'clock instead of later.

White:

The man I sent said that Voorhis made a very excellent

H.M.Jr:

Voorhis?

White:

Voorhis - Congressman.

H.M.Jr:

Where's he from?

Hanes:

California.

Foley:

It was very interesting that the vote on the rule
was 208 to 147, strictly a party vote. I think only

Foley:

speech for the bill.

two Democrats voted against the rule and only two

H.M.Jr:

Republicans voted in favor of the rule. So it was
strictly a party vote on the rule, which I think will
be about the vote on the bill.
What was the rule? I don't understand.

-8-

387

Foley:

208
to 147.
Seven
hours limited debate. Strictly party vote,

McReynolds: That's a pretty good indication.

H.M.Jr:
Foley:

And Dies got his spleen up, didn't he?
Yes.

White:

Dirksen made a speech against the bill, the man
said, claimed that the funds were being used,
not
stablization funds were being used for purposes
Lochhead:

Very interesting that the New York Tribune quoted
make any reference to the fact that Cochran had
answered it. The Times gave both sides.

his speech in full in regard to that and didn't

H.M.Jr:

Well, Herbert Gaston told me that from now on, since
they have removed their manager, A1 Warner, who was

a very good fellow, at the head of the Tribune Bureau
here in Washington - that from now on they're going
to get much more partisan. But I always thought that
the Washington Bureau of the Tribune sent out about
the fairest news out of Washington. I mean their
stories were never colored - their news stories.
Really did an awful good job. But they've moved him

out, you see; going to go political now.
Hanes:

H.M.Jr:
Hanes:

H. M.Jr:

What's he going to do?
He's
got a job with the Columbia Broadcasting Company
as commentator.
Good man.

He's an awfully nice man. I knew him in Albany.
(on phone)
Hello.you.
- I see. - How about Congressman
Somers?
- Thank

0. K., Harry?
White:

That's all.

Lochhead:

Things are quiet. I was laughing - saying this was

the third, the odd-number week, the non-crisis week.

I mean they come on even weeks.

England says that the market is not so pessimistic
this morning and they've only got a million dollars
this morning, which is very small compared to what
they have been doing the last week.

388

-9H.M.Jr:

Well, I don't believe that Mr. Hitler is going to
do anything with his fleet in the Atlantic. I
just think that he isn't going to do anything
with that fleet down there. I think they'11 just
rub him out over night if they want to.

Lochhead:
Graves:

But there isn't as much tension this morning.
I talked yesterday with Mr. Milligan, as you asked.

H.M.Jr:

Yes.

Graves:

And I'll give you a summary of my conversation.

H.M.Jr:

I told that gentleman when he was in here that if

he continued the way he was - that he was getting
the Treasury very much upset, see?

(on phone) Hello. (H.M.Jr. holds conversation with

Congressman Somers)

Are you through, Harold?
Graves:

Yes, sir.
(Gaston comes in)

Gibbons:

Have you heard from Senator Wagner?

H.M.Jr:

Not a word.

Gibbons:

They said Townsend and Bankhead introduced the bill,

and he grabbed one of his own so he could control it.

He said, "I'll call Henry. Tell him not to worry,
that I can control this thing, keep control of it."

He said Townsend was trying to put this thing over.
I saw where Eccles testified yesterday before
Townsend's committee.

But he said, "Henry knows me well enough to know I

H.M.Jr:

wouldn't do anything to offend him."
You didn't have to do any threatening.

Gibbons:

No. He mentioned your father. He said, "His father

H.M.Jr:

was my benefactor when I was a kid."

That's right.

- 10 -

383

Gibbons:

Very nice, you know. It makes sense. He said, "I'm
not
going
to letI'm
thischairman
thing go of
onthis
anyway;
I'm going
to be
to busy.
committee.
I'll talk
to Henry."
he
doesn't
want to.He won't do anything, because
H.M.Jr:

Well, of course - well, I just say I don't gang up
with people,bu I just - Crowley, of course, says
he had nothing to do with the Brown Bill; I believe
him
with
my the
tongue
in my
to do
with
other
bill.cheek; and Eccles has nothing
(on phone) Hello. - Right. - Hello, Mac. - - On the

pavement they break an axle? - Good. - I thought
Coast Guard was an emergency organization. - All right.

It's good it isn't raining. - Goodbye.

Gibbons:

H.M.Jr:
Gibbons:

This radio truck I asked them to send up from Springfield, where there is no radio station - leaving out
of Springfield, on the pavement, the axle broke.
Couldn't they get another one right away?

Not the radio truck. It isn't important, but
There should be a radio outfit in Springfield. Want

me to go to work on it?
H.M.Jr:
Gibbons:

H.M.Jr:

No,
no, right.
this is one of these radio trucks. I mean
it's all
I know, but

It's good for the boys - I mean whenever I once or
twice test them out, it puts them on their toes when

they break down.
Gibbons:

I thought W 0 R, National Broadcasting - they'd
probably have a truck right there.

H.M.Jr:

Huh uh. No, they couldn't handle it. They haven't

got a direction finder and all that stuff. No, it's
the direction finder and all the rest of the equip-

ment that goes with it.
Gibbons:

Do you remember Mr. Cairns and Mr. Johnson the

other morning mentioning about this twenty-five
percent additional duty - that they were going
to try to prevent importers from putting up
the money if the stuff had been shipped prior

to - if it can be proven that there was nothing

390

- 11 paid to them by the German Government? Remember

H.M.Jr:
Gibbons:

we were discussing that with you?

Well, the point was that the man wouldn't have
to put up the cash. That was the point.
That was the thought on Johnson's part, but it
won't work out. They'11 have to put up the

twenty-five percent duty because we have no way
Collector
Durning thinks that would be too much
of
a gamble.

of telling; there 18 only an affidavit, and

H.M.Jr:

Well, I don't
anything - I don't know who
brought
it upknow
to me.

White:

Johnson brought it up.

H.M.Jr:

We'll let you and Johnson handle it.

Gibbons:

Yes.

Did you discuss Mrs. Pike with Jim yesterday?
H.M.Jr:

How did you know Jim was here?

Gibbons:

I wanted to talk to him; he said "I'm going to
have
lunch with your boss; I can't talk to
you.

H.M.Jr:

Yes.

Gibbons:

Senator Pepper submitted a name in place of

Allie Angle for investigation.
H.M.Jr:

Allie Angle?

Gibbons:

The Collector of Customs in Florida - I'm sorry.

H.M.Jr:

Oh.

Gibbons:

I guess we'11 have to investigate it.
We'll investigate it as a revenue case. We
ought to investigate that. But as I told you,
the boss has already had his talk with Pepper.

McR:

391

- 12 Gibbons:

I thought you'd want to know it.

H.M.Jr:

Yes.

Gibbons:

Mrs. Lynch has been confirmed.

H.M.Jr:

Oh, that's nice.

Gibbons:

One executive session. I don't know whether
they have had the second executive session or
not.

H.M.Jr:

But it's equivalent to being confirmed by the
Senate?

Gibbons:

By the whole Senate. Then they go over it again.

H.M.Jr:

She's been confirmed in one session.

Gibbons:

Now they adjourn that day. And I don't know
whether they have had an executive session since
or not.

H.M.Jr:

But Bob Wagner was nice?

Gibbons:

Oh, very nice.

H.M.Jr:

All right.

Gibbons:

Perfectly nice.

H.M.Jr:

Anything else?

Gibbons:

That's all.

White:

Before you turn from that, I wonder whether you
might not make a note to get in touch with

So mers after this thing is over. He has
practically promised the fellow from the American
Farm Federation that you would give sympathetic
consideration - in fact he used a much stronger
word than that - to their request for an inquiry,
similar to the one which the Wagner Committee

was going to offer; and he even said that he
would get in touch with Wagner and tell him
that he would support it. I spoke to him later
and said I thought the Administration and yourself

392

- 13 were not enthusiastic about it, and he said at
the time, "Well, there's no harm in telling
them we'll do what we can." I don't think he
knows
your position. And I think before it's
too late
H.M.Jr:

Will you remind me again?

White:

Yes, I will.

H.M.Jr:

I mean this comes under the heading of fun I mean this committee business. I mean I don't

take it too seriously.

Dan?

Bell:

Here's the memorandum on the war loan staff.

H.M.Jr:

Oh. I'll take that with me. Yes, I'll read

Bell:

Should have been a little more complete. Back
in 1931 I was designated as the head of a war
section of this War Policies Commission to write

that.

a history of this war financing and all the
agencies that had to do with it. Just about the
time they started to hold their hearings, I took
sick, and when I came back my boss went away
sick.

H.M.Jr:

Who was your boss?

Bell:

Mr. Hand. He killed himself, you remember, in
July 1931. So that thing has never been completed.

H.M.Jr:

I see.

McR:

H.M.Jr:

Hand was the first Commissioner of Accounts and
Deposits when it was set up.
Now, on that - Monday morning I want somebody -

don't know who's doing it - but if anything is
left of the Railroad Administration
(Bell hands H.M.Jr. a memorandum,

apparently re Railroad Administration)

Wonderful - such service.

393

- 14 Bell:

One employee, I can tell you.
H.M.Jr:
Foley:

(Mrs. Klotz comes in)

Look, Miss Chauncey, sit here.

it's a memorandum from Tietjens to me, but
That's

White:

Foley:

H.M.Jr:
Foley:

H.M.Jr:

That's why you possibly came late this morning.
Doing that.

Well, this goes with me.
We're getting another one on the port control.

Yes.

Mac, I spoke to the President last night and
asked him if I could get in touch with Carl Gray,
former head of Union Pacific - he said, "Fine" -

on this thing. And find out - and will you

ask if they'd be here at 3:00. The President
also suggested I have the president of the

McR:

B. & O. come down, and talk to the two of them.
Gray, that's the former head of U. P.

Hanes:

And Dan Willard.

McR:

And Willard.

H.M.Jr:

And tell them what it's about - that very confidentially, without any publicity, I want to
talk to them about, in case there is trouble

abroad, what they think we should do.
McR:

H.M.Jr:
White:

Yes, sir.

And I'd like you and Bell in on it. Get that

thing started. That's 3:00 P. M. next Monday.
In conversation with them, you might drop a
word with respect to the possibility of seeing
that same group again sometime in the near future

394

- 15 -

H.M.Jr:

with respect to the railway equipment proposal.
Their views on it would be very valuable.

Well, I don't want them to know what I'm doing

in respect Itomean
getting
President.
I this ready for the
White:

O. K.

H.M.Jr:

I mean let's keep them on fiscal and monetary

stuff. And they are not thinking in terms of
getting ready. I mean I just - well, I wouldn't
use that sort of people on this. I mean on this
getting ready for war stuff I'm using entirely

different type of people, and I'm using people
in the industry who know the business, you see.
And if one of those men wanted to find out, they'd

have to go to a fellow like Carl Gray to find
out. I mean they're purely theoretical, and
these fellows are operators. You may not - I
mean they can do it from the theoretical approach
and statistical and the rest; but if we get into
this thing, I've got to have operating men that
have come up through - from brakemen up through
the line, that know their stuff and are practical
fellows.
White:

I guess you didn't understand me, but it's all
right.
I gather that you didn't, but we can
postpone it.

H.M.Jr:

(laughs) What you mean to say is you don't want
to
understand me, which is something quite
different.

White:

No, no, I

H.M.Jr:

It's all right, Harry.

White:

If I understand what you said, then you didn't
understand me. Let's put it that way.
Well, let's say we both understand what we didn't
say, what we left unsaid. O. K.?

H.M.Jr:
White:

O. K.

395

- 16 H.M.Jr:

Is that all right?

White:

It's all right.

H.M.Jr:

Willing to leave it that way?
Very funny - we had this meeting at the house
last night and during the discussion something
came up - I don't know what it was - Eccles
said that he - he opened the meeting by saying

he hadn't seen Currie in a month. So I said,
"Well, I'm always glad to meet Currie at my
house," or something like that. Then when the

next thing came up - something came up about

his work, Eccles said he didn't quite understand

White:

He said, "If I understand Currie

H.M.Jr:

Then we asked him if he questioned it. He said,
"Well, of course, I brought Currie over from

"

the Treasury with me because he agrees with me."

Then Harry says something about - it wasn't so
bad having a boss that you could disagree with.

Incidentally, you know, you (Bell) were invited
last night.
Bell:

Yes. I thought it was called off. But I had

this other engagement. Incidentally, I was the

honor guest and couldn't very well stay away.
H.M.Jr:

But I mean you were extended an invitation.

Bell:

Yes, thank you.

H.M.Jr:

Smith said he was very pleased with the meeting.

He said he hoped that that was just the kind of
meeting that could take place in Washington.

White:

Did you purposely not call on him?

H.M.Jr:

I thought it was unfair to call on him the first
time.

396

- 17 Bell:

He's
gotkind.
plenty on his shoulders without policies
of this
At your last staff meeting you asked about the
peak of expenditures.

H.M.Jr:

Yes.

Bell:

With a hurried check on the budget, it looks to
me as though the deficit for 1939 would be

nearer three and a half billion than four billion;
looks as though we're going to get about
125 to 150 million dollars more revenue than

our estimates, and that our expenditures will
probably drop off from 250 to 300 million dollars.
So that the total expenditures in 1939, that is,
your budget cash outlay, will not be far off from
the estimated expenditures for the 1940 budget
as it now stands, unless Congress appropriates
a great deal more money.

You talk about the budgetary expenditures of
General and Emergency. I don't see much difference
in any month from now until the end of December.
I think they'11 run between 600 and 650 million
dollars a month as an average. If you add

interest on the public debt and the special
transactions such as for the corporations and
so forth, I'd say June is the high month; but
that includes 150 million dollars of cash outlay
to redeem the Home Owners Loan bonds. Now, the

chances are we won't do that, we'11 refund the
whole maturing issue and leave the cash in the
Treasury, in which case it makes September the

high month. But that also has fifty million
dollars of special transactions in it for the
Farm Credit Administration. When we come to

that period, we may not pay that off in cash, we
may refund that maturing issue and save the cash.
I don't see that there is enough difference
between any of the months, outside of the interest,
between now and December to make any difference

H.M.Jr:

in the peak.
K. Got anything else?
O.

397

- 18 Bell:

Well,
I still
have some Commodity Credit unfinished
business.
Hanes:

Bell:

Dan, now
maythat
I ask
is the total outgo for
1939
youwhat
estimate?

I figure as a total budget expenditure it will
be nine billion two instead of nine billion
five; and that includes the transfer to trust
accounts. And it's eight billion 994, almost
nine billion, for the 1940 estimate. So there
is just about two hundred million dollars

difference between the two years, and what

happens there is that your regular expenditures,
national defense, et cetera, begin going up in
July and will gradually - that, plus the increase
in what
public
works,
gradually take the place
of
goes
out inwill
WPA.
White:

Bell:
H.M.Jr:

Did you push it beyond December, Dan?
No, up to December.

Well, Dan, do you want to come back about 11:00
and we'll clean up whatever else you have?

Bell:

Yes, fine.

H.M.Jr:

What?

Bell:

All right.

H.M.Jr:
McR:

Mac?

No, I haven't anything. I might say on that
conference the boys had

H.M.Jr:

What conference?

McR:

With Milligan - he was perfectly happy on it;
there was no friction. Elmer Irey was in at
the latter part of the conference. And he is
entirely satisfied with the way the Treasury
is treating him.

H.M.Jr:

Who? My God, he should be.

398

- 19 McR:

Yes.

H.M.Jr:

It's the other way around. I'm not satisfied
with the way they're treating us.
Well,
he's
pretty well lined up. I was delighted
with the
results.

McR:

H.M.Jr:

Take a look at this week's issue of Life - the

McR:

He'll get quite a campaign out of that.
Now, what I'd like to do now is - I'd like Hanes

H.M.Jr:

great racket-buster, Governor Stark.

and Gaston and Foley and Duffield to stay with

me, please.

399

April 21, 1939
9:45 a.m.

HMJr:

Hello.

Operator:

Mr. Gaston left his home at 8:30 and the maid said
she thought he was coming to the office.

HMJr:

I see, and what about Congressman Somers?

0:

I'm trying him at the hotel and his room is busy.

HMJr:

Thank you.

O:

Right.
9:46 a.m.

HMJr:

Andrew L.

Hello.

Somers:

Hello.

HMJr:

Morgenthau talking.

S:

Good morning, Mr. Secretary, how are you?

HMJr:

I -- I'm fine. I want to congratulate you on the

S:

magnificent job you're doing.
Now wait a minute, don't do that until tomorrow.

HMJr:

Well, you're two -- two-thirds through.

S:

Well, I hope 80.

HMJr:
S:

HMJr:
S:

I think you've handled it simply wonderfully.
Well, I'm doing the best I can.
How do you feel about it today?

I feel fairly good and, of course, you know that almost anything might happen but I -- I think I've gotten
our side so lined up now that they won't break up.

HMJr:

Uh-huh. When do you start voting?

S:

About -- we'll start voting about twelve o'clock, I
think -- between twelve and one.

-2HMJr:

And then everybody goes to the ball game, huh?

S:

That's right.

HMJr:

Well, we're down here and if I can be of any help,

S:

400

don't hesitate.

Well, that's fine, Mr. Secretary. I certainly appreciate the -- the help that your office has given me
so far. Mr. Bernard, Mr. White and the attorney, Mr

HMJr:

Foley?

S:

No, the -- his assistant, I believe.

HMJr:

Bernstein.

S:

Yeah, that's right -- Mr. Bernstein. They've been very

wonderful.
HMJr:

Good. Well I -- well I'm glad to hear that and just
don't forget that I'm -- I'm here if I can be of any
use.

S:

All right, Mr. Secretary, thanks a lot.

HMJr:

My money is on you.

S:

Thank you.

HMJr:

Two billion dollars.

S:

I -- I hope that we can bring it through.

HMJr:

O. K.

HMJr:

All right.
All right.

S:

Bye-bye.

HMJr:

Good bye.

S:

401

April 21, 1939
10:47 a.m.

Frank
Murphy:

Hello.

HMJr:

Yes, Frank.

M:

Henry?

HMJr:

Talking.

M:

Henry, this is Frank Murphy.

HMJr:

I understand.

M:

In regard to the

HMJr:

Hello.

M:

Hello.

HMJr:

Yes.

M:

Yes, just a minute, Henry. Hello?

HMJr:

Yes.

M:

Now it's all right.

HMJr:

Yes.

M:

In regard to the Skidmore case

HMJr:

Yeah.

which I have been checking up on

M:

HMJr:

Somebody on the wire?

Yeah.

it's not in this office on a very satisfactory

M:

basis.

M:

It is not?
It is not.

HMJr:

Yeah.

M:

There's practically nothing been submitted to us
except a request to have a Grand Jury availabl e.

HMJr:

-2-

402

HMJr:

Yeah.

M:

It's not in any condition here at all where we could
go ahead with it, and what I wish you would do -if it's agreeable with you -- is instruct your man
there to contact Mr. Morris right away and see if
that can't be brought up to where we can take some
action on it if we're going to.

HMJr:

Uh-huh.

M:

Morris -- I sent for him this morning to talk over
with it -- talk it over with him, and he's reported
to me just how it stands in this office, and there
isn't anything that we could do until some further
material reaches us from your investigators.

HMJr:
M:

HMJr:
M:

I see. Well
So if you'd have your man contact Morris, I think they
can work out the program to be followed here.

I'll do that.
All right.

HMJr:

Thank you.

M:

Good bye.

403

April 21, 1939
11:25 a.m.

HMJr:

Hello.

Operator:

Mr. Jones. Go ahead.
Hello.

HMJr:
Jesse

Jones:

Hello, Henry

HMJr:

Why didn't you tell me you were going to become
Secretary of Commerce?

J:

Well, you didn't ask me !

HMJr:

Well, God damn it, I can't keep up with you.
Oh -- well, we're pretty fast on our feet some of us

J:

boys.

HMJr:

You're telling me

J:

Yeah. Well

HMJr:

Anyway.

anyway, the thing I called you about now is that

J:

I was asked sometime ago to -- Walter Cummings sug-

gested to try to see if sometime or other I couldn't
find a little better paid job for Steve Gibbons.
HMJr:
J:

Uh-huh.

Now, I could drop him in a reasonable spot, I think.
Not definite about it, and sometime in a month or two

or three, in a little bank where he wouldn't -- you

know where he wouldn't be over his head.
HMJr:

Yeah.

J:

And where it would be perfectly safe to put him. And

HMJr:

Well

J:

I'm just telling you about it first 80 that

to see whether you think I ought to consider him.

HMJr:

Well......

J:

I think the job would probably pay him about fifteen
thousand dollars.

-2HMJr:

Well, I'd like to talk to Steve if I could.

J:

Well, of course you could.
Because this is

HMJr:

404

J:

But I want -- before I talked to Steve I wanted to
talk to you.

HMJr:

Yes.

J:

Yes, -- be fine.

HMJr:

O. K.

J:

Could you do that?

HMJr:

I'd like to, yes.

J:

Well, it is all right if I talk to Steve?

Well, I'd -- all right, because I know you -- you're
just like I am; you'd be glad to help him if you can.

HMJr:

Well

J:

If -- that is -- if you -- if you can get -- if you can
spare him.

HMJr:

Well, if that's what he wants.

J:

Yeah.

HMJr:

Is this what he wants?

J:

I don't know if it is or not. So I am talking to you
first about it.

HMJr:

I see.

J:

I think we could. We've got some of those little old

Jersey banks up there, as you know, we're mending up.

HMJr:

Yeah.

J:

I think I might fix him a place there where he couldn't

HMJr:

Yeah.

get hurt, where he wouldn't, you know, be over his head.

-3
J:

405

Where he'd be -- be -- wouldn't be objectionable to

the Administration -- to the Administration. So

HMJr:

Well, I'm -- I'm surprised. I didn't know Steve had
anything in mind.

J:

Well, I guess he's just looking for a little more money.

HMJr:

Uh-huh.

J:

He's probably had all the glory he's going to get where

he is, you know.
HMJr:

J:

HMJr:

Well, I -- I appreciate very much your calling me, and

I'll -- I'll ask him tn come in and see me.
That'll be fine.
And -- on this reorganization business, I've got my
ear to the ground but

J:

Yeah.

HMJr:

I don't -- I don't know what's going to happen.

J:

Well, of course, everybody's asking me and I -- I know
nothing to tell them.

HMJr:

Yeah.

J:

And I just tell them I have no comment.

HMJr:

Yeah.

J:

HMJr:

I guess I've had a hundred calls.
Well, you saw what I said yesterday. They asked me at

HMJr:

the press conference, and I said, "I can't fight ghosts."
Yes, I noticed that.
I don't know just what I meant, but I thought it sounded

J:

I wondered what you meant when I read it. I think it

J:

pretty good.

was all right.

HMJr:

All right.

J:

Well, thank you.

HMJr:

Thank you.

J:

Good bye.

406

April 21, 1939
12:01 p.m.

Andrew L.
Somers:

Mr. Secretary, there's very little change down on the
Hill. They're debating now an amendment that some -the Republicans proposed to put -- accounting control
of the fund under the General Accounting Office.

HMJr:

Yes.

S:

HMJr:
S:

But they haven't come to any vote yet.
I see.
Now, we have Bill Johnson here, Herbert Gaston and
Doc White, Huntington Cairns, Aggie and I, -- we're

talking about a visit that Bill got this morning from

Dr. Tannenberg , the Commercial Attache of the German

Embassy. He came in and admitted that they had ex-

hausted every effort to -- to subsidize, in a manner
satisfactory to us, their exports to the United States
and put forward a proposal for limited trade on a free
exchange basis.

HMJr:

Yeah.

S:

So it -- it's a complete capitulation, Bill believes.

HMJr:

I see.

S:

And a recognition on their part that we were entirely
right in the way we sized the situation up and we had
no alternative but to impose the countervailing duties.

HMJr:

I see. All right.

S:

Would -- would you like to talk to Bill?

HMJr:

Bill who?

S:

Bill Johnson.

HMJr:

No.

S:

All right. O. K.

407

April 21, 1939
12:06 p.m.

HMJr:

Hello.

Operator:

Mr. Crowley. Go ahead.
Hello.

HMJr:

Leo T.
Crowley:

Hello, Mr. Secretary.

HMJr:

How are you?

C:

Fine, how are you?

HMJr:

Good. Leo.

C:

Yeah.

HMJr:

I'd like to ask you a question which you needn't answer

C:

Sure.

HMJr:

But I'd like to ask you in the strictest of confidence,

if you don't want to.

see?
C:

Yeah.

HMJr:

And if you don't want to answer, you can forget it, see?

C:

Yeah.

HMJr:

Have you offered Steve Gibbons a job?

C:

HMJr:
C:

No. No, here's what -- here's what happened. Jesse
called me up one day and said that Steve would like to
be, sometime in the near -- before 1940 -- would like
to get a job in a banking setup, and he asked me if we
had covered all of our liquidations up in New Jersey
Yeah.

and I told him no that we had not, and that if

Steve wanted to go into a setup like that we would be
glad to consider
him
forsaid,
it. Then
called
mewrong
back
later
and
"Wellhe
now,
I was

Steve didn't want any job --

ing
He was forward to
the Administration would end and he didn't want to be

about a few in. moments that. looking the and time that liquidat- maybe

out in the street.

408

-2HMJr:

Uh-huh.

0:

And he was looking for some connection in an industry

or in a bank -- in a going institution.

HMJr:

I see.

C:

And that was all there was to that.

HMJr:

Uh-Huh.

0:

But I think what Steve 18 looking for was something -thinking that maybe at the end of next year he'd be

out -- he'd have to get a job.

HMJr:
C:

HMJr:

Uh-huh.

But I think that's all there was to it.
I see. Well, just -- this is just between the two of
us.

C:

Well, that's -- that's the story and I'll keep it
strictly confidential.

HMJr:

Right.

C:

Thank you.

HMJr:

Good bye.

409

April 21, 1939
12:16 p.m.

Andrew L.
Somers:

amendment WAB beaten 182 to 100.

HMJr:

A hundred and eight-two to a hundred !

S:

Yeah.

HMJr:

Well, on that basis, if they can beat that they can
beat anything.

S:

HMJr:

S:

I think so. The -- the Democrats are sticking together
and they are getting a party vote, you see.
Well, because that, I would say, would be one of the
weakest things.

Yeah. Well, I mean, if you could put this audit in the
-- in the General Accounting Office, then you'd have to

take up questions with the Comptroller General as to
what uses the Fund could be put to, and you'd have to
tip off your hand each time you wanted to get off the
beaten path. So it would be very embarrassing to have

that kind of impediment, and I -- I think we're in

pretty good shape. As you say, 1f they can beat an
amendment of that kind, it looks as though they are

going to stick together

HMJr:
S:

O. K.

the Democrats. Yeah, I'll keep you informed.
Mr. Secretary, do you think that the State Department

ought to be informed on this conversation that Bill

Johnson had with
HMJr:
S:

HMJr:

Yes.

He -- it's all right for him to report it to Feis.
Yes.

S:

All right.

HMJr:

Thank you.

S:

Fine.

410 510
April 21, 1939
12:32 p.m.

HMJr:

Hello.

Operator:

Just one moment, please, Mr. Secretary.

Hull's

(Brief pause)

Cordell
Hull:

Hello.

HMJr:

Cordell

H:

Yes, sir.

HMJr:

How are you?

H:

All right.

HMJr:

I'd like to make a suggestion for you to think over.

H:

Yeah.

HMJr:

You know, in regard to letting the British know about
our having gotten an Attorney General's ruling on that
matter I showed you yesterday.

H:

Yeah.

HMJr:

I'd like to make this suggestion, and -- I discussed

this with the President -- that I tell it to him

verbally.
H:

Yes.

H:

With the understanding that if it ever got out, I'd
deny it.
Well now, something like that would be very....

HMJr:

See?

HMJr:

H:

would be very helpful, because if -- if it should
get out that we had -- they -- you see, they won't
take notice of the fact that you are not making any
promises.

HMJr:

Yes.

H:

They'11 just -- they'11 just say, "Well, that means
that we are turning our Government over to furnish
credit over there. If

-2HMJr:

Yeah.

H:

And that they've got that -- all that

411

HMJr:

Well, would you turn it over in you r mind, and then
I'll talk to you about it again Monday?

H:

Yes.

HMJr:

You see I could do it -- I could do it one of two ways I could call Butterworth on the phone.

H:

Yeah.

HMJr:

Or I could send for Bewley, the financial attache and

H:

Yes, now they -- you see, if that should get out

HMJr:

Yes.

tell it to him verbally, either way.

they would amend the Neutrality Act over night

H:

HMJr:

and make it airtight on that line.
Well, I -- I talked to the President. That was -- ah

his idea that if -- to say that if it got out, I would

deny that I ever made any such statement, but tell him
80 that before hand.

H:

Yes. Now, this is no -- I'm not bothering at all about
that, but the fact is, that in my opinion, a pretty
close question of construction of that neutrality

provision.
HMJr:
H:

HMJr:

H:

HMJr:
H:

Yeah.

And that's why I felt that there would be all the more
controversy if it should get out, you understand.
Well, you know, we have a formal opinion from the
Attorney General.
will

I know you have, but you'll find the best lawyers/differ on that.

Well, I didn'
As I say, I'm not raising that question at all, you
understand.

412

-3- HMJr:

Well

H:

HMJr:

except to -- in connection with the aggravated

attacks that will be made if it should get out.
Well, I don't want to make things any more difficult,
and -- but I thought I'd give you this today and then
I'd call you up again Monday.

H:

HMJr:

All right.
Is that all right?

H:

Yes.

HMJr:

Thank you.

H:

Yes, thank you, Henry.

413

April 21, 1939
2:05 p.m.

HMJr:

Hello.

Operator:

Go ahead.

Somers:

Hello.

HMJr:

Mr. Somers?

S:

Mr. Secretary, there's your bill 225 to 158.

HMJr:

Well

S:

Just as you handed it to us.

Andrew L.

HMJr:

S:

Well, that's simply wonderful and my very, very
heartiest congratulations and appreciation.
Well, thanks. Now I suppose that the Senate will get
it and we may have to into conference, but I'll do all
I can for you in conference to

HMJr:

Well, I'll -- I'll

S:

We'll kick that old fellow Carter Glass around a little

HMJr:

Well, I'll need you badly. We'll have -- they won't

S:

HMJr:
S:

bit, maybe.

handle it the same way that you did.

Well, we'll -- we'll see what they do.
I guess you're pretty tired, aren't you?
Well, I tell you, candidly, when I get into a thing

like this I -- I get a little bit nervous and I can't
sleep and I haven't had any rest now, nor any sleep,

three nights and I just feel about -- about ready to
go to bed. So I'm going to do that and probably wake
up Monday morning sometime.

HMJr:
S:

I can't tell you how much I appreciate it.
All right, Mr. Secretary. Thank you, and I certainly
want to thank you again for all the help that your
office gave me. Without them why I might have been
in some difficulties.

414

-2HMJr:

Well, I'11 be seeing you soon.

S:

All right, sir.

HMJr:

Good bye.

S:

Bye-bye, Mr. Secretary.

415
REB
GRAY

Rio de Janeiro

Dated April 21, 1939
Rec'd 2:07 p. m.

Secretary of State,
Washington.

126, April 21, 1 p. m.
Department's 65, April 20, 4 p. m.
The Director of Exchange informs ME that he intends

gradually to bring the cross selling rate bEtwEEn the
compensation mark and the dollar and the spread between
the compensation mark and the dollar

deptement

into line with the agreements arrived at in Washington. HE would not make a

definite promise as to when this will be accomplished as
he states that the bank wishes to avoid perturbing rudely
trade between Brazil and Germany and working hardships

on Brazilian firms who already have contracts for purchases

of German merchandise. (In my opinion a contributing factor

is the strong pressure of the Sao Paulo cotton interests
to protect their sales in Germany) the Director assured

ME that he will continue to maintain a strict control of
the COMMERCE between the two countries and to prevent the

Banco do Brazil's "bought" position from becoming too large.
Commercial

416
REB

2-#126, From Rio, Apr.21,1p.m.

Commercial banks are purchasing Export drafts on the

free market at 18.740 to 18.750 and selling free Exchange

for payment of import drafts at 18.900 to 3 milreis.
The selling rate for the compensation mark remains at
6.100 and the buying rate at 5,700.
While I understand that the question of the Central
RESERVE Bank is being studied no great progress appears

to have been made and from present indications the

Brazilian Government will not request the loan of gold

in the near future.
CAFFERY

HTM

KLP

03V13038

417
PLAIN

CJ

London

Dated April 21, 1939
RECEIVED 2:40 p.m.

Secretary of State,
Washington.

537, April 21, 7 p.m.

FOR TREASURY FROM BUTTERWORTH.

OnE. The Exact wording of the following statement

by the Chancellor of the Exchequer, as reported in the

official Parliamentary Record, is noteworthy: Asked in
the HOUSE of Commons yesterday "Whether in order to fan

cilitate the financing of the armament Expenditure he is

proposing to take steps to prevent or control Export of

British capital for the purchase of foreign securities,"
Sir John Simon replied: "As the House has been informed
on SEVERAL occasions, the purchase of foreign securities

for resale is already regulated by the Foreign Transactions
Advisory Committee and I am glad of this opportunity of
Expressing my hope that no such purchases will be made

for investment Either. I am sure that the good SENSE of

investors will indicate to them that the Export of capital at the present time when the requirements for national
defence are so great would be deleterious to the national

interests."
Though in form hardly more than a casual observation,
in

418

-2- #537, April 21, 7 p.m., from London
in Effect this announcement constitutes another step in

the direction of financial restrictions in Great Britain.
For information on the inception and subsequent actions of
the Foreign Transactions Advisory Committee reference

is made to my telegrams 192, April 8, 6 p.m., 1936, 92,
February 23, 7 p.m., 1937, 81, February 1, 8 p.m., 1938,
and 1451, DECEMBER 20, 6 p.m., 1938.

Two. Although the London stock Exchange was again

firmer today, the volume of trading was of negligible
proportions. Likewise the foreign Exchange market was
very inactive; for Example, up to noon use LITRESS broker

in the market had not done a single spot. dcllar deal.
of the 126 bars sold at fixing 33 were married and the
Bank of England supplied a few. I understand that
Samuel Montagu and the Chase Bank are the only buyers

willing to arbitrage pending a clarification of the in
surance position.
KENNEDY
PEG

03/13038
0001 88.94

419

03V13038
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: April 21, 1939, 5 p.m.

NO.: 801
FROM COCHRAN.

This afternoon there is to be a meeting of the
French Cabinet. At eight o'clock tonight Reynaud will
broadcast a speech in which it is expected that he
will make known the additional burdens that the French
people will have to assume in order to meet armament

bills. It is believed that these burdens will be heavy
and protests are already being voiced by Blum and other

Left leaders lest the capitalists are favored more than
the laborers.
Exchange and security trading continues inactive,

awaiting developments. Very little sterling was gained
by the French control. In Belgium, technical measures
of restriction similar to those employed in the crisis
of last May are being followed, but there is continued

flight of capital. Observers on the market know that
today at least three million dollars were lost by the
National Bank of Belgium. There is gossip that after
the Pierlot Government appears before the Belgian
Parliament next Tuesday the belga will be devalued
8 percent.

EA:LWW

BULLITT.